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SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 0-19856
XIRCOM, INC.
2300 Corporate Center Drive
Thousand Oaks, California 91320
Telephone: (805) 376-9300
CALIFORNIA (State of Incorporation)
95-4221884 (IRS Employer Identification No.)
Securities registered pursuant to section 12(b) of the Act:
Title of Class: COMMON STOCK, $.001 PAR VALUE
Name of Exchange: NASDAQ/NMS
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the Common Stock on the Nasdaq Stock Market
on November 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $170,194,276. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of Registrant's Common Stock, $.001 par value,
was 22,740,596 at November 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's Proxy
Statement for its Annual Meeting of Shareholders to be held on January 23, 1998.
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PART 1
ITEM 1. BUSINESS
This Annual Report contains trend analysis and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the trend analysis and other
forward-looking statements contained herein, as a result of the risk factors set
forth elsewhere in this report.
Xircom, Inc. ("Xircom" or the "Company") develops, manufactures, sells and
supports a comprehensive set of network access solutions for mobile and remote
personal computer (PC) users. These products represent a market category
recognized as mobile networking. The Company's principal products enable PC
users to access information and resources found on local area networks (LANs)
and on-line services such as the Internet. The Company operates in one industry
segment: the design, development, manufacture, marketing and support of computer
network connectivity products. Xircom's products are recognized for innovative
technology, high reliability and broad compatibility.
Xircom was founded in 1988 and pioneered the use of the universal PC parallel
port to connect portable PCs to LANs. Xircom's Pocket LAN Adapter(TM) product
established the mobile networking market and by 1992 had become the leading
solution for portable PC-to-LAN connectivity. In 1992, Xircom was the first
company in the industry to ship an adapter compliant with the standards set by
the Personal Computer Memory Card International Association ("PCMCIA" or "PC
Card"). Through September 30, 1997, the Company has sold more than 3.5 million
PC Card or parallel port LAN adapters and remains the market leader in PC Cards
for portable PCs.
In 1994 and 1995 Xircom expanded its offerings to include products addressing
wide area networking, which enable access to a LAN from a remote location. These
products include multifunction LAN adapter and modem PC Cards (Combo cards), and
modem-only PC Cards.
MARKET BACKGROUND
Growth in Client/Server Computing. Local area networks offer greater
productivity and lower systems costs by enabling workgroups and geographically
dispersed organizations to share information, applications and resources such as
printers, file servers and communication devices. LANs have enabled the
widespread use of personal computers and servers in a client/server network
configuration, and wide area networking has created "enterprise networks" of
broadly interconnected LANs which offer client PCs access to LANs from almost
any location.
Trends Toward Smaller, Mobile Computers. Simultaneous with the growth in LANs,
continuing technological advances have been made in portable PCs, often referred
to as laptop or notebook computers. Growing use of portable computers is being
driven by an increasingly mobile workforce requiring a higher level of
productivity, including field service personnel, salespeople, consultants,
traveling executives, telecommuters and "day extenders," who work at home in the
evening or on weekends. An increasing number of workers are now utilizing
portable computers as their primary PCs and more business applications are being
developed specifically for portable PCs. According to independent market
research, portable PC shipments worldwide are expected to grow from 11.8 million
in 1996 to over 26 million in 2001.(1) It is also projected that 64% of portable
computers shipped in 2001 will be connected to a LAN by 2001(2) compared to 39%
in
- - --------------------------------------------------------------------------------
(1) International Data Corporation, 1997
(2) International Data Corporation, 1997
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1996, and that 84% of portable PC users in the U.S. will use their portable as
their primary PC by the year 2000.(3)
Remote Access. Over the last several years, there has been a significant
increase in the number of PC users accessing a corporate LAN or an on-line
service (e.g., America Online, Prodigy, CompuServe or the Internet) from a
"remote" location. To do so requires a modem on the client PC and a modem "on
the LAN" that serves as a communication gateway to the network (often referred
to as a remote access server or communications server). The modem market has
grown substantially over the last several years and today nearly all portable
PCs are equipped with a modem. The market for PC Card modems is expected to grow
from 4.1 million units in 1996 to 11.2 million units by 2001.(4)
PRODUCTS
The Company's products include Ethernet and Token Ring LAN adapters, combination
LAN adapters and modems, and modem-only products.
WIRED LAN ADAPTERS FOR PORTABLE PCS
Xircom offers the industry's broadest family of PC Card and parallel port
(Pocket) LAN adapters that operate on Ethernet and Token Ring topologies and are
compatible with all widely used wiring. Xircom LAN adapters incorporate
preconfigured software drivers that support over 50 different network operating
systems and communication protocols. Most Xircom adapters include DOS-, Windows-
and Windows 95-based menu-driven software for simple, fast installation.
Xircom shipped the industry's first external parallel port LAN adapter, the
Pocket Ethernet Adapter(TM), in May 1989, and is currently shipping its
third-generation product. Xircom also shipped the first commercially available
parallel port adapter for Token Ring networks, the Xircom Pocket Token Ring
Adapter(TM), in December 1989. BYTE magazine's 20th anniversary issue named
Xircom's original Pocket LAN Adapter as one of the Most Important Networking
Products of all time. Net sales from Pocket LAN Adapter products have declined
to 4% of Xircom's total net sales in fiscal 1997 and 1% in the fourth quarter of
fiscal 1997, compared to 11% in 1996. The percentage of net sales is expected to
continue to decline in 1998 as the PC Card becomes the exclusive form factor for
connecting peripheral devices to portable PCs.
During 1991, the PCMCIA made possible the development of PC Cards by defining
certain dimensional interface standards for use by a variety of PC peripherals,
including memory cards, fax/modems, LAN adapters and disk drives. The PC Card
interface, or slot, is now incorporated into nearly all portable computers,
allowing the PC Card peripheral device, which is the size of a thick credit
card, to be inserted. Xircom was first to ship an Ethernet LAN adapter card
compliant with the PCMCIA standard in late 1992 and began shipping its
CreditCard Ethernet Adapter(TM) in February 1993. The Company commenced
shipments of its CreditCard Token Ring Adapter(TM) in December 1993. In June
1996, the Company began shipping its CreditCard Ethernet Adapter 10/100(TM),
which supports both 10Mbps and 100Mbps networks, and in October 1996 commenced
shipment of the industry's first 32-bit CardBus Ethernet 10/100 Adapter(TM) for
connecting CardBus-enabled portable computers to 10 Mbps and 100 Mbps networks.
In November 1996, Xircom began shipping its second-generation CreditCard
Ethernet Adapter 10/100. Net sales from PC Card LAN adapters were 42% of the
total net sales in fiscal 1997 compared to 37% in fiscal 1996.
- - --------------------------------------------------------------------------------
(3) International Data Corporation, 1997
(4) International Data Corporation, 1997
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MULTIFUNCTION ADAPTER/MODEM CARDS
In February 1994, the Company began shipping the first PC Card offering both a
LAN adapter and a modem in a single PCMCIA card (a "Combo card"). The CreditCard
Ethernet+Modem(TM) adapter quickly achieved market acceptance and received a
number of industry awards for technical excellence, including PC Magazine's
"1994 Technical Excellence Award" in the Networking Hardware category. The
Company commenced shipments of the second-generation CreditCard Ethernet+Modem
II(TM) adapter in September 1994 and in July 1995 was the first to ship in
volume a combination PC Card product incorporating a V.34 modem with a LAN
adapter. In January 1997, Xircom shipped the CreditCard Ethernet Modem 33.6(TM)
with GlobalACCESS(TM) features. In July 1997, the Company shipped the industry's
first CreditCard Ethernet 10/100+Modem 56(TM) incorporating a 56Kbps modem and
10/100Mbps Ethernet adapter in a single PC Card. This innovative PC Card
received PC Computing Magazine's MVP (Most Valuable Product) Award for 1997. The
Ethernet+Modem products accounted for 43% of total net sales for fiscal 1997
compared to 44% in fiscal 1996.
PC CARD MODEM
Xircom commenced shipment of the Company's first modem-only PC Card in September
1995. The original CreditCard Modem 28.8(TM) adapter incorporated the latest
V.34 standard and broadened Xircom's remote access solutions by adding a
modem-only option for PC notebook users who require high-speed remote access to
LANs, commercial on-line service, or the Internet. In October 1996, Xircom
shipped its CreditCard Modem 33.6(TM) adapter featuring the new V.34-1996
standard. In July 1997, the Company began shipping its full-featured CreditCard
Modem 56-GlobalACCESS(TM) for world travelers. In September 1997, the Company
rounded out its modem line with CreditCard Modem 33.6-upgradable (to 56Kbps) and
the cost-effective CreditCard Modem 56. The Company also began shipping its
CreditCard GSM(TM) PC Card which provides wireless data, fax and Short Message
Service (SMS) communications over GSM cellular phones. The PC Card Modem
products accounted for 11% of total net sales for fiscal 1997 compared to 7% for
1996.
Xircom expects customers for its PC Card client products to continue to demand
higher speeds and bandwidth and is focusing its development efforts on new
versions of its PC Card LAN adapters (both 16-bit PCMCIA and 32-bit CardBus
buses), and multifunction PC Cards that will combine LAN, modem and ISDN
technologies for use with high-bandwidth applications.
OTHER PRODUCTS
Netaccess Products. Netaccess, Inc. ("Netaccess"), the Company's subsidiary
which sold digital and analog remote access server products to original
equipment manufacturers ("OEMs") and through two-tier distribution channels, was
sold by the Company on June 30, 1997 to a wholly-owned subsidiary of Brooktrout
Technology, Inc. The sale included all of the net assets of Netaccess including
accounts receivable, product inventory, property and equipment, and rights to
related intellectual property. The sale resulted in a loss of $6.3 million, net
of income tax benefit. The financial results of Netaccess have been reported as
discontinued operations for all periods presented in the Company's consolidated
financial statements.
INDUSTRY LEADERSHIP
The Company is a worldwide leader in simplifying the installation and
configuration of PC Card and CardBus connectivity products by incorporating
certain proprietary software coding in its installation routines. The Company
has developed an intelligent Windows-based installation utility which now ships
with most Xircom adapters. Although the Windows 95 operating system improved the
installation process for PC Cards, CardBus adapters and other peripherals,
add-on hardware often requires driver updates to enhance features or
performance. Therefore, installation utilities and related driver software
remain an important feature of the products.
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GLOBALACCESS(TM)
The Company ships its products worldwide and therefore has developed a unique
GlobalACCESS modem feature set for ease of use internationally. This expertise
includes obtaining worldwide homologation with local telephone approvals in over
25 countries including: France, Germany, UK, Japan, Australia, Holland, Denmark,
Belgium and Austria. Xircom has developed a modem design which is a single,
worldwide solution and has a programmable Data Access Arrangement ("DAA").
Xircom has developed a unique software application called CountrySelect(TM),
allowing the global traveler to easily configure the modem DAA as he/she travels
from country to country.
Device driver software is also a key component of the Company's products. Device
drivers allow the hardware and firmware (the software code which provides
operating instructions to the hardware) to interact with the communications port
on the PC in which the LAN adapter or modem is being installed (e.g., the
parallel port, PCMCIA, or CardBus slot). While the Company's leading products
are designed to operate with the major operating systems, including Microsoft
Windows 95, Windows NT and Windows 3.1, the Company has also developed Driver
Development Kits that include a library of software interfaces and source code
examples to substantially reduce the time required for other network operating
system vendors to develop drivers for Xircom products. The Company believes that
its family of external LAN adapter products incorporates software drivers for a
broader range of computers and network operating systems than any other family
of external LAN adapters commercially available.
Some of the Company's technical advancements and accomplishments since 1989
include:
- Pioneered the use of the PC parallel port for LAN connectivity;
- Participated with Zenith Data Systems and Intel Corp. in the development
of Enhanced Parallel Port ("EPP") technology;
- Was first to ship an Ethernet PCMCIA/PC Card LAN adapter;
- Was first to ship a parallel port modem, which offers higher throughput
than a serial port modem;
- Was first to ship a PC Card combining a LAN adapter and a modem;
- Was first to incorporate full-duplex Ethernet technology in its PC Card
LAN adapters, which offers up to twice the data throughput on an Ethernet
network;
- Developed the first wireless LAN adapter fully contained in a PC Card
(with no external circuitry);
- Was first to incorporate and ship 100 Mbps Ethernet technology in a PC
Card;
- Developed the durable MiniDock Connector System cable alternative;
- Was first to ship a 32-bit CardBus adapter for connecting
CardBus-equipped notebook computers to 10 Mbps and 100 Mbps networks;
- Was first to ship a 56 Kbps modem and a 100 Mbps Ethernet adapter on a
single PC Card.
Xircom has adopted a Distributed Development Environment ("DDE") to facilitate
the remote physical location of some of its engineers. DDE provides structured
development methodologies and high-speed network links into Xircom's corporate
development network. A key component of DDE is the use of Xircom's products by
the engineers that develop and support them. It is believed that DDE results in
increased productivity and retention of key employees. At this time program
participants include engineers located in Austin, Texas; Provo, Utah; Boise,
Idaho; and Kontich, Belgium.
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RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology, short product life cycles and evolving industry standards. The
Company believes that technical innovation in its products is required to make
them more desirable than other portable LAN connectivity solutions. The
Company's expertise lies in developing small form factor products which require
a high degree of electronic component integration and careful circuitry design.
In addition, use of Application Specific Integrated Circuits ("ASIC") reduces
the number of semiconductor devices required in the Company's products resulting
in lower manufacturing cost and higher product reliability. Because of the many
variations of portable PCs that the Company's products are installed in, the
Company's ASIC devices are designed so that they can be automatically
reconfigured upon initialization by the Company's proprietary software.
The Company also utilizes flash programmable memory in all of its products to
allow certain changes, enhancements or error corrections to be implemented
through a software download by the user.
The Company's current research and development efforts include ongoing feature
enhancement and cost reduction of current products, continued development of
higher-speed and higher bandwidth PC Cards, and support for the Company's OEM
customers.
The Company has participated in leading industry standards committees, including
executive membership in PCMCIA, and steering committee membership of the Gigabit
Ethernet Alliance. Other standards activities include participation in Institute
of Electronic and Electrical Engineers ("IEEE") committees 802.3u for 100Mb
Ethernet and 802.3z for 1Gb Ethernet LANs. In the Wide Area Networking ("WAN")
arena, Xircom participates in the Portable Computer and Communications
Association ("PCCA") and the International Telecommunications Standards Users
Group ("ITSUG") GSM working party. Xircom is also a voting member of the
European Telecommunications Standards Institute ("ETSI").
Approximately 11% of the company's 770 employees were engaged in research and
development activities as of September 30, 1997. During fiscal years 1997, 1996
and 1995, the Company incurred research and development expenditures of
$12,799,000, $9,537,000 and $13,085,000, respectively.
MARKETING
The Company sells its products primarily through domestic and international
distributors. U.S. distributors include major national distributors of computers
and networking equipment such as Ingram Micro Inc., Tech Data Corporation and
Merisel, Inc., and national reseller organizations such as MicroAge, Inc.,
Inacom and Vanstar Corporation. The Company also sells directly to major
domestic retail chains, such as CompUSA, to portable computer manufacturers and
to a number of OEM customers such as Intel Corp.
Internationally the Company sells products through a worldwide network of
distributors. In fiscal 1997, 1996 and 1995, international sales (sales to
customers outside the U.S.) comprised 52%, 46% and 45%, respectively, of total
net sales (see Note Eleven of the accompanying Consolidated Financial
Statements). All international sales are denominated in U.S. dollars and may be
subject to government controls and other risks, including, in some cases, export
licenses, federal restrictions on export, currency fluctuations, political
instability, trade restrictions, and changes in tariffs and freight rates. The
Company has experienced no material difficulties to date as a result of these
factors.
Xircom generally seeks to develop the markets for its products through marketing
programs that promote end-user demand. The Company generates brand recognition
through trade advertising, participation in trade shows and public relations
activities. The Company has a field sales organization and has expanded its
inside sales/telemarketing function to create demand by
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calling directly on resellers, VARs and end-users, but fulfills demand through
its distributors. The Company also has field sales persons and support engineers
to sell its products to OEMs.
BACKLOG
The Company manufactures its products to its forecast of near-term demand and
maintains inventories of finished goods and top-level subassemblies to satisfy
customer orders. Product shipments are generally made within four weeks after
receipt of orders although some OEM customers submit orders for scheduled
deliveries over a longer period. Orders from distribution customers are
cancelable without penalty and OEM customers may reschedule or cancel orders
outside a certain minimum time period. Accordingly, the Company generally does
not seek to maintain any significant backlog, and backlog was not significant at
September 30, 1997 or 1996.
COMPETITION
The Company believes that the principal competitive factors in the market for
external LAN adapters and indirectly competitive products are brand name
recognition; price; support of commonly used topologies, network wiring systems
and network operating systems; performance (including data transfer speeds);
compatibility with many brands of portable computers; quality and reliability;
ease of use; size, especially with respect to the latest subnotebook and
handheld portable PCs; and customer support and service.
Similar to the market for external LAN adapters, the principal competitive
factors for external modems are brand name recognition; price; performance
(primarily throughput, but also error control, connection maintenance and
compression); compatibility with many brands of portable computers and software
applications; support of industry standards; quality and reliability; ease of
use and customer support and service.
The Company's direct competition for parallel port LAN adapters has primarily
come from a small number of privately held companies, and Xircom has maintained
a dominant market share in this market segment (i.e., over 65%). This market
has, however, declined significantly as PC Cards have become the dominant means
of network connectivity for portable and notebook uses. The PC Card LAN adapter
market has become significantly more competitive, and the Company has a number
of competitors that have substantially greater financial, development,
manufacturing and marketing resources and market presence than Xircom, including
Fujitsu Microelectronics, Inc., Intel Corporation ("Intel") (which purchases its
products through an OEM relationship with the Company), International Business
Machines Corp. (IBM), Motorola Inc. and 3Com Corporation, including its U.S.
Robotics and Megahertz brands (collectively "3Com"). Other manufacturers of
desktop LAN adapters offering PC Card adapters include Standard Microsystems
Corporation, Madge Networks Limited and Olicom A/S. In the multifunction PC Card
market (Ethernet+Modem), the Company's most significant current competitor is
3Com, although other smaller companies, including Ositech Communications Inc.
and New Media, also offer Ethernet+Modem PC Cards as does Intel (which purchases
its product through an OEM relationship with the Company). In addition, the
Company is likely to experience additional competition from other large
companies that address other segments of the PC Card market.
The Company also competes indirectly with companies that provide alternative
means to connect portable computers to LANs such as docking stations or port
replicators with built-in networking capabilities. COMPAQ Computer Corporation,
Toshiba Corporation (Toshiba), IBM, NEC Corporation (NEC) and others offer
docking stations for certain of their portable computers. Although docking
stations historically enjoyed some competitive advantage because they provide a
broader range of functionality than just a LAN connection, the greater built-in
capabilities of many new portable PCs and the standardization provided by PC
Card slots reduce
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the demand for this additional functionality. In addition, the use of peripheral
devices provides the PC user an upgrade path as speed or other enhancements to
the network are developed.
Ethernet interface chipsets on PC system boards which eliminate the need for a
LAN adapter have been offered only in a limited number of portable PCs to-date,
generally because the chipset solution adds cost and complexity to the base PC
and requires the PC manufacturer to provide networking technical support. As a
result, the Company believes that PC Card solutions for networking portable
computers will continue to dominate the market because of the performance,
flexibility and range of choices they offer to both users and PC manufacturers.
Over the last several years, the increased competition in the PC Card LAN market
and the shift from the parallel port to PC Card form factor for portable LAN
adapters has resulted in a decline in overall market share and lower standard
gross profit margins for the Company.
In the modem-only PC Card market, the competition is significant. 3Com holds a
majority market share for PC Card modems and offers a proprietary feature called
X-Jack which integrates the RJ-11 phone jack into the PC Card case. Other
competitors in this market include Boca Research, Hayes Microcomputer Products,
Psion Dacom, Ltd., TDK Systems, and many others, including manufacturers who may
hold leading or significant market shares within specific countries. Xircom
believes that it can continue to leverage its engineering, sales and
manufacturing resources with its V.34-1996 and 56K PC Card modems because of its
modem technology and market recognition with its Ethernet+Modem PC Card
products. In addition, because nearly all portable PCs utilize a modem, there
may be a greater likelihood that modem functionality could be included by the PC
manufacturers, and some models include modems today. However, the Company
believes that just as for LAN adapters, standard expansion slots like PCMCIA
that allow the users of the PCs more flexibility in choice of modems and
upgradeability as the technology advances will be a standard for some time to
come. In addition, the Company has achieved significant market share in the
combination Ethernet+Modem market segment and expects to offer other
multifunction cards in the future as a way of differentiating its modem
products.
MANUFACTURING
The Company believes that high-volume, low-cost manufacturing has become an
important capability to compete effectively in the PC Card market. As a result,
the Company commenced in-house manufacturing in September 1995 and now builds
all of its PC Card adapters at its facilities in Penang, Malaysia. The Company
purchases most key components in Penang directly from third-party suppliers with
local representation. The Company inspects these components for quality and
performs final assembly, test, packaging and shipping in Penang.
Although the Company generally uses standard parts and components for its
products, certain key components used in the Company's products are currently
available from only one source, and others are available from a limited number
of sources. Components currently available from one source include proprietary
Ethernet chipsets (used in the CreditCard Ethernet Adapter) fabricated by
Symbios Logic and Atmel Corp., a Token Ring chipset from Texas Instruments,
Rockwell and Lucent Technologies modem chipsets (used in modem and Combo
products) and a standard Motorola microprocessor (used in the modem and Combo
products). In addition, other components, including other semiconductor devices,
transceivers, transformers and plastic and metal product housings, are available
or acquired from a single source or a limited number of sources. Although the
Company has not experienced any significant parts shortages over the past year,
many of these components require long-lead purchase orders so that flexibility
to change order quantities due to changes in demand is limited. Inability to
obtain sufficient supplies of these components or develop alternative sources as
needed could have a material adverse effect on the Company's operating results.
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PROPRIETARY RIGHTS AND LICENSES
The Company seeks to protect its intellectual property rights in certain of its
products and technologies through patents, copyrights, trade secrets, and
trademarks. The Company holds several United States patents relating to parallel
port and PC Card networking and data transfer technologies. Other U.S. patent
applications relating to current research and development efforts of the Company
are in progress. The Company regularly evaluates the applicability of its
patents to other products of third parties. The Company has several license
agreements with third parties granting rights related to the Company's parallel
port data transfer technology in return for license fee payments or
cross-licensing of technology of the licensee. The Company also seeks to protect
its proprietary rights through a combination of employee and third-party
nondisclosure agreements.
EMPLOYEES
As of September 30, 1997, the Company employed a total of 770 persons, including
186 in sales, marketing and customer support; 87 in engineering and product
development; 452 in operations; and 45 in finance and other administrative
areas.
The Company's success depends on its continued ability to attract and retain
qualified personnel. Competition for such personnel in the computer networking
industry is intense and the Company must provide competitive salary, stock
incentive and benefit packages to attract such personnel. The Company has
development activities in Thousand Oaks, California; Austin, Texas; Provo, Utah;
Boise, Idaho; and, Kontich, Belgium. None of the Company's employees is
represented by a collective bargaining arrangement. The Company believes that
its relations with its employees are good.
FACTORS AFFECTING STOCK PRICE
The market price of Xircom's common stock may fluctuate substantially over short
periods of time due to a number of factors, including those factors that could
affect Xircom's future financial performance as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 13 to 19 of this document. The price may also be affected by factors which
influence the overall market for stocks or the market for stocks of
high-technology companies in particular.
EXECUTIVE OFFICERS
The following sets forth certain information with respect to the executive
officers of the Company and their ages as of December 1, 1997.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Dirk I. Gates Chairman of the Board, President and Chief Executive
36 Officer
Steven F. DeGennaro 34 Vice President, Finance and Chief Financial Officer
Marc M. Devis 37 Senior Vice President, Worldwide Sales
Randall H. Holliday 48 General Counsel and Secretary
Carl E. Russo 41 Executive Vice President and Chief Operating Officer
</TABLE>
Mr. Gates has served as Chairman of the Board of the Company since January 1995
and as President and a Director of the Company since its incorporation in
November 1988. He has also served as Chief Executive Officer since October 1991.
Mr. DeGennaro has served as Vice President, Finance and Chief Financial Officer
of the Company since June 1996. He had previously served from May 1995 to June
1996 as Vice President, Finance and Chief Accounting Officer and previously
since January 1994 as Corporate Controller and Chief Accounting Officer. Prior
to joining the Company in 1993, Mr. DeGennaro was a senior manager at KPMG Peat
Marwick, a big-six accounting firm. Mr. DeGennaro is a CPA.
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Mr. Devis has served as Senior Vice President, Worldwide Sales since July 1997,
Senior Vice President, Europe and AsiaPacific Sales and Marketing since August
1996 and Vice President, Europe and Asia-Pacific Sales and Marketing since
January 1995. He had previously served, since June 1991, as Managing Director of
Xircom Europe N.V.
Mr. Holliday has served as General Counsel of the Company since January 1995. In
December 1993, Mr. Holliday joined the Company as Corporate Counsel. From March
1990 to December 1993, Mr. Holliday was Division Counsel of Abex Aerospace
Division, Pneumo Abex Corporation, an aircraft hydraulic components
manufacturer.
Mr. Russo has served as Executive Vice President and Chief Operating Officer
since February 1997 and Executive Vice President and General Manager since April
1995. From January 1994 to March 1995, Mr. Russo held executive positions at
Network Systems Corporation, a manufacturer of high-speed networking equipment
and software, most recently as Senior Vice President, Channel Networking Group.
From 1991 until 1993, Mr. Russo served as President of FTR, Inc., a professional
motor sports team, which filed for liquidation under Chapter 7 of the U.S.
Bankruptcy Code in December 1993. From 1985 until 1991, Mr. Russo held executive
positions at AT&T Paradyne, a manufacturer of wide area networking products,
most recently as Vice President and General Manager, Data Networking Products.
ITEM 2. PROPERTIES
The Company's headquarters are located in 87,000 square feet of a leased
facility in Thousand Oaks, California. This facility accommodates corporate
administration, engineering, marketing, sales and customer support. Distribution
is conducted in a portion of an adjacent 50,000 square-foot leased facility. The
Company also leases a manufacturing and distribution facility in Penang,
Malaysia; facilities for its European subsidiaries in Kontich, Belgium; Paris,
France; Basingstoke, England; Grassbrunn, Germany; and Stockholm, Sweden; and
facilities for its Asia-Pacific sales and marketing operations in Singapore;
Hong Kong; Tokyo, Japan; and Sydney, Australia. The Company believes its
existing facilities are adequate for its current needs and additional facilities
proximate to its existing facilities are available for lease to meet future
needs.
Financial information regarding leases and lease commitments are contained in
Note Ten of Notes to Consolidated Financial Statements on pages 33 to 34 of this
document.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Xircom Common Stock began trading on The Nasdaq Stock Market on March 31, 1992
under the symbol XIRC. The Company has not paid cash dividends on its Common
Stock and does not plan to pay cash dividends for the foreseeable future. Under
the terms of the Company's credit agreement, it is prohibited from declaring or
paying dividends without the prior consent of the lender. As of November 25,
1997, there were 375 holders of record of the Company's Common Stock.
<TABLE>
<S> <C> <C>
Fiscal 1997 High Low
- - -------------------------------------------------------------------------------------
FIRST QUARTER $23 3/4 $15 5/8
SECOND QUARTER 31 1/8 13 7/8
THIRD QUARTER 18 3/4 7 1/2
FOURTH QUARTER $16 3/8 $11 1/2
<CAPTION>
<S> <C> <C>
Fiscal 1996 High Low
- - -------------------------------------------------------------------------------------
First quarter $14 3/8 $8 7/8
Second quarter 14 1/4 9 1/2
Third quarter 17 1/2 11 1/8
Fourth quarter $ 17 $11 1/4
</TABLE>
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected balance sheet and statement of operations
data as of and for the fiscal years ended September 30, 1993 through 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Net sales $184,575 $166,757 $119,528 $131,580 $82,212
Cost of sales 126,300 107,437 79,048 63,964 38,093
- - -----------------------------------------------------------------------------------------
Gross profit 58,275 59,320 40,480 67,616 44,119
Research and development expenses 12,799 9,537 13,085 11,613 6,882
Sales and marketing expenses 43,012 32,723 37,086 25,194 17,105
General and administrative expenses 8,259 6,543 7,031 5,491 5,073
In-process research and development
and other nonrecurring charges(1) 2,163 1,505 5,745 -- --
- - -----------------------------------------------------------------------------------------
Operating income (loss) from
continuing operations (7,958) 9,012 (22,467) 25,318 15,059
Other income (expense), net 3,172 (1,338) 435 (175) 760
- - -----------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (4,786) 7,674 (22,032) 25,143 15,819
Income tax provision (benefit) (1,437) 2,506 (7,000) 9,231 6,169
- - -----------------------------------------------------------------------------------------
Income (loss) from continuing
operations (3,349) 5,168 (15,032) 15,912 9,650
Discontinued operations:
Operating income (loss), net of
income taxes (226) 784 (43,772) -- --
Loss on disposal, net of income
taxes (6,275) -- -- -- --
- - -----------------------------------------------------------------------------------------
Net income (loss)(1) $ (9,850) $ 5,952 $(58,804) $ 15,912 $ 9,650
- - -----------------------------------------------------------------------------------------
Net income (loss) per share --
continuing operations(1) $ (.16) $ .26 $ (.88) $ .95 $ .59
Net income (loss) per share(1) $ (.46) $ .30 $ (3.44) $ .95 $ .59
BALANCE SHEET DATA
Working capital $ 95,501 $ 34,711 $ 25,909 $ 72,590 $57,759
Total assets $147,930 $107,201 $ 85,649 $101,015 $75,267
Long-term obligations, net of
current portion $ -- $ 1,860 $ 597 $ 134 $ 793
Shareholders' equity $113,427 $ 65,603 $ 53,095 $ 82,115 $62,530
- - -----------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1997 includes $2,163 ($1,514, net of tax benefit) or $.07 per share
for write-off of in-process research and development. Fiscal 1996 includes
$1,505 ($1,023 net of tax benefit) or $.05 per share for loss on sale of
Netwave product line. Fiscal 1995 includes $5,745 ($3,561 net of tax
benefit) or $.21 per share for other nonrecurring charges.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report contains trend analysis and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the trend analysis and other
forward-looking statements contained herein, as a result of the risk factors set
forth below and elsewhere in this report.
RESULTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - --------------------------------------------------------------------------------------
Net sales $184,575 11% $166,757 40% $119,528
</TABLE>
NET SALES -- 1997 VERSUS 1996
Net sales increased 11% to $184.6 million in fiscal 1997 from $166.8 million in
fiscal 1996 primarily due to increased net sales of LAN adapters, modems and
multifunction LAN and modem cards ("Combo cards") (collectively "client
products"), which connect portable PCs to networks, the Internet and on-line
services (such as America Online). The increase in net sales of client products
was primarily due to growth in overall market demand for local and wide area
network connectivity products and an increase in unit sales of the Company's
client products by its distribution and OEM customers. 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 adopted by the Company during fiscal 1995;
continuing increased market acceptance of the Company's Combo cards and Fast
Ethernet cards; and increased sales of the Company's modem-only PC Card
products. Unit shipments of client products increased 41% in 1997 over 1996 but
average selling prices and gross profit declined due to increased competition in
the PC Card LAN adapter market and to the continued shift in product mix to PC
Card versions from higher-margin parallel port versions. The increase in net
sales was offset partially by a reduction in shipments by the Company to its
distributors during the fourth quarter of fiscal 1997 in order to reduce the
levels of inventories at its distributors and enable the Company to quickly
react to market changes. The Company's Credit Card Ethernet+Modem and CreditCard
Ethernet Adapter accounted for 43% and 42%, respectively, of 1997 sales and 44%
and 37%, respectively, of 1996 sales.
INTERNATIONAL SALES. Total international sales (shipments to customers located
outside the U.S.) increased as a percentage of total sales to 52% in 1997 from
46% in 1996. PC Card sales in Europe and Asia-Pacific grew at a faster rate than
in the U.S. during 1997 primarily because of greater market growth in Asia and
shorter delays in 1997 as compared to 1996 between initial shipment of new
products in the U.S. and the shipment of internationally approved versions of
such products.
NET SALES -- 1996 VERSUS 1995
Net sales increased in 1996 as compared to 1995 due primarily to growth in
overall market demand for local and wide area network connectivity products and
an increase in unit sales of client products by the Company's distributors. Unit
sales of LAN adapter products increased 60% in 1996 compared to 1995. In
addition, overall average selling prices in 1996 declined from 1995 due
primarily to the increased competition in the PC Card LAN adapter market and to
the continued shift in product mix from PC Card versions from higher-margin
parallel port versions.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ---------------------------------------------------------------------------------------
Gross profit $58,275 (2%) $59,320 47% $40,480
Percentage of net sales 31.6% 35.6% 33.9%
</TABLE>
GROSS PROFIT -- 1997 VERSUS 1996
Gross profit consists of net sales less cost of sales, which includes product
costs (materials, labor, manufacturing overhead and royalty payments to
licensers of software incorporated into the
13
<PAGE> 14
Company's products) and other costs of sales, including provisions for excess
and obsolete inventory and warranty expense. The decrease in gross profit as a
percent of net sales in 1997 compared to 1996 was primarily attributable to
lower average selling prices on client products; the increased portion of sales
represented by PC Card products, which have lower gross profit margins than the
Company's parallel port products; the increased portion of sales made to OEM
customers, which generally have lower gross profit margins than sales made
through the Company's distribution partners; and increased inventory reserves
charged to cost of sales, related primarily to excess parallel port products.
These negative gross profit impacts were partially offset by increased shipments
and the resulting decrease in fixed costs as a percentage of total cost of
sales, a change in the discount structure on products sold into the distribution
channel beginning in the September 1996 quarter, and the favorable impact of
cost reduction efforts including the successful transition of all the Company's
PC Card production to its own manufacturing facility in Penang, Malaysia.
Start-up expenses related to the Malaysian manufacturing facility had a negative
impact on gross profit in the first half of fiscal 1996.
GROSS PROFIT -- 1996 VERSUS 1995
The increase in gross profit as a percent of net sales in 1996 compared to 1995
was primarily attributable to increased revenue and the resulting decrease in
fixed costs as a percentage of total cost of sales, as well as the favorable
impact of cost reduction efforts including the successful transition of all the
Company's PC Card production to its own manufacturing facility in Penang,
Malaysia. These positive margin impacts were partially offset by the increased
portion of sales represented by PC Card products, which have lower gross profit
margins than the Company's parallel port products, and to selling price
reductions on PC Card products. In addition, start-up expenses related to the
Malaysian manufacturing facility had a negative impact on gross margins in the
first half of fiscal 1996. The 1995 results also include a $5.7 million
inventory reserve charged to cost of sales, related primarily to excess wireless
LAN products.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ----------------------------------------------------------------------------------------
Research and development $12,799 34% $9,537 (27%) $13,085
Percentage of net sales 6.9% 5.7% 10.9%
</TABLE>
Research and development expenses increased in 1997 in absolute dollars and as a
percentage of sales as a result of additional staffing to support expanded
product offerings, offset partially by reduced spending on Netwave products.
Research and development expenses decreased in 1996 as compared to 1995 in
absolute dollars as a result of more focused product development efforts,
including reduced spending on Netwave products, notwithstanding higher sales
levels. Total expenditures for research and development expenses are likely to
increase in 1998 as compared to 1997 in absolute dollars due to planned
expenditures on product enhancements and new product introductions.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ---------------------------------------------------------------------------------------
Sales and marketing $43,012 31% $32,723 (12%) $37,086
Percentage of net sales 23.3% 19.7% 31.0%
</TABLE>
Sales and marketing expenses increased in 1997 from 1996 due to additional
headcount, marketing activities to support the increased sales levels and
expanding markets, and increased distributor-related sales and marketing
expenses. As discussed in "Gross profit" above, the Company changed its discount
structure on products sold into the distribution channel beginning in the
September 1996 quarter and, as a result, improved its gross profit margins in
that quarter. However, the additional gross profit dollars were applied to
product and marketing programs, which increased the amount of sales and
marketing expenses. Sales and marketing expenses decreased in 1996 from 1995 as
a result of consolidation of certain sales operations, reduced overall
promotional spending due to a more focused product line, and reduced
14
<PAGE> 15
headcount through employee attrition. Sales and marketing expenses for fiscal
1998 are expected to increase in absolute dollars to support planned new product
introductions.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ----------------------------------------------------------------------------------------
General and administrative $8,259 26% $6,543 (7%) $7,031
Percentage of net sales 4.5% 3.9% 5.9%
</TABLE>
General and administrative expenses increased in 1997 due to the need to support
growth in the organization and, to a lesser extent, continued expansion of
information systems hardware and software including Year 2000 upgrades. It is
expected that general and administrative expenses will increase in absolute
dollars in fiscal 1998 to support further growth within the overall
organization. During 1997, the Company performed an initial analysis of the
impact of computer software issues associated with the Year 2000 and initiated
modification efforts. The Company does not anticipate significant future
expenditures or a material disruption in operations relating to Year 2000
issues. Costs of the Company's Year 2000 efforts are expensed as incurred.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ----------------------------------------------------------------------------------------
In-process research and
development and other
nonrecurring charges $2,163 44% $1,505 (74%) $5,745
Percentage of net sales 1.2% 0.9% 4.8%
</TABLE>
Nonrecurring charges of $2,163,000 ($1,514,000, net of tax benefit) in 1997
consisted of the write-off of in-process research and development associated
with the purchase of certain assets from Angia Communications, Inc. Nonrecurring
charges of $1,505,000 ($1,023,000, net of tax benefit) in 1996 related to the
sale of the Netwave product line. Nonrecurring charges of $5,745,000
($3,561,000, net of tax benefit) in 1995 related primarily to the sale of
certain assets, the write-off of lease obligations on excess and idle
facilities, and severance payments related to a reduction in workforce.
TOTAL OPERATING EXPENSES. Excluding nonrecurring charges, total operating
expenses were $64,070,000 in 1997 compared to $48,803,000 in 1996 (a 31%
increase). This increase was primarily due to increased product development
activities and marketing activities to support the increased sales levels and
expanding markets. Excluding nonrecurring charges, total operating expenses in
1996 decreased by 15% as compared to 1995. This decrease was primarily due to
more focused product development activities, a reduction in certain promotional
spending and reduced headcount through employee attrition.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ---------------------------------------------------------------------------------------
Other income (expense), net $3,172 N/A $(1,338) N/A $435
Percentage of net sales 1.7% (0.8)% 0.4%
</TABLE>
Net other income or expense includes interest income from the investment of
available cash, foreign currency transaction gains or losses, and interest
expense on notes payable and capital leases.
Interest income was $2,195,000, $473,000 and $1,700,000 in 1997, 1996 and 1995,
respectively. Foreign currency transaction gains (losses) were $2,119,000,
$(8,000) and $(83,000) in 1997, 1996 and 1995, respectively. The net other
income for 1997 as compared to net other expense for 1996 was due primarily to
higher interest income and lower interest expense in 1997 as a result of
increased cash balances and reduced borrowings under credit facilities, and due
to increased foreign currency transaction gains. The net other expense for 1996
as compared to net other income earned for 1995 was due primarily to lower
interest
15
<PAGE> 16
income and higher interest expense in 1996 as a result of reduced cash balances
and borrowings under credit facilities.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ---------------------------------------------------------------------------------------
Income tax provision (benefit) $(1,437) N/A $2,506 N/A $(7,000)
Effective tax rate 30.0% 32.7% 31.8%
</TABLE>
The Company's effective tax rate in 1997 was 30.0%. The difference between the
effective tax rate in the current year and the 35% federal statutory tax rate
was due primarily to benefits from the tax holiday status of the Company's
operations in Malaysia. The Company's effective tax rate in 1996 was comprised
of a 32.0% rate for profitable operations in the last three quarters of 1996 and
a 23.6% tax benefit related to a pre-tax loss recorded in the first quarter of
1996.
Excluding nonrecurring charges, loss from continuing operations and loss per
share from continuing operations for 1997 was $1,835,000 and $0.09,
respectively, compared to income from continuing operations and income per share
from continuing operations for 1996 of $6,191,000 and $0.31, respectively.
<TABLE>
<S> <C> <C> <C> <C> <C>
(in thousands) 1997 CHANGE 1996 Change 1995
- - ---------------------------------------------------------------------------------------
Discontinued operations, net
of
income taxes $(6,501) N/A $784 N/A $(43,772)
Effective tax rate 22.2% 33.2% 0.0%
</TABLE>
The financial results of Netaccess, which includes remote access server and
multi-port modem products sold to original equipment manufacturers and through
two-tier distribution channels, have been reported as discontinued operations
for all periods presented. On June 30, 1997, the Company completed the sale of
Netaccess resulting in a loss of $6,275,000, net of income tax benefit.
Operating loss from discontinued operations, net of income taxes, for 1997 was
$226,000, compared with a profit of $784,000 for 1996 and a loss of $43,772,000
for 1995. The 1995 loss consisted primarily of the write-off of $40,000,000 of
in-process research and development purchased from Primary Rate Incorporated
that had not yet reached technological feasibility and accordingly was charged
to the Company's operations.
Net loss and net loss per share for 1997 was $9,850,000 and $0.46, respectively,
compared to net income and net income per share for 1996 of $5,952,000 and
$0.30, respectively.
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 and market presence than Xircom in the PC, desktop
LAN adapter and PC Card modem industries and with greater financial resources
now have a significant presence in the PC Card adapter market. As a result, the
Company's net sales and gross profit margins have been and could continue to
remain subject to continued adverse competitive pressure. Continuing competitive
factors include price competition, new product introductions by competitors,
promotional efforts by competitors, and changes in the level of inventories in
the Company's distribution channels. The Company believes its share of the PC
Card LAN adapter market stabilized in 1996 and 1997, due primarily, the Company
believes, to a more competitive pricing strategy for PC Card products adopted
during fiscal 1995, the success of its combination Ethernet LAN and Modem PC
Card, and the introduction of several new PC Card products in late 1996 and
1997. Such new products include the Company's Fast Ethernet PC Card which began
shipping in June 1996, its fourth-generation Combo cards which began shipping in
September 1996, its CardBus Ethernet adapter which began shipping in October
1996, its Fast Ethernet+Modem 56 Combo cards which began shipping in June 1997,
and its 56 Kbps modem PC Card which began shipping in July 1997. However,
competition is expected to
16
<PAGE> 17
remain intense and the Company could experience declines in its market share.
Moreover, the Company believes that the market for PC Card LAN adapters, modems
and Combo cards will continue to be price competitive for the long-term and thus
could continue to result in lower gross profit margins than the Company has
earned from such products in the past.
The Company believes that its manufacturing facility is operating at a greater
efficiency level than during fiscal 1996. This manufacturing facility began
volume production in early fiscal 1996 and is now producing all of the Company's
PC Card products. While the in-house manufacturing facility and increased
production volumes are expected to continue to have a positive impact on cost
reduction efforts, the Company may not be able to achieve significant additional
efficiencies from this facility. In addition, the proportion of revenues derived
from the Combo and modem-only PC Cards (which have lower gross profit margins
compared to LAN PC Cards) and the proportion of revenue derived from the OEM
channel (which generally results in lower gross profit margins than sales made
through the Company's distribution partners) have negatively impacted overall
gross margins and may continue to offset any improvements from manufacturing and
design efficiencies if such revenue mix changes continue. There can be no
assurances that the Company will be able to achieve cost reductions through
increased manufacturing efficiencies in order to keep pace with competitors'
cost reductions or in an amount sufficient in the event of anticipated
competitive price reductions to allow price reductions required to maintain or
increase market share without adversely affecting gross profit margins.
The Company generally ships products within one to four weeks after receipt of
orders and therefore its sales backlog is typically minimal. Accordingly, the
Company's expectations of future net sales are based largely on its own estimate
of future demand and not on firm customer orders. If net sales do not meet
expectations, the Company may not be able to reduce expenses commensurately in
the near-term, and profitability would be adversely affected.
The Company's net sales may be affected by its distributors' decisions as to the
quantity of the Company's products to be maintained in their inventories. During
the fourth quarter of fiscal 1997, the Company reduced shipments to its
distributors in order to reduce the levels of channel inventories and enable the
Company to react more quickly to the market. At the end of September 1997, the
Company believes its distributors had what the Company considers to be normal
levels of inventory overall. However, there can be no assurance that
distributors will not choose to reduce inventory levels nonetheless, which would
adversely affect net sales.
All of the Company's international sales are denominated in U.S. dollars and may
be subject to government controls and other risks, including in some cases,
export licenses, federal restrictions on export, currency fluctuations,
political instability, trade restrictions, and changes in tariffs and freight
rates. Due to recent currency fluctuations impacting the Company's Asian
markets, the Company has taken steps to mitigate the impact of such fluctuations
on its Asian distributors. The Company has not experienced significant negative
impacts to date as a result of these factors, however future changes in local
economies or other factors could impact future operations.
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.
The Company's modem-only PC Card products generally have lower gross profit
margins than PC Card LAN adapters, however, 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.
17
<PAGE> 18
Because all PC Card products are being manufactured at the Company's own
facilities, interruptions in supply of products could occur if the Company is
unable to accurately forecast or react to changes in product demand, which in
turn could adversely affect future sales. Interruptions could also occur due to
political or economic changes in Malaysia.
In summary, gross profit margins are impacted by a number of factors, including
the rate of sales growth, competitive pricing pressures, the mix of product
sales, the mix of sales made through various channels, and component and
manufacturing costs. In addition, new products often have lower margins until
market acceptance and increased volumes permit component cost reductions and
manufacturing efficiencies. Frequent product transitions also increase the risk
of inventory obsolescence and interruptions of sales.
A number of additional factors could have an impact on the Company's future
operating results. The industry in which the Company operates is characterized
by rapid technological change and short product life cycles. While the Company
has historically been successful in developing leading technology for its
products, ongoing investment in research and development will be required to
maintain the Company's technological position and the Company could be required
to increase the rate of such investments depending on competitive factors. Many
of the Company's competitors have greater financial and technical resources than
the Company. It is also possible that networking capability could be included in
the PC itself or in extension modules to PCs, which could cause a reduction in
the demand for add-on networking devices. The Company's results are also
dependent on continued growth in the underlying market for portable networking
products as well as the Company's ability to retain its market share.
The Company is aware that competitors have duplicated certain functionality of
the Company's products. There can be no assurance that the Company's patents,
copyrights, trademarks and other efforts to protect its intellectual property
will prevent duplication of the Company's technology or that they will provide a
competitive advantage. The Company is also aware that there can be no assurance
that a patent issued to the Company would be upheld as valid if litigation over
a patent were initiated. The Company believes that, due to the rapid pace of
technological change in the LAN communications industry, the Company's success
is likely to depend more upon continued innovation, technical expertise,
marketing skills and customer support and service than legal protection of the
Company's proprietary rights.
With the proliferation of new products and rapidly changing technology in the PC
Card market, there is a significant volume of patents or similar intellectual
property rights held by third parties. Given the nature of the Company's
products and development efforts, there are risks that claims associated with
such patents or intellectual property rights could be asserted by third parties.
These risks may include the following: the cost of licensing a given technology
if the Company believes it may be prudent to secure such rights; the claimant
may not offer such a license on terms acceptable to the Company; the cost of
litigation or settlement of such claims could be substantial regardless of the
merits of the allegations; the Company may not prevail in the event of
litigation; if the Company did not prevail in litigation, it could be required
to pay significant damages, and/or to cease sales and production of infringing
products, and only make future sales of a noninfringing design.
The Company currently includes software licensed from third parties in certain
of its Ethernet+Modem, modem-only and Token Ring products, which, in the
aggregate, accounted for 59% of revenues in fiscal 1997. The Company's operating
results could be adversely affected by a number of factors relating to this
third-party software. Such factors include failure by a licensor to promote or
support the software, delays in shipment of the Company's products as a result
of delays in the introduction of licensed software or errors in the licensed
software, excess customer support costs or product returns experienced by the
Company due to errors in licensed software, or termination of the Company's
relationship with such licensors.
18
<PAGE> 19
Because of frequent technology changes and rapid industry growth, the cost and
availability of components used to manufacture the Company's products may
fluctuate. Some components, including custom chipsets, are available from only
one supplier. Any interruptions in these supply sources or limitations on
availability could impact the Company's ability to deliver its products and in
turn adversely affect future earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operating activities provided cash of approximately
$5.6 million in 1997, primarily as a result of a decrease in working capital
requirements (consisting of a decrease in accounts receivable, offset in part by
increases in inventory and income tax receivable), which offset net loss from
continuing operations. Investing activities in 1997 provided $3.4 million in
cash, primarily as a result of $11.0 million in proceeds from the sale of
Netaccess in June 1997. The Company incurred capital expenditures of $6.4
million, primarily related to equipment for increased headcount, manufacturing
equipment and leasehold improvements at the Malaysian manufacturing facility,
and information systems hardware and software. The Company has no material fixed
commitments for capital expenditures, however the Company has made the decision
to purchase for cash the Malaysian manufacturing facility which it currently
leases. The purchase of the facility would require a capital expenditure of
approximately $4.5 million.
The Company's financing activities provided $51.2 million in cash in 1997. On
February 28, 1997, the Company sold to Intel Corporation 2,516,405 newly issued
shares of the Company's common stock (representing a 12.5 percent interest at
the date of issuance) and a warrant to purchase an additional 1,509,903 newly
issued shares of the Company's common stock. In consideration, the Company
received net cash proceeds of $51.4 million. The warrant is exercisable at a
price of $22.85 per share through February 27, 1998, $27.01 per share from
February 28, 1998 through February 27, 1999, and $31.16 per share from February
28, 1999 through its expiration on February 27, 2002. The Company intends to use
the proceeds from the equity investment for working capital purposes.
The Company has a two-year credit facility with a bank for borrowings up to
$25.0 million. Loans under the agreement are advanced based on the Company's
accounts receivable and inventories, subject to borrowing formulas and are
secured by all U.S.-based assets of the Company. As of September 30, 1997, there
were no borrowings outstanding under the agreement. The agreement expires in
December 1998. The Company also has a credit facility, denominated in Malaysian
ringgit, with a bank in Malaysia totaling $10.8 million. $2.5 million was
outstanding under this agreement as of September 30, 1997. All amounts under
this facility were repaid by the Company in November 1997. The Company had
approximately $14.0 million in borrowings available under its credit facilities
as of September 30, 1997.
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.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
XIRCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands, except per share information)
Fiscal Years Ended September 30 1997 1996 1995
- - --------------------------------------------------------------------------------------
Net sales $184,575 $166,757 $119,528
Cost of sales 126,300 107,437 79,048
- - --------------------------------------------------------------------------------------
Gross profit 58,275 59,320 40,480
Operating expenses:
Research and development 12,799 9,537 13,085
Sales and marketing 43,012 32,723 37,086
General and administrative 8,259 6,543 7,031
In-process research and development and
other nonrecurring charges 2,163 1,505 5,745
- - --------------------------------------------------------------------------------------
Total operating expenses 66,233 50,308 62,947
- - --------------------------------------------------------------------------------------
Operating income (loss) from continuing operations (7,958) 9,012 (22,467)
Other income (expense), net 3,172 (1,338) 435
- - --------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes (4,786) 7,674 (22,032)
Income tax provision (benefit) (1,437) 2,506 (7,000)
- - --------------------------------------------------------------------------------------
Income (loss) from continuing operations (3,349) 5,168 (15,032)
Discontinued operations:
Operating income (loss), net of income taxes (226) 784 (43,772)
Loss on disposal, net of income taxes (6,275) - -
- - --------------------------------------------------------------------------------------
Net income (loss) $ (9,850) $ 5,952 $(58,804)
Net income (loss) per share:
Continuing operations $ (.16) $ .26 $ (0.88)
Discontinued operations (.30) .04 (2.56)
- - --------------------------------------------------------------------------------------
Net income (loss) $ (.46) $ .30 $ (3.44)
Weighted average shares outstanding 21,560 19,745 17,082
- - --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
20
<PAGE> 21
XIRCOM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(In thousands, except share and per share information)
September 30 1997 1996
- - ---------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 75,109 $ 21,377
Accounts receivable, net of allowances for sales returns
and bad debts of $6,254 ($3,434 in 1996) 9,549 25,006
Accounts receivable from related party 1,348 --
Income tax receivable 5,006 2,652
Inventories 28,962 13,771
Deferred income taxes 7,075 5,409
Other current assets 2,476 3,330
- - ---------------------------------------------------------------------------------------
Total current assets 129,525 71,545
Equipment and improvements, net 17,819 18,136
Net assets of discontinued operations -- 17,151
Other assets 586 369
- - ---------------------------------------------------------------------------------------
Total assets $147,930 $107,201
- - ---------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ -- $ 5,100
Accounts payable 10,431 10,260
Accrued liabilities 20,107 18,986
Current portion of long-term obligations 2,541 1,422
Accrued income taxes 945 1,066
- - ---------------------------------------------------------------------------------------
Total current liabilities 34,024 36,834
Long-term obligations -- 1,860
Deferred income taxes 479 2,904
Commitments and contingencies
Shareholders' equity:
Preferred Stock, 2,000,000 shares authorized, none issued -- --
Common Stock, $.001 par value, 50,000,000 shares authorized;
22,671,822 shares outstanding at September 30, 1997
(19,731,142 in 1996) 23 20
Paid-in capital 140,892 83,221
Accumulated deficit (27,488) (17,638)
- - ---------------------------------------------------------------------------------------
Total shareholders' equity 113,427 65,603
- - ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $147,930 $107,201
- - ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
21
<PAGE> 22
XIRCOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
Earnings
---------------- Paid-in (Accumulated
(In thousands) Shares Amount Capital Deficit) Total
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 16,116 $ 16 $ 46,885 $ 35,214 $ 82,115
Issuance of Common Stock for
acquisition of PRI 2,049 2 22,281 -- 22,283
Value of options assumed in
connection with acquisition
of PRI -- -- 2,278 -- 2,278
Issuance of Common Stock under
Employee Stock Purchase Plan 58 -- 684 -- 684
Exercise of stock options 703 1 2,843 -- 2,844
Tax benefit related to
employee stock options -- -- 1,695 -- 1,695
Net loss -- -- -- (58,804) (58,804)
- - ------------------------------------------------------------------------------------------
Balance at September 30, 1995 18,926 19 76,666 (23,590) 53,095
Issuance of Common Stock under
Employee Stock Purchase Plan 116 -- 888 -- 888
Exercise of stock options 689 1 3,965 -- 3,966
Tax benefit related to
employee stock options -- -- 1,702 -- 1,702
Net income -- -- -- 5,952 5,952
- - ------------------------------------------------------------------------------------------
Balance at September 30, 1996 19,731 20 83,221 (17,638) 65,603
Issuance of Common Stock 2,516 3 51,358 -- 51,361
Issuance of Common Stock under
Employee Stock Purchase Plan 125 -- 1,259 -- 1,259
Exercise of stock options 450 -- 4,050 -- 4,050
Tax benefit related to
employee stock options -- -- 1,062 -- 1,062
Repurchase of Common Stock,
net (150) -- (58) -- (58)
Net loss -- -- -- (9,850) (9,850)
- - ------------------------------------------------------------------------------------------
Balance at September 30, 1997 22,672 $ 23 $140,892 $(27,488) $113,427
- - ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
22
<PAGE> 23
XIRCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
Fiscal Years Ended September 30 1997 1996 1995
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (3,349) $ 5,168 $(15,032)
Adjustments to derive cash flows from continuing
operating activities:
Depreciation and amortization 6,499 6,135 5,846
Deferred income taxes 2,043 5,187 (3,760)
Foreign currency exchange (gain) loss (2,119) 8 83
Write-off of in-process research and development 2,163 -- --
Loss on sale of Netwave product line -- 1,505 --
Other -- 81 (107)
Changes in assets and liabilities, net of the effect
of acquisition and disposition:
Accounts receivable 14,109 (13,920) 9,329
Income tax receivable (2,354) 5,710 (8,362)
Inventories (15,191) 1,026 (1,710)
Prepaid expenses and other current assets 854 (1,684) (415)
Accounts payable and accrued liabilities 1,996 (1,792) 12,432
Income taxes payable 941 1,627 1,892
- - --------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 5,592 9,051 196
Net cash used in operating activities of
discontinued operations (5,984) (4,569) (5,114)
- - --------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (392) 4,482 (4,918)
INVESTING ACTIVITIES
Purchases of equipment and improvements (6,437) (8,309) (13,626)
Decrease in other assets 338 728 46
Proceeds from sale of Netaccess, Inc. 11,000 -- --
Proceeds from sale of Netwave product line -- 1,000 --
Acquisitions, net of cash acquired (1,463) -- (24,387)
Purchases of short-term investments -- -- (13,975)
Proceeds from sale of short-term investments -- -- 51,047
- - --------------------------------------------------------------------------------------
Net cash provided by (used in) continuing investing
activities 3,438 (6,581) (895)
Net cash used in investing activities of
discontinued operations (501) (1,288) (98)
- - --------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,937 (7,869) (993)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 56,612 4,854 3,528
Proceeds from issuance of debt obligations 960 8,526 1,200
Repayment of debt obligations (6,385) (1,659) (153)
- - --------------------------------------------------------------------------------------
Net cash provided by financing activities 51,187 11,721 4,575
Net increase (decrease) in cash and cash equivalents 53,732 8,334 (1,336)
Cash and cash equivalents at beginning of period 21,377 13,043 14,379
- - --------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 75,109 $ 21,377 $ 13,043
- - --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
23
<PAGE> 24
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Xircom, Inc. (the "Company") and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated.
BUSINESS
The Company designs, manufactures, markets and supports products that allow
notebook PCs to connect to a network either locally or remotely.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents and are carried at cost
plus accrued interest. Interest income totaled $2,195,000, $473,000 and
$1,700,000 for fiscal 1997, 1996 and 1995, respectively, and is included in
Other income (expense), net in the accompanying Consolidated Statements of
Operations.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily through large two-tier distributors or
original equipment manufacturers. The Company makes periodic evaluations of the
creditworthiness of its customers and generally does not require collateral. To
date, the Company has not experienced any material bad debts or collection
problems. As of September 30, 1997 and 1996, three customers accounted for a
total of 33% and 35%, respectively, of total trade accounts receivable. Accounts
receivable from related party represents amounts due from Intel Corporation.
INVENTORIES
Inventories are carried at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Equipment and improvements are stated at cost. Depreciation and amortization is
provided using the straight-line method over the estimated useful lives of the
assets, ranging from one to seven years. Leasehold improvements are amortized
using the straight-line method over the term of the related lease or the useful
life of the asset, whichever is shorter.
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. 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 contractual agreements which permit
distributors and dealers to return products or receive price protection credits
under certain circumstances. The Company makes a provision for the estimated
amount of product returns or credits that may occur under these contracts in the
period of sale.
NONRECURRING CHARGES
In fiscal 1997, the Company recorded a charge to operations of $2,163,000
($1,514,000, net of tax benefit) for the write-off of in-process research and
development in connection with the purchase of certain assets from Angia
Communications, Inc., a developer and manufacturer of
24
<PAGE> 25
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PC Card products. In fiscal 1996, the Company recorded a charge to operations of
$1,505,000 ($1,023,000, net of tax benefit) for the sale of all assets and
intellectual property related to its Netwave wireless LAN product line. In
fiscal 1995, the Company recorded charges to operations of $5,745,000
($3,561,000, net of tax benefit) related to the sale of certain assets, the
write-off of excess and idle facilities and severance payments related to a
reduction in workforce.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. To date, substantially all of the Company's sales have been denominated
in U.S. dollars. Gains (losses) from foreign currency transactions and
re-measurement totaled $2,119,000, $(8,000) and $(83,000) for fiscal 1997, 1996
and 1995, respectively, and are recognized currently in the Consolidated
Statements of Operations.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock and dilutive common stock equivalents (stock options and
warrants) outstanding. Fully diluted amounts for each period do not materially
differ from the amounts presented herein.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") was issued in February 1997 and must be adopted by the Company on
December 31, 1997. Early adoption is not permitted, however all prior year
earnings per share data must be restated upon adoption to conform to the new
standard. SFAS 128 simplifies the calculation of earnings per share data by
replacing primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Basic earnings per share excludes dilutive
securities including stock options, and is calculated using the weighted average
common shares outstanding for the period. Diluted earnings per share, which is
generally consistent with the fully diluted calculation under present accounting
rules, reflects the dilution to earnings that would occur if securities, stock
options and other dilutive securities resulted in the issuance of common stock.
The Company anticipates that prior period earnings per share, when restated for
SFAS 128, will remain unchanged or will be slightly higher. If the Company had
been permitted to adopt SFAS 128 in fiscal 1997, there would have been no change
in the amount reported as loss from continuing operations per common share. The
Company does not expect the impact of SFAS 128 on fully diluted earnings per
share to be material on future calculations.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131") was
issued. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The adoption of
SFAS 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
25
<PAGE> 26
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LICENSING AGREEMENTS
The Company has entered into agreements with third parties to license software
and hardware that is incorporated into or sold with certain of the Company's
products. Royalties associated with such licenses are accrued and expensed as
cost of goods sold when the products are shipped.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense totaled
$4,753,000, $3,094,000 and $4,954,000 for fiscal 1997, 1996 and 1995,
respectively.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The industry in which the Company operates is characterized
by rapid technological change and short product life cycles. As a result,
estimates are required to provide for product returns, price protection, product
obsolescence and warranty returns. Historically, actual amounts recorded under
these programs have not varied significantly from estimated amounts. Actual
results may differ, however, from those estimates, although management does not
believe that any differences would materially affect the Company's financial
position or reported results.
STOCK OPTIONS
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant. The Company awards options for a fixed number of
shares at an option price equal to the fair value at the date of grant.
Accordingly, the financial statements do not include any expense related to
employee stock option awards. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." See Note Eight.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made for purposes of
consistent presentation.
NOTE TWO: DISCONTINUED OPERATIONS
In June 1995, the Company acquired the assets and assumed the liabilities and
outstanding stock options of Primary Rate Incorporated ("PRI"), later renamed as
Netaccess, Inc. ("Netaccess"). The purchase price, net of cash acquired and
proceeds from exercise of options and warrants, totaled approximately
$50,279,000, including assumed stock options which had an associated value of
$2,278,000. The purchase price was paid using funds from the Company's working
capital and through the issuance of 2,049,019 shares of common stock which had a
value at issuance of $22,283,000. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets and liabilities were recorded at
their estimated fair market values at the date of acquisition. Approximately
$40,000,000 of the total purchase price represented the value of in-process
research and development that had not yet reached technological feasibility and
accordingly was charged to the Company's operations.
On March 31, 1997, the Company decided to discontinue its multi-port modem and
remote access server business and on June 30, 1997, completed the sale of
Netaccess. Proceeds of the
26
<PAGE> 27
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sale were $11,000,000. The accompanying financial statements have been prepared
to reflect the historical financial position and results of operations of
Netaccess as discontinued operations for all periods presented.
The net assets of Netaccess, comprised principally of accounts receivable,
inventory, deferred tax asset, fixed assets, goodwill and other intangibles,
offset by trade accounts payable and other liabilities, have been classified as
Net assets of discontinued operations in the accompanying Consolidated Balance
Sheets. See Note Nine for cash flow information for the discontinued operations.
Operating income (loss) from discontinued operations is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $13,185 $26,549 $ 7,037
- - --------------------------------------------------------------------------------------
Operating income (loss) before income tax provision
(benefit) $ (323) $ 1,174 $(43,772)
Income tax provision (benefit) (97) 390 --
- - --------------------------------------------------------------------------------------
Operating income (loss), net of tax (226) 784 (43,772)
- - --------------------------------------------------------------------------------------
Loss on disposal before income tax benefit (8,604) -- --
Income tax benefit (2,329) -- --
- - --------------------------------------------------------------------------------------
Loss on disposal, net of tax benefit (6,275) -- --
- - --------------------------------------------------------------------------------------
Total discontinued operations, net of tax $(6,501) $ 784 $(43,772)
- - --------------------------------------------------------------------------------------
</TABLE>
NOTE THREE: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<S> <C> <C>
September 30, 1997 1996
- - -------------------------------------------------------------------------------------
Finished goods $17,984 $ 5,617
Sub-assemblies 2,441 1,348
Work-in-process 1,253 650
Component parts 7,284 6,156
- - -------------------------------------------------------------------------------------
$28,962 $ 13,771
- - -------------------------------------------------------------------------------------
</TABLE>
NOTE FOUR: EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
<TABLE>
<S> <C> <C>
September 30 1997 1996
- - -------------------------------------------------------------------------------------
Equipment $ 25,337 $ 22,214
Furniture and fixtures 3,504 4,997
Leasehold improvements 7,135 7,256
- - -------------------------------------------------------------------------------------
35,976 34,467
Less accumulated depreciation and amortization (18,157) (16,331)
- - -------------------------------------------------------------------------------------
$ 17,819 $ 18,136
- - -------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE FIVE: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<S> <C> <C>
September 30 1997 1996
- - -------------------------------------------------------------------------------------
Payroll and related benefits $ 2,918 $ 4,032
Warranty reserve 4,041 3,204
Accrued marketing costs 4,281 3,115
Excess and idle facilities cost 2,347 3,593
Other 6,520 5,042
- - -------------------------------------------------------------------------------------
$20,107 $18,986
- - -------------------------------------------------------------------------------------
</TABLE>
NOTE SIX: BANK BORROWINGS AND LONG-TERM OBLIGATIONS
Notes payable to bank as of September 30, 1996 consisted of $2,600,000 payable
to a bank and $2,500,000 payable to a financial institution, both due and repaid
in fiscal 1997.
Long-term obligations consist of the following (in thousands):
<TABLE>
<S> <C> <C>
September 30 1997 1996
- - -------------------------------------------------------------------------------------
Term loans $ 2,536 $ 3,234
Other 5 48
- - -------------------------------------------------------------------------------------
Total long-term obligations 2,541 3,282
Less current portion 2,541 1,422
- - -------------------------------------------------------------------------------------
$ -- $ 1,860
- - -------------------------------------------------------------------------------------
</TABLE>
On November 8, 1995, the Company entered into a one-year credit agreement with a
financial institution for borrowings up to a maximum of $15,000,000 at the prime
rate plus 1 1/4 percent. The agreement expired in December 1996.
On December 30, 1996, the Company entered into a two-year credit facility with a
bank for borrowings up to $25,000,000 at the prime rate or at a LIBOR-based
rate. Loans under the agreement are advanced based on the Company's accounts
receivable and inventories, subject to borrowing formulas and are secured by all
U.S.-based assets of the Company. As of September 30, 1997, there were no
borrowings outstanding under the agreement.
The Company has a credit facility with another bank, denominated in Malaysian
ringgit, that permits borrowings under a bankers acceptance agreement, at a
fixed rate of 7.18%, and on a revolving credit and term loan basis at the bank's
reference rate plus 1.0% (10.5% as of September 30, 1997). As of September 30,
1997, $2,536,000 was outstanding under both the revolving credit and term loan
provisions of this agreement ($3,834,000 as of September 30, 1996) and there
were no amounts outstanding under the bankers acceptance agreement ($2,000,000
as of September 30, 1996). Subsequent to September 30, 1997, all amounts under
this facility were repaid by the Company. The carrying value of the Company's
bank borrowings approximates their fair values due to both the variable market
interest rates and short-term maturities of these borrowings.
The Company had approximately $14,042,000 in borrowings available under its
credit facilities as of September 30, 1997. Interest expense totaled $478,000,
$766,000 and $63,000 for fiscal 1997, 1996 and 1995, respectively.
28
<PAGE> 29
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE SEVEN: INCOME TAXES
The income tax provision (benefit) includes the following (in thousands):
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
- - --------------------------------------------------------------------------------------
Current:
Federal $(3,785) $(1,785) $(3,048)
State -- 131 --
Foreign 945 766 --
- - --------------------------------------------------------------------------------------
(2,840) (888) (3,048)
- - --------------------------------------------------------------------------------------
Deferred:
Federal 1,403 3,394 (7,524)
State (1,754) 813 --
Valuation allowance 1,754 (813) 3,572
- - --------------------------------------------------------------------------------------
1,403 3,394 (3,952)
- - --------------------------------------------------------------------------------------
$(1,437) $ 2,506 $(7,000)
- - --------------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<S> <C> <C>
September 30 1997 1996
- - -------------------------------------------------------------------------------------
Book reserves not deductible for tax $ 8,443 $ 4,186
Book in excess of tax depreciation 1,918 277
Net operating loss carryforward and credit 5,960 3,134
- - -------------------------------------------------------------------------------------
Total deferred tax asset 16,321 7,597
Valuation allowance (3,263) (1,509)
- - -------------------------------------------------------------------------------------
Deferred tax asset, net 13,058 6,088
- - -------------------------------------------------------------------------------------
Foreign operations (5,252) (3,132)
Other (1,210) (451)
- - -------------------------------------------------------------------------------------
Total deferred tax liabilities (6,462) (3,583)
- - -------------------------------------------------------------------------------------
Net deferred tax asset $ 6,596 $ 2,505
- - -------------------------------------------------------------------------------------
</TABLE>
Balance sheet classification of the net deferred tax asset is as follows (in
thousands):
<TABLE>
<S> <C> <C>
September 30 1997 1996
- - -------------------------------------------------------------------------------------
Current deferred tax asset $ 7,075 $ 5,409
Noncurrent deferred tax liability (479) (2,904)
- - -------------------------------------------------------------------------------------
$ 6,596 $ 2,505
- - -------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997 the Company has net operating loss carryforwards for
federal tax and state tax purposes of approximately $3,558,000 and $443,000,
respectively, which expire during the period 2001 through 2011. The amount of
the federal net operating loss and a portion of the state net operating loss
that may be used to offset taxable income and income taxes in future years are
subject to certain change in ownership and pre-acquisition loss limitations.
A valuation allowance for deferred tax assets was established in 1995 to reflect
the uncertainty of the availability of the loss carryback generated in 1995,
applicable to state income taxes. For 1996, the valuation allowance was reduced
due to the realization of state deferred losses that were originally valued. For
1997, an additional valuation allowance was created due to the
29
<PAGE> 30
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
uncertainty of the future realization of the deferred tax asset generated in
1997 applicable to state income states. A reconciliation of the provision
(benefit) for income taxes with the tax (benefit) computed by applying the 35%
federal statutory tax rate is as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
- - ---------------------------------------------------------------------------------------
Computed expected tax (benefit) $(1,675) $2,686 $(7,711)
State income taxes, net of federal benefit -- 163 (1,198)
Research and development credit -- (110) --
Foreign operations (566) (39) --
Valuation allowance on deferred tax asset 680 -- 2,177
Tax exempt FSC and interest income -- (157) (303)
Other 124 (37) 35
- - ---------------------------------------------------------------------------------------
$(1,437) $2,506 $(7,000)
- - ---------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, foreign earnings of $14,327,000 have been retained
indefinitely by subsidiary companies for reinvestment, on which no additional
U.S. tax has been provided. If repatriated, additional taxes of approximately
$4,789,000 on these earnings, net of available foreign tax credit carryforwards,
would be due. Income (loss) before income taxes for all foreign operations was
$12,282,000, $5,547,000 and $(638,000) for fiscal 1997, 1996 and 1995,
respectively.
NOTE EIGHT: COMMON STOCK AND RELATED PLANS
On February 28, 1997, the Company sold to Intel Corporation 2,516,405 newly
issued shares of the Company's common stock (representing a 12.5 percent
interest at the date of issuance) and a warrant to purchase an additional
1,509,903 newly issued shares of the Company's common stock. In consideration,
the Company received net cash proceeds of $51,361,000. The warrant is
exercisable at a price of $22.85 per share through February 27, 1998, $27.01 per
share from February 28, 1998 through February 27, 1999, and $31.16 per share
from February 28, 1999 through its expiration on February 27, 2002.
During fiscal 1997, the Company purchased 150,000 shares of Common Stock from a
director of the Company, with substantially all of the proceeds contributed by
the director to the Company as capital.
The Company's Stock Option Plan (1992 Plan), as amended, authorizes a total of
up to 6,600,000 shares of Common Stock for issuance as either incentive stock
options with exercise prices which may not be less than fair market value at the
date of grant, or nonqualified stock options. The options generally vest over
three to four years and have terms of five to seven years. The 1992 Director
Stock Option Plan (Director Plan) provides for the grant of nonqualified options
for a total of up to 425,000 shares of Common Stock to non-employee members of
the Board of Directors. The options are granted at fair market value as of the
date of grant and vest over a four-year period. The Company established the 1995
Stock Option Plan (1995 Plan) in connection with the acquisition of PRI.
Unvested options to purchase shares of PRI were converted into options to
purchase shares of the Company's common stock with vesting rights similar to the
1992 Plan. Options to purchase 232,363 shares of the Company were granted under
the 1995 Plan. As of September 30, 1997, the Company had 876,807 shares of
common stock available for future grant under its stock option plans.
30
<PAGE> 31
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table is a summary of activity for the Company's stock option
plans:
<TABLE>
<CAPTION>
Option price per share
-------------------------------
Number of Weighted-
shares Low High Average
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at October 1, 1994 2,119,262 $0.33 $26.50 $ 9.32
Granted 2,245,577 $1.29 $22.50 $10.62
Exercised (703,376) $0.33 $16.75 $ 4.04
Canceled (1,124,256) $1.29 $26.50 $16.33
- - -----------------------------------------------------------------------------------------
Outstanding at September 30, 1995 2,537,207 $0.33 $19.50 $ 8.83
Granted 1,150,550 $9.00 $17.13 $12.16
Exercised (688,963) $0.33 $11.50 $ 5.67
Canceled (679,300) $1.29 $19.50 $10.20
- - -----------------------------------------------------------------------------------------
Outstanding at September 30, 1996 2,319,494 $1.29 $17.13 $11.04
Granted 1,428,900 $8.63 $29.00 $14.17
Exercised (449,493) $1.29 $15.50 $ 9.01
Canceled (593,777) $1.86 $29.00 $13.42
- - -----------------------------------------------------------------------------------------
Outstanding at September 30, 1997 2,705,124 $7.63 $27.75 $12.48
- - -----------------------------------------------------------------------------------------
</TABLE>
Information regarding stock options outstanding as of September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------
Weighted- ----------------------
Weighted- Average Weighted-
Average Remaining Average
Exercise Contractual Exercise
Shares Price Life Shares Price
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $11.00 1,147,354 $10.12 4.82 years 279,780 $10.16
$11.00 - $14.00 1,024,597 $12.09 5.49 years 236,004 $11.73
Over $14.00 533,173 $18.32 5.54 years 52,246 $15.61
</TABLE>
As of September 30, 1997, 1996 and 1995, stock options to purchase 568,030,
443,863 and 604,864 shares were exercisable at weighted average exercise prices
of $11.32, $9.47 and $6.01, respectively.
The Company's 1994 Employee Stock Purchase Plan (ESPP) allows employees to
purchase Common Stock of the Company, through payroll deductions, at 85% of the
market value of the shares at the beginning or end of the offering period,
whichever is lower. The plan provides for the grant of rights to employees to
purchase up to a total of 400,000 shares of common stock. During fiscal 1997,
124,782 shares were issued under the plan at prices ranging from $7.86 to
$14.45. During fiscal 1996, 116,149 shares were issued under the plan at a price
of $7.65 and during fiscal 1995, 57,537 shares were issued under the plan at
prices ranging from $9.88 to $14.66. As of September 30, 1997, 101,532 shares
were available for issuance under this plan.
Subsequent to the end of fiscal 1997, the Board of Directors approved the
authorization of an additional 900,000 shares for issuance under the 1992 Plan
and 200,000 shares under the ESPP, subject to shareholder approval at the next
Annual Meeting of Shareholders.
If the Company recognized employee stock option-related compensation expense in
accordance with SFAS 123 and used the Black-Scholes option valuation model for
determining the
31
<PAGE> 32
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
weighted average fair value of options granted after September 30, 1995, its net
income and earnings per share would have been as follows (in thousands, except
per share amounts):
<TABLE>
<S> <C> <C>
1997 1996
- - --------------------------------------------------------------------------------------
Net income (loss) $ (9,850) $5,952
Pro forma stock compensation expense, net (2,056) (461)
- - --------------------------------------------------------------------------------------
Pro forma net income (loss) $(11,906) $5,491
- - --------------------------------------------------------------------------------------
Pro forma income (loss) per share $ (.55) $ .29
- - --------------------------------------------------------------------------------------
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The pro forma effect on net
income for fiscal 1997 and 1996 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to fiscal 1996. Pro forma
information in future years will reflect the amortization of a larger number of
stock options granted in several succeeding years.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996: risk-free interest rates of 6.1% and 6.0%,
respectively; dividend yields of 0%; volatility factors of the expected market
price of the Company's common stock of .60; and expected life of the options of
4 years. These assumptions resulted in weighted-average fair values of $7.30 and
$6.23 per share for stock options granted in 1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
The Company maintains a defined contribution 401(k) plan under which its U.S.
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company makes matching contributions based on a participant's
contribution up to a specified maximum percentage of the participant's
contribution. Participants vest in the Company's contributions based on years of
service. Company contributions were $174,000, $65,000 and $69,000 for fiscal
1997, 1996 and 1995, respectively.
32
<PAGE> 33
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE NINE: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
- - ------------------------------------------------------------------------------------------
Cash paid
Interest $ 491 $ 763 $ 61
Income taxes $ 82 $ 51 $ 3,383
Non-cash transactions
Tax benefit related to employee stock options $ 1,062 $ 1,702 $ 1,695
- - ------------------------------------------------------------------------------------------
Reconciliation of assets acquired and liabilities
assumed
Fair value of assets acquired $ 2,463 $ -- $ 52,644
Liabilities assumed (1,000) -- (1,956)
Less: Non-cash consideration -- -- (26,301)
- - ------------------------------------------------------------------------------------------
Cash paid for acquisition $ 1,463 $ -- $(24,387)
- - ------------------------------------------------------------------------------------------
Cash flows from discontinued operating activities
Income (loss) from discontinued operating activities $(6,501) $ 784 $(43,772)
Adjustments to derive cash flows from discontinued
operating activities:
Write-off of in-process research and development -- -- 40,000
Depreciation and amortization 1,777 2,028 632
Deferred income taxes (2,329) -- --
Change in net assets of discontinued operations 1,069 (7,381) (1,974)
- - ------------------------------------------------------------------------------------------
Net cash used in discontinued operating activities $(5,984) $(4,569) $ (5,114)
- - ------------------------------------------------------------------------------------------
Cash flows from investing activities of discontinued
operations
Purchases of equipment and improvements $ (501) $(1,288) $ (98)
- - ------------------------------------------------------------------------------------------
</TABLE>
NOTE TEN: COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating leases
expiring on various dates through 2005. Rent expense was $1,512,000, $1,447,000
and $1,737,000 for fiscal 1997, 1996 and 1995, respectively. As of September 30,
1997, the minimum future rental payments under all noncancelable operating
leases for facilities and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Fiscal year leases
---------------------------------------------------------------------------
<S> <C>
1998 $ 2,170
1999 1,863
2000 1,542
2001 1,578
2002 1,603
Thereafter 4,330
---------------------------------------------------------------------------
$13,086
---------------------------------------------------------------------------
</TABLE>
Future minimum rentals to be received under noncancelable subleases as of
September 30, 1997 totaled $527,000.
Under certain license agreements (see Note One), the Company is required to pay
specified amounts of per unit royalties based on sales of certain of its
products. Some of these agreements also contain minimum quarterly and annual
volume requirements. Certain of these agreements expire on specific dates,
others continue in effect as long as the technology is incorporated into
33
<PAGE> 34
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Company's products, and some can be terminated by either party after
specified notice periods. Royalties under these agreements amounted to $740,000,
$1,490,000, and $2,129,000 for fiscal 1997, 1996 and 1995, respectively.
The Company is involved in certain claims and legal proceedings which arise in
the normal course of business. Management does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE ELEVEN: SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the design, development,
manufacture, marketing and support of computer network connectivity products.
Information about the Company's operations in the U.S., Europe and Asia is
presented below.
<TABLE>
<CAPTION>
(in thousands) United States Europe Asia Eliminations Total
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1997
Net sales to
unaffiliated
customers $ 98,677 $53,941 $ 31,957 $ -- $184,575
Intercompany sales 83,159 -- 132,397 (215,556) --
- - --------------------------------------------------------------------------------------------
Total sales $181,836 $53,941 $164,354 $(215,556) $184,575
Operating income (loss)
from continuing
operations $(17,304) $ 131 $ 10,296 $ (1,081) $ (7,958)
Identifiable assets $118,780 $15,513 $ 26,149 $ (12,512) $147,930
- - --------------------------------------------------------------------------------------------
Fiscal 1996
Net sales to
unaffiliated
customers $ 99,573 $45,865 $ 21,319 $ -- $166,757
Intercompany sales 59,594 17 64,915 (124,526) --
- - --------------------------------------------------------------------------------------------
Total sales $159,167 $45,882 $ 86,234 $(124,526) $166,757
Operating income from
continuing operations $ 1,853 $ 572 $ 5,339 $ 1,248 $ 9,012
Identifiable assets $ 80,801(1) $13,980 $ 21,842 $ (9,422) $107,201
- - --------------------------------------------------------------------------------------------
Fiscal 1995
Net sales to
unaffiliated
customers $ 85,734 $33,794 $ -- $ -- $119,528
Intercompany sales 31,135 -- 3,057 (34,192) --
- - --------------------------------------------------------------------------------------------
Total sales $116,869 $33,794 $ 3,057 $ (34,192) $119,528
Operating income (loss)
from continuing
operations $(20,384) $ (291) $ 21 $ (1,813) $(22,467)
Identifiable assets $ 81,443(1) $ 9,786 $ 5,489 $ (11,069) $ 85,649
- - --------------------------------------------------------------------------------------------
</TABLE>
(1) Identifiable assets includes net assets of discontinued operations of
$17,151,000 and $10,510,000 as of September 30, 1996 and 1995, respectively.
Total export sales (sales to unaffiliated foreign entities) were $10,347,000,
$9,582,000 and $19,782,000 for fiscal 1997, 1996 and 1995, respectively. Net
sales to one customer in excess of 10% of total net sales was 17%, 21% and 20%
for fiscal 1997, 1996 and 1995, respectively. Net sales to Intel Corporation
were less than 10% of total net sales in fiscal 1997 (see Note Eight).
34
<PAGE> 35
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE TWELVE: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per Quarter ended
share data) Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal Year
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1997
Net sales $56,309 $57,140 $50,226 $ 20,900 $ 184,575
Gross profit (loss) 20,816 21,740 16,911 (1,192) 58,275
Net income (loss) 4,457 4,341 (5,833) (1) (12,815)(2) (9,850)
Net income (loss) per
share $ .22 $ .20 $ (.25) (1) $ (.57)(2) $ (.46)
- - -------------------------------------------------------------------------------------------
Fiscal 1996
Net sales $33,805 $39,978 $43,919 $ 49,055 $ 166,757
Gross profit 11,780 13,697 15,304 18,539 59,320
Net income (loss) (760) 1,373 2,535 2,804(3) 5,952
Net income (loss) per
share $ (.04) $ .07 $ .13 $ .14(3) $ .30
- - -------------------------------------------------------------------------------------------
</TABLE>
(1) In the third quarter of fiscal 1997, net loss includes $6,275,000 or $.29
per share for loss on sale of Netaccess, Inc.
(2) In the fourth quarter of fiscal 1997, net loss includes $1,514,000 or $.07
per share for the write-off of in-process research and development.
(3) In the fourth quarter of fiscal 1996, net income includes $1,023,000 or $.05
per share for nonrecurring charges.
35
<PAGE> 36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
XIRCOM, INC.
We have audited the accompanying consolidated balance sheets of Xircom, Inc. as
of September 30, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Xircom, Inc. at
September 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
October 20, 1997
36
<PAGE> 37
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of Xircom is incorporated by reference
from the information under the caption "Election of Directors -- Nominees" in
the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
Information with respect to executive officers of Xircom is incorporated by
reference to Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions "Executive
Officer Compensation" and "Certain Transactions" in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the captions "Principal
Shareholders" and "Election of Directors -- Nominees" in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Transactions" in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
37
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Xircom, Inc. and the
Report of Independent Auditors, are included in Item 8 of this document:
<TABLE>
<CAPTION>
Page in
Form 10-K
<S> <C> <C>
Consolidated Statements of Operations -- Years ended September 30,
1997, 1996 and 1995 20
Consolidated Balance Sheets at September 30, 1997 and 1996 21
Consolidated Statements of Shareholders' Equity -- Years ended
September 30, 1997, 1996 and 1995 22
Consolidated Statements of Cash Flows -- Years ended September 30,
1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24-35
Report of Ernst & Young LLP, Independent Auditors 36
(2) Consolidated financial statement schedule:
Schedule II -- Valuation and Qualifying Accounts 39
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
38
<PAGE> 39
SCHEDULE II
XIRCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Charged
Balance at to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR SALES RETURNS AND
BAD DEBTS $3,434 $28,872 $ 26,052 $ 6,254
- - -------------------------------------------------------------------------------------------
LIABILITY RESERVES:
WARRANTY $3,204 $ 3,170 $ 2,333 $ 4,041
- - -------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1996
Deducted from asset accounts:
Allowance for sales returns and
bad debts $3,425 $15,277 $ 15,268 $ 3,434
- - -------------------------------------------------------------------------------------------
Liability reserves:
Warranty $1,800 $ 7,049 $ 5,645 $ 3,204
- - -------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
Deducted from asset accounts:
Allowance for sales returns and
bad debts $2,911 $21,592 $ 21,078 $ 3,425
- - -------------------------------------------------------------------------------------------
Liability reserves:
Warranty $1,295 $ 4,821 $ 4,316 $ 1,800
- - -------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
(3) Exhibits included herein (numbered in accordance with Item 601 of Regulation
S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------- ----------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization By and Among Xircom, Inc., a California
Corporation, Xircom, Inc., a Delaware Corporation, and Primary Rate
Incorporated, a Delaware Corporation, dated April 12, 1995 (incorporated by
reference to Exhibit 2.1 of the Company's report on Form 8-K dated June 22,
1995, No. 0-19856)
3.1 Amended Articles of Incorporation of Xircom, Inc. (incorporated by reference
to Exhibit 3.1 of the Company's report on Form 10-Q for the quarter ended
March 31, 1992)
3.2 Bylaws of Xircom, Inc. (incorporated by reference to Exhibit 3.3 of
Amendment No. 3 to the Company's registration statement on Form S-1, No.
33-45667)
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1
of Amendment No. 3 to the Company's registration statement on Form S-1, No.
33-45667)
10.1 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.3
of the Company's report on Form 10-Q for the quarter ended March 31, 1992)
10.9 Stock Option Plan of the Company, as amended and restated on January 17,
1997, and forms of agreement thereunder (incorporated by reference to
Exhibit 4.1 of the Company's registration statement on Form S-8 filed on
April 17, 1997, No. 333-25367)
10.10 1992 Director Stock Option Plan of the Company, as amended and restated on
January 17, 1997, and forms of agreement thereunder (incorporated by
reference to Exhibit 4.2 of the Company's registration statement on Form S-8
filed on April 17, 1997, No. 333-25367)
10.15 Form of Distributor Agreement (1)
10.20 Agreement of Substitution, dated as of September 1, 1990, between Willemijn
Houdstermaatschappij BV and the Company (1)(2)
10.26 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.26 of the Company's report on Form 10-K for the year ended September 30,
1993)
10.27 Facility lease agreement, dated as of March 29, 1994, between Metropolitan
Life Insurance Company and the Company (incorporated by reference to Exhibit
10.1 of the Company's report on From 10-Q for the quarter ended March 31,
1994)
10.28 Facility lease agreement, dated as of March 29, 1994, between Metropolitan
Life Insurance Company and the Company (incorporated by reference to Exhibit
10.2 of the Company's report on From 10-Q for the quarter ended March 31,
1994)
10.30 Credit Agreement Among Xircom, Inc., Certain Lenders Named Herein and
NationsBank of Texas, N.A. as Administrative Agent, dated as of December 30,
1996 (incorporated by reference to Exhibit 10.30 of the Company's report on
Form 10-Q for the quarter ended December 31, 1996)
10.30a Security Agreement Between Xircom, Inc. as Debtor and NationsBank of Texas,
N.A. as Administrative Agent, dated as of December 30, 1996 (incorporated by
reference to Exhibit 10.30 of the Company's report on Form 10-Q for the
quarter ended December 31, 1996)
10.30c Intellectual Property Security Agreement Between Xircom, Inc. as Debtor and
NationsBank of Texas, N.A. as Administrative Agent, dated as of December 30,
1996 (incorporated by reference to Exhibit 10.30 of the Company's report on
Form 10-Q for the quarter ended December 31, 1996)
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- - ------- ----------------------------------------------------------------------------
<S> <C>
10.31 Xircom, Inc. Common Stock and Warrant Purchase Agreement, of January 13,
1997, between Xircom, Inc. and Intel Corporation (incorporated by reference
to Exhibit 10.31 of the Company's report on Form 10-Q for the quarter ended
March 31, 1997)
10.31a Warrant to Purchase Shares of Common Stock of Xircom, Inc., dated February
28, 1997 (incorporated by reference to Exhibit 10.31 of the Company's report
on Form 10-Q for the quarter ended March 31, 1997)
10.31b Investor Rights Agreement, dated February 28, 1997, between Xircom, Inc. and
Intel Corporation (incorporated by reference to Exhibit 10.31 of the
Company's report on Form 10-Q for the quarter ended March 31, 1997)
10.32 Asset Purchase Agreement by and among BTINH Operating Company, Inc. as
Buyer, Brooktrout Technology, Inc. as Parent, Netaccess, Inc. as Seller and
Xircom, Inc. as Seller's Sole Stockholder, dated June 30, 1997 (incorporated
by reference to Exhibit 10.32 of the Company's report on Form 10-Q for the
quarter ended June 30, 1997)
21.1 Subsidiaries of Xircom, Inc. (see page 42)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 43)
24.1 Power of Attorney (see page 44)
27.1 Financial Data Schedule
</TABLE>
- - ---------------
(1)Incorporated by reference to corresponding exhibit number of the Company's
registration statement on Form S-1, No. 33-45667
(2)Confidential treatment granted as to certain portions of this Exhibit
(b) Reports on Form 8-K:
A Report on Form 8-K was filed by the Company on October 8, 1997 pursuant to
Item 5 of Form 8-K ("Other Events"). The report related to a press release
issued by the Company on October 2, 1997 regarding the Company's announcement of
the acquisition of selected assets from Angia Communications, Inc. and a
corresponding one-time charge of $0.07 per share in the fourth quarter of fiscal
1997. A copy of the press release was filed as an exhibit to such report.
A Report on Form 8-K was filed by the Company on September 24, 1997 pursuant to
Item 5 of Form 8-K ("Other Events"). The report related to a press release
issued by the Company on September 11, 1997 regarding the Company's announcement
of its shift to a new speed-based distribution model, its estimated fourth
quarter 1997 operating results and its new worldwide sales organization. A copy
of the press release was filed as an exhibit to such report.
41
<PAGE> 42
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Xircom Europe N.V.
Xircom Asia PTE LTD
Xircom FSC, Inc.
Xircom, Inc. (Delaware)
Xircom Operations (Malaysia) SDN. BHD.
Xircom U.K., Ltd.
Xircom France, S.A.R.L.
Xircom Deutschland GmbH
Xircom AB
Xircom Asia Limited
Xircom Asia Pacific Ltd.
42
<PAGE> 43
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the 1992 Director Stock Option Plan, 1992 Stock Option Plan, 1995
Stock Option Plan and 1994 Employee Stock Purchase Plan and in the Registration
Statement (Form S-3 No. 33-93972) and in the related Prospectus of Xircom, Inc.
of our report dated October 20, 1997, with respect to the consolidated financial
statements and schedule of Xircom, Inc., included in this Annual Report (Form
10-K) for the year ended September 30, 1997.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
December 12, 1997
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XIRCOM, INC.
Date: December 12, 1997
By: /s/ DIRK I. GATES
----------------------------------
Dirk I. Gates
Chairman of the Board
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dirk I. Gates and Steven F. DeGennaro, jointly
and severally, his attorneys-in-fact, each with the power of substitution for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DIRK I. GATES Chairman of the December 12, 1997
- - --------------------------------------------- Board, President and
Dirk I. Gates Chief Executive
Officer (Principal
Executive Officer)
/s/ STEVEN F. DEGENNARO Vice President, December 12, 1997
- - --------------------------------------------- Finance and Chief
Steven F. DeGennaro Financial Officer
(Principal Financial
Officer)
/s/ MICHAEL F.G. ASHBY Director December 12, 1997
- - ---------------------------------------------
Michael F.G. Ashby
/s/ KENNETH J. BIBA Director December 12, 1997
- - ---------------------------------------------
Kenneth J. Biba
/s/ GARY J. BOWEN Director December 12, 1997
- - ---------------------------------------------
Gary J. Bowen
/s/ J. KIRK MATHEWS Director December 12, 1997
- - ---------------------------------------------
J. Kirk Mathews
/s/ WILLIAM J. SCHROEDER Director December 12, 1997
- - ---------------------------------------------
William J. Schroeder
/s/ DELBERT W. YOCAM Director December 12, 1997
- - ---------------------------------------------
Delbert W. Yocam
</TABLE>
44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 75,109
<SECURITIES> 0
<RECEIVABLES> 17,151
<ALLOWANCES> 6,254
<INVENTORY> 28,962
<CURRENT-ASSETS> 129,525
<PP&E> 35,976
<DEPRECIATION> 18,157
<TOTAL-ASSETS> 147,930
<CURRENT-LIABILITIES> 34,024
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 113,404
<TOTAL-LIABILITY-AND-EQUITY> 147,930
<SALES> 184,575
<TOTAL-REVENUES> 184,575
<CGS> 126,300
<TOTAL-COSTS> 126,300
<OTHER-EXPENSES> 66,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 480
<INCOME-PRETAX> (4,786)
<INCOME-TAX> (1,437)
<INCOME-CONTINUING> (3,349)
<DISCONTINUED> (6,501)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,850)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
