-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QPQQL3Skh9vhPi3oLXss9PXwHDCHo1dDv/9/vjzVdn8+mr8LLSC24SfdRaWFvusu XHHYvG+ZuFD5Rm4Dtcy1/w== 0000892569-96-001569.txt : 19960816 0000892569-96-001569.hdr.sgml : 19960816 ACCESSION NUMBER: 0000892569-96-001569 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XIRCOM INC CENTRAL INDEX KEY: 0000883905 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 954221884 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19856 FILM NUMBER: 96611785 BUSINESS ADDRESS: STREET 1: 2300 CORPORATE CENTER DRIVE CITY: THOUSAND OAKS STATE: CA ZIP: 91320 BUSINESS PHONE: 8053769300 MAIL ADDRESS: STREET 1: 2300 CORPORATE CENTER DRIVE CITY: THOUSAND OAKS STATE: CA ZIP: 91320 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED 6/30/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-Q (Mark one) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTER ENDED JUNE 30, 1996 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-19856 ---------------------------------- XIRCOM, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-4221884 (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) 2300 CORPORATE CENTER DRIVE THOUSAND OAKS, CALIFORNIA 91320 (Address of principal executive offices & zip code) REGISTRANT'S TELEPHONE NUMBER: (805) 376-9300 ---------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- There were 19,561,854 shares of the registrant's $.001 par value Common Stock outstanding as of August 7, 1996. 2 XIRCOM, INC. TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Items 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 2 3 XIRCOM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) June 30, 1996 September 30, 1995 ------------- ------------------ Current assets: Cash and cash equivalents $ 16,341 $ 13,658 Accounts receivable 25,509 13,699 Income tax receivable 436 8,362 Inventories 23,700 17,067 Deferred income taxes 9,017 9,017 Other current assets 2,025 1,459 --------- --------- Total current assets 77,028 63,262 Equipment and improvements, net 19,784 17,588 Other assets 6,686 7,892 --------- --------- Total assets $ 103,498 $ 88,742 ========= ========= Current liabilities: Notes payable to bank $ 1,960 $ 600 Accounts payable 16,587 18,561 Accrued liabilities 18,829 14,313 Current portion of long-term obligations 1,430 401 Accrued income taxes 1,690 1,141 --------- --------- Total current liabilities 40,496 35,016 Long-term obligations 2,217 631 Shareholders' equity: Common stock 19 19 Paid-in capital 81,208 76,666 Accumulated deficit (20,442) (23,590) --------- --------- Total shareholders' equity 60,785 53,095 --------- --------- Total liabilities and shareholders' equity $ 103,498 $ 88,742 ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 XIRCOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share information)
Three months ended Nine months ended June 30 June 30 1996 1995 1996 1995 --------- --------- --------- --------- Net sales $ 52,223 $ 16,474 $ 135,246 $ 96,554 Cost of sales 33,413 12,866 86,371 55,303 --------- --------- --------- --------- Gross profit 18,810 3,608 48,875 41,251 Operating expenses: Research and development 3,421 3,648 9,645 10,063 Sales and marketing 8,816 9,918 26,481 26,927 General and administrative 2,387 2,110 6,929 5,433 In-process research and development and other non-recurring charges -- 42,119 -- 42,119 --------- --------- --------- --------- Total operating expenses 14,624 57,795 43,055 84,542 --------- --------- --------- --------- Operating income (loss) 4,186 (54,187) 5,820 (43,291) Other income (expense), net (458) 291 (1,095) 525 --------- --------- --------- --------- Income (loss) before income taxes 3,728 (53,896) 4,725 (42,766) Income tax provision (benefit) 1,193 (5,140) 1,577 (1,022) --------- --------- --------- --------- Net income (loss) $ 2,535 $ (48,756) $ 3,148 $ (41,744) ========= ========= ========= ========= Weighted average shares outstanding 19,999 17,018 19,648 16,508 Net income (loss) per share $ .13 $ (2.87) $ .16 $ (2.53)
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 XIRCOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine months ended June 30 1996 1995 -------- -------- Operating activities: Net income (loss) $ 3,148 $(41,744) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Write-off of in-process R&D -- 40,000 Depreciation and amortization 6,229 3,982 Deferred income tax benefit -- (5,790) Deferred rent -- (23) Changes in assets and liabilities, net of the effect of the acquisition: Accounts receivable (11,810) 10,854 Income tax receivable 7,926 -- Inventories (6,633) (10,302) Other current assets (566) 116 Accounts payable and accrued liabilities 2,542 (2,158) Income taxes payable 1,599 219 -------- -------- Net cash provided by (used in) operating activities 2,435 (5,116) -------- -------- Investing activities: Purchase of Primary Rate Incorporated -- (24,134) Purchase of short-term investments -- (14,220) Sale of short-term investments -- 47,468 Purchases of equipment and improvements (7,257) (10,317) Other 38 (151) -------- -------- Net cash used in investing activities (7,219) (1,354) -------- -------- Financing activities: Proceeds from issuance of common stock 3,492 2,163 Proceeds from issuance of long-term debt 3,219 -- Net borrowings under line-of-credit agreement 1,360 -- Long-term debt repayments (604) (265) -------- -------- Net cash provided by financing activities 7,467 1,898 -------- -------- Net increase (decrease) in cash 2,683 (4,572) Cash and cash equivalents at beginning of period 13,658 14,379 -------- -------- Cash and cash equivalents at end of period $ 16,341 $ 9,807 ======== ======== Supplemental cash flow disclosures: Cash paid for: Interest $ 390 $ 47 Income taxes 20 4,551 Tax benefit related to employee stock options $ 1,050 $ 1,161 Reconciliation of assets acquired and liabilities assumed: Fair value of assets acquired $ -- $ 52,644 Liabilities assumed -- (1,956) Less: Noncash consideration -- (26,554) -------- -------- Cash paid for acquisition $ -- $ 24,134 ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 XIRCOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit (except for the balance sheet information as of September 30, 1995, which was derived from audited consolidated financial statements) pursuant to Securities and Exchange Commission regulations. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position at June 30, 1996 and the consolidated results of operations for the three- and nine-month periods ended June 30, 1996 and 1995, and cash flows for the nine-month periods ended June 30, 1996 and 1995, in accordance with generally accepted accounting principles. The accompanying financial statements are condensed and do not include footnotes and certain financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the audited financial statements included in the Company's 1995 annual report on Form 10-K. The results of operations for the three- and nine-month periods ended June 30, 1996 are not necessarily indicative of the results to be expected for the entire fiscal year. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common stock equivalents (stock options) outstanding. Fully diluted amounts for each period do not materially differ from the amounts presented herein. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consisted of the following (in thousands):
June 30 September 30 1996 1995 ------- ------- Finished goods $ 8,987 $ 4,448 Sub-assemblies 4,299 6,629 Work-in-process 2,088 2,495 Component parts 8,326 3,495 ------- ------- $23,700 $17,067 ======= =======
6 7 XIRCOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 REVENUE RECOGNITION The Company recognizes revenue from product sales when shipped. The Company generally provides a lifetime limited warranty against defects in the hardware component and a two-year limited warranty on the software component of its network adapters and modem products. Netaccess products have a five-year hardware warranty and a 90-day software warranty, and ISDN products have a two-year hardware and a one-year software warranty. In addition, the Company provides telephone support to purchasers of its products as needed to assist them in installation or use of the products. The Company makes provisions for these costs in the period of sale. The Company also has policies and/or contractual agreements which permit distributors and dealers to return products under certain circumstances. The Company makes a provision for the estimated amount of product returns that may occur under these programs and contracts in the period of sale. CASH AND CASH EQUIVALENTS All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents and are carried at cost plus accrued interest. RECLASSIFICATIONS Certain reclassifications of prior year amounts have been made for purposes of consistent presentation. 7 8 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the trend analysis and other forward-looking statements contained herein, as a result of the risk factors set forth below and elsewhere in this report. RESULTS OF OPERATIONS - --------------------- The following table sets forth the statements of operations as a percentage of net sales:
Three months ended Nine months ended June 30 June 30 1996 1995 1996 1995 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 64.0 78.1 63.9 57.3 ----- ----- ----- ----- Gross profit 36.0 21.9 36.1 42.7 Operating expenses: Research and development 6.5 22.1 7.1 10.4 Sales and marketing 16.9 60.2 19.6 27.9 General and administrative 4.6 12.8 5.1 5.6 In-process research and development and other non-recurring charges -- 255.7 -- 43.6 ----- ----- ----- ----- 28.0 350.8 31.8 87.5 ----- ----- ----- ----- Operating income (loss) 8.0 (328.9) 4.3 (44.8) Other income (expense), net (.9) 1.8 (.8) .5 ----- ----- ----- ----- Income (loss) before income taxes 7.1 (327.1) 3.5 (44.3) Income tax provision (benefit) 2.2 (31.1) 1.2 (1.1) ----- ----- ----- ----- Net income (loss) 4.9% (296.0)% 2.3% (43.2)% ===== ===== ===== =====
NET SALES PC CARD AND PARALLEL PORT PRODUCT SALES. Net sales of LAN adapters and modems ("client products") for the three months ended June 30, 1996 increased 175% from the corresponding period a year ago due to growth in overall market demand for such products that connect portable PCs to networks, the Internet and on-line services (such as America Online), as well as sales of the Company's modem-only PC Card product, which was introduced in September 1995. Also, net sales in the June 1995 quarter were negatively impacted by the Company's efforts to reduce channel inventories that had built up in the first half of fiscal 1995. Unit shipments of client products increased 8 9 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 202% for the June 1996 quarter versus the June 1995 quarter but average selling prices declined due to increased competition in the PC Card LAN adapter market and to a shifting mix of products from parallel port versions to PC Card versions. Net sales from client products for the nine-month period ended June 30, 1996 increased at a lesser rate, 32%, compared to the corresponding period of the prior year than the increase of the three-month period of fiscal 1996 over the same period of fiscal 1995 because of flat sales in the first six months of fiscal 1996 compared to the same period of fiscal 1995. As explained in the Form 10Q for the December 1995 quarter, the Company experienced increased competition during the course of fiscal 1995, a decline in market share year-over-year and a shifting mix of product sales away from the higher priced parallel port LAN adapters. However, the Company has experienced an increase in unit sales of its client products by its distributors in each of the last four quarters. The growth in channel sell-through may be indicative of several factors: an increased growth rate in shipments of portable PCs, which in turn require network connections; a more competitive pricing strategy first adopted by the Company during fiscal 1995; the rapid growth in sales of the latest version of the Company's Ethernet+Modem PC Card, which first shipped in July 1995; and increased sales of modem-only products first introduced in September 1995. REMOTE ACCESS PRODUCT SALES. The Company completed its acquisition of Primary Rate Incorporated ("PRI"), a provider of Integrated Services Digital Network ("ISDN") products to original equipment manufacturers ("OEMs") in June 1995. Revenues from this new product line accounted for approximately 16% and 13% of net sales for the three- and nine-month periods ended June 30, 1996, respectively. The Netaccess remote access server and Netwave wireless LAN product lines accounted for approximately 1% of net sales during each of the three- and nine-month periods of fiscal 1996. In the corresponding nine-month period of 1995, the Company derived approximately 8% of its revenue from these product lines based on initial shipments of the MultiPort Modem product, an FCC-approved version of its Netwave product and, beginning in June 1995, ISDN OEM products. The MultiPort Modem product line has not contributed a material amount of revenue since its introduction. Development of this product has continued and certain improvements have been made that should allow the Company to reintroduce it to the market as part of the Netaccess series of remote access server products later in calendar year 1996. INTERNATIONAL SALES. Shipments to customers located outside the U.S. were 43% and 40%, respectively, of total net sales for the three- and nine-month periods ended June 30, 1996, compared to 63% and 44%, respectively, for the corresponding periods of fiscal 1995. The lower percentage of international sales in 1996 was primarily due to the addition of ISDN OEM sales in fiscal 1996, which to date have been predominantly U.S.-based, and to stronger channel sell-through in Europe in the June 1995 quarter which resulted in less impact on international sales due to channel inventory reductions than in the U.S. 9 10 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Many of the Company's products (such as Netaccess, PC Card modems and ISDN products) are designed to connect to public telecommunications networks and therefore require approvals for use in certain countries. While the Company attempts to design its products to meet the requirements of most major countries worldwide, the testing and approvals process takes additional time. Historically, the time between first shipments to the U.S. market and shipments to major international markets requiring approvals has been three to six months. As a result, the proportion of international sales may be lower than historical levels during product introduction periods. GROSS PROFIT Gross profit margins for the three- and nine-month periods of fiscal 1996 were 36.0% and 36.1%, respectively, compared to 21.9% and 42.7%, respectively, for the comparable prior-year periods. The increase in the June 1996 quarter compared to the June 1995 quarter was due primarily to the unusually low revenues in the 1995 period and the resulting greater portion of fixed costs in relation to total cost of sales. The decrease in the nine-month period of 1996 compared to the corresponding period of the prior year is due to the increased proportion of sales of PC Card adapters, which have lower gross profit margins than the Company's parallel port adapters, and to selling price reductions on PC Card products during fiscal 1995. In addition, start-up expenses related to the commencement of operations for the Company's own manufacturing of PC Cards had a negative impact on gross margins in the December 1995 quarter and, to a lesser extent, in the March 1996 quarter. The Company has now successfully transitioned all of its PC Card manufacturing to this in-house facility. While this transition is expected to have a positive impact on cost reduction efforts, the proportion of revenues derived from the Ethernet+Modem and modem-only PC Cards, which have lower gross profit margins compared to LAN PC Cards and systems division products, have negatively impacted overall gross margins and may continue to offset improvements from manufacturing and design efficiencies if such revenue mix changes continue. In June 1996, the Company commenced shipment of its Fast Ethernet PC Card adapters for connecting portable PCs to 100 megabit Ethernet networks. Fast Ethernet products have higher gross profit margins than the overall corporate average and thus are expected to have a positive impact on gross profit margins. OPERATING EXPENSES Excluding nonrecurring charges related to the acquisition of PRI in June 1995, operating expenses for the three-month period ended June 30, 1996 decreased by 7% compared to the corresponding prior-year period primarily due to more focused product development activities, a reduction in certain promotional spending and reduced headcount through employee attrition. Operating expenses (excluding nonrecurring charges) for the nine months ended June 30, 1996 increased 1% compared to the corresponding 1995 period, primarily due to the expansion of product lines, the 10 11 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS acquisition of PRI and expanded international operations. The Company has reduced operating expenses as a percentage of net sales for each of its functional areas (research and development, sales and marketing, and general and administrative) in each of the last four quarters. Total operating expenses are expected to increase in the fourth quarter of fiscal 1996 but may continue to decrease as a percentage of net sales. Research and development expenses were 6% lower in the third quarter of fiscal 1996 compared to the same period of fiscal 1995 and were 4% lower in the first nine months of fiscal 1996 compared to the corresponding period of 1995. The reduced expenditure levels are a result of more focused product development efforts. Research and development expenses are expected to increase modestly in absolute dollars for the fourth quarter of fiscal 1996. Sales and marketing expenses were 11% lower in the June 1996 quarter compared to the June 1995 quarter and were 2% lower for the nine months ended June 30, 1996 as compared with the corresponding prior-year period. Sales and marketing expenditures have been reduced substantially from the levels in the second half of fiscal 1995, both in amount and as a percentage of sales. Expenses of $8.8 million in the June 1996 quarter, compared to $11.8 million in the September 1995 quarter and $9.9 million in the June 1995 quarter, reflect consolidation of certain sales operations, reduced overall promotional spending due to a more focused product line and reduced headcount through employee attrition. Sales and marketing expenses are expected to increase slightly in the near term to support planned new product introductions. General and administrative expenses for the three- and nine-month periods of 1996 increased by 13% and 28%, respectively, compared to the corresponding periods of 1995 primarily due to expanded information systems hardware and software and the amortization of goodwill and other intangible assets related to the acquisition of PRI in June of 1995. Nonrecurring charges in the fiscal 1995 periods of $42.1 million ($41.3 million, net of tax benefit of $0.8 million) consisted primarily of in-process research and development purchased from PRI that had not yet reached technological feasibility and, therefore, were required to be written off under generally accepted accounting principles. Excluding nonrecurring charges, total operating expenses were $15.7 million and $42.4 million, respectively, for the three- and nine-month periods ended June 30, 1995. Net losses and net losses per share for the same periods, excluding nonrecurring charges, were $7.4 million and $.4 million, respectively, and $0.44 and $0.02, respectively. OTHER INCOME (EXPENSE), NET Net other income or expense includes interest income from the investment of available cash, early payment discounts earned by the company offset by early payment discounts taken by customers, foreign currency transaction gains or losses and interest 11 12 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS expense on notes payable and capital leases. The Company had net other expense for the first nine months of fiscal 1996 compared to net other income for the corresponding fiscal 1995 period due primarily to lower interest income and higher interest expense in the 1996 period as a result of reduced cash balances and borrowings under credit facilities. Interest expense is expected to increase for the balance of fiscal 1996 as a result of borrowings required to fund capital expenditures and operations. INCOME TAXES The Company's effective tax rate was 33.4% for the first nine months of fiscal 1996 as a result of an expected 32% tax rate for profitable operations in the second and third quarters and the 25.6% tax benefit related to a pre-tax loss recorded in the first quarter. Based on current assumptions of revenue and profitability, the Company estimates that the fourth quarter of fiscal 1996 will be taxed at a 32% rate, primarily due to tax holiday status for the Company's operations in Malaysia. RISK FACTORS - ------------ The market for portable PC LAN adapters has grown rapidly since the Personal Computer Memory Card International Association (PCMCIA) introduced a standard form factor for PC Card (originally "PCMCIA") LAN adapters in 1993. Companies with greater name recognition in the PC, desktop LAN adapter and PC Card modem industries and with greater financial resources now have a significant presence in the PC Card LAN adapter market. As a result, the Company's net sales and gross profit margins could be adversely impacted by several factors including increased price competition, the Company's percentage market share in the PC Card LAN adapter market, the proportion of sales from parallel port products, and the levels of inventories in the Company's distribution channels. Although the Company believes its share of the PC Card LAN adapter market stabilized in 1996, primarily because of its more competitive pricing strategy for PC Card products adopted during fiscal 1995, its success with the latest version of its combination Ethernet LAN and Modem PC Card and the anticipated introduction of its Fast Ethernet PC Cards which began shipments in June 1996, competition is expected to remain intense and therefore the Company's market share could be adversely affected by continued price competition, new product introductions by competitors or promotional efforts by competitors. The Company believes that the market for PC Card LAN adapters and modems will be price competitive for the long-term and thus could continue to result in lower gross profit margins than the Company has earned from such products in the past. While the Company believes its current product costs are competitive, it continues to redesign its products for cost savings. In addition, the Company's new manufacturing facility, which began volume production in the December 1995 quarter and is now producing all of the Company's PC Card products, is operating at a greater efficiency level than in the first half of fiscal 1996. However, there can be no assurances that cost reductions achieved through increased manufacturing efficiencies will keep pace with competitors' cost 12 13 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS reductions or be sufficient to allow price reductions required to maintain or increase market share without adversely affecting gross profit margins. The Company generally ships products within one to six weeks after receipt of orders and therefore its sales backlog is typically minimal. Accordingly, the Company's expectations of future net sales are based largely on its own estimate of future demand and not on firm customer orders and, therefore, future expenditures are based in part on its estimates of future sales. If net sales do not meet expectations, the Company may not be able to reduce expenses commensurately in the near-term, and profitability could be adversely affected. The Company's net sales may be affected by its distributors' decisions as to the quantity of the Company's products to be maintained in their inventories. At the end of June 1996, the Company believes its distributors had what it considers to be normal levels of inventory overall. There can be no assurances that new products that the Company may introduce will achieve market acceptance or sell through to end users in sufficient quantities to make them viable for the long-term. In addition, the Company may have difficulty in establishing its presence in markets in which it does not have significant brand recognition, such as remote access. The Company introduced a line of modem-only PC Card products late in fiscal 1995, utilizing existing technologies from its combination LAN and modem PC Cards and modem-based remote access products. While the PC Card modems generally have lower gross profit margins than PC Card LAN adapters, increased sales volume from modems would have a positive impact on coverage of fixed manufacturing costs which in time could partially offset the generally lower margins on modem products. While product areas such as remote access and ISDN are expected to contribute higher gross profit margins, the sales growth to be achieved in these areas is likely to be proportionate with sales growth in PC Card products, and therefore any positive impact on overall gross margins, may be limited. Because all PC Card products are now being manufactured at the Company's own facilities, interruptions in supply of products could occur if the Company is unable to accurately forecast or react to changes in product demand, which in turn could adversely affect future sales. Interruptions could also occur due to political or economic changes in Malaysia. In summary, gross profit margins are impacted by a number of factors, including the rate of sales growth, competitive pricing pressures, the mix of product sales, component and manufacturing costs, and the shipments of new products, which often have lower margins until market acceptance and increased volumes permit component cost reductions and manufacturing efficiencies. Frequent product transitions also increase the risk of inventory obsolescence and interruptions of sales. 13 14 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A number of additional factors could have an impact on the Company's future operating results. The industry in which the Company operates is characterized by rapid technological change and short product life cycles. While the Company has historically been successful in developing leading technology for its products, ongoing investment in research and development will be required to maintain the Company's technological position, and the Company could be required to increase the rate of such investments depending on competitive factors. Many of the Company's competitors have greater financial and technical resources than the Company. It is also possible that networking capability could be included in the PC itself or in extension modules to PCs, which could cause a reduction in the demand for add-on networking devices. The Company's results are also dependent on continued growth in the underlying market for portable networking products as well as the Company's ability to retain its market share. With the proliferation of new products and rapidly changing technology in the PC Card and remote access server markets, there is a significant volume of patents or similar intellectual property rights held by third parties. Given the nature of the Company's products and development efforts, there are risks that claims associated with such patents or intellectual property rights could be asserted by third parties. These risks may include the following: the cost of litigation or settlement of such claims could be substantial regardless of the merits of the allegations; the Company may not prevail in the event of litigation; if the Company did not prevail in litigation, it could be required to pay significant damages, and/or to cease sales and production of infringing products, and only make future sales of a noninfringing design. Such a claim was asserted in March 1996 in relation to the Company's CreditCard Ethernet products. See "Legal Matters" in "Notes to Condensed Consolidated Financial Statements" in the Company's Form 10-Q for March 31, 1996. To date, the Company has received no further communication regarding this assertion. Based on the specific allegations made, the facts known at this time, and the investigation and evaluation by the Company and its outside intellectual property counsel regarding the allegations, management does not currently believe that this matter will have a material adverse effect on the Company's financial condition or results of operations in the event that the third party continues to pursue this matter. Because of frequent technology changes and rapid industry growth, the cost and availability of components used to manufacture the Company's products may fluctuate. Some components, including custom chipsets, are available from only one supplier. Any interruptions in these supply sources or limitations on availability could impact the Company's ability to deliver its products and in turn adversely affect future earnings. The Company is also subject to additional risk factors as identified in its Annual Report to Shareholders and filing on Form 10-K for the year ended September 30, 1995. 14 15 XIRCOM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1996 the Company had $16.3 million in cash and cash equivalents. The Company's operating activities provided cash of approximately $2.4 million in the nine-month period ended June 30, 1996, primarily as a result of income from operations, income tax refunds received and an increase in accounts payable offset by increases in accounts receivable and inventories. Accounts receivable increased due to higher quarterly revenue and fewer early payment discounts offered in the June 1996 quarter compared to the September 1995 quarter. Inventories increased primarily due to the transition from turn-key to in-house manufacturing and to an increase in the volume of business. The Company had capital expenditures of $7.3 million in the first nine months of fiscal 1996 primarily for manufacturing equipment and leasehold improvements at its Malaysian manufacturing facility. The Company has no material fixed commitments for capital expenditures and expects that the rate of capital expenditures will decrease in the near term. The Company is evaluating a lease versus buy decision for its Malaysian manufacturing facility. If the Company purchases the facility, it would result in an increase in capital expenditures of approximately $6.0 million and the issuance of long-term debt to finance the purchase. The Company has a domestic credit facility that permits borrowings up to $15.0 million at the prime rate plus 1-1/4%. Advances under the agreement are based on eligible accounts receivable and inventories and are secured by all U.S.-based assets of the Company. As of June 30, 1996, there were no borrowings outstanding under this agreement, which expires in November 1996. The Company also has a credit facility in Malaysia totaling $10.8 million with interest rates ranging from 1/2% to 1-1/2% over the bank's reference rate. As of June 30, 1996, there was $2.0 million in demand notes and $3.5 million in term loans outstanding under this facility, which expires in April 1999. The Company had approximately $19.4 million in borrowings available under its credit facilities as of June 30, 1996. The Company believes that cash on hand, borrowings available under its existing facilities or from other financing sources and cash provided by operations will be sufficient to support its working capital and capital expenditure requirements for at least the next twelve months. However, there can be no assurances that future cash requirements to fund operations will not require the Company to seek additional capital sooner than the twelve months, or that such additional capital will be available when required on terms acceptable to the Company. 15 16 XIRCOM, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Risk Factors" under "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER ITEMS In May 1996, Patrick P. Parker was appointed Vice President, Engineering. In June 1996, Jerry N. Ulrich resigned as Chief Operating Officer and Chief Financial Officer of the Company. At the same time, Steven F. DeGennaro was appointed Chief Financial Officer of the Company. In June 1996, Michael F.G. Ashby, Vice President and Chief Financial Officer of Pacific Telesis Enterprises, was named to Xircom's Board of Directors. In July 1996, Bruce C. Edwards resigned as a member of the Board of Directors and was replaced by Delbert W. Yocam, an independent consultant. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K The company filed one report on Form 8-K during the fiscal quarter covered by this report, as follows: (i) Report on Form 8-K filed on June 25, 1996, reporting under Item 5 the filing of a press release regarding a management buyout. 16 17 SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XIRCOM, INC. (Registrant) Date: August 12, 1996 /s/ Dirk I. Gates ------------------------------------------------------------------- Dirk I. Gates Chairman of the Board, President and Chief Executive Officer Date: August 12, 1996 /s/ Steven F. DeGennaro ------------------------------------------------------------------- Steven F. DeGennaro Vice President, Finance and Chief Financial Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1996 OCT-01-1995 JUN-30-1996 16,341 0 25,509 0 23,700 77,028 19,784 0 103,498 40,496 2,217 0 0 19 60,766 103,498 135,246 0 86,371 0 43,055 0 0 4,725 1,577 0 0 0 0 3,148 .16 0
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