-----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, OSM+yog+IdW+n7bUH3yBPDQmnSpCuSbU4w5R+onFesPv6VmN74G749ddOLKfU8xZ DcQUnjHkeN1a/VtdcodGdg== 0000892569-97-003452.txt : 19980102 0000892569-97-003452.hdr.sgml : 19980102 ACCESSION NUMBER: 0000892569-97-003452 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971215 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XIRCOM INC CENTRAL INDEX KEY: 0000883905 STANDARD INDUSTRIAL CLASSIFICATION: 3576 IRS NUMBER: 954221884 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19856 FILM NUMBER: 97737922 BUSINESS ADDRESS: STREET 1: 2300 CORPORATE CENTER DR CITY: THOUSAND OAKS STATE: CA ZIP: 91320-1420 BUSINESS PHONE: 8053769300 MAIL ADDRESS: STREET 1: 2300 CORPORATE CENTER DRIVE CITY: THOUSAND OAKS STATE: CA ZIP: 91320-1420 10-K 1 FORM 10-K FOR PERIOD ENDED SEPTEMBER 30, 1997 1 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. 2 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 2 3 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 3 4 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. 4 5 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. 5 6 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 6 7 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 7 8 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. 8 9 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.
Name Age Position 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
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. 9 10 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 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. 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
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
11 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. (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 - - -----------------------------------------------------------------------------------------
(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 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 (in thousands) 1997 CHANGE 1996 Change 1995 - - -------------------------------------------------------------------------------------- Net sales $184,575 11% $166,757 40% $119,528
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. (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%
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 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. (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%
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. (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%
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 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. (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%
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. (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%
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. (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%
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 16 income and higher interest expense in 1996 as a result of reduced cash balances and borrowings under credit facilities. (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%
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. (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%
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 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 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 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 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA XIRCOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(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 - - --------------------------------------------------------------------------------------
See accompanying notes 20 21 XIRCOM, INC. CONSOLIDATED BALANCE SHEETS (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 - - ---------------------------------------------------------------------------------------
See accompanying notes 21 22 XIRCOM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Retained Earnings ---------------- Paid-in (Accumulated (In thousands) Shares Amount Capital Deficit) Total - - ------------------------------------------------------------------------------------------ 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 - - ------------------------------------------------------------------------------------------
See accompanying notes 22 23 XIRCOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Fiscal Years Ended September 30 1997 1996 1995 - - -------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------
See accompanying notes 23 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 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 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 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):
1997 1996 1995 - - -------------------------------------------------------------------------------------- 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) - - --------------------------------------------------------------------------------------
NOTE THREE: INVENTORIES Inventories consist of the following (in thousands): 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 - - -------------------------------------------------------------------------------------
NOTE FOUR: EQUIPMENT AND IMPROVEMENTS Equipment and improvements consist of the following (in thousands): 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 - - -------------------------------------------------------------------------------------
27 28 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE FIVE: ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands): 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 - - -------------------------------------------------------------------------------------
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): 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 - - -------------------------------------------------------------------------------------
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 29 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE SEVEN: INCOME TAXES The income tax provision (benefit) includes the following (in thousands): 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) - - --------------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): 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 - - -------------------------------------------------------------------------------------
Balance sheet classification of the net deferred tax asset is as follows (in thousands): September 30 1997 1996 - - ------------------------------------------------------------------------------------- Current deferred tax asset $ 7,075 $ 5,409 Noncurrent deferred tax liability (479) (2,904) - - ------------------------------------------------------------------------------------- $ 6,596 $ 2,505 - - -------------------------------------------------------------------------------------
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 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): 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) - - ---------------------------------------------------------------------------------------
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 31 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table is a summary of activity for the Company's stock option plans:
Option price per share ------------------------------- Number of Weighted- shares Low High Average - - ----------------------------------------------------------------------------------------- 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 - - -----------------------------------------------------------------------------------------
Information regarding stock options outstanding as of September 30, 1997 is as follows:
Options Outstanding Options Exercisable ---------------------------------------- Weighted- ---------------------- Weighted- Average Weighted- Average Remaining Average Exercise Contractual Exercise Shares Price Life Shares Price - - ------------------------------------------------------------------------------------------ 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
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 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): 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 - - --------------------------------------------------------------------------------------
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 33 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE NINE: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (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) - - ------------------------------------------------------------------------------------------
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):
Operating Fiscal year leases --------------------------------------------------------------------------- 1998 $ 2,170 1999 1,863 2000 1,542 2001 1,578 2002 1,603 Thereafter 4,330 --------------------------------------------------------------------------- $13,086 ---------------------------------------------------------------------------
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 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.
(in thousands) United States Europe Asia Eliminations Total - - -------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------
(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 35 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE TWELVE: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per Quarter ended share data) Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal Year - - ------------------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------------------
(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 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 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 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:
Page in Form 10-K 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
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 39 SCHEDULE II XIRCOM, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions Charged Balance at to Balance Beginning Costs and at End of Description of Period Expenses Deductions Period - - ------------------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------------------
39 40 (3) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Number Description of Document - - ------- ---------------------------------------------------------------------------- 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)
40 41
Exhibit Number Description of Document - - ------- ---------------------------------------------------------------------------- 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
- - --------------- (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 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 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 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.
SIGNATURE TITLE DATE /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
44 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 75,109 0 17,151 6,254 28,962 129,525 35,976 18,157 147,930 34,024 0 0 0 23 113,404 147,930 184,575 184,575 126,300 126,300 66,233 0 480 (4,786) (1,437) (3,349) (6,501) 0 0 (9,850) (.46) (.46)
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