-----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, NTrFauMykKkOae6YKPlQfFei6JB49mckgOt+7thgzrrwUaXJuaROyK8PM47fLr0I uxSWdYyuM7sNTwIq8+d8zg== 0000892569-95-000722.txt : 19951214 0000892569-95-000722.hdr.sgml : 19951214 ACCESSION NUMBER: 0000892569-95-000722 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XIRCOM INC CENTRAL INDEX KEY: 0000883905 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 954221884 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19856 FILM NUMBER: 95601160 BUSINESS ADDRESS: STREET 1: 2300 CORPORATE CENTER DRIVE CITY: THOUSAND OAKS STATE: CA ZIP: 91320 BUSINESS PHONE: 8053769300 MAIL ADDRESS: STREET 1: 2300 CORPORATE CENTER DRIVE CITY: THOUSAND OAKS STATE: CA ZIP: 91320 10-K 1 FORM 10-K ENDING SEPTEMBER 30, 1995 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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, 1995 [ ] 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 95-4221884 (State of Incorporation) (IRS Employer Identification No.) Securities registered pursuant to section 12(b) of the Act: Title of Class Name of Exchange -------------- ---------------- COMMON STOCK, $.001 PAR VALUE 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 15, 1995, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $120,388,000. 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 19,003,174 at November 15, 1995. 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 19, 1996. 2 INTRODUCTORY STATEMENT References made in this Annual Report on Form 10-K to "Xircom," the "Company" or the "Registrant" refer to Xircom, Inc. and its wholly owned subsidiaries. Xircom is a registered trademark, and CreditCard LAN Adapter, CreditCard Modem, Pocket LAN Adapter, Ethernet+Modem, Netwave, Parallel Port Multiplexor, Tractor Grip, Netaccess, MultiPort Modem, MultiChannel ISDN Adapter, and Instant ISDN are trademarks of Xircom, Inc. Other company and product names contained in this report may be trade names or trademarks of other companies. 2 3 PART 1 ITEM 1. BUSINESS 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 online services such as the Internet. 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 established the mobile networking market and by 1992 had become the leading solution for portable PC-to-LAN connectivity. In late 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, 1995, the Company has sold nearly two million PC Card or parallel port LAN adapters and remains the overall market leader in LAN adapters 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 combination LAN adapter and modem PC Cards, a modem-only PC Card and systems-level mobile networking solutions, including remote access server products. In 1995, the Company began shipping its wireless LAN products in volume. 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 will grow from 7.3 million in 1994 to over 16 million in 1999.(1) It is also projected that 47% of portable computers will be connected to a LAN by 1998 compared to 12% in 1994(2) and that 80% of portable PC users in the U.S. will use their portable as their primary PC by the year 2000.(3) - ------------------------- (1) International Data Corporation, 1995 (2) International Data Corporation, 1995 (3) BIS Strategic Decision, 1995 3 4 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 online 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 (oftentimes referred to as a remote access server or communications server). The modem market has grown substantially over the last several years and today it is estimated that 91% of portable PCs are equipped with a modem. The market for PC Card modems is expected to grow from 1.6 million units in 1994 to 7.1 million units by 1998.(4) The remote access server market is also expected to grow from approximately 700,000 "ports" in 1994 to 7.0 million in 1998.(5) Integrated Services Digital Network (ISDN) usage is expected to become a larger proportion of such connections because ISDN enables higher speeds than analog modem-based connections and the telephone carriers are making ISDN service more broadly available. ISDN services are based on multiple 64 kilobits-per-second (Kbps) digital channels (two "B" channels for a basic rate interface and 23 to 30 "B" Channels for a primary rate interface) compared to 28.8 Kbps speeds for a V.34 analog modem. PRODUCTS In 1995 the Company reorganized into Client and Systems Divisions, grouping its similar product lines together to achieve greater efficiencies and resource utilization. CLIENT PRODUCTS Client 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 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 also incorporate preconfigured software drivers that support over 48 different network operating systems and communication protocols. Most Xircom adapters include both DOS- and Windows-based menu-driven software for simple, fast installation. Xircom shipped the industry's first external parallel port LAN adapter, the Pocket Ethernet Adapter, in May 1989. The second-generation product, Pocket Ethernet Adapter II, was first shipped in September 1991 and the third-generation Pocket Ethernet Adapter III was first shipped in March 1993. The Pocket Token Ring Adapter, first shipped in December 1989, was the first commercially available parallel port adapter for Token Ring networks. The second-generation Pocket Token Ring Adapter II was first shipped in February 1992, and the third-generation Pocket Token Ring Adapter III was first shipped in December 1993. Today Xircom remains the dominant supplier of Pocket LAN Adapters, with a market share estimated to be over 70%(6). BYTE magazine's 20th anniversary issue in September 1995 named Xircom's original Pocket LAN Adapter as one of the Most Important Networking Products of all time. Revenues from Pocket LAN adapters represented 34% of Xircom's total revenues in fiscal 1995 compared to 55% in 1994. This proportion had further declined to 26% in the fourth quarter of fiscal 1995 and is expected to continue to decline in 1996 and 1997 as the PC Card becomes the dominant form factor for connecting peripheral devices to portable PCs. During 1991, the PCMCIA defined certain dimensional interface standards for use by a variety of PC peripherals, including memory cards, fax/modems, LAN adapters and disk drives. The - ------------------------------ (4) International Data Corporation, 1995 (5) International Data Corporation, 1995, and Xircom (6) Dataquest Incorporated, 1995 4 5 PC Card interface, or slot, is now incorporated into most 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 in February 1993. The Company commenced shipments of its CreditCard Token Ring Adapter in December 1993. The second-generation CreditCard Ethernet Adapter IIps and CreditCard Token Ring Adapter IIps were first shipped in June and July 1994, respectively. In August 1995, the Company announced support for Windows 95 for its entire line of Ethernet and Token Ring PC Card adapters and was an active participant in Microsoft's launch of Windows 95. Revenues from PC Card LAN adapters, including combination LAN adapters and modems, were 59% of the total in fiscal 1995. Multifunction Adapter/Modem Cards. In February 1994, the Company began shipping the first PC Card offering a LAN adapter and a modem in a single PCMCIA card. The CreditCard Ethernet+Modem 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 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. The Ethernet+Modem products accounted for 23% of revenue for all of fiscal 1995 and 34% in the fourth quarter of fiscal 1995. PC Card Modem. Xircom commenced shipment of the Company's first modem-only PC Card in September 1995. The CreditCard Modem 28.8 incorporates the latest V.34 standards and broadens Xircom's remote access solutions by adding a modem-only option for PC notebook users who require high- speed remote access to LANs, commercial online service, or the Internet. 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, and multifunction PC Cards that will combine LAN, modem and ISDN technologies for use with high-bandwidth applications. Other Client Products. Xircom also offers the Parallel Port Multiplexor, which allows a user to connect both a parallel port LAN adapter and a dedicated printer through a single parallel port. In September 1995, Pacific Data Products completed the purchase of Xircom's Pocket Print Server product line in an agreement that had no material financial impact on Xircom. SYSTEMS PRODUCTS Xircom's systems solutions include remote access server products and wireless LAN products. Remote Access. Xircom's solutions in this market are based on an "open systems" approach to remote access. Industry analysts project that in the future the majority of dial-in remote access servers will be open systems much like LAN file servers are today. They will integrate a standard PC with remote access software from Novell or Microsoft and adapters like Xircom's MultiPort Modem Card. The MultiPort Modem Card, which was first shipped in March 1995, includes four or eight V.34 (28.8 Kbps) modems on a card. Experts predict that the latest analog modems have most likely reached the theoretical maximum speed except for the possible development of further data compression techniques. As a result, users are beginning to migrate to ISDN technology for higher-speed remote network and Internet connections. In addition, ISDN service is becoming more broadly 5 6 available and the costs of installation, service and equipment are priced more reasonably. Industry analysts project that ISDN basic rate terminal adapter shipments will grow from 225,000 units in 1995 to 550,000 units in 1999,(7) while ISDN server ports will increase from 345,000 to 1,023,000.(8) In June 1995, Xircom entered the market for ISDN remote access through its acquisition of Primary Rate Incorporated ("PRI"). PRI, started in 1989, developed the industry's first primary rate interface to a computer for the computer telephony market. PRI's subsequent efforts were on developing ISDN solutions for OEM customers. Today, these OEM customers include AT&T, Xyplex, Ericsson, IBM, Bell Atlantic, BellSouth and other vendors who use Xircom ISDN technology as a component of their internetworking, telecommunications and remote access solutions. Prior to the acquisition, PRI had developed an ISA (Industry Standard Architecture) version of a primary rate interface card that runs under Windows NT and a first-generation basic rate interface card. These products are now being marketed as ISDN server cards complementing the analog MultiPort Modem Cards Xircom introduced earlier in 1995. Further development of these products will allow Xircom to offer a seamless dial-in server solution for both ISDN and analog users employing Windows NT or Netware Connect. PRI's experience in ISDN software development will also be utilized in development of new PC Card ISDN products. Wireless LAN. In January 1995, the Company commenced volume shipments of Netwave, its wireless LAN product line that enables the user to establish a peer-to-peer network or maintain an Ethernet network connection while moving about the workplace unencumbered by wires and cables. Based on 2.4 GHz, spread spectrum, frequency hopping radio frequency (RF) technology, Netwave products include the CreditCard Netwave Adapter and the Netwave Access Point for Ethernet. The Netwave adapter, radio and antenna are fully self-contained in a single PC Card, with no external circuitry. The companion Netwave Access Point for Ethernet is a Netwave-to-Ethernet bridge that attaches directly to the wired LAN, enabling a number of Netwave adapter users to access the network through one access point. With multiple access points installed throughout a facility, Netwave users can roam within the coverage area while maintaining real-time access to network services. Netwave can also be utilized in a simple peer-to-peer network configuration without access points. Xircom shipped its Netwave Release 2.5 in July 1995, which offers improved throughput, seamless roaming capabilities and utilities for conducting site surveys and managing the wireless connection. At the same time, the Company announced a new aggressive pricing and seeding program and introduced a Netwave Starter Kit to promote trials and testing by potential users. Netwave supports a wide range of network operating systems and PC hardware and software. The Company is active on the Institute of Electronic and Electrical Engineers ("IEEE") 802.11 Wireless LAN Committee, which is developing an industry standard to assure interoperability among various vendors' products. While the market for wireless LAN has been small to date, industry analysts expect the market to grow more rapidly once a standard is issued sometime in 1996. In April 1995, Netwave passed European Telecommunications Standard testing and has gained approvals for sale in most major European countries. - -------------------------------------- (7) International Data Corporation, 1995 (8) International Data Corporation, 1995 6 7 Netwave contributed less than 5% of total revenues in fiscal 1995. 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 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 an erasable programmable read-only memory (EPROM) in most of its products to allow certain changes, enhancements or error corrections to be implemented through a software download as opposed to a change in hardware. The Company is a leader in simplifying the installation and configuration of a portable LAN adapter by incorporating certain proprietary software coding in its parallel port products. Subsequently, because of difficulties associated with installation of PC Cards, the Company developed a Windows-based installation utility in fiscal 1994, which now ships with most Xircom adapters. Although the new Windows 95 operating system, released in August 1995, improved the installation process for PC Cards and other peripherals, add-on hardware often requires driver updates to enhance features or performance. Therefore, installation utilities remain an important feature of the products. 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 that the LAN adapter or modem is being installed in (e.g., the parallel port or PCMCIA slot). While the Company's leading products are designed to operate with the major operating systems, including Microsoft Windows 3.1, Windows NT and Windows 95, 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 adapters. 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: o Pioneered the use of the PC parallel port for LAN connectivity; o Participated with Zenith Data Systems and Intel Corp. in the development of Enhanced Parallel Port ("EPP") technology; o Was first to ship an Ethernet LAN adapter; o Was first to ship a parallel port modem, which offers higher throughput than a serial port modem; o Was first to ship a PC Card combining a LAN adapter and a modem; o Was first to incorporate full-duplex Ethernet technology in its LAN adapters, which offers up to twice the data throughput on an Ethernet network; 7 8 o Developed the first wireless LAN adapter fully contained in a PC Card (with no external circuitry); o Developed block mode transfers for use in modems, allowing greater throughput than normally available. The June 1995 acquisition of PRI provided the Company with faster entry to an emerging market for ISDN products. PRI developed ISDN protocol software, called Instant ISDN, with an open application programming interface, to simplify the incorporation of their ISDN products into other OEM solutions. PRI also provided experience in gaining approvals for the sale of ISDN products and technology ("homologation") in Europe, Japan and Canada. 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; Colorado Springs, Colorado; Provo, Utah; and Kontich, Belgium. The Company's current research and development efforts include ongoing feature enhancement and cost reduction of current products, continued development of multifunction PC Cards, development of new versions of Netwave wireless LAN products, enhancement of remote access modem server products and ISDN server products, and support for the Company's OEM customers. The Company has participated in leading industry standards committees such as the IEEE Working Group 1284 Committee for Parallel Port Standardization, the PCMCIA Committee for add-in cards for portable computers, the IEEE 802.11 Standards Committee for Wireless LANs, the Fast Ethernet Alliance for developing 100 megabit-per-second Ethernet technology and the National ISDN Users Forum. In 1995 Xircom co-founded the Mobile MIB Task Force, a group formed to extend existing standards to handle the unique issues of managing mobile computer users who connect to networks. Other participants include Compaq, IBM, Motorola, Zenith Data Systems and National Semiconductor. Approximately 19% of the company's 500 employees were engaged in research and development activities as of September 30, 1995. During fiscal years 1995, 1994 and 1993, the Company incurred research and development expenditures of $13,824,000, $11,613,000 and $6,882,000, 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 IE Advanced Systems, Inc., Vanstar Corporation and MicroAge, Inc. The Company also sells directly to major domestic retail chains, such as Computer City Supercenter and CompUSA. The Company also sells its products to portable computer manufacturers and has a number of OEM customers for its ISDN products. Internationally the Company sells products through a worldwide network of distributors. In fiscal 1995, 1994 and 1993, international sales (sales to customers outside the U.S.) comprised 43%, 39% and 37%, respectively, of total net sales. All international sales are 8 9 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. In 1995, the Company developed a small field sales organization and expanded its inside sales/telemarketing function to create demand by calling directly on resellers, VARs and end-users interested in client or systems products. 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 six 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. Backlog was not significant at September 30, 1995 or 1994. COMPETITION The Company believes that the principal competitive factors in the market for external LAN adapters and indirectly competitive products are 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; customer support and service; brand name recognition; and price. Similar to the market for external LAN adapters, the principal competitive factors for external modems are 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; customer support and service; brand name recognition; and price. 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 70%). The PC Card LAN adapter market has become significantly more competitive, and the Company has a number of competitors that have substantially greater development, manufacturing and marketing resources than Xircom, including Fujitsu Microelectronics, Inc., International Business Machines Corp. (IBM), Motorola Inc., 3Com Corporation and U.S. Robotics Inc.'s Megahertz subsidiary. 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 closest competitor is Megahertz. Other smaller companies also offer Ethernet+Modem PC Cards including Ositech Communications Inc. and New Media. In addition, 3Com and Motorola have jointly developed and recently commenced shipments of a combination LAN+modem PC Card. The Company also competes indirectly with companies that provide alternative means to 9 10 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 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. 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 resulted in a loss of overall market share, sales declines and lower gross margins for the Company in 1995. While the Company has taken steps to be more competitive, particularly on price, and believes it has recently stabilized in its market share, the significant level of competition could adversely affect sales and profitability in the future. For the Company's recently introduced modem-only PC Card, the competition is significant. U.S. Robotics and its Megahertz subsidiary jointly hold a majority market share for PC Card modems and control a design feature called X-Jack which integrates the RJ-11 phone jack into the PCMCIA case. Other competitors in this market include Hayes Microcomputer Products, Boca Research, AT&T Paradyne (although AT&T has announced it is discontinuing its PCMCIA line of modems), TDK Systems, and many others, including manufacturers who may hold leading or significant market shares within specific countries. Xircom believes that it can leverage its engineering, sales and manufacturing resources with its V.34 PC Card modem because it already has modem technology and market recognition with its Ethernet+Modem PC Card products. Nevertheless, this market is historically very price-competitive, and some competitors, including U.S. Robotics, have proprietary designs which may result in lower manufacturing costs. In addition, because approximately 90% of 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 the 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. In the wireless LAN market, the key competitive factors are range, ability to penetrate obstructions, power consumption, performance (principally data transmission speed), antenna configuration, price and compatibility with the PC platform. The Company's direct competition for wireless LAN products comes from an increasing number of radio-based system manufacturers, some of whom, such as Proxim, Inc. and Solectek Corp., are focused specifically in wireless technologies. Others, including AT&T, IBM Corporation and Symbol Technologies, Inc., have substantially greater research, manufacturing, and marketing resources than the Company. Others are known to be preparing products for entering in the 10 11 wireless LAN market including 3Com Corporation, Telxon Corporation and Breeze Wireless Communications, Inc. In addition, the Company has licensed its Netwave technology to certain chipset manufacturers who may market such chipsets to others. The Company believes its Netwave product has a unique form factor with no antennae or other circuitry outside the PC Card adapter. Some competitors claim advantages in range and manageability. The Company also believes it has certain advantages in the software which operates on its access points although others offer similar functionality. Various components of Netwave are designed around specifications that served as a basis for parts of the standard being developed by the IEEE 802.11 Committee on wireless LAN standards. This could provide the Company some time-to-market advantage in introduction of standards-compliant products in 1996. The Company competes directly with a wide variety of vendors offering remote access solutions. In ISDN, direct competitors include small, ISDN-focused manufacturers as well as divisions of larger, well-established companies such as 3Com Corporation and U.S. Robotics, Inc. For the MultiPort Modem Card, direct competition is primarily from RS232 interface board manufacturers such as Digi International Inc., which provides low-cost serial port cards that end users or integrators use with standard external modems. Indirect competitors such as Shiva Corp., Ascend Communications, Inc., and Telebit Corp. currently dominate the remote access market by providing stand-alone products that do not require integration with other hardware or software. In addition, major internetworking vendors including Cisco Systems, Inc., Bay Networks, Inc. and Cabletron Systems, Inc. have recently added remote access solutions. All of these indirect competitors have substantially greater development and marketing resources than the Company. 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 with a limited volume production run of PC Cards at new facilities in Penang, Malaysia. The Company expects to ramp its production through April 1996 when most of its PC Card and parallel port adapters will be built in Penang. To-date, all the Company's PC Card products have been assembled by a single subcontractor on a turn-key basis. Components are purchased, warehoused, assembled and tested by such subcontractor before being sent to the Company for final packaging and shipping. The Company utilizes other subcontractors to assemble its parallel port adapters and cable assemblies. The Company purchases certain key components directly from third-party suppliers. The Company inspects these components for quality and forwards them to the subcontractors as needed. In the future, most components will be purchased in Penang using current vendors with local representation. Final assembly, test, packaging and shipping, currently performed by the Company at its facility in Thousand Oaks, California, will be transitioned to the Penang operation during 1996. 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 a proprietary Ethernet chipset (used in the Pocket Ethernet Adapter) purchased from Fujitsu Microelectronics, a proprietary Ethernet chipset (used in the CreditCard Ethernet Adapter) purchased from SymBIOS Logic, a Token Ring chipset from Texas 11 12 Instruments, an AT&T modem chipset (used in the modem products) and a standard Motorola microprocessor (used in the modem products). In addition, other components, including other semiconductor devices, transformers and plastic 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. PROPRIETARY RIGHTS AND LICENSES The Company has applied for numerous patents relating to its external LAN adapters, parallel port multiplexor, parallel port and PC Card modems, and wireless LAN products. Patents covering the original parallel port adapter and the parallel port multiplexor were issued in March 1994 and January 1994, respectively. A patent covering the combination parallel port Ethernet and modem was issued in April 1995. The Company has entered into licensing agreements with three competitors related to the parallel port adapter technology. Additionally, the Company is currently reviewing the applicability of its parallel port adapter and combination parallel port Ethernet and modem patents to other competitive products. The Company also seeks to protect its proprietary rights through a combination of employee and third-party nondisclosure agreements as well as copyright and trademark protection. 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 competitive advantage. 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. The Company currently includes software licensed from third parties in its Token Ring, Ethernet+Modem, modem-only, ISDN and remote access server products, which, in the aggregate, accounted for 43% of revenues in fiscal 1995. The Company's operating results could be adversely affected by a number of factors relating to this third-party software, including failure by the licensers 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 licensers. Madge Networks Agreement. The Company entered into a Software License Agreement with Madge Networks Limited ("Madge") pursuant to which Madge and the Company jointly developed the SmartRing Token Ring Adapter software, based on proprietary Token Ring software of Madge. Madge has licensed its SmartRing Token Ring Adapter software to Xircom for use in LAN adapters. The Company paid Madge an initial development fee and up-front license fee, and pays an additional royalty to Madge on each Token Ring LAN adapter the Company sells. Royalty payments are subject to certain quarterly minimums, with any royalties in excess of the quarterly minimum credited against future minimums. The agreement terminates on the date when the Company ceases to market Token Ring LAN adapters or may be terminated earlier by Madge if the Company does not meet minimum royalty payments. In September 1993 the Company entered into a similar agreement for the license of the SmartRing software for use in the Xircom CreditCard Token Ring adapter. 12 13 Willemijn License. The Company has entered into a nonexclusive patent license agreement with Willemijn Houdstermaatschappij BV (Willemijn) with respect to certain Token Ring technology for which Willemijn holds patents. Under this agreement, the Company pays a royalty on each Token Ring adapter sold by the Company. The agreement terminates in October 1998, upon expiration of the Willemijn U.S. patent. Shiva License. The Company entered into a PPP Client Software License Agreement with Shiva Corporation for software to be included in Ethernet+Modem, modem-only, ISDN and remote access server products. Under this agreement, the Company pays a royalty on products sold incorporating the Shiva technology. The agreement is nonexclusive and expires in June 1997. Tractor Grip License. The Company has licensed the use of the Tractor Grip device for attaching parallel port LAN adapters to PCs. The Company's license terminates upon the expiration of the United States patent in March 2009. Under this agreement, the Company pays a royalty on products sold incorporating the Tractor Grip technology. Fax/Modem License. The Company has entered into a nonexclusive license agreement for fax/modem software used in Ethernet+Modem and modem-only products. Under this agreement, the Company pays a royalty on each copy of the software. The agreement has an initial term of two years and provides for renewals upon mutual agreement of the parties. The Company has entered into additional license agreements that require the payment of per-unit royalties on wireless LAN products. To date, royalties paid under these agreements have not been material. EMPLOYEES As of September 30, 1995, the Company employed a total of 500 persons, including 210 in sales, marketing and customer support; 97 in engineering and product development; 143 in operations; and 50 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, in Mountain View, California and Salem, New Hampshire. 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 18 to 24 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. 13 14 MANAGEMENT The following sets forth certain information with respect to the executive officers of the Company and their ages as of December 1, 1995.
Name Age Position ---- --- -------- Dirk I. Gates 34 Chairman of the Board, President and Chief Executive Officer Robert W. (Sam) Bass 49 Vice President, Operations Thomas V. Brown 53 Vice President, Corporate Communications and Marketing and Acting General Manager, Systems Division Steven F. DeGennaro 32 Vice President, Finance and Chief Accounting Officer Marc M. Devis 35 Vice President, Europe and Asia- Pacific Sales and Marketing Randall H. Holliday 46 General Counsel and Secretary Carl E. Russo 39 Executive Vice President and General Manager, Client Division Jerry N. Ulrich 41 Chief Operating Officer and Chief Financial 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. Bass has served as Vice President, Operations of the Company since January 1992. From September 1990 until joining the Company, Mr. Bass served as Vice President, Operations of Fibermux Corporation, a provider of intelligent hubs to the LAN market. Mr. Brown has served as Vice President, Corporate Communications and Marketing of the Company since November 1994. He is currently on temporary assignment as Acting General Manager, Systems Division. From February 1991 until November 1994, he served as Vice President, Corporate Communications, and from October 1990 until February 1991 he was a consultant to the Company. Mr. DeGennaro has served as Vice President, Finance and Chief Accounting Officer of the Company since May 1995. He had previously served 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. Mr. Devis has served as Vice President, Europe and Asia-Pacific Sales and Marketing since January 1995. He had previously served, since June 1991, as Managing Director of 14 15 Xircom Europe N.V. From July 1989 to May 1991, Mr. Devis served as President and Chairman of Westex N.V., a distributor of computer equipment. 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 General Manager, Client Division 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. Mr. Ulrich has served as Chief Operating Officer and Chief Financial Officer of the Company since May 1995. He had previously served since December 1992 as Vice President, Finance and Administration and Chief Financial Officer and since March 1992 as Vice President, Finance. From 1991 until joining the Company, Mr. Ulrich was Corporate Controller for Adaptec, Inc., a manufacturer of hard disk controllers and small computer system interface (SCSI) host adapters. From 1989 to 1991, Mr. Ulrich served as Vice President, Finance and Chief Financial Officer of Pleion Corporation, a manufacturer of modular office furniture. Mr. Ulrich is a CPA. 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. Final assembly, test and shipping operations are conducted in an adjacent 50,000 square-foot leased facility. The Company also leases a facility that accommodates additional engineering, marketing, sales and customer support staff in Salem, New Hampshire; a manufacturing and distribution facility in Penang, Malaysia; a sales office in Washington, D.C.; a research and development facility in Mountain View, California; facilities for its European subsidiary in Kontich, Belgium; and facilities for its Asia-Pacific sales and marketing operations in Singapore and Sydney, Australia. In 1995, the Company opened sales offices in Paris, France; Basingstoke, England; Grassbrunn, Germany; and Stockholm, Sweden. 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 page 38 of this document. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 16 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. As of November 27, 1995, there were 426 holders of record of the Company's Common Stock.
FISCAL 1995 HIGH LOW ----------- ------- ------- FIRST QUARTER $23-1/2 $ 16 SECOND QUARTER 19 13-1/4 THIRD QUARTER 14-1/4 10-1/8 FOURTH QUARTER $15-3/8 $ 9 Fiscal 1994 ----------- First quarter $ 19 $ 14 Second quarter 28-1/4 16-1/4 Third quarter 25-1/2 12-3/4 Fourth quarter $21-1/4 $13-3/4
16 17 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, 1991 through 1995.
(In thousands, except per share amounts) 1995 1994 1993 1992 1991 - ---------------------------------------- -------- -------- ------- ------- ------- STATEMENT OF OPERATIONS DATA Net sales $126,565 $131,580 $82,212 $59,083 $26,324 Cost of sales 86,080 63,964 38,093 27,440 11,550 -------- -------- ------- ------- ------- Gross profit 40,485 67,616 44,119 31,643 14,774 Research and development expenses 13,824 11,613 6,882 3,908 1,615 Sales and marketing expenses 38,686 25,194 17,105 14,817 6,714 General and administrative expenses 8,092 5,491 5,073 3,391 2,297 In-process research and development and other nonrecurring charges 46,126 - - - - -------- -------- ------- ------- ------- Operating income (loss) (66,243) 25,318 15,059 9,527 4,148 Other income (expense), net 439 (175) 760 90 (12) -------- -------- ------- ------- ------- Income (loss) before income taxes (65,804) 25,143 15,819 9,617 4,136 Income tax provision (benefit) (7,000) 9,231 6,169 3,560 1,663 -------- -------- ------- ------- ------- Net income (loss)(1) $(58,804) $ 15,912 $ 9,650 $ 6,057 $ 2,473 -------- -------- ------- ------- ------- Net income (loss) per share(1) $ (3.44) $ .95 $ .59 $ .41 $ .19 BALANCE SHEET DATA Working capital $ 28,446 $ 72,590 $57,759 $47,300 $ 5,135 Total assets $ 88,742 $101,015 $75,267 $57,043 $13,747 Long-term obligations, net of current portion $ 831 $ 134 $ 793 $ 1,181 $ 678 Shareholders' equity $ 53,095 $ 82,115 $62,530 $49,569 $ 6,179 ======== ======== ======= ======= =======
(1) Fiscal 1995 includes $43,942 (net of tax benefit of $2,184), or $2.57 per share, for write-off of in-process research and development and other nonrecurring charges. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- -------- ------ -------- ------ ------- Net sales $126,565 (4%) $131,580 60% $82,212
Net sales of LAN adapter products, which accounted for 93% of net sales in 1995 and nearly all of the net sales in 1994, decreased 11% due to the Company's efforts to reduce channel inventories that had built up in the second half of fiscal 1994 and due to a loss of market share in the PC Card market. Unit sales of LAN adapter products increased only 3% in 1995 compared to 1994, which was substantially below the market growth rate. In addition, overall average selling prices in 1995 declined 13% from 1994 due primarily to the increased competition in the PC Card LAN adapter market and to a shifting mix of products from parallel port versions to PC Card versions. The decline in average selling price was partially offset by an increase in revenues derived from the higher-priced combination Ethernet+Modem products. The Company's CreditCard Ethernet Adapter and Credit Card Ethernet+Modem accounted for 29% and 23%, respectively, of 1995 sales and 27% and 12%, respectively, of 1994 sales. The Company believes it achieved some stabilization of its market share over the last four months of fiscal 1995. Expected market growth and stable market share would result in higher growth in unit shipments in fiscal 1996, as compared to fiscal 1995. Results for the first two months of fiscal 1996 were consistent with this expectation. The systems products (wireless LAN, remote access and ISDN OEM products) contributed 7% of net sales in fiscal 1995. The Company believes revenues from ISDN OEM products will increase in fiscal 1996 (due in part to a growing customer base and because the results from the acquisition of Primary Rate Incorporated ("PRI") were included for only four months of fiscal 1995). Sales of the Company's remote access products and wireless LAN products are dependent on the Company's ability to create greater awareness of its products among value-added resellers, system integrators and end users. In addition, there can be no assurances that the Company will be able to devote adequate sales and marketing resources or further develop the products to achieve such awareness or acceptance in the case of wireless LAN. The Company expects that this market will continue to develop slowly until standards are finalized (now expected by mid-1996) and users become more aware of the types of applications that will make wireless LAN connections useful. Net sales increased in 1994 due primarily to higher unit shipments of both parallel port and PC Card versions of the Company's external LAN adapters, offset by lower average selling prices. The higher unit volume was attributable to growth in overall portable PC shipments and the percentage of those portable PCs connected to LANs and the introduction of new PC Card products, including the Company's combination LAN adapter and modem product. International sales (shipments to customers located outside the U.S.) increased as a percentage of total sales to 43% in 1995 from 39% in 1994. Sales in Europe and Asia-Pacific grew at a faster rate than in the U.S. during 1995 primarily because of greater market growth in Asia, commencement of shipments of an internationally approved version of the combination 18 19 Ethernet+Modem product and less effect from reduction of channel inventories as compared to the U.S.
(in thousands) 1995 CHANGE 1994 Change 1993 - --------------- ------- ------ ------- ------ ------- Gross profit $40,485 (40%) $67,616 53% $44,119 Percentage of net sales 32.0% 51.4% 53.7%
Gross profit consists of net sales less cost of sales, which includes product costs (materials, subcontract assembly costs, labor, manufacturing overhead and royalty payments to licensers of software incorporated into the Company's products) and provisions for excess and obsolete inventory and warranty expense. The decline in gross profit as a percent of net sales in 1995 compared to 1994 was primarily attributable to product mix changes away from parallel port products and toward PC Card products, which have lower gross profit margins than parallel port products, as well as price reductions on the Company's CreditCard Ethernet and CreditCard Ethernet+Modem products. In addition, lower-than-expected revenues and the resulting greater portion of fixed cost of sales in relation to total cost of sales contributed to the decline in gross profit margins. The 1995 results also include an $8.7 million inventory reserve charged to cost of sales related primarily to excess wireless LAN and remote access products. The decline in gross profit margin in 1994 compared to 1993 was primarily attributable to the increased proportion of sales of PC Card adapters. Excluding nonrecurring charges, operating expenses in 1995 increased by 43% compared to 1994. While the Company took actions during the second half of 1995 to slow the growth in expenses, including a reduction in workforce in April of approximately 10% and deferral of most new hiring, expenses increased in general due to the significant expansion of the Company's product offerings and the acquisition of PRI in June 1995. Product line expansion efforts required more development expenditures as well as significant increases in sales and marketing expenditures. While the PRI acquisition caused further increases in expenses initially, the Company has taken measures to achieve a 15% - 20% reduction in operating expenses in the first quarter of fiscal 1996 as compared to the fourth quarter of fiscal 1995 ($18.2 million, excluding nonrecurring charges). These measures include staff attrition, focus on fewer product development activities and reductions in the level of sales, marketing and promotional activities for certain products. The Company is continuing to examine opportunities for cost reduction beyond its first quarter 1996 target.
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- ------- ------ ------- ------ ------ Research and development $13,824 19% $11,613 69% $6,882 Percentage of net sales 10.9% 8.8% 8.4%
Research and development expenses increased in 1995 and 1994 as the Company expanded headcount and expenditures for engineering materials, equipment, software development and outside services, all related to the development of a significant number of new products. Although the Company has reduced the planned breadth of certain product line expansion efforts, and the level of expenditures is expected to decline from the fourth quarter of fiscal 1995 to the first quarter of fiscal 1996, total expenditures for research and development expenses in all of fiscal 1996 are likely to increase in absolute dollars. They are currently expected to decline, however, as a percentage of net sales. 19 20
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- ------- ------ ------- ------ ------- Sales and marketing $38,686 54% $25,194 47% $17,105 Percentage of net sales 30.6% 19.2% 20.8%
Sales and marketing expenses increased substantially in absolute dollars during 1995 and 1994 due primarily to additions in sales and marketing personnel, additional advertising for new products and higher promotional expenditures related to increased competition in the PC Card market, efforts to reduce higher-than-normal levels of channel inventories, and activities to launch new remote access and wireless LAN products. Sales and marketing for all of fiscal 1996 are currently planned to be about equal to fiscal 1995 and are expected to decline as a percentage of sales.
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- ------- ------ ------ ------ ------ General and administrative $8,092 47% $5,491 8% $5,073 Percentage of net sales 6.4% 4.2% 6.2%
General and administrative expenses increased in absolute dollars in each of 1995 and 1994, primarily due to increased headcount, related expenses and expanded information systems and controls. Amortization of goodwill and other intangible assets related to the acquisition of PRI that is included in general and administrative expenses totaled approximately $519,000 during 1995 and is expected to be approximately $1,600,000 per year in future years. Therefore, total general and administrative expenses will increase in fiscal 1996 but are currently expected to decline as a percentage of sales.
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- ------- ------ ------- ------ ------ In-process research and development and other nonrecurring charges $46,126 N/A $ - N/A $ - Percentage of net sales 36.4% - -
Nonrecurring charges of $46,126,000 ($43,942,000, net of tax benefit of $2,184,000) consist primarily of $40,000,000 of in-process research and development purchased from PRI that had not yet reached technological feasibility and, therefore, is required to be written off under generally accepted accounting principles. Additional nonrecurring charges relate 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. Excluding nonrecurring charges, total operating expenses were $60,602,000 in 1995 compared to $42,298,000 in fiscal 1994 (a 43% increase). Net loss and net loss per share for fiscal 1995, excluding nonrecurring charges, was $14,862,000 and $0.87, respectively. 20 21
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- ---- ------ ------ ------ ---- Other income (expense), net $439 N/A $(175) N/A $760 Percentage of net sales 0.3% (0.1%) 0.9%
Net other income or expense includes interest income from the investment of available cash, prompt payment discounts earned by the Company offset by prompt payment discounts taken by customers, foreign currency translation gains or losses, and interest expense on capital leases. Interest income in 1995 and 1994 of $1,700,000, and $1,562,000, respectively, resulted from investments of the proceeds from the Company's initial public offering of common stock and, in 1994, of cash generated from operations. Net other expense in 1994 includes a charge of $575,000 for the early termination of the lease on the Company's corporate headquarters facility.
(in thousands) 1995 CHANGE 1994 Change 1993 - -------------- -------- ------ ------ ------ ------ Income taxes $(7,000) N/A $9,231 50% $6,169 Effective tax rate 10.6% 36.7% 39.0%
The Company's effective tax benefit declined in 1995 due to the nondecuctibility of the write-off of in-process research and development and the amortization of goodwill related to the acquisition of Primary Rate Incorporated. Excluding the effect of the nondeductible items, the effective tax rate decreased to 28% due to the write-off of State deferred tax assets not allowable as a carryback to offset prior years' state tax liabilities. The Company's effective tax rate declined in 1994 primarily because of increased benefits realized from sales through Xircom FSC, Inc. (a foreign sales corporation) because the Company's PC Card products were manufactured in the United States. In addition, credits for research and development expense increased in 1994. FACTORS THAT MAY AFFECT FUTURE RESULTS 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. In 1994, the PC Card market overtook the market for parallel port adapters, and competition increased substantially in 1995. Companies with greater name recognition in the PC, desktop LAN adapter and PC Card modem industries and with greater financial resources gained market share during 1994 and 1995 and now have a significant presence in the PC Card LAN adapter market. In 1995, the Company's net sales and gross margin were adversely impacted by a combination of factors: increased price competition, loss of market share in the PC Card LAN adapter market, a lower proportion of sales from parallel port products, higher than normal levels of inventories in the Company's distribution channels and the related effect of reducing those channel inventory levels. The Company also believes that the market for PC Card LAN adapters will be more price competitive for the long-term and thus result in lower gross profit margins than the Company 21 22 had earned from such products in the past. While the Company believes its current product costs are very competitive, it continues to redesign its products for cost savings. The Company expects to further reduce its manufacturing costs by manufacturing at its own facility beginning in fiscal 1996, although efficiencies related to the new manufacturing facility are not expected to be realized until at least the second fiscal quarter. There can be no assurances that such cost reductions will keep pace with competitors' cost reductions nor be sufficient to allow price reductions required to maintain market share without adversely affecting gross profit margins. The Company generally ships products within one to six weeks after receipt of orders and therefore its sales backlog is typically minimal. Accordingly, the Company's expectations of future net sales are based largely on its own estimate of future demand and not on firm customer orders. The Company's expenditures are based in part on such estimates of future sales. If orders and net sales do not meet expectations, the Company may not be able to reduce expenses commensurately in the near-term, and profitability could be adversely affected. The Company's net sales may also be affected by its distributors' decisions as to the quantity of the Company's products to be maintained in their inventories. The Company saw an increase in the level of channel inventories during the last half of fiscal 1994 as product sell-through slowed compared to the first half of fiscal 1994. The Company reduced the level of such channel inventories during the second half of fiscal 1995 by significantly reducing its shipments to its distributors. There can be no assurances that the Company's new products will achieve market acceptance or sell through to end users in sufficient quantities to make them viable for the long-term. In addition, unless increases in sales allow the Company to make sufficient expenditures in the sales and marketing areas, the Company may have difficulty in establishing its presence in these new markets. The Company expects that PC Card LAN adapters will continue to increase as a proportion of revenues when compared with parallel port LAN adapters, although the Company anticipates that the rate of growth will be slower than that experienced in the past. The Company's PC Card products generally sell for lower prices than the Company's comparable parallel port products and have lower gross profit margins. The Company introduced a line of modem-only PC Card products in the fourth fiscal quarter of 1995, utilizing existing technologies from its combination LAN and modem PC Cards and modem-based remote access products. The PC Card modems have gross profit margins lower than the Company's historical average overall gross profit margin, although it is presently anticipated that the increased volume will have a positive impact on coverage of fixed manufacturing costs. While new product areas such as remote access, ISDN and wireless LAN are expected to contribute higher gross profit margins, the level of sales to be achieved in these new areas is uncertain and such contributions are not currently expected to offset the decline in gross profit margins associated with the PC Card and modem product lines. The Company established in-house manufacturing capabilities at the end of fiscal 1995. Although the Company commenced a gradual transition from manufacturing at its subcontractors to its own facilities at the end of fiscal 1995, interruptions in supply of products could occur if problems arise in this transition, which in turn could adversely affect future sales. Also, the Company will continue to incur start-up manufacturing costs in early fiscal 1996 which could adversely affect gross profit margins. 22 23 In summary, gross profit margins are impacted by a number of factors, including the rate of sales growth, competitive pricing pressures, the mix of product sales, component and manufacturing costs, and the shipments of new products, which often have lower margins until market acceptance and increased volumes permit component cost reductions and manufacturing efficiencies. Frequent product transitions also increase the risk of inventory obsolescence and interruptions of sales. As discussed under Note Two in the Notes to Consolidated Financial Statements, the Company acquired PRI, an ISDN technology company in June 1995. Historically, PRI has focused its sales and development efforts on the OEM market and has recorded limited sales to date to the end-user market. There can be no assurances that the Company will be able to successfully develop the end-user market for ISDN products or be able to compete effectively with other companies that have significantly greater resources than the Company and which have recently entered the ISDN market. The acquisition required significant capital and equity investments and is expected to be dilutive to stockholders in the near-term. It will continue to be dilutive unless, and until, significantly increased revenues and profitability are attained by the ISDN product lines. The Company's corporate headquarters, research and development facilities and other critical business operations are located near major earthquake faults. Operating results could be materially adversely affected in the event of a major earthquake. 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. Increased competition in the PC Card market has resulted in shorter product life cycles than in the past. 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. 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. 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 operating activities used cash of approximately $4.4 million in 1995 primarily as a result of losses from operations, net of the write-off of in-process research and development, and increases in inventory and income taxes receivable offset by a decrease in accounts receivable and increases in accounts payable and accrued liabilities. The Company also used approximately $24.4 million for the acquisition of PRI. Additional cash expenditures of approximately $1.2 million related to the acquisition are expected to occur in 1996. The Company's capital expenditures of $13.6 million were for leasehold improvements at new facilities, equipment related to increased headcount, manufacturing equipment and leasehold improvements at the new Malaysian manufacturing facility, and information systems hardware and software. The Company has no material fixed commitments for capital expenditures. 23 24 Effective November 8, 1995, the Company entered into a credit agreement that permits borrowings up to $15.0 million at the prime rate plus 1-1/4%. Advances under the agreement are based on eligible accounts receivable and inventory and are secured by all U.S.-based assets of the Company. Initial availability under the eligibility and borrowing formulas was approximately $9.0 million. The agreement expires in November 1996. The Company believes that cash on hand, borrowings available under its new credit facility 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. During the second half of fiscal 1995, the Company experienced reduced revenue levels and losses from operations. While revenues are expected to increase and results of operations are expected to improve significantly in the December 1995 period, 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 on terms acceptable to the Company. 24 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA XIRCOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share information)
Fiscal Years Ended September 30 1995 1994 1993 - ------------------------------- -------- -------- ------- Net sales $126,565 $131,580 $82,212 Cost of sales 86,080 63,964 38,093 -------- -------- ------- Gross profit 40,485 67,616 44,119 Operating expenses: Research and development 13,824 11,613 6,882 Sales and marketing 38,686 25,194 17,105 General and administrative 8,092 5,491 5,073 In-process research and development and other nonrecurring charges 46,126 - - -------- -------- ------- Total operating expenses 106,728 42,298 29,060 Operating income (loss) (66,243) 25,318 15,059 Other income (expense), net 439 (175) 760 -------- -------- -------- Income (loss) before income taxes (65,804) 25,143 15,819 Income tax provision (benefit) (7,000) 9,231 6,169 -------- -------- ------- Net income (loss) $(58,804) $ 15,912 $ 9,650 Net income (loss) per share $ (3.44) $ 0.95 $ 0.59 Weighted average shares outstanding 17,082 16,833 16,351 ======== ======== =======
See accompanying notes 25 26 XIRCOM, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share information)
September 30 1995 1994 - ------------ -------- -------- ASSETS Current assets: Cash and cash equivalents $ 13,658 $ 14,379 Short-term investments - 37,072 Accounts receivable, net of allowances for sales returns and bad debts of $5,687 ($4,588 in 1994) 11,592 20,415 Income tax receivable 8,362 - Inventories 19,174 13,987 Deferred income taxes 9,017 3,932 Other current assets 1,459 1,571 -------- -------- Total current assets 63,262 91,356 Equipment and improvements, net 17,588 8,857 Other assets 7,892 802 -------- -------- Total assets $ 88,742 $101,015 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,561 $ 11,000 Accrued liabilities 14,313 6,464 Current portion of long-term obligations 801 359 Accrued income taxes 1,141 943 -------- -------- Total current liabilities 34,816 18,766 Long-term obligations 831 134 Commitments and contingencies Shareholders' equity: Preferred Stock, 2,000,000 shares authorized, none issued - - Common Stock, $.001 par value, 50,000,000 shares authorized; 18,926,030 shares outstanding at September 30, 1995 (16,116,098 in 1994) 19 16 Paid-in capital 76,666 46,885 Retained earnings (accumulated deficit) (23,590) 35,214 -------- -------- Total shareholders' equity 53,095 82,115 -------- -------- Total liabilities and shareholders' equity $ 88,742 $101,015 ======== ========
See accompanying notes 26 27 XIRCOM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Common Stock Unearned Earnings ------------------- Paid-in Stock (Accumulated (In thousands) Shares Amount Capital Compensation Deficit) Total - -------------- ------ ------ ------- ------------ ------------ -------- Balance at October 1, 1992 14,514 $15 $40,257 $(355) $ 9,652 $ 49,569 Exercise of stock options 1,155 1 1,775 - - 1,776 Tax benefit related to employee stock options - - 1,327 - - 1,327 Amortization of unearned stock compensation - - - 208 - 208 Net income - - - - 9,650 9,650 ------ --- ------- ----- -------- -------- Balance at September 30, 1993 15,669 16 43,359 (147) 19,302 62,530 Exercise of stock options 447 - 1,590 - 1,590 Tax benefit related to employee stock options - - 1,936 - - 1,936 Amortization of unearned stock compensation - - - 147 - 147 Net income - - - - 15,912 15,912 ------ --- ------- ----- -------- -------- 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 ====== === ======= ===== ======== ========
See accompanying notes 27 28 XIRCOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Years Ended September 30 1995 1994 1993 - ------------------------------- --------- -------- -------- OPERATING ACTIVITIES Net income (loss) $(58,804) $ 15,912 $ 9,650 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Write off of in-process research and development 40,000 - - Depreciation and amortization 6,479 3,776 1,981 Deferred income tax benefit (3,760) (1,280) (1,380) Deferred rent (24) (366) 36 Amortization of unearned stock compensation - 147 208 Changes in assets and liabilities, net of the effect of the acquisition: Accounts receivable 10,091 (6,265) (3,671) Income tax receivable (8,362) - - Inventories (3,536) (2,742) (3,049) Prepaids and other current assets 431 (340) (325) Accounts payable and accrued liabilities 11,149 7,469 5,620 Income taxes payable 1,892 1,410 1,315 -------- -------- -------- Net cash provided by (used in) operating activities (4,444) 17,721 10,385 INVESTING ACTIVITIES Purchase of PRI, net of cash acquired (24,387) - - Purchase of short-term investments (13,975) (39,962) (42,086) Sale of short-term investments 51,330 33,385 33,187 Purchases of equipment and improvements (13,600) (7,418) (3,997) Other (175) (433) (48) -------- -------- -------- Net cash used in investing activities (807) (14,428) (12,944) FINANCING ACTIVITIES Proceeds from issuance of common stock 3,528 1,590 1,776 Proceeds from issuance of long-term debt 1,200 - - Long-term debt repayments (198) (434) (430) -------- -------- -------- Net cash provided by financing activities 4,530 1,156 1,346 Net increase (decrease) in cash and cash equivalents (721) 4,449 (1,213) Cash and cash equivalents at beginning of period 14,379 9,930 11,143 -------- -------- -------- Cash and cash equivalents at end of period $ 13,658 $ 14,379 $ 9,930 ======== ======== ========
See accompanying notes 28 29 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 PCs to be connected locally or remotely to a network. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 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. Investments with maturities of between three and twelve months are considered to be short-term investments and are carried at cost plus accrued interest, which approximates market. Interest income totaled $1,700,000, $1,562,000 and $1,082,000 for fiscal 1995, 1994 and 1993, respectively, and is included in Other income (expense), net in the accompanying Consolidated Statements of Operations. Effective October 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities." Adoption of SFAS 115 had no effect on the accompanying consolidated financial statements. CONCENTRATION OF CREDIT RISK 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, 1995 and 1994, three distributors accounted for a total of 15% and 40%, respectively, of total trade receivables. 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. INTANGIBLE ASSETS Included in Other assets in the accompanying Consolidated Balance Sheets are goodwill and other intangibles associated with the acquisition of PRI as described in Note Two. Amortization of all intangible assets is provided on a straight-line basis over their estimated useful lives ranging from three to seven years. Accumulated amortization of all intangible assets was $534,000 as of September 30, 1995. REVENUE RECOGNITION The Company recognizes revenue from product sales when shipped. The Company generally provides a lifetime limited warranty against defects in the hardware component and a two-year limited warranty on the software component of its network adapters and modem products. Netaccess products have a five-year hardware warranty and a 90-day software warranty, and ISDN products have a two-year hardware and a one-year software 29 30 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS warranty. In addition, the Company provides telephone support to purchasers of its products as needed to assist them in installation or use of the products. The Company makes provisions for these costs in the period of sale. The Company also has policies and/or contractual agreements which permit distributors and dealers to return products under certain circumstances. The Company makes a provision for the estimated amount of product returns that may occur under these programs and contracts in the period of sale. NONRECURRING CHARGES The Company recorded charges to operations during the year related to the sale of certain assets, the write-off of excess and idle facilities and severance payments related to a reduction in workforce. The aggregate amount of these nonrecurring charges of $6,126,000 ($3,942,000, net of tax benefit) has been charged to the Company's operations along with the write-off of in-process research and development in connection with the purchase of PRI as described in Note Two. 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 and losses from re-measurement are recognized currently in the Consolidated Statements of Operations. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. INCOME TAXES Effective October 1, 1993, the Company adopted the provisions of SFAS 109, "Accounting for Income Taxes." Adoption of SFAS 109 did not have a material effect on the accompanying consolidated financial statements. The Company has not provided U.S. income taxes on the undistributed income of its foreign subsidiaries. The cumulative amount of such income was not significant as of September 30, 1995. It is management's intent that such earnings will be permanently reinvested. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common stock equivalents (stock options) outstanding. Fully diluted amounts for each period do not materially differ from the amounts presented herein. 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. RECLASSIFICATIONS Certain reclassifications of prior year amounts have been made for purposes of consistent presentation. NOTE TWO: BUSINESS ACQUISITION In June 1995, the Company acquired the assets and assumed the liabilities and outstanding stock options of Primary Rate Incorporated (PRI). PRI develops, manufactures, markets and supports standards-based Integrated Service Digital Network (ISDN) products which provide 30 31 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS connectivity solutions for corporate information system departments, original equipment manufacturers and end-users. The purchase price, net of cash acquired and proceeds from exercise of options and warrants, totaled approximately $50,279,000 including the assumed stock options which had an associated value of $2,278,000. The balance of 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. The purchase price plus costs directly attributable to the completion of the acquisition have been allocated to the assets and liabilities acquired. 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 was charged to the Company's operations. In connection with the acquisition, the Company recorded goodwill and other intangible assets totaling $6,413,000 and a net deferred tax asset totaling approximately $2,301,000. The net deferred tax asset related primarily to the net operating loss carryforward discussed in Note Seven and deferred taxes related to other intangible assets pursuant to SFAS 109. The Company's consolidated results of operations include the operating results of PRI from the acquisition date. The following unaudited pro forma information combines the consolidated results of operations of the Company and PRI as if the acquisition had occurred on October 1, 1994 and 1993. Adjustments have been made to reflect the amortization of goodwill and other intangibles identified in the purchase price allocation, the reduction in interest income earned due to the decrease in cash position resulting from the cash used as part of the acquisition consideration, the effects of the above-mentioned items on the provision for income taxes and the issuance of common stock as part of the acquisition consideration. The pro forma information is presented for illustrative purposes only, and is not necessarily indicative of what the actual results of operations would have been during such periods or representative of future operations (in thousands, except per share amounts):
1995 1994 -------- -------- Net sales $130,641 $136,388 Net income (loss) (24,346) 13,364 Net income (loss) per share $ (1.26) $ 0.70 ======== ========
The proforma information presented above does not reflect the write-off of in-process research and development costs of $40,000,000 which was included in the actual operating results for the year ended September 30, 1995. 31 32 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE THREE: INVENTORIES Inventories consist of the following (in thousands):
September 30 ------------------------ 1995 1994 ------- ------- Finished goods $ 6,555 $ 4,206 Sub-assemblies 6,629 3,591 Work-in-process 2,495 2,273 Component parts 3,495 3,917 ------- ------- $19,174 $13,987 ======= =======
NOTE FOUR: EQUIPMENT AND IMPROVEMENTS Equipment and improvements consist of the following (in thousands):
September 30 ------------------------- 1995 1994 -------- -------- Equipment $ 19,834 $ 10,635 Furniture and fixtures 3,638 1,348 Leasehold improvements 6,006 1,912 Capitalized leased equipment 1,296 1,736 -------- -------- 30,774 15,631 Less accumulated depreciation and amortization (13,186) (6,774) -------- -------- $ 17,588 $ 8,857 ======== ========
Accumulated amortization related to capitalized leased equipment was $1,092,000 and $1,550,000 as of September 30, 1995 and 1994, respectively. 32 33 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE FIVE: ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
September 30 --------------------- 1995 1994 ------- ------ Payroll and related benefits $ 2,365 $2,387 Warranty reserve 1,835 1,295 Accrued marketing costs 2,715 1,126 Excess and idle facilities cost 4,866 852 Other 2,532 804 ------- ------ $14,313 $6,464 ======= ======
NOTE SIX: BANK BORROWINGS AND LONG-TERM OBLIGATIONS Long-term obligations consist of the following (in thousands):
September 30 --------------------- 1995 1994 ------ ---- Capitalized lease obligations due through 2000 with effective interest rates ranging from 6% to 19% $ 432 $493 Note payable to bank, due March 1996 600 - Term loan, due through September 1998 600 - ------ ---- Total long-term obligations 1,632 493 Less current portion 801 359 ------ ---- $ 831 $134 ====== ====
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 (10% as of November 8, 1995). 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. Initial borrowings available under the line were approximately $9,000,000. The Company has a credit facility with its bank in Malaysia that permits borrowings on a revolving credit and term loan basis at the bank's reference rate plus 1% (8.45% as of September 30, 1995). As of September 30, 1995, $600,000 was outstanding under both the revolving credit and term loan provisions of this agreement. Aggregate principal maturities on the note payable to bank and term loan outstanding at September 30, 1995 were $783,000 in 1996, $200,000 in 1997, and $217,000 in 1998. Interest expense totaled $68,000, $157,000 and $211,000 for fiscal 1995, 1994 and 1993, respectively. 33 34 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE SEVEN: INCOME TAXES The income tax provision (benefit) includes the following (in thousands):
1995 1994 1993 -------- ------- --------------- Liability method Deferred Method -------------------------- --------------- Current: Federal $(3,048) $ 8,475 $ 5,940 State - 2,010 1,608 Foreign - 26 1 ------- ------- ------- (3,048) 10,511 7,549 Deferred: Federal (7,524) (1,263) (1,163) State - (17) (211) Foreign - - (6) Valuation allowance 3,572 - - ------- ------- ------- (3,952) (1,280) (1,380) ------- ------- ------- $(7,000) $ 9,231 $ 6,169 ======= ======= =======
34 35 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
September 30 ------------------------- 1995 1994 ------- ------ Book reserves not deductible for tax $10,910 $3,052 Book in excess of tax depreciation 640 414 State and foreign income taxes - 661 Net operating loss carryforward and credit 3,908 - ------- ------ Total deferred tax asset 15,458 4,127 Valuation allowance (3,572) - ------- ------ Deferred tax asset, net 11,886 4,127 ------- ------ Basis difference in acquired assets (1,271) - Other (423) (195) ------- ------ Total deferred tax liabilities (1,694) (195) ------- ------ Net deferred tax asset $10,192 $3,932 ======= ======
Balance sheet classification of the net deferred tax asset is as follows (in thousands):
September 30 ------------------------ 1995 1994 ------- ------ Current deferred tax asset $ 9,017 $3,932 Noncurrent deferred tax asset 1,175 - ------- ------ $10,192 $3,932 ======= ======
Noncurrent deferred tax assets are included in Other assets in the accompanying Consolidated Balance Sheets. At September 30, 1995 the Company has net operating loss carryforwards for federal tax and state tax purposes of approximately $9,246,000 and $3,939,000, respectively, which expire during the period 2000 through 2010. 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. 35 36 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. A reconciliation of the provision for income taxes with the tax computed by applying the federal statutory tax rate (35%, 35% and 34.75% for fiscal 1995, 1994 and 1993, respectively) is as follows (in thousands):
1995 1994 1993 -------- ------ ------ Computed expected tax (benefit) $(23,031) $8,800 $5,497 State taxes, net of federal benefit (1,309) 1,163 912 Tax exempt FSC and interest income (303) (325) (268) Research and development credit - (500) (200) Write-off of purchased in-process technology 14,000 - - Valuation allowance on deferred tax asset 3,572 - - Other 71 93 228 -------- ------ ------ $ (7,000) $9,231 $6,169 ======== ====== ======
NOTE EIGHT: COMMON STOCK AND RELATED PLANS The Company's Stock Option Plan (1992 Plan), as amended in January 1992, 1994 and 1995, authorizes a total of up to 5,300,000 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 expire after five years. The 1992 Director Stock Option Plan provides for the grant of nonqualified options for a total of up to 225,000 shares of Common Stock to non-employee members of the Board of Directors. The options are granted at the fair market value at 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. The following table is a summary of activity for the Company's stock option plans: 36 37 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of Option price shares per share --------- ------------- Outstanding at October 1, 1992 2,705,065 $ 0.27-$11.50 Granted 641,250 $ 7.63-$18.25 Exercised (1,154,866) $ 0.27-$11.50 Canceled (63,807) $ 0.33-$10.00 ---------- ------------- Outstanding at September 30, 1993 2,127,642 $ 0.33-$18.25 Granted 549,000 $14.50-$26.50 Exercised (447,103) $ 0.33-$14.00 Canceled (110,277) $ 2.33-$19.25 ---------- ------------- Outstanding at September 30, 1994 2,119,262 $ 0.33-$26.50 Granted 2,245,577 $ 9.63-$22.50 Exercised (703,376) $ 0.33-$16.75 Canceled (1,120,756) $ 1.29-$26.50 ---------- ------------- Outstanding at September 30, 1995 2,540,707 $ 0.33-$19.50 ========== =============
On August 3, 1995, upon approval by the Compensation Committee of the Board of Directors, the Company offered all holders of outstanding options under the 1992 Plan at exercise prices in excess of $10.00 per share the opportunity to exchange such options for new options at an exercise price of $10.00 per share, the fair market value of the Company's stock on such date. As a condition of the exchange, the program required a one-year delay in the vesting of the options exchanged. In connection with this repricing, an aggregate of 792,464 shares of Common Stock were repriced to an exercise price of $10.00 per share. The repriced options have been included in the preceding option table as both canceled and granted in fiscal 1995. As of September 30, 1995, options for 602,899 shares were exercisable at an average price of $6.03 and 679,680 shares were available for future grants under the plans. Subsequent to the end of fiscal 1995, the Board of Directors approved the authorization of an additional 700,000 shares for issuance under the 1992 Plan, subject to shareholder approval at the next Annual Meeting of Shareholders. The Company has established the 1994 Employee Stock Purchase Plan which 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 a maximum of 250,000 shares of common stock. During fiscal 1995, 57,537 shares were issued under the plan. 37 38 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE NINE: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(in thousands) 1995 1994 1993 - -------------- --------- ------ ------ Cash paid Interest $ 61 $ 156 $ 213 Income taxes $ 3,383 $6,369 $6,235 -------- ------ ------ Non-cash transactions Acquisition of assets under capital leases $ - $ 20 $ 50 Tax benefit related to employee stock options $ 1,695 $1,936 $1,327 -------- ------ ------ Reconciliation of assets acquired and liabilities assumed related to the acquisition of PRI Fair value of assets acquired $ 52,644 $ - $ - Liabilities assumed (1,956) - - Less: Non-cash consideration (26,301) - - -------- ------ ------ Cash paid for acquisition $ 24,387 $ - $ - ======== ====== ======
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 $1,790,000, $1,129,000 and $962,000 for fiscal 1995, 1994 and 1993, respectively. As of September 30, 1995, the minimum future rental payments under all noncancelable leases for facilities and equipment are as follows (in thousands):
Capital Operating Fiscal year leases leases - ----------- -------- --------- 1996 $278 $ 3,090 1997 114 2,689 1998 43 1,884 1999 26 1,620 2000 8 1,559 Thereafter - 6,340 ---- ------- Total minimum lease payments $469 $17,182 ---- ======= Less amount representing interest $ 37 ---- Present value of lease payments $432 ====
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 the Company's products, and some can be terminated by either party after specified notice periods. Royalties under these agreements amounted to $2,129,000, $2,843,000, and $2,574,000 for fiscal 1995, 1994 and 1993, respectively. 38 39 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 personal 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 1995 Net sales to unaffiliated customers $ 92,771 $33,794 $ - $ - $126,565 Intercompany sales 31,135 - 3,057 (34,192) - -------- ------- ------- -------- -------- Total sales $123,906 $33,794 $ 3,057 $(34,192) $126,565 Operating income (loss) $(64,160) $ (291) $ 21 $ (1,813) $(66,243) Identifiable assets $ 94,890 $ 9,786 $10,289 $(26,223) $ 88,742 -------- ------- ------- -------- -------- Fiscal 1994 Net sales to unaffiliated customers $ 97,081 $34,494 $ 5 $ - $131,580 Intercompany sales 26,532 - 1,272 (27,804) - -------- ------- ------- -------- -------- Total sales $123,613 $34,494 $ 1,277 $(27,804) $131,580 Operating income $ 24,496 $ 251 $ 46 $ 525 $ 25,318 Identifiable assets $100,311 $ 8,624 $ 1,710 $ (9,630) $101,015 -------- ------- ------- -------- -------- Fiscal 1993 Net sales to unaffiliated customers $ 58,348 $23,863 $ 1 $ - $ 82,212 Intercompany sales 18,168 - 274 (18,442) - -------- ------- ------- -------- -------- Total sales $ 76,516 $23,863 $ 275 $(18,442) $ 82,212 Operating income $ 15,251 $ (118) $ 32 $ (106) $ 15,059 Identifiable assets $ 75,050 $ 7,300 $ 445 $ (7,528) $ 75,267 ======== ======= ======= ======== ========
39 40 XIRCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total export sales (sales to unaffiliated foreign entities) were $20,069,000, $16,991,000 and $11,422,000 for fiscal 1995, 1994 and 1993, respectively. Sales to customers in excess of 10% of total sales are as follows:
1995 1994 1993 ---- ---- ---- Customer A 21% 28% 21% Customer B 7% 10% 11% Customer C 9% 11% 15% == == ==
NOTE TWELVE: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data) - ------------------------------------- Quarter ended ----------------------------------------------------------------- Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal Year ------- ------- -------- -------- ----------- Fiscal 1995 Net sales $40,106 $39,974 $ 16,474 $ 30,011 $ 126,565 Gross profit 20,026 17,617 3,608 (766) 40,485 Net income (loss) 4,536 2,476 (48,756)(2) (17,060)(3) (58,804) Net income (loss) per share $ .27 $ .15 $ (2.87)(2) $ (.91)(3) $ (3.44) ------- ------- -------- -------- --------- Fiscal 1994 Net sales $26,376 $30,245 $ 36,089 $ 38,870 $ 131,580 Gross profit 14,370 16,221 18,284 18,741 67,616 Net income 3,431 3,922 4,197 4,362(1) 15,912 Net income per share $ .21 $ .23 $ .25 $ .26(1) $ .95 ======= ======= ======== ======== =========
(1) In the fourth quarter of fiscal 1994, the Company reduced its tax rate for the fiscal year to 36.7% resulting in a tax rate of 31.0% for the fourth quarter. The Company also recorded a pretax charge of $575,000 in the fourth quarter of fiscal 1994 for the early termination of a lease. (2) In the third quarter of fiscal 1995, the net loss includes $41,337,000 or $2.43 per share for nonrecurring charges. (3) In the fourth quarter of fiscal 1995, the net loss includes $2,605,000 or $0.14 per share for nonrecurring charges. The Company also recorded a pretax charge of $8,700,000 in the fourth quarter of fiscal 1995 for additional inventory reserves. 40 41 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, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. 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, 1995 and 1994 and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, 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. ERNST & YOUNG LLP Woodland Hills, California October 19, 1995, except for the second paragraph of Note Six, as to which the date is November 8, 1995 41 42 ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 42 43 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 1996 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 1996 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 1996 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 1996 Annual Meeting of Shareholders. 43 44 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, 1995, 1994 and 1993 25 Consolidated Balance Sheets at September 30, 1995 and 1994 26 Consolidated Statements of Shareholders' Equity - Years ended September 30, 1995, 1994 and 1993 27 Consolidated Statements of Cash Flows - Years ended September 30, 1995, 1994 and 1993 28 Notes to Consolidated Financial Statements 29-40 Report of Ernst & Young LLP, Independent Auditors 41 (2) Consolidated financial statement schedule: Schedule II - Valuation and Qualifying Accounts 45
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 44 45 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, 1995 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR SALES RETURNS AND BAD DEBTS $4,588 $20,324 $19,225 $5,687 ====== ======= ======= ====== LIABILITY RESERVES: WARRANTY $1,295 $ 4,858 $ 4,318 $1,835 ====== ======= ======= ====== YEAR ENDED SEPTEMBER 30, 1994 Deducted from asset accounts: Allowance for sales returns and bad debts $1,900 $ 8,093 $ 5,405 $4,588 ====== ======= ======= ====== Liability reserves: Warranty $ 825 $ 3,034 $ 2,564 $1,295 ====== ======= ======= ====== YEAR ENDED SEPTEMBER 30, 1993 Deducted from asset accounts: Allowance for sales returns and bad debts $1,320 $ 3,580 $ 3,000 $1,900 ====== ======= ======= ====== Liability reserves: Warranty $ 300 $ 1,874 $ 1,349 $ 825 ====== ======= ======= ======
45 46 (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. 33-45567) 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. 33-45567) 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 27 1995, and forms of agreement thereunder (incorporated by reference to Exhibit 4.1 of the Company's registration statement on Form S-8 filed on May 31, 1995, No. 33-92872) 10.10 1992 Director Stock Option Plan of the Company and forms of agreement thereunder (incorporated by reference to Exhibit 10.2 of the Company's report on Form 10-Q for the quarter ended March 31, 1992) 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) 10.23 PPIEC Development Program Agreement, dated as of October 26, 1992, between Fujitsu Microelectronics, Inc. and the Company (incorporated by reference to Exhibit 10.1 of the Company's report on Form 10-Q for the quarter ended December 31, 1992)(2) 10.24 Software License Agreement, dated as of January 1, 1993, between Madge Networks Limited and the Company (incorporated by reference to Exhibit 10.2 of the Company's report on Form 10-Q for the quarter ended December 31, 1992)(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)
46 47 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) 10.29 Loan and Security Agreement, dated as of November 8, 1995, between The CIT Group/Credit Finance, Inc., and Xircom, Inc. and Primary Rate Incorporated 10.29a. Pledge Agreement, dated as of November 8, 1995, between The CIT Group/Credit Finance, Inc., and Xircom, Inc. 10.29b. Secured Continuing Corporate Guaranty dated November 8, 1995, by Xircom, Inc. 10.29c. Patent Security Agreement dated as of November 8, 1995 by Xircom, Inc. in favor of The CIT Group/Credit Finance, Inc. 10.29d. Trademark Security Agreement dated as of November 8, 1995 between Xircom, Inc. and The CIT Group/Credit Finance, Inc. 22.1 Subsidiaries of Xircom, Inc. (see page 48) 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 49) 24.1 Power of Attorney (see page 50) 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: None 47 48 EXHIBIT 22.1 SUBSIDIARIES OF THE COMPANY Xircom Europe N.V. Xircom Asia Pacific PTE LTD Xircom FSC, Inc. Primary Rate Incorporated Xircom Operations (Malaysia) SDN. BHD. Xircom U.K., Ltd. Xircom France, S.A.R.L. Xircom Deutschland GmbH Xircom AB Primary Rate Limited Xircom Asia Limited 48 49 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements pertaining to the Stock Option Plan, 1992 Director Stock Option Plan, 1994 Employee Stock Purchase Plan and 1995 Stock Option 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 19, 1995, except for the second paragraph of Note Six, as to which the date is November 8, 1995, 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, 1995. ERNST & YOUNG LLP Woodland Hills, California November 30, 1995 49 50 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: November 30, 1995 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 Jerry N. Ulrich, 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 Board, President November 30, 1995 - -------------------------- and Chief Executive Officer Dirk I. Gates (Principal Executive Officer) /s/ JERRY N. ULRICH Chief Operating Officer November 30, 1995 - -------------------------- and Chief Financial Officer Jerry N. Ulrich (Principal Financial Officer) /s/ STEVEN F. DEGENNARO Vice President, Finance and November 30, 1995 - -------------------------- Chief Accounting Officer Steven F. DeGennaro (Principal Accounting Officer) /s/ KENNETH J. BIBA Director November 30, 1995 - -------------------------- Kenneth J. Biba /s/ GARY J. BOWEN Director November 30, 1995 - -------------------------- Gary J. Bowen /s/ BRUCE C. EDWARDS Director November 30, 1995 - -------------------------- Bruce C. Edwards /s/ J. KIRK MATHEWS Director November 30, 1995 - -------------------------- J. Kirk Mathews /s/ WILLIAM J. SCHROEDER Director November 30, 1995 - -------------------------- William J. Schroeder
50 51 EXHIBIT INDEX
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. 33-45567) 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. 33-45567) 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 27 1995, and forms of agreement thereunder (incorporated by reference to Exhibit 4.1 of the Company's registration statement on Form S-8 filed on May 31, 1995, No. 33-92872) 10.10 1992 Director Stock Option Plan of the Company and forms of agreement thereunder (incorporated by reference to Exhibit 10.2 of the Company's report on Form 10-Q for the quarter ended March 31, 1992) 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) 10.23 PPIEC Development Program Agreement, dated as of October 26, 1992, between Fujitsu Microelectronics, Inc. and the Company (incorporated by reference to Exhibit 10.1 of the Company's report on Form 10-Q for the quarter ended December 31, 1992)(2) 10.24 Software License Agreement, dated as of January 1, 1993, between Madge Networks Limited and the Company (incorporated by reference to Exhibit 10.2 of the Company's report on Form 10-Q for the quarter ended December 31, 1992)(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)
52 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) 10.29 Loan and Security Agreement, dated as of November 8, 1995, between The CIT Group/Credit Finance, Inc., and Xircom, Inc. and Primary Rate Incorporated 10.29a. Pledge Agreement, dated as of November 8, 1995, between The CIT Group/Credit Finance, Inc., and Xircom, Inc. 10.29b. Secured Continuing Corporate Guaranty dated November 8, 1995, by Xircom, Inc. 10.29c. Patent Security Agreement dated as of November 8, 1995 by Xircom, Inc. in favor of The CIT Group/Credit Finance, Inc. 10.29d. Trademark Security Agreement dated as of November 8, 1995 between Xircom, Inc. and The CIT Group/Credit Finance, Inc. 22.1 Subsidiaries of Xircom, Inc. (see page 48) 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 49) 24.1 Power of Attorney (see page 50) 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 EX-10.29 2 LOAN AGREEMENT BETWEEN CIT GROUP AND XIRCOM 1 LOAN AND SECURITY AGREEMENT EXHIBIT 10.29 2 LOAN AND SECURITY AGREEMENT XIRCOM, INC. and PRIMARY RATE, INC. This Agreement is between the undersigned Borrower and the undersigned Lender concerning loans and other credit accommodations to be made by Lender to Borrower. SECTION 1. PARTIES 1.1 The "Borrower" is the person, firm, corporation or other entity identified as the Borrower in Section 10 and its successors and assigns. If more than one Borrower is specified in Section 10, all references to Borrower shall mean each of them, jointly and severally, individually and collectively, and the successors and assigns of each. 1.2 The "Lender" is The CIT Group/Credit Finance, Inc., and its successors and assigns. SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS 2.1 Revolving Loans. Lender shall, subject to the terms and conditions contained herein, make revolving loans to Borrower ("Revolving Loans") in amounts requested by Borrower from time to time, but not in excess of the Net Availability existing immediately prior to the making of the requested Revolving Loan and provided the requested Revolving Loan would not cause the outstanding Obligations to exceed the Maximum Credit. (a) The "Maximum Credit" is set forth in Section 10.1(a) hereof. (b) The "Gross Availability" shall be calculated at any time as the sum of (i) the product obtained by multiplying the then-outstanding amount of Eligible Accounts, net of all taxes, discounts, allowances and credits given or claimed, by the Eligible Accounts Percentage set forth in Section 10.1(b), subject to any applicable sublimit set forth in such Section, plus: (ii) the product obtained by multiplying the applicable Eligible Inventory Percentages, if any, set forth in Section 10.1(b) by the values (as determined by Lender based on the lower of cost or market) of Eligible Inventory, but the amount so added shall not exceed any sublimits set forth in Section 10.1(c), minus: (iii) any Reserves. 3 (c) The "Net Availability" shall be calculated at any time as an amount equal to the Gross Availability minus the aggregate amount of all then-outstanding Obligations of Borrower to Lender. (d) "Eligible Accounts" are accounts created by Borrower in the ordinary course of its business which are and remain acceptable to Lender for lending purposes. General criteria for Eligible Accounts are set forth below but may be revised from time to time by Lender, in its sole judgment, on thirty (30) days' prior written notice to Borrower. Lender shall, in general, deem accounts to be Eligible Accounts if: (1) such accounts arise from bona fide completed transactions and have not remained unpaid for more than the number of days after the invoice date set forth in Section 10.1(d); (2) the amounts of the accounts reported to Lender are absolutely owing to Borrower and do not arise from sales on consignment, guaranteed sale or other terms under which payment by the account debtors may be conditional or contingent (other than stock rotation or stock balancing rights); (3) the account debtor's chief executive office or principal place of business is located in the United States or Canada or payment of the account is fully supported by a letter of credit or insured by FCIA or Exim Bank (at Lender's option) and each of which is assigned to Lender and in form and substance acceptable to Lender; (4) such accounts do not arise from progress billings (except as set forth in Section 10.1(b), consignments, retainages or bill and hold sales (other than stock rotation or stock balancing rights); (5) there are no contra relationships, setoffs, counterclaims or disputes existing with respect thereto and, where Lender deems appropriate, it is furnished with a non-offset letter in form and substance satisfactory to Lender, and there are no other facts existing or threatened which would impair or delay the collectability of all or any portion thereof; (6) the goods giving rise thereto were not at the time of the sale subject to any liens except those permitted in this Agreement; (7) such accounts are not accounts with respect to which the account debtor or any officer or employee thereof is an officer, employee or agent of or is affiliated with Borrower, directly or indirectly, whether by virtue of family membership, ownership, control, management or otherwise; (8) such accounts are not accounts with respect to which the account debtor is the United States or any State or political subdivision thereof or any department, agency or instrumentality of the United States, any State or political subdivision, unless there has been compliance with the Assignment of Claims Act or any similar State or local law, if applicable; (9) Borrower has delivered to Lender or Lender's representative such documents as Lender may have requested pursuant to Section 5.8 hereof in connection with such accounts and Lender shall have received a verification of such account, satisfactory to it, if sent to the account debtor or any other obligor or any bailee pursuant to Section 5.4 hereof; (10) there are no facts, existing or threatened, which might result in any adverse change in the account debtor's financial condition; (11) such accounts owed by a single account debtor or its affiliates do not represent more than twenty percent (20%) of all otherwise Eligible Accounts, or in the case of Tech Data or Merisel, do not represent more than thirty percent (30%) or, in the case of Ingram Micro, do not represent more than thirty-five percent (35%), of all otherwise Eligible Accounts (provided that 2 4 accounts excluded from Eligible Accounts solely by reason of this subsection (11) shall nevertheless be considered Eligible Accounts to the extent of the amount of such accounts which does not exceed the applicable limit); (12) such accounts are not owed by an account debtor whose accounts or whose affiliates' accounts greater than ninety (90) days past invoice date comprise more than fifty percent (50%) of the accounts of such account debtor or its affiliates owed to Borrower; (13) such accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the amount of any customer credit limits as established, and changed, from time to time by Lender on 15 days' notice to Borrower (accounts excluded from Eligible Accounts solely by reason of this subsection (13) shall nevertheless be considered Eligible Accounts to the extent the amount of such accounts does not exceed such customer credit limit); and (14) such accounts are owed by account debtors deemed creditworthy at all times by Lender. (e) "Eligible Inventory" is inventory owned by Borrower which is and remains acceptable to Lender for lending purposes and is located at one of the addresses set forth in Section 10.6(d). (f) Lender shall have a continuing right to deduct reserves in determining the Gross Availability ("Reserves"), and to increase and decrease such Reserves from time to time, if and to the extent that, in Lender's reasonable credit judgment, such Reserves are necessary to protect Lender against any state of facts which does, or would, with notice or passage of time or both, constitute an Event of Default or have an adverse effect on any Collateral. Lender may, at its option, implement Reserves by designating as ineligible a sufficient amount of accounts or inventory which would otherwise be Eligible Accounts or Eligible Inventory so as to reduce Gross Availability by the amount of the intended Reserve. Without limiting the foregoing, Reserves shall be established for 100% of the undrawn face amount of standby letters of credit and for 100% of the undrawn face amount of Accommodations for the purchase of Eligible Inventory minus the applicable advance rate percentage multiplied by the cost of the inventory, plus duty and freight. Additionally, should any of the top eleven account debtors as referenced in Section 6.1 hereof be carrying more than 2 1/2 months of inventory, Lender may create a Reserve for the inventory in excess of a 2 1/2 month supply. The 2 1/2 month supply will be based on the prior 3 months sales to the account debtor in question. 2.2 Intentionally Deleted 2.3 Accommodations. (a) Subject to the terms and conditions contained herein, Lender may, in its sole discretion, issue or cause to be issued, from time to time at Borrower's request and on terms and conditions and for purposes satisfactory to Lender, credit accommodations consisting of letters of credit, bankers' acceptances, merchandise 3 5 purchase guaranties or other guaranties or indemnities for Borrower's account (collectively, "Accommodations"). Borrower shall execute and perform additional agreements relating to the Accommodations in form and substance acceptable to Lender and the issuer of any Accommodations, all of which shall supplement the rights and remedies granted herein. Any payments made by Lender or any affiliate of Lender in connection with the Accommodations shall constitute additional Revolving Loans to Borrower. (b) In addition to the fees and costs of any issuer in connection with issuing or administering Accommodations, Borrower shall pay monthly to Lender, on the first day of each month, a charge on the face amount of all outstanding Accommodations computed daily from the date of issuance until termination or payment, at the rate set forth in Section 10.3(a) (the "Accommodation Charges"). (c) No Accommodation will be issued unless the full amount of the Accommodation requested, plus fees and costs for issuance, is less than the Net Availability existing immediately prior to the issuance of the requested Accommodation, or if the requested Accommodation would cause the sum of the outstanding Obligations to exceed the Maximum Credit, or cause the sum of the open amount of Accommodations to exceed, at any time, the Accommodation sublimit set forth in Section 10.3(b). (d) All indebtedness, liabilities and obligations of any sort whatsoever, however arising, whether present or future, fixed or contingent, secured or unsecured, due or to become due, paid or incurred or otherwise arising in connection with any Accommodation shall be included in the term "Obligations" as defined herein, and shall include, without limitation, (i) all amounts due or which may become due under any Accommodation; (ii) all amounts charged or chargeable to Borrower or to Lender by any bank, other financial institution or correspondent bank which opens, issues or is involved with such Accommodations; (iii) Lender's Accommodation Charges and all fees, costs and other charges of any issuer of any Accommodation; and (iv) all duties, freight, taxes, costs, insurance and all such other charges and expenses which may pertain directly or indirectly to any Obligations or Accommodations or to the goods or documents relating thereto. (e) Borrower unconditionally agrees to indemnify and hold Lender harmless from any and all loss, claim or liability (including reasonable attorneys' fees) arising from any transactions or occurrences relating to any Accommodation established or opened for Borrower's account, the Collateral relating thereto and any drafts or acceptance thereunder, including any such loss or claim due to any action taken by an issuer of any Accommodation. Borrower further agrees to indemnify and hold Lender harmless for any errors or omissions in connection with the Accommodations, whether caused by Lender, by the issuer of any Accommodation or otherwise. Borrower's unconditional obligation to indemnify and hold Lender harmless under this provision 4 6 shall not be modified or diminished for any reason or in any manner whatsoever, except for Lender's gross negligence or wilful misconduct. Borrower agrees that any charges made to Lender by any issuer of any Accommodation shall be conclusive on Borrower and may be charged to Borrower's account. (f) Lender shall not be responsible for the conformity of any goods to the documents presented, the validity or genuineness of any documents or delay, default, or fraud by the Borrower or shipper and/or anyone else in connection with the Accommodations or any underlying transaction. (g) Borrower agrees that any action taken by Lender, if taken in good faith, or any action taken by an issuer of any Accommodation, under or in connection with any Accommodation, shall be binding on Borrower and shall not create any resulting liability to Lender, except in the case of gross negligence or wilful misconduct. In furtherance thereof Lender shall, upon and during the continuance of an Event of Default or if Lender is directly collecting the accounts pursuant to Section 5.4, have the full right and authority to clear and resolve any questions of non-compliance of documents; to give any instructions as to acceptance or rejection of any documents or goods; to execute for Borrower's account any and all applications for steamship or airway guarantees, indemnitees or delivery orders; to grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents; and to agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications or Accommodations. All of the foregoing actions may be taken in Lender's sole name, and the issuer thereof shall be entitled to comply with and honor any and all such documents or instruments executed by or received solely from Lender, all without notice to or any consent from Borrower. None of the foregoing actions described in this subsection 2.3 (g) may be taken by Borrower after and during the continuance of an Event of Default or if Lender is directly collecting the accounts, without Lender's express written consent. 2.4 Obligations In Excess of Limitations. Lender may, in the exercise of its reasonable credit judgment, make or permit Revolving Loans and Accommodations or other Obligations in excess of the Maximum Credit, Gross Availability or applicable sublimits. To the extent such excess is permitted by Lender, all or any portion of such excess shall become due and payable upon Lender's demand therefor. To the extent the aggregate amount of Revolving Loans and Accommodations or other Obligations at any time exceeds, without the consent of Lender, the Maximum Credit, Gross Availability or applicable sublimits, all of such excess shall be immediately due and payable, upon Lender's demand therefor. SECTION 3. INTEREST AND FEES 3.1 Interest. 5 7 (a) Interest on all Obligations shall be payable by Borrower on the first day of each month, calculated upon the closing daily outstanding principal balances in the loan account(s) of Borrower for each day during the immediately preceding month, at the per annum rate set forth as the Interest Rate in Section 10.4(a). The Interest Rate shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate (as defined below), effective as of the date of each such change. On and after any Event of Default or termination or non-renewal hereof, at Lender's option, interest on all due and unpaid Obligations shall accrue at a rate equal to two percent (2%) per annum in excess of the Interest Rate otherwise payable until such time as all Obligations are indefeasibly paid in full in immediately available funds (notwithstanding entry of any judgment against Borrower or the exercise of any other right or remedy by Lender), and all such interest shall be payable on demand. Interest, including interest charged upon the occurrence of an Event of Default, shall be calculated on the basis of actual days elapsed over a 360-day year. In no event shall charges constituting interest exceed the rate permitted under any applicable law or regulation. However, if any interest or other charges paid or payable in connection with this Agreement are ever determined to exceed the maximum amount or rate permitted by law, Borrower and Lender understand and agree that: (A) the amount or rate of interest or other charges payable by Borrower pursuant to this lending transaction shall be reduced to the maximum amount permitted by law; and (B) any excess amount previously collected from Borrower in connection with this lending transaction which exceeded the maximum amount permitted by law will be credited against the outstanding principal balance. If the outstanding principal balance has already been paid, the excess amount paid will be refunded to Borrower. (b) The "Prime Rate" is the rate of interest publicly announced by Chemical Bank (or its successor) in New York, New York as its prime rate or similar such designation (such rate is not intended to be the lowest rate of interest charged by such bank to its borrowers). 3.2 Facility Fee. Borrower shall pay Lender on each anniversary of the date hereof during any Term of this Agreement, a Facility Fee in the amount set forth in Section 10.4(b), which fee shall be fully earned and payable as of each anniversary, if any, hereof during any Term of this Agreement. 3.3 Closing Fee. Borrower shall pay Lender on the date hereof a Closing Fee in the amount set forth in Section 10.4(c), which fee is fully earned as of the date hereof. 3.4 Unused Line Fee. Borrower shall pay Lender on the first day of each month, in arrears, during the initial and any renewal term an Unused Line Fee at the rate set forth in Section 10.4(d), calculated on the amount, if any, by which the Maximum Credit exceeds the average outstanding principal balance of all Revolving Loans and Accommodations made to Borrower for the preceding month. 6 8 3.5 Charges to Loan Account. At Lender's option, all payments of principal, interest, fees, costs, expenses and other charges provided for in this Agreement, or in any other agreement now or hereafter existing between Lender and Borrower, may be charged on the date when due as principal to any loan account of Borrower maintained by Lender, and shall thereafter bear interest at the rate and payable in the manner provided herein for the accrual and payment of interest on outstanding Obligations. No portion of any fees or charges payable by Borrower hereunder shall be refundable for any reason including, without limitation, termination of this Agreement. SECTION 4. GRANT OF SECURITY INTEREST 4.1 Grant of Security Interest. To secure the payment and performance in full of all Obligations, Borrower hereby grants to Lender a continuing security interest in and lien upon, and a right of setoff against, and Borrower hereby assigns and pledges to Lender, all of the Collateral, including any Collateral not deemed eligible for lending purposes. 4.2 Obligations. "Obligations" shall mean any and all Revolving Loans, Accommodations and all other indebtedness, liabilities and obligations of every kind, nature and description owing by Borrower to Lender, including principal, interest, charges, fees and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal Term or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended and whether arising directly or howsoever acquired by Lender including from any other entity outright, conditionally or as collateral security, by assignment, merger with any other entity, participations or interests of Lender in the obligations of Borrower to others, assumption, operation of law, subrogation or otherwise and shall also include all amounts chargeable to Borrower under this Agreement or in connection with any of the foregoing. 4.3 Collateral. "Collateral" shall mean all of the following property of Borrower: (a) All now owned and hereafter acquired right, title and interest of Borrower in, to and in respect of all: accounts, including without limitation all interests in goods represented by accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; chattel paper; general intangibles (including, but not limited to, tax and duty claims and refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, license agreements and licenses, whether as licensor or licensee, computer software programs and systems, choses in action and other claims, and existing and 7 9 future leasehold interests in equipment, real estate and fixtures); documents; instruments; letters of credit, bankers' acceptances or guaranties; cash monies, deposits, securities, bank accounts, deposit accounts, credits and other property now or hereafter held in any capacity by Lender, its affiliates or any entity which, at any time, participates in Lender's financing of Borrower or at any other depository or other institution; and agreements or property securing or relating to any of the items referred to above; (b) All now owned and hereafter acquired right, title and interest of Borrower in, to and in respect of goods, including, but not limited to: (i) All inventory, wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description, including all raw materials, work-in-process, finished goods and materials to be used or consumed in Borrower's business; and all names or marks affixed to or to be affixed thereto for purposes of selling same by the seller, manufacturer, lessor or licensor thereof; (ii) All equipment and fixtures, wherever located, whether now owned or hereafter acquired, including, without limitation, all machinery, equipment, motor vehicles, furniture and fixtures, and any and all additions, substitutions, replacements (including spare parts) and accessions thereof and thereto; (iii) All consumer goods, farm products, crops, timber, minerals or the like (including oil and gas), wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description; (c) All now owned and hereafter acquired right, title and interest of Borrower in, to and in respect of any other personal property or any fixtures in or upon which Lender has or may hereafter have a security interest, lien or right of setoff; (d) All present and future books and records relating to any of the above, including, without limitation, all computer programs, printed output and computer readable data, in any media, in the possession or control of the Borrower, any computer service bureau or other third party; (e) All notes, security interests and deeds of trust or mortgages in favor of Borrower; and (f) All products and proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds and all claims against third parties for loss or destruction of or damage to any of the foregoing. 8 10 SECTION 5. COLLECTION AND ADMINISTRATION 5.1 Collections. Borrower shall, at Borrower's expense and in the manner requested by Lender from time to time, direct that remittances and all other proceeds of accounts and other Collateral shall be sent to a lock box designated by and/or maintained in the name of Lender, and deposited into a bank account maintained in the name of Lender under arrangements with the depository bank under which all funds deposited to such bank account are required to be transferred solely to Lender. Borrower shall bear all risk of loss of any funds deposited into such account. In connection therewith, Borrower shall execute such lock box and bank account agreements as Lender shall specify. Any collections or other proceeds received by Borrower shall be held in trust for Lender and immediately remitted to Lender, in kind. 5.2 Payments. All Obligations shall be payable at Lender's office set forth below or at Bank of America, NT & SA, in Los Angeles, California, or such substitute bank as Lender may determine ("Lender's Bank") or such other place as Lender may designate from time to time. For purposes of determining Gross and Net Availability, remittances and other payments with respect to the Collateral and Obligations will be treated as credited to the loan account of Borrower maintained by Lender and Collateral balances to which they relate, upon the date of Lender's receipt of advice from Lender's Bank that such remittances or other payments have been credited to Lender's account or in the case of remittances or other payments, received directly in kind by Lender, upon the date of Lender's deposit thereof at Lender's Bank, subject to final payment and collection. In computing interest charges, the loan account of Borrower maintained by Lender will be credited with remittances and other payments two (2) Business Days after Lender has received advice of receipt of remittances in Lender's account at Lender's Bank. For purposes of this Agreement, "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which either Lender or banks located in Los Angeles, California, or New York, New York are authorized to close. 5.3 Loan Account Statements. Lender shall deliver to Borrower monthly a loan account statement. Each statement shall be considered correct and binding upon Borrower as an account stated, except to the extent that Lender receives, within sixty (60) days after the mailing of such statement, written notice from Borrower of any specific exceptions by Borrower to that statement. 5.4 Direct Collections. Lender may, at any time, whether or not an Event of Default has occurred, without notice to or consent of Borrower, in Lender's reasonable credit judgment, (a) notify any account debtor that the accounts and other Collateral which includes a monetary obligation have been assigned to Lender by Borrower and that payment thereof is to be made to the order of and directly to Lender; (b) send, or cause to be sent by its designee, requests (which may identify the sender by a pseudonym) for verification of accounts and other Collateral directly to any account debtor or any other obligor or any bailee with respect thereto; and (c) demand, collect or enforce payment of any accounts or such other 9 11 Collateral, but without any duty to do so, and Lender shall not be liable for any failure to collect or enforce payment thereof. At Lender's reasonable request, all invoices and statements sent to any account debtor, other obligor or bailee, shall state that the accounts and such other Collateral have been assigned to Lender and are payable directly and only to Lender. 5.5 Attorney-in-Fact. Borrower hereby appoints Lender and any designee of Lender as Borrower's attorney-in-fact and authorizes Lender or such designee, at Borrower's sole expense, to exercise at any time in Lender's or such designee's discretion all or any of the following powers, which powers of attorney, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) receive, take, endorse, assign, deliver, accept and deposit, in the name of Lender or Borrower, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof; (b) transmit to account debtors, other obligors or any bailee's notice of the interest of Lender in the Collateral or request from account debtors or such other obligors or bailees at any time, in the name of Borrower or Lender or any designee of Lender, information concerning the Collateral and any amounts owing with respect thereto; (c) notify account debtors or other obligors to make payment directly to Lender, or notify bailees as to the disposition of Collateral; (d) take or bring, in the name of Lender or Borrower, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of or other realization upon the accounts and other Collateral; (e) after and during the continuance of an Event of Default change the address for delivery of mail to Borrower and to receive and open mail addressed to Borrower; (f) after and during the continuance of an Event of Default, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations; and (g) execute in the name of Borrower and file against Borrower in favor of Lender financing statements or amendments with respect to the Collateral. 5.6 Liability. Borrower hereby releases and exculpates Lender, its officers, employees and designees, from any liability arising from any acts under this Agreement or in furtherance thereof, whether as attorney-in-fact or otherwise, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, except for gross negligence or wilful misconduct. In no event will Lender have any liability to Borrower for lost profits or other special or consequential damages. 5.7 Administration of Accounts. After written notice by Lender to Borrower prior to an Event of Default and automatically, without notice, after an Event of Default, Borrower shall not, without the prior written consent of Lender in each instance, which consent shall not be unreasonably withheld, (a) grant any extension of time of payment of any of the accounts or any other Collateral which includes a monetary obligation; (b) compromise or settle any of the accounts or any such other Collateral for less than the full amount thereof; (c) release in whole or in part any account debtor or other person liable for the payment of any 10 12 of the accounts or any such other Collateral; or (d) grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any of the accounts or any such other Collateral. 5.8 Documents. At such times as Lender may reasonably request and in the manner reasonably specified by Lender, Borrower shall deliver to Lender or Lender's representative, as Lender shall designate, copies or originals of invoices, agreements, proofs of rendition of services and delivery of goods and other documents evidencing or relating to the transactions which gave rise to accounts or other Collateral, together with customer statements, schedules describing the accounts or other Collateral and/or statements of account and confirmatory assignments to Lender of the accounts or other Collateral, in form and substance satisfactory to Lender and duly executed by Borrower. Without limiting the provisions of Section 5.7, Borrower's issuance of credits, discounts, allowances, deductions, return authorizations or the like will promptly be reported to Lender in writing; provided that Borrower further agrees to issue the foregoing in a timely and prompt manner and to advise Lender of the granting of any credits (whether or not issued) arising or in an amount outside the ordinary course of business of Borrower as presently conducted or not customary in Borrower's ordinary business practice. In no event shall any such schedule or confirmatory assignment (or the absence thereof or omission of any of the accounts or other Collateral therefrom) limit or in any way be construed as a waiver, limitation or modification of the security interests or rights of Lender or the warranties, representations and covenants of Borrower under this Agreement. Any documents, schedules, invoices or other paper delivered to Lender by Borrower may be destroyed or otherwise disposed of by Lender six (6) months after receipt by Lender, unless Borrower requests their return in writing in advance and makes prior arrangements for their return, at its expense. 5.9 Access. From time to time as reasonably requested by Lender, at the sole expense of Borrower (but subject to Section 6.13(d), Lender or its designee shall have complete access to all of the premises where Collateral is located for the purposes of inspecting the Collateral, including Borrower's books and records, and Borrower shall permit Lender or its designee to make such copies of such books and records or extracts therefrom as Lender may request. Without expense to Lender, Lender may use such of Borrower's personnel, equipment, including computer equipment, programs, printed output and computer readable media, supplies and premises as Lender shall request for the collection of accounts and realization on other Collateral. Borrower hereby irrevocably authorizes all accountants and third parties, with the exception of Borrower's attorneys with respect to information for which a privilege is asserted, to disclose and deliver to Lender at Borrower's expense all financial information, books and records, work papers, management reports and other information in their possession regarding Borrower. 11 13 5.10 Environmental Audits. From time to time, as reasonably requested by Lender, at the sole expense of Borrower, Borrower shall provide Lender, or its designee, complete access to all of Borrower's facilities for the purpose of conducting an environmental audit of such facilities as Lender or its designees may deem necessary. Borrower agrees to cooperate with Lender with respect to any environmental audit conducted by Lender or its designee pursuant to this Section 5.10. 5.11 Primary Rate. Xircom, Inc. and Primary Rate, Inc. have jointly informed Lender that all accounts and inventory are initially recorded on the books of Xircom, Inc. even though some of the accounts and inventory belong to Primary Rate, Inc. Once each fiscal quarter, Xircom, Inc. reflects the assets of Primary Rate, Inc. by shifting certain accounts on Xircom, Inc.'s books and records and inventory to Primary Rate, Inc. In addition to the foregoing, Lender is informed by Xircom, Inc. and Primary Rate, Inc. that Xircom, Inc. pays the accounts payable and other obligations of Primary Rate, Inc. Therefore, Lender's advances to Xircom, Inc. will be used, in part, to pay the liabilities of Primary Rate, Inc. In connection with the foregoing, Borrower agrees as follows: (a) At the end of each fiscal quarter, Xircom, Inc. will report to Lender in writing any reallocation of accounts or inventory to Primary Rate, Inc. Lender reserves the right to reallocate its loans to Primary Rate, Inc. based on such information. (b) At the end of each fiscal quarter, Xircom, Inc. will report to Lender in writing the amount of liabilities of Primary Rate, Inc. paid by Xircom, Inc. during such fiscal quarter. (c) Subject to Lender's right to reallocate loans pursuant to Section 5.11(a), Borrower directs Lender to make all advances to Xircom, Inc. SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS Borrower hereby represents, warrants and covenants to Lender the following, the truth and accuracy of which, and compliance with which, shall be continuing conditions of the making of loans or other credit accommodations by Lender to Borrower: 6.1 Financial and Other Reports. Borrower shall keep and maintain its books and records in a manner sufficient to permit the preparation of financial statements, in accordance with generally accepted accounting principles, consistently applied. Borrower shall, at its sole expense, deliver to Lender (a) weekly, on or before Tuesday of each week, accurate and complete perpetual inventory reports; (b) monthly, on or before the tenth (10th) day of each month, accurate and complete accounts receivable and accounts and notes payable agings and a monthly inventory report; (c) monthly, on or before the twentieth (20th) day of 12 14 each month, internally prepared interim financial statements and the "Top 11 Report" with supporting schedules for each of the top eleven account debtors measured by volume of sales; (d) annually, as soon as available, but in no event later than ninety (90) days after the end of Borrower's fiscal year, audited financial statements of Borrower accompanied by the report and opinion thereon of independent certified public accountants acceptable to Lender; and (e) with such frequency as Lender shall reasonably request, cash flow projections in a form reasonably acceptable to Lender. All of the foregoing shall be in such form and together with such information with respect to the business of Borrower or any guarantor, as Lender may in each case request. Borrower shall also provide Lender, upon Lender's request, with accurate and complete copies of any reports, forms or other documents prepared or delivered by Borrower to any agency or authority pursuant to the requirements of any governmental statutes, regulations or ordinances and, without the necessity of Lender's request, copies of all filings with the Securities and Exchange Commission. 6.2 Trade Names. Borrower may from time to time render invoices to account debtors under its trade name(s) set forth in Section 10.6(f) after Lender has received prior written notice from Borrower of the use of such trade name(s) and as to which, Borrower agrees that: (a) such trade name does not refer to another corporation or other legal entity; (b) all accounts and proceeds thereof (including any returned merchandise) invoiced under any such trade names are owned exclusively by Borrower and are subject to the security interest of Lender and the other terms of this Agreement; and (c) all schedules of accounts and confirmatory assignments including any sales made or services rendered using the trade name shall show Borrower's name as assignor and Lender is authorized to receive, endorse and deposit to any loan account of Borrower maintained by Lender all checks or other remittances made payable to any trade name of Borrower representing payment with respect to such sales or services. 6.3 Losses. Borrower shall promptly notify Lender in writing of any loss, damage, investigation, action, suit, proceeding or claim relating to a material portion of the Collateral or which may result in any material adverse change in Borrower's business, assets, liabilities or condition, financial or otherwise. 6.4 Books and Records. Borrower's books and records concerning accounts and its chief executive office are and shall be maintained only at the address set forth in Section 10.6(c). Borrower's only other places of business and the only other locations of Collateral having an aggregate value in excess of $50,000, if any, are and shall be the addresses set forth in Sections 10.6(d) and 10.6(e) hereof, provided that Borrower may change such locations or open a new place of business upon thirty (30) days' prior written notice to Lender; provided that Borrower shall not be required to give any such notice with respect to a location at which Collateral with a value of less than $50,000 in the aggregate will be located. Prior to any change in location or opening of any new place of business, Borrower shall execute and deliver or cause to be executed and delivered to Lender such financing statements, 13 15 financing documents and security and other agreements as Lender may reasonably require, including, without limitation, those described in Section 6.14. 6.5 Title. Borrower has and at all times will continue to have good and marketable title, free from defects, to all of the Collateral, free and clear of all liens, security interests, claims or encumbrances of any kind except in favor of Lender and except, if any, those set forth on Schedule A hereto. 6.6 Disposition of Assets. Borrower shall not directly or indirectly: (a) sell, lease, transfer, assign, abandon or otherwise dispose of (each a "Transfer") any part of the Collateral or any material portion of its other assets, other than (i) Transfers consisting of sales of inventory to buyers in the ordinary course of business, (ii) Transfers consisting of sales of worn-out or obsolete equipment in the ordinary course of business, (iii) Transfers consisting of the disposal of furniture in connection with the leasing of Borrower's previous headquarters facility, (iv) Transfers of non-exclusive licenses and similar arrangements for the use of proprietary rights of Borrower; (v) Transfers which constitute liquidation of cash equivalent investments; (vi) Transfers from Borrower to its subsidiaries which are permitted under Section 6.12 hereof, and (vii) other Transfers not otherwise permitted by this Section 6.6 not exceeding $1,000,000 in the aggregate in any fiscal year if written notice is given to Lender and the proceeds are remitted to Lender in kind to Lender's lock box; or (b) consolidate with or merge with or into any other entity, or permit any other entity to consolidate with or merge with or into Borrower (except that any existing subsidiary of Borrower may merge with and into Borrower so long as Borrower is the surviving corporation); or (c) form or acquire any interest in any firm, corporation or other entity. 6.7 Insurance. Borrower shall at all times maintain, with financially sound and reputable insurers, casualty insurance with respect to the Collateral and other assets. All such insurance policies shall be in such form, substance, amounts and coverage as may be satisfactory to Lender and shall provide for thirty (30) days' prior written notice to Lender of cancellation or reduction of coverage. Borrower hereby irrevocably appoints Lender and any designee of Lender as attorney-in-fact for Borrower to obtain such insurance at Borrower's expense, if Borrower does not do so, and, after an Event of Default, to adjust or settle any claim or other matter under or arising pursuant to such insurance or to amend or replace such insurance. Borrower shall deliver to Lender evidence of such insurance and a lender's loss payable endorsement satisfactory to Lender as to all existing and future insurance policies with respect to the Collateral. Borrower shall deliver to Lender, in kind, all instruments representing proceeds of insurance received by Borrower. Lender may apply any insurance proceeds received at any time to the cost of repairs to or replacement of any portion of the Collateral and/or, at Lender's option, to payment of or as security for any of the Obligations, whether or not due, in any order or manner as Lender determines; provided, however, that so long as no Event of Default has occurred and is continuing and the loss is under $500,000, Lender shall disburse the proceeds of insurance for casualty losses to Borrower to replace or repair the damaged or destroyed items. 14 16 6.8 Compliance With Laws. Borrower is and at all times will continue to be in compliance with the requirements of all material laws, rules, regulations and orders of any governmental authority relating to its business (including laws, rules, regulations and orders relating to taxes, payment and withholding of payroll taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety or environmental matters) and all material agreements or other instruments binding on Borrower or its property. All of Borrower's inventory shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders related thereto. Borrower shall pay and discharge all taxes, assessments and governmental charges against Borrower or any Collateral prior to the date on which penalties are imposed or liens attach with respect thereto, unless the same are being contested in good faith and, at Lender's option in the exercise of Lender's reasonable credit judgment. Reserves are established for the amount contested and penalties which may accrue thereon. 6.9 Accounts. With respect to each account deemed an Eligible Account, except as reported in writing to Lender, Borrower has no knowledge that any of the criteria for eligibility are not or are no longer satisfied. As to each account, except as disclosed in writing to Lender prior to or at the time such account arises (a) each is valid and legally enforceable and represents an undisputed bona fide indebtedness incurred by the account debtor for the sum reported to Lender; (b) each arises from an absolute and unconditional sale of goods, without any right of return or consignment (except for stock rotation or stock balancing rights), or from a completed rendition of services; (c) each is not, at the time such account arises, subject to any defense, offset, dispute, contra relationship, counterclaim, or any given or claimed credit, allowance or discount, except as specified on the invoice; and (d) all statements made and all unpaid balances and other information appearing in the invoices, agreements, proofs of rendition of services and delivery of goods and other documentation relating to the accounts, and all confirmatory assignments, schedules, statements of account and books and records with respect thereto, are true and correct and in all respects what they purport to be; provided, that so long as Borrower promptly notifies Lender after Borrower's knowledge thereof that an account no longer meets the criteria set forth in the foregoing representations and warranties and the account is removed from Borrower's Gross Availability, no Event of Default shall rise from the falsity of these representations and warranties. 6.10 Equipment. With respect to Borrower's equipment, Borrower shall keep the equipment in good order and repair, and in running and marketable condition, except for obsolete or worn out equipment replaced in the ordinary course of business. 6.11 Intentionally Deleted. 6.12 Affiliate Transactions. Borrower will not, directly or indirectly: (a) lend or advance money or property to, guarantee or assume indebtedness of, or invest (by capital contribution or otherwise) in any person, firm, corporation or other entity (except for (i) advances in the ordinary course of business to suppliers in respect of the purchase of 15 17 supplies or equipment, (ii) endorsement of negotiable instruments for deposit or collection in the ordinary course of business, (iii) investments in obligations of the United States Government, deposit accounts, certificates of deposit, commercial paper, money market funds or other permitted by Borrower's investment policy which has been approved by the Board of Directors of Borrower and Lender (which consent shall not be unreasonably withheld), (iv) investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business, (v) extensions of credit which arise as a result of sales by Borrower to its subsidiaries to the extent that the sales do not result in loans in excess of Gross Availability or any applicable sublimits, (vi) investments in Primary Rate, Inc. and investments in other subsidiaries, and (vii) other investments aggregating not in excess of $1,000,000 in any fiscal year of Borrower; or (b) declare, pay or make any dividend or other distribution on account of any shares of any class of stock of Borrower now or hereafter outstanding except, if Borrower is an "S corporation" as defined in the Internal Revenue Code of 1986, as amended, for dividends to shareholders in an amount equal to their state and federal tax liabilities associated with such status from time to time; or (c) except as set forth in any subordination agreement between Lender and the applicable party or as otherwise permitted herein, make any payment of the principal amount of or interest on any indebtedness owing to any officer, director, shareholder or affiliate (excluding any subsidiary) of Borrower; or (d) make any loans or advances to any officer, director, employee, shareholder or affiliate of Borrower other than travel and other advances and relocation and similar loans in the ordinary course of business or any other loans not in the ordinary course of business in an aggregate amount not to exceed $500,000 in any fiscal year of Borrower; or (e) enter into any sale, lease or other transaction with any officer, director, employee, shareholder or affiliate of Borrower on terms that are less favorable to Borrower than those which might be obtained at the time from persons who are not an officer, director, employee, shareholder or affiliate of Borrower (other than loans to employees at below market interest rates which are otherwise permitted under this Section 6.12). 6.13 Fees and Expenses. Borrower shall pay, on Lender's demand, all costs, expenses, fees, filing fees and taxes payable in connection with the preparation, execution, delivery, recording, administration (including Lender's standard wire transfer and returned check fees as Lender shall, from time to time, advise Borrower), collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement and all other existing and future agreements or documents contemplated herein or related hereto, including any amendments, waivers, supplements or consents which may hereafter be made or entered into in respect hereof, or in any way involving claims by or against Lender directly or indirectly arising out of or related to the relationship between Borrower and Lender or any guarantor and Lender, including, but not limited to, the following, whether incurred before, during or after the initial or any renewal Term or after the commencement of any case with respect to Borrower or any guarantor under the United States Bankruptcy Code or any similar statute: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all title insurance and other 16 18 insurance premiums, appraisal fees, search fees and fees incurred in connection with any environmental report, audit, survey, or remediation; (c) all fees as then in effect relating to the wire transfer of loan proceeds and all other funds and fees then in effect for returned checks and credit reports; (d) all expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic, field examinations of the Collateral and Borrower's operations, plus a per diem charge at the then prevailing rate (currently $650.00 per person per day, not to exceed $16,000 per year so long as there is no Event of Default) for Lender's examiners in the field and office; and (e) the reasonable costs, fees and disbursements of in-house and outside counsel to Lender, including but not limited to such fees and disbursements incurred as a result of litigation between the parties hereto, any third party and in any appeals arising therefrom. 6.14 Further Assurances. At the request of Lender, at any time and from time to time, at Borrower's sole expense, Borrower shall execute and deliver or cause to be executed and delivered to Lender, such agreements, documents and instruments, including waivers, consents and subordination agreements from landlords, bailees, mortgagees or other holders of property of Borrower or of loans due from Borrower or security interests or liens in the Collateral, and do or cause to be done such further acts as Lender, in its discretion, reasonably exercised, deems necessary or desirable to create, preserve, perfect or validate any security interest of Lender or the priority thereof in the Collateral and otherwise to effectuate the provisions and purposes of this Agreement. Borrower hereby authorizes Lender to file financing statements or amendments against Borrower in favor of Lender with respect to the Collateral, without Borrower's signature and to file as financing statements any carbon, photographic or other reproductions of this Agreement or any financing statements signed by Borrower. 6.15 Inventory. At Borrower's expense (but no more often than twice per year while no Event of Default is outstanding), Lender may conduct appraisals of Borrower's inventory from time to time. If the outstanding loan against Eligible Inventory exceeds 70% of the appraised liquidation value of the Eligible Inventory, Borrower will pay the difference thereof to Lender in three equal monthly installments. 6.16 Environmental Condition. None of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute. No lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. Borrower is in compliance in all material respects with all statutes, regulations, ordinances and other legal requirements pertaining to the production, storage, handling, treatment, release, transportation or disposal of any hazardous waste or hazardous substance. 17 19 SECTION 7. EVENTS OF DEFAULT AND REMEDIES 7.1 Events of Default. All Obligations shall be immediately due and payable, without notice or demand, and any provisions of this Agreement as to future loans and credit accommodations by Lender shall terminate automatically, upon the termination or non-renewal of this Agreement or, at Lender's option, upon or at any time after the occurrence or existence of any one or more of the following (each, an "Event of Default"): (a) Borrower fails to pay when due any of the Obligations; (b) Borrower fails to perform, keep or observe any covenant contained in Sections 6.1(a) or 6.1(b) within three (3) Business Days, or in Sections 6.1(c), 6.1(d), 6.1(e), 6.3, 6.5, 6.7 or 6.8 within five (5) Business Days, in each case of the date that Borrower is required to perform, keep or observe such covenant;provided that such 3 and 5 Business Day cure periods, as applicable, shall only be available to Borrower twice in any fiscal year with respect to each covenant; (c) Any representation, warranty or statement of fact made by Borrower to Lender in this Agreement or any other agreement, schedule, confirmatory assignment or otherwise, or to any affiliate of Lender, shall prove inaccurate or misleading in any material respect; (d) Any guarantor or subordinated creditor of Borrower revokes, terminates or fails to perform any of the material terms of any guaranty, endorsement, subordination agreement or other agreement of such party with or in favor of Lender or any affiliate of Lender; (e) Any judgment(s) in excess of $500,000 in the aggregate or any injunction or attachment is obtained against Borrower or any guarantor and is either enforced or remains unstayed for a period of fifteen (15) days; (f) Any guarantor which is a natural person dies, or Borrower or any guarantor which is a partnership or corporation is dissolved, or Borrower or any guarantor which is a corporation fails to maintain its corporate existence in good standing, or the usual business of Borrower or any guarantor ceases or is suspended; (g) Borrower or any guarantor becomes insolvent, makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a general meeting of its creditors or principal creditors; (h) Any petition or application for any relief under the bankruptcy laws of the United States now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is 18 20 filed by or against Borrower or any guarantor and in the case of an involuntary petition in bankruptcy, is not dismissed within thirty (30) days from the date of the filing thereof; (i) Any indictment of Borrower or any guarantor occurs under any criminal statute, or criminal or civil proceedings are commenced or threatened against Borrower or any guarantor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any material portion of the property of Borrower or any guarantor; (j) Borrower shall enter into any business other than that in which it is engaged as of the date hereof or businesses related or incidental thereto; or (k) Any default or event of default occurs on the part of Borrower under any agreement, document or instrument to which Borrower is a party or by which Borrower or any of its property is bound, creating or relating to any indebtedness of Borrower to any person or entity other than Lender in a principal amount exceeding $250,000, if the effect of such default is to accelerate, or to permit the acceleration of, the maturity of all or any part of such indebtedness, or all or any part of any such indebtedness shall be declared to be due and payable or required to be prepaid for any other reason, in either event prior to the stated maturity thereof. 7.2 Remedies. Upon the occurrence of an Event of Default and at any time thereafter, Lender shall have all the default rights and remedies provided in this Agreement, any other agreements between Borrower and Lender, the Uniform Commercial Code or other applicable law, all of which rights and remedies may be exercised without notice to Borrower, all such notices being hereby waived, except such notice as is expressly provided for hereunder or is not waivable under applicable law. All rights and remedies of Lender are cumulative and not exclusive and are enforceable, in Lender's discretion, alternatively, successively or concurrently on any one or more occasions and in any order Lender may determine. Without limiting the foregoing, Lender may (a) accelerate the payment of all Obligations and demand immediate payment thereof to Lender; (b) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral; (c) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender; (d) collect, foreclose, receive, appropriate, set off and realize upon any and all Collateral; (e) extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations; and (f) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, by public or private sales at any exchange, broker's board, any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for 19 21 cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days' prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made shall be deemed to be reasonable notice thereof and Borrower waives any other notice. If Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. 7.3 Application of Proceeds. Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of any of the Obligations, in whole or in part (including reasonable attorneys' fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to Borrower) and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency together with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses. 7.4 Lender's Cure of Third Party Agreement Default. Lender may, at its option, cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and pay any amount, incur any expense or perform any act which, in Lender's sole judgment, is necessary or appropriate to preserve, protect, insure, maintain or realize upon the Collateral. Lender may charge Borrower's loan account for any amounts so expended, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment, bonding or discharge, and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS 8.1 Jury Trial Waiver. BORROWER AND LENDER EACH WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 20 22 8.2 Counterclaims. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any kind, nature or description in any action or proceeding instituted by Lender with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating thereto, except compulsory counterclaims. 8.3 Jurisdiction. Borrower hereby irrevocably submits and consents to the non-exclusive jurisdiction of the State and Federal Courts located in the State of California and any other State where any Collateral is located, with respect to any action or proceeding arising out of this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating thereto. In any such action or proceeding, Borrower waives personal service of the summons and complaint or other process and papers therein and agrees that the service thereof may be made by mail directed to Borrower at its chief executive office set forth herein or other address thereof of which Lender has received notice as provided herein or as otherwise permitted by law, service to be deemed complete five (5) days after mailing return receipt requested, or as permitted under the rules of either of said Courts. Any such action or proceeding commenced by Borrower against Lender will be litigated only in a federal court located in the Central District of California, or a state court in the County of Los Angeles, California. 8.4 No Waiver by Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. A waiver by Lender of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS 9.1 Term. This Agreement shall only become effective upon execution and delivery by Borrower and Lender and shall continue in full force and effect for a term of one (1) year from the date hereof and shall be deemed automatically renewed for successive terms of one (1) year thereafter unless terminated as of the end of the initial or any renewal term (each a "Term") by either party giving the other written notice at least sixty (60) days prior to the end of the then-current Term. 9.2 Early Termination. Borrower may also terminate this Agreement by giving Lender at least thirty (30) days' prior written notice at any time upon payment in full of all of the Obligations as provided herein, including the early termination fee provided below. Lender shall also have the right to terminate this Agreement at any time upon or after the occurrence and during the continuance of an Event of Default. If Lender terminates this Agreement upon or after the occurrence of an Event of Default, or if Borrower shall terminate this Agreement as permitted herein effective prior to the end of the Initial Term, in addition to all other Obligations, Borrower shall pay to Lender, upon the effective date of termination, in 21 23 view of the impracticality and extreme difficulty of ascertaining actual damages, an early termination fee equal to 3% of the Maximum Credit. 9.3 Additional Cash Collateral. Upon any termination of this Agreement by Borrower as permitted herein, in addition to payment of all Obligations which are not contingent, Borrower shall deposit such amount of cash collateral as Lender reasonably determines is necessary to secure Lender from loss, cost, damage or expense, including reasonable attorneys' fees, in connection with any open Accommodations or remittance items or other payments provisionally credited to the Obligations or with respect to which Lender has not yet received final and indefeasible payment. 9.4 Notices. Except as otherwise provided, all notices, requests and demands hereunder shall be (a) made to Lender at its address set forth in Section 10.6(a) and to Borrower to the attention of Vice President Finance with a copy to General Counsel, at its chief executive office set forth in Section 10.6(c), or to such other address as either party may designate by written notice to the other in accordance with this provision; and (b) deemed to have been given or made: if by hand, immediately upon delivery; if by telex, telegram or facsimile, immediately upon receipt; if by overnight delivery service, one (1) day after dispatch; and if by first class or certified mail, three (3) days after deposit in the U.S. Mail, postage prepaid and addressed as set forth herein. 9.5 Severability. If any provision of this Agreement is held to be invalid or unenforceable, such provision shall not affect this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable. 9.6 Entire Agreement; Amendments; Assignments. This Agreement contains the entire agreement of the parties as to the subject matter hereof, all prior commitments, proposals and negotiations concerning the subject matter hereof being merged herein. Neither this Agreement nor any provision hereof shall be amended, modified or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns, except that any obligation of Lender under this Agreement shall not be assignable or inure to the successors and assigns of Borrower. 9.7 Discharge of Borrower. No termination of this Agreement shall relieve or discharge Borrower of its obligations, grants of Collateral, duties and covenants hereunder or otherwise until such time as all Obligations to Lender have been indefeasibly paid and satisfied in full, including, without limitation, the continuation and survival in full force and effect of all security interests and liens of Lender in and upon all then existing and thereafter-arising or acquired Collateral and all warranties and waivers of Borrower. 22 24 9.8 Usage. All terms used herein which are defined in the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement and all references to the singular or plural herein shall also mean the plural or singular, respectively. 9.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 9.10 Confidentiality. In handling any confidential information of Borrower, Lender shall use reasonable care to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement, except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Lender or to Lender's attorneys or agents in connection with present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest of Lender under this Agreement, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order; provided that Borrower is given notice; and (iv) as may be required in connection with the examination, audit or similar investigation of Lender. Notwithstanding any provision of this Agreement to the contrary, prior to the occurrence of an Event of Default, Borrower will not be required to disclose, permit the inspection, examination, copying or making extracts of, or discussions of, any document, information or other matter (i) that constitutes non-financial trade secrets or non-financial proprietary information that does not constitute or relate to the Collateral, or (ii) in respect to which disclosure to Lender (or designated representative) is then prohibited by law. SECTION 10. ADDITIONAL DEFINITIONS AND TERMS 10.1 (a) Maximum Credit: the lesser of $15,000,000 or (1) 33 1/3% plus $2,000,000 from the date hereof through December 31, 1995, (2) 33 1/3% plus $1,000,000 from January 1, 1996 through March 31, 1996 and (3) 33 1/3% thereafter, of the prior three months' collections, to be determined by Lender on a monthly basis (aggregate for both Borrowers) 23 25 (b) Gross Availability Formulas: Eligible Accounts Percentage: 75%(1)(subject to a sublimit of $250,000 against progress-billed Accounts) Eligible Inventory Percentages Finished Goods: 40%; provided that advances against eligible finished goods inventory shall at no time exceed 70% of the appraised orderly liquidation value (as determined by Lender) of the eligible finished goods inventory and finished subassemblies (top level assemblies).(2) ____________________ (1) So long as dilution does not exceed 15%. If dilution exceeds 15%, the advance percentage shall be reduced by 1% for each percent of dilution in excess of 15%. For purposes of determining dilution, Lender will make that determination based on its audits but, in general, Lender will not include in the computation of dilution accounts which were never Eligible Accounts or any account to the extent a Reserve has been established for that account. (2) The Eligible Inventory Percentage shall be reduced to 20% immediately upon any determination by Lender that Borrower has recorded cumulative net losses, exclusive of non-cash, non- recurring restructure charges, in excess of the following levels for the given periods:
Period Cumulative Net Loss ------ ------------------- Quarter ended 12/31/95 $4,000,000 Quarter ended 03/31/96 4,000,000 Quarter ended 06/30/96 4,000,000 Quarter ended 09/30/96 4,000,000
The Eligible Inventory Percentage will be increased to the original 40% if the Cumulative Net Loss in a calendar quarter subsequent to a reduction in the Eligible Inventory Percentage meets (continued...) 24 26 (c) Inventory Sublimit: $4,500,000 (aggregate for both Borrowers) (d) Maximum days after Invoice Date for Eligible Accounts: 90 10.2 Intentionally Deleted 10.3 Accommodations: (a) Lender's Charge for Accommodations: 1.25% over a 360-day year (b) Sublimit for Accommodations: $1,000,000 (aggregate for both Borrowers) 10.4 Fees: (a) Interest Rate: Prime Rate plus 1.25% over a 360-day year (b) Facility Fee: 1.0% of the Maximum Credit (due only at anniversary) (c) Closing Fee: 1.0% of the Maximum Credit (d) Unused Line Fee: 0.25%; provided no Unused Line Fee will be payable so long as Borrower maintains a minimum monthly average loan of $2,500,000. 10.5 Intentionally Deleted. 10.6 (a) Lender's Office: 300 South Grand Avenue Third Floor Los Angeles, CA 90071 (b) Borrower: Xircom, Inc. Primary Rate, Inc. - --------------- (2) (...continued) the financial test above and no Event of Default has occurred and is continuing. 25 27 (c) Borrower's Chief Executive Office: 2300 Corporate Center Drive Thousand Oaks, California 91320 (d) Locations of Eligible Inventory Collateral: See Schedule "B". (e) Borrower's Other Offices and Locations of Collateral: See Schedule "C". (f) Borrower's Trade Names for Invoicing: See Schedule "D". IN WITNESS WHEREOF, Borrower and Lender have duly executed this Agreement this 8 day of November 1995. LENDER: BORROWER: - ------ -------- THE CIT GROUP/CREDIT XIRCOM, INC. FINANCE, INC. By: Thomas Hayes By: R. Holliday ---------------------------- ------------------------ Title: Vice President Title: Secretary ------------------------- --------------------- PRIMARY RATE, INC. By: R. Holliday ------------------------ Title: Secretary --------------------- 26 28 SCHEDULE A Permitted Liens (a) Encumbrances consisting of easements, zoning restrictions, or other restrictions on the use of real property or, imperfections to title to real property that could not reasonably be expected to have a material adverse effect on Borrower or its assets; (b) Liens for taxes, assessments, or other governmental charges that are not delinquent or which are being contested in good faith and for which adequate Reserves have been established; (c) Liens of mechanics, materialmen, warehousemen, carriers, landlords or other similar statutory liens securing obligations that are not yet due and are incurred in the ordinary course of business or which are being contested in good faith and for which adequate Reserves have been established; (d) Liens resulting from good faith deposits to secure payment of workmen's compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, contracts (other than for payment of debt), or leases, all in the ordinary course of business; (e) The following existing liens:
Secured Party Filing No. ------------- ---------- 1) LEASTEC CORPORATION 91-257180 2) LEASTEC INCOME FUND 85-1 91-269053 3) XEROX CORPORATION 91-257825 4) PITNEY BOWES CREDIT CORPORATION 92-002700 5) LEASTEC INCOME FUND III 92-024699 (*ASSIGNED TO FLEET CREDIT) 6) AMPLICON, INC. 92-045540 (*ASSIGNED TO CONCORD COMMERCIAL) 7) LEASTEC CORPORATION 92-071115 (*ASSIGNED TO FLEET CREDIT)
A-1 29 8) BUSINESS CREDIT LEASING 92-153167 9) AMPLICON, INC. 91-240224 (*ASSIGNED TO CONCORD COMMERCIAL) 10) MASTER LEASE DIVISION OF TOKAI 91-149449 FINANCIAL 11) SIEMENS CREDIT CORPORATION 91-220146 12) SIEMENS CREDIT CORPORATION 91-220147 13) LEASTEC INCOME FUND III 91-257179
(f) Liens arising from judgments, decrees or attachments not constituting an Event of Default under Section 7 hereof and for which adequate Reserves have been established; (g) Liens which constitute rights of setoff of an ordinary nature or banker's liens for amounts on deposit whether arising by operation of law or by contract in connection with with arrangements with banks in the ordinary course of business; and (h) liens not to exceed in the aggregate $250,000 for the purchase or lease of equipment. A-2 30 SCHEDULE B Locations of Eligible Inventory Collateral 2300 Corporate Center Drive Thousand Oaks, California 91320 10 Manor Parkway Salem, New Hampshire 03079 B-1 31 SCHEDULE C Borrower's Other Offices and Locations of Collateral 2041 Landings Drive Mountain View, California 94043 915 15th Street, N.W. Washington, D.C. 20005 C-1 32 SCHEDULE D Borrower's Trade Names for Invoicing PRI Xircom Systems Division Xircom ISDN Products Division D-1 EX-10.29A 3 PLEDGE AGREEMENT CIT GROUP AND XIRCOM 1 PLEDGE AGREEMENT EXHIBIT 10.29A 2 PLEDGE AGREEMENT This Pledge Agreement is entered into as of the 8 day of November, 1995, by and between: PLEDGOR: XIRCOM, INC. AND PLEDGEE: THE CIT GROUP / CREDIT FINANCE, INC. 1. Pledge of Collateral and Delivery of Pledged Collateral. 1.1 Pledgor hereby pledges and assigns to Pledgee and grants to Pledgee a security interest in all of the Collateral described in Section 2 below, whether now owned or hereafter acquired, now or at any time hereafter in the possession, custody or control of Pledgee or its agents, whether held for safekeeping, in a safe deposit box, or otherwise ("Collateral") to secure prompt payment and full performance of the obligations described in Section 3 below (collectively, "Obligations"). 1.2 All certificates or instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of Pledgee pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Pledgee. Pledgee shall have the right, at any time, after an Event of Default (as defined herein), in its reasonable discretion and without notice to Pledgor, to transfer to or to register in the name of Pledgee or any of its nominees any or all of the Collateral. In addition, Pledgee shall have the right at any time after and during the continuance of an Event of Default, to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. 2. Collateral. The Collateral consists of the following: 2.1 All the shares of the capital stock of Primary Rate, Inc. (the "Company"), owned beneficially and of record by Pledgor as listed on Schedule I attached hereto and made a part hereof, and all cash, dividends, other securities, instruments, rights and other property at any time and from time to time received or receivable in respect of the stock of the Company or in exchange for all or any part thereof, including without limitation, stock dividends, warrants, rights to subscribe, conversion rights, liquidating dividends and other stock rights, and in the event Pledgor receives any of the foregoing, Pledgor acknowledges that the same shall be received IN TRUST for Pledgee and agrees immediately to deliver the same to Pledgee in original form of receipt, together with any stock or bond powers, assignments, endorsements or other documents or instruments as Pledgee may reasonably 3 request to establish, protect or perfect Pledgee's interest in respect of such Collateral; and 2.2 All other property hereafter delivered to Pledgee (or any agent or bailee holding on behalf of Pledgee) by Pledgor in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, dividends, other securities, instruments, rights and other property at any time and from time to time received or receivable in respect thereof or in exchange for all or any part thereof, including without limitation, stock dividends, warrants, rights to subscribe, conversion rights, liquidating dividends and other stock rights, and in the event Pledgor receives any of the foregoing, Pledgor acknowledges that the same shall be received IN TRUST for Pledgee and agrees immediately to deliver the same to Pledgee in original form of receipt, together with any stock or bond powers, assignments, endorsements or other documents or instruments as Pledgee may request to establish, protect or perfect Pledgee's interest in respect of such Collateral; and 2.3 All proceeds of all of the foregoing. 3. Obligations. The Obligations secured under this Pledge Agreement are: 3.1 (i) the obligations of Pledgor under that certain Loan and Security Agreement ("Lending Agreement") of even date herewith made by Pledgor in favor of Pledgee; and (ii) the obligations of Pledgor under this Pledge Agreement, and all extensions, amendments, modifications and renewals of any of the foregoing. 4. Representations and Warranties. Pledgor represents and warrants on the date hereof, that: 4.1 Except as heretofore disclosed to Pledgee in writing, Pledgor is the sole legal, beneficial and, if applicable, record owner of the Collateral (or, in the case of after-acquired Collateral, will be the sole such owner thereof), having good and marketable title thereto, free of all liens, security interests, encumbrances or claims of any kind, except Permitted Liens and liens in favor of Pledgee. 4.2 All information heretofore, herein or hereafter given to Pledgee by or on behalf of Pledgor is complete, true and correct. 4.3 All shares of stock constituting Collateral (a) with respect to the Company have been duly and validly issued in compliance with all applicable state and federal laws (including, without limitation, the Securities Act of 1933, as amended (the "Securities Act")), (b) are fully paid, nonassessable and free of preemptive rights, (c) are not subject to any restrictions upon the voting rights or upon the transfer thereof other than as may appear on the face of the certificates evidencing such Collateral, (d) constitute all securities of the Companies owned beneficially and of record by Pledgor and/or any of its affiliates and (e) include 100% of the issued and outstanding shares of each class of voting stock of the Company; 2 4 4.4 The fair saleable value of Pledgor's assets exceeds Pledgor's liabilities, and Pledgor meets its debts as they mature; 4.5 There does not now exist and, after giving effect to all transactions contemplated in connection herewith, there will not exist any default, breach or violation under any material loan document, corporate or partnership instrument or other instrument or regulation to which Pledgor is a party or to which assets of Pledgor are subject or bound; 4.6 Pledgor represents that it is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation, and has all requisite power and authority and necessary licenses to own and operate its properties and carry on its business, and to enter into the transactions contemplated by this Pledge Agreement. 5. Covenants of Pledgor. Until the Obligations are paid in full, Pledgor agrees to: 5.1 Preserve and protect the Collateral provided that Pledgee acknowledges receipt of the stock certificates described on Schedule I hereto; 5.2 Not create, incur, assume or permit to exist any liens, encumbrances, security interests, levies, assessments or charges on or in any of the Collateral, except those approved in writing by Pledgee and Permitted Liens; 5.3 Promptly pay and discharge before the same become delinquent all taxes, assessments and governmental charges or levies imposed on any of the Collateral; 5.4 Not sell, encumber, or otherwise dispose of or transfer any Collateral, or any right or interest therein and agrees that it will (i) cause the Company not to issue any other voting stock in addition to or in substitution for the Collateral, except to Pledgor, or in connection with outstanding stock options or with the prior written consent of Pledgee and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of the Companies; 5.5 Appear in and defend, at Pledgor's own expense, any action or proceeding which may affect Pledgor's title to or Pledgee's interest in the Collateral; 5.6 Procure or execute and deliver, from time to time, in form and substance satisfactory to Pledgee, any stock powers, bond powers, endorsements, assignments, financing statements, estoppel certificates or other writings reasonably deemed necessary or appropriate by Pledgee to perfect, maintain or protect Pledgee's security interest in the Collateral and the priority thereof, and take such other action and deliver such other documents, instruments and agreements pertaining to the Collateral as Pledgee may request to effectuate the intent of this Pledge Agreement; 3 5 5.7 Keep separate, accurate and complete records of the Collateral and provide Pledgee with access thereto and the right to make extracts therefrom; 5.8 Provide Pledgee with such other information pertaining to the Collateral as Pledgee may reasonably request from time to time; and 5.9 Maintain and preserve its corporate or other legal existence and that of the Companies, and all rights, privileges, franchises and other authority necessary for the conduct of their respective businesses. 6. Authorized Action by Pledgee. 6.1 After the occurrence and during the continuation of an Event of Default (as defined herein), Pledgor hereby irrevocably appoints Pledgee as its attorney-in-fact to do (but Pledgee shall not be obligated to and shall not incur any liability to Pledgor or any third party for failure so to do) any act which Pledgor is obligated by this Pledge Agreement to do, and to exercise such rights and powers as Pledgor might exercise with respect to the Collateral, including, without limitation, the right to: 6.1.1 collect by legal proceedings or otherwise and endorse, receive and receipt for all payments, proceeds and other sums and property now or hereafter payable on or in respect of proceeds and other sums and property now or hereafter payable on or in respect of the Collateral, including dividends and interest payments; 6.1.2 enter into any extension, reorganization, deposit, merger or consolidation agreement or other agreement pertaining to the Collateral, and in connection therewith may deposit or surrender control of the Collateral thereunder, accept other property in exchange therefor, and do and perform such acts and things as it may deem proper, and any money or property secured in exchange therefor shall be applied to the Obligations or held by Pledgee pursuant to the provisions of this Pledge Agreement; 6.1.3 protect and preserve the Collateral; 6.1.4 to the extent permitted by law, transfer the Collateral to its own or its nominee's name; and 6.1.5 make any compromise, settlement or adjustment, and take any action it deems advisable, with respect to the Collateral. 6.2 Any reasonable costs and expenses, including reasonable attorneys' fees, Pledgee may incur while acting as Pledgor's attorney-in-fact hereunder are included in the Obligations secured hereby. It is further agreed and understood between the parties hereto that such care as Pledgee gives to the safekeeping of its own property of like kind shall constitute reasonable care of the Collateral when in Pledgee's possession; provided, however, that Pledgee shall not be required to make any presentment, demand or protest, or give any notice and need not take any action to preserve any rights against any 4 6 prior party or any other person in connection with the Obligations or with respect to the Collateral. 6.3 All the foregoing powers authorized herein, being coupled with an interest, are irrevocable so long as any Obligations are outstanding. 7. Transfer, Voting, Dividends, Etc. 7.1 Notwithstanding any other provision hereof, so long as no Event of Default (as defined herein) shall have occurred and be continuing: 7.1.1 Pledgor shall be entitled to exercise all voting powers pertaining to all shares of stock and other securities constituting Collateral for all purposes not inconsistent with the terms of this Pledge Agreement; 7.1.2 Pledgor shall be entitled to receive and retain all dividends (other than stock or liquidating dividends) and all interest payments payable in respect of the Collateral; provided, however, that all stock or property representing stock or liquidating dividends or a distribution or return of capital upon or in respect of the shares of stock constituting Collateral or resulting from a split-up, revision or reclassification of such Collateral or received in exchange therefor, as a result of a merger, consolidation or otherwise, shall be paid or transferred directly to Pledgee immediately upon receipt thereof by Pledgor, and shall be retained by Pledgee as Collateral hereunder; and 7.1.3 in order to permit Pledgor to exercise such voting powers and to receive such dividends Pledgee shall, if necessary, upon the written request of Pledgor, from time to time, execute and deliver to Pledgor appropriate proxies. 7.2 If any Event of Default (as defined herein) shall have occurred and while the same is continuing: 7.2.1 Pledgee, or its nominee or nominees, shall, at its option, have the sole and exclusive right to exercise all voting powers pertaining to the shares of stock constituting Collateral, and shall exercise such powers in such manner as Pledgee may elect, and Pledgor hereby grants Pledgee an irrevocable proxy, coupled with an interest to vote such shares of stock; provided, however, that such proxy shall terminate upon termination of Pledgee's security interest therein; and 7.2.2 All dividends and other distributions made upon or in respect of shares of stock constituting Collateral and all interest payments shall be paid directly to and shall be retained by Pledgee as Collateral hereunder. 8. Default and Remedies. 8.1 The occurrence of any Event of Default under and as defined in the Lending Agreement but subject to cure periods, if applicable, set forth therein (herein 5 7 "Events of Default") shall, at the option of Pledgee and without notice to or demand on Pledgor, constitute an Event of Default hereunder. 8.2 Upon the occurrence of any Event of Default, Pledgee may, at its option, without notice to or demand on Pledgor, declare all Obligations immediately due and payable, and Pledgee shall have all the default rights and remedies of a secured party (other than the right to any deficiency) under Chapter 5 of Division 9 of the California Uniform Commercial Code and other applicable law as well as the right to sell or otherwise dispose of the Collateral, or any part thereof, either at public or private sale, on any broker's board or securities exchange, in lots or in bulk, for cash, on credit or otherwise, with or without representations or warranties, and upon such terms as shall be acceptable to Pledgee, all of which rights and remedies may be exercised with or without further notice to Pledgor, at Pledgee's sole option and as Pledgee in its sole discretion may deem advisable. 8.3 The net cash proceeds resulting from the collection, liquidation, sale, or other disposition of the Collateral shall be applied first, to the reasonable expenses (including reasonable all attorneys' fees) of holding, storing, preparing for sale, selling, collecting, liquidating and the like, including any brokerage commissions and stamp or transfer taxes, and then to the satisfaction of all Obligations secured hereby, application as to any particular obligation or indebtedness or against principal or interest to be in Pledgee's absolute discretion. 8.4 If by reason of any prohibition contained in the Securities Act of 1933, as now or hereafter in effect, or applicable in California or other State securities laws, as now or hereafter in effect, or in any rules or regulations pertaining to any of the foregoing laws, Pledgee in good faith reasonably believes it is compelled to resort to one or more private sales of shares of stock constituting Collateral to a single purchaser or a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof, Pledgor acknowledges and agrees that private sales of such Collateral may be held notwithstanding that such sales may be at prices and on other terms less favorable to Pledgor than if such Collateral were sold at public sale. Pledgor further agrees that Pledgee has no obligation to delay the sale of any such Collateral for the period of time necessary to permit registration of the Collateral, even if the issuer thereof would, or should, agree to register such Collateral for public sale under applicable securities laws. Pledgor specifically agrees that private sales made under the foregoing circumstances shall be deemed to have been made in a "commercially reasonable" manner. 9. Duty of Pledgee. Pledgee shall not be under any duty or obligation whatsoever to collect any dividends, interest or other payments due or accruing in respect of the Collateral or to take any action to preserve rights in connection with any Collateral, including, without limitation, making or giving any presentment, demands for performance, notices of non-performance, protests, notices of protest or notices of dishonor in connection with any Collateral. 6 8 10. Cumulative Rights. The rights, powers and remedies of Pledgee under this Pledge Agreement shall be in addition to all rights, powers and remedies given to Pledgee under any statute or rule of law, this Pledge Agreement or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently. 11. Waiver. Any forbearance, failure or delay by Pledgee in exercising any right, power or remedy shall not preclude the further exercise thereof, and every right, power or remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Pledgee. Pledgor waives any right to require Pledgee to proceed against any person or to exhaust any Collateral or to pursue any remedy in Pledgee's power prior to pursuing Pledgor in respect of the Obligations. 12. Setoff. Pledgor agrees that Pledgee may exercise its rights of setoff with respect to the Obligations in the same manner as if the Obligations were unsecured. 13. Binding Upon Successors. All rights of Pledgee under this Pledge Agreement shall inure to the benefit of its successors and assigns, and all obligations of Pledgor shall bind the representatives, executors, administrators, heirs, successors and assigns of the Pledgor. 14. Remedies Independent. If any default should be made in the payment of any Obligations, or in the terms and conditions of any security held therefor, Pledgee is hereby expressly given the right at its option to proceed in the enforcement of this Pledge Agreement, independently of any other remedy or security Pledgee may at any time hold in connection with the Obligations, and it shall not be necessary for Pledgee to proceed upon or against, and/or exhaust any other security or remedy, whether against any security, obligor or guarantor, before proceeding to enforce this Pledge Agreement. 15. Entire Agreement; Severability. This Pledge Agreement contains the entire pledge agreement between Pledgee and Pledgor with respect to the Collateral. If any of the provisions of this Pledge Agreement shall be held invalid or unenforceable, this Pledge Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 16. Return; Acquittance. Pledgee may at any time deliver any Collateral to Pledgor and the receipt thereof by Pledgor shall be a complete and full acquittance in respect of the Collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 17. References. The singular includes the plural. If more than one debtor executes this Pledge Agreement, the term Pledgor shall be deemed to refer to each of the undersigned as well as to all of them, and the Collateral and the Obligations shall include the separate and joint Collateral and Obligations of each of the undersigned. All obligations and agreements hereunder shall be joint and several. The captions or titles of the sections of this 7 9 Pledge Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 18. Choice of Law. This Pledge Agreement shall be construed in accordance with and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. Pledgor irrevocably and unconditionally submits to the jurisdiction of the Courts of the State of California or of the United States located in the County of Los Angeles, in connection with any legal action or proceeding arising out of or relating to this Pledge Agreement, and Pledgor waives any objection relating to the basis for personal or in rem jurisdiction or to venue which it may now or hereafter have in any such suit, action or proceeding. 19. Jury Trial. PLEDGOR AND PLEDGEE WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE OBLIGATIONS HEREIN OR TO THIS PLEDGE AGREEMENT. 20. Notice. Any written notice, consent or other communication provided for in this Pledge Agreement shall be delivered or sent by first-class mail, with postage prepaid, to the party to be notified, to the mailing address stated below. Such addresses may be changed by written notice as provided herein. 21. Expenses. Pledgor will reimburse Pledgee for all reasonable out-of-pocket expenses incurred by Pledgee arising out of the enforcement of this Agreement, including without limitation, reasonable attorneys' fees and costs whether or not suit is filed. 8 10 22. Indemnification. Pledgor agrees to pay, and on demand to indemnify and hold harmless, Pledgee, its successors, assigns, agents and servants, from and against any and all claims, damages, losses, liabilities, demands, suits, judgments, causes of action and all legal proceedings, whether civil or criminal, penalties, fines and other sanctions, and any costs and expenses incurred in connection therewith, including reasonable attorneys' fees, which may result from, relate to or arise out of this Pledge Agreement or any Collateral, including the ownership, purchase, delivery, acceptance or rejection, use, possession or disposition of any item of Collateral, but not including any claims arising out of the gross negligence or willful misconduct of Pledgee or its agents and servants. PLEDGEE: THE CIT GROUP / CREDIT PLEDGOR: XIRCOM, INC. FINANCE, INC. By: Thomas Hayes By: R. Holliday ----------------------------- ------------------------------ Its: Vice President Its: Secretary ----------------------------- ------------------------------ PLEDGEE'S ADDRESS FOR NOTICES: PLEDGOR'S ADDRESS FOR NOTICES: 300 South Grand Avenue 2300 Corporate Center Drive 3rd Floor Thousand Oaks, California 91320 Los Angeles, California 90071 Attention: Vice President - Finance Attention: Manager with copy to General Counsel Telecopy: (213) 613-2537 Telecopy: (805) 376-9120 9 11 SCHEDULE I
Class of Stock No. of Shares -------------- ------------- Common 100
EX-10.29B 4 SECURED CONTINUING CORPORATE GUARANTY BY XIRCOM 1 SECURED CONTINUING CORPORATE GUARANTY EXHIBIT 10.29B 2 SECURED CONTINUING CORPORATE GUARANTY FOR VALUE RECEIVED, and in consideration of any loan or other financial accommodation heretofore or hereafter at any time made or granted to Primary Rate, Inc. ("Borrower"), by The CIT Group/Credit Finance, Inc. ("Lender"), the undersigned, Xircom, Inc. ("Guarantor"), hereby agrees as follows: 1. Guaranty of Obligations. Guarantor unconditionally, absolutely and irrevocably guarantees the full and prompt payment and performance when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations of Borrower to Lender, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing or due or to become due, including, without limitation, under or in connection with that certain Loan and Security Agreement dated as of November ___, 1995, between Borrower and Lender, and each of the documents, instruments and agreements executed and delivered in connection therewith, as each may be modified, amended, supplemented or replaced from time to time (all such obligations are herein referred to, collectively, as the "Liabilities", and all documents evidencing or securing any of the Liabilities are herein referred to, collectively, as the "Loan Documents"). This Secured Continuing Corporate Guaranty (this "Continuing Guaranty") is a guaranty of payment and performance when due and not of collection. In the event of any default by Borrower in making payment of, or default by Borrower in performance of, any of the Liabilities, Guarantor agrees on demand by Lender to pay and perform all of the Liabilities as are then or thereafter become due and owing or are to be performed under the terms of the Loan Documents. Guarantor further agrees to pay all expenses (including reasonable attorneys' fees and expenses) paid or incurred by Lender in endeavoring to collect the Liabilities, or any part thereof, and in enforcing this Continuing Guaranty. 2. Security for Continuing Guaranty. This Continuing Guaranty is secured by that certain Loan and Security Agreement of even date herewith among Guarantor, Borrower and Lender (the "Security Document"). 3. Continuing Nature of Guaranty and Liabilities. This Continuing Guaranty shall be continuing and shall not be discharged, impaired or affected by: a. the insolvency of Borrower or the payment in full of all of the Liabilities at any time or from time to time; b. the power or authority or lack thereof of Borrower to incur the Liabilities; 3 c. the validity or invalidity of any of the Loan Documents or the documents securing the same; d. the existence or non-existence of Borrower as a legal entity; e. any transfer by Borrower of all or any part of any collateral in which Lender has been granted a lien or security interest pursuant to the Loan Documents; f. any statute of limitations affecting the liability of Guarantor under this Continuing Guaranty or the Loan Documents or the ability of Lender to enforce this Continuing Guaranty or any provision of the Loan Documents or the Security Document; or g. any right of offset, counterclaim or defense of Guarantor, including, without limitation, those which have been waived by Guarantor pursuant to Paragraph 7 hereof. 4. Insolvency of Borrower or Guarantor. Without limiting the generality of any other provision hereof, Guarantor agrees that, in the event of the dissolution or insolvency of Borrower or Guarantor or the inability of Borrower or Guarantor to pay their respective debts as they mature, or an assignment by Borrower or Guarantor for the benefit of creditors, or the institution of any proceeding by or against Borrower or Guarantor alleging that Borrower or Guarantor is insolvent or unable to pay their respective debts as they mature, Guarantor will pay to Lender forthwith the full amount which would be payable hereunder by Guarantor if all of the Liabilities were then due and payable, whether or not such event occurs at a time when any of the Liabilities are otherwise due and payable. 5. Payment of the Liabilities. Any amounts received by Lender from whatever source on account of the Liabilities may be applied by Lender toward the payment of such of the Liabilities, and in such order of application, as Lender may from time to time elect, and notwithstanding any payments made by or for the account of Guarantor pursuant to this Continuing Guaranty. Guarantor agrees that, if at any time all or any part of any payment theretofore applied by Lender to any of the Liabilities is or must be rescinded or returned by Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of Borrower), such Liabilities shall, for the purposes of this Continuing Guaranty and to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence notwithstanding such application by Lender, and this Continuing Guaranty shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by Lender had not been made. 6. Permitted Actions of Lender. Lender may from time to time, in its sole discretion and without notice to Guarantor, take any or all of the following actions: 2 4 a. retain or obtain a security interest in any assets of Borrower or any third party to secure any of the Liabilities or any obligations of Guarantor hereunder; b. retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to Guarantor, with respect to any of the Liabilities; c. extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Liabilities; d. waive, ignore or forbear from taking action or otherwise exercising any of its default rights or remedies with respect to any default by Borrower under the Loan Documents; e. release, waive or compromise any obligation of Guarantor hereunder or any obligation of any nature of any other obligor primarily or secondarily obligated with respect to any of the Liabilities; f. release its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any collateral now or hereafter securing any of the Liabilities or any obligation hereunder, or extend or renew for one or more periods (whether or not longer than the original period) or release, waive, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property; and g. demand payment or performance of any of the Liabilities from Guarantor at any time or from time to time, whether or not Lender shall have exercised any of its rights or remedies with respect to any property securing any of the Liabilities or any obligation hereunder, or proceeded against any other obligor primarily or secondarily liable for payment or performance of any of the Liabilities. 7. Specific Waivers. Without limiting the generality of any other provision of this Continuing Guaranty, Guarantor hereby expressly waives: a. notice of the acceptance by Lender of this Continuing Guaranty; b. notice of the existence, creation, payment, nonpayment, performance or nonperformance of all or any of the Liabilities; c. presentment, demand, notice of dishonor, protest, notice of protest and all other notices whatsoever with respect to the payment or performance of the Liabilities or the amount thereof or any payment or performance by Guarantor hereunder; 3 5 d. all diligence in collection or protection of or realization upon the Liabilities or any thereof, any obligation hereunder or any security for or guaranty of any of the foregoing; e. any right to direct or affect the manner or timing of Lender's enforcement of its rights or remedies; f. any and all defenses which would otherwise arise upon the occurrence of any event or contingency described in Paragraph 1 hereof or upon the taking of any action by Lender permitted hereunder; g. any defense, right of set-off, claim or counterclaim whatsoever and any and all other rights, benefits, protections and other defenses available to Guarantor now or at any time hereafter, including, without limitation, under California Civil Code Sections 2787 to 2855, inclusive, and California Code of Civil Procedure Sections 580a, 580b, 580d or 726, and all successor sections; and h. all other principles or provisions of law, if any, that conflict with the terms of this Continuing Guaranty, including, without limitation, the effect of any circumstances that may or might constitute a legal or equitable discharge of a guarantor or surety. 8. Irrevocability. Guarantor hereby further waives all rights to revoke this Continuing Guaranty at any time, and all rights to revoke any agreement executed by Guarantor at any time to secure the payment and performance of Guarantor's obligations under this Continuing Guaranty, including, without limitation, the Security Document. 9. Statutory Waiver of Rights and Defenses Regarding Election of Remedies. Guarantor waives all rights and defenses arising out of an election of remedies by Lender, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor's rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the California Code of Civil Procedure or otherwise. 10. Subordination. Guarantor hereby subordinates any and all indebtedness of Borrower to Guarantor to the full and prompt payment and performance of all of the Liabilities. Guarantor agrees that Lender shall be entitled to receive payment of all Liabilities prior to Guarantor's receipt of payment of any amount of any indebtedness of Borrower to Guarantor. Any payments on such indebtedness to Guarantor, if Lender so requests, shall be collected, enforced and received by Guarantor, in trust, as trustee for Lender and shall be paid over to Lender on account of the Liabilities, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Lender is authorized and empowered, but not obligated, in its discretion, (a) in the name of Guarantor, to collect and enforce, and to submit claims in respect of, indebtedness of Borrower to Guarantor and to apply any amounts received thereon to the 4 6 Liabilities, and (b) to require Guarantor (i) to collect and enforce, and to submit claims in respect of, any indebtedness of Borrower to Guarantor, and (ii) to pay any amounts received on such indebtedness to Lender for application to the Liabilities. 11. Subrogation. Guarantor will not exercise any rights which it may acquire by way of subrogation under this Continuing Guaranty, by any payment hereunder or otherwise, until all of the Liabilities have been paid in full, in cash, and Lender shall have no further obligations to Borrowers under the Loan Documents or otherwise. If any amount shall be paid to Guarantor on account of such subrogation rights at any other time, such amount shall be held in trust for the benefit of Lender and shall be forthwith paid to Lender to be credited and applied to the Liabilities, whether matured or unmatured, in such manner as Lender shall determine in its sole discretion. 12. Assignment of Lender's Rights. Lender may, from time to time, without notice to Guarantor, assign or transfer any or all of the Liabilities or any interest therein and, notwithstanding any such assignment or transfer of the Liabilities or any subsequent assignment or transfer thereof, the Liabilities shall be and remain the Liabilities for the purpose of this Continuing Guaranty. Each and every immediate and successive assignee or transferee of any of the Liabilities or of any interest therein shall, to the extent of such party's interest in the Liabilities, be entitled to the benefits of this Continuing Guaranty to the same extent as if such assignee or transferee were Lender; provided, however, that unless Lender shall otherwise consent in writing, Lender shall have an unimpaired right, prior and superior to that of any such assignee or transferee, to enforce this Continuing Guaranty for its own benefit as to those of the Liabilities which Lender has not assigned or transferred. 13. Indulgences Not Waivers. No delay in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Lender of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Continuing Guaranty be binding upon Lender, except as expressly set forth in a writing duly signed and delivered by Lender. No action of Lender permitted hereunder shall in any way affect or impair the rights of Lender or the obligations of Guarantor under this Continuing Guaranty. 14. Financial Condition of Borrower. Guarantor represents and warrants that it is fully aware of the financial condition of Borrower, and Guarantor delivers this Continuing Guaranty based solely upon its own independent investigation of Borrower's financial condition and in no part upon any representation or statement of Lender with respect thereto. Guarantor further represents and warrants that it is in a position to and hereby does assume full responsibility for obtaining such additional information concerning Borrower's financial condition as Guarantor may deem material to its obligations hereunder, and Guarantor is not relying upon, nor expecting Lender to furnish it any information in Lender's possession concerning Borrower's financial condition or concerning any 5 7 circumstances bearing on the existence or creation, or the risk of nonpayment or nonperformance of the Liabilities. Guarantor hereby waives any duty on the part of Lender to disclose to Guarantor any facts it may now or hereafter know about Borrower, regardless of whether Lender has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or has reason to believe that such facts are unknown to Guarantor. Guarantor hereby knowingly accepts the full range of risk encompassed within a contract of "Continuing Guaranty" which includes, without limitation, the possibility that Borrower will contract for additional indebtedness for which Guarantor may be liable hereunder after Borrower's financial condition or ability to pay its lawful debts when they fall due has deteriorated. 15. Representations and Warranties. Guarantor represents and warrants to Lender that each of the following statements is accurate and complete as of the date of this Continuing Guaranty: a. Guarantor is a corporation duly organized, validly, existing and in good standing under the laws of its state of incorporation and is duly qualified and in good standing in each jurisdiction where the nature of its business or properties requires such qualification, except where the failure to qualify could not have a material adverse effect on the condition (financial or otherwise), business, operations, properties or prospects of Guarantor (a "Material Adverse Effect"); b. the execution, delivery and performance by Guarantor of this Continuing Guaranty are within the power of Guarantor and have been duly authorized by all necessary actions on the part of Guarantor or its shareholders; c. this Continuing Guaranty has been duly executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally; d. the execution, delivery and performance of this Continuing Guaranty do not (i) violate any provisions of law or any order of any court or other agency of government (each, a "Requirement of Law"), (ii) contravene any provision of Guarantor's Articles or Certificate of Incorporation, Bylaws or any material contract or agreement to which Guarantor is a party or by which Guarantor or Guarantor's assets are bound (each, a "Contractual Obligation"), or (iii) result in the creation or imposition of any lien, charge or encumbrance of any nature upon any property, asset or revenue of Guarantor except pursuant to or as set forth in the Security Document; 6 8 e. all consents, approvals, orders and authorizations of, and registrations, declarations and filings with, any governmental agency or authority or other person or entity (including, without limitation, the shareholders or partners of any entity), if any, which are required to be obtained in connection with the execution and delivery of this Continuing Guaranty or the performance of Guarantor's obligations hereunder have been obtained, and each is in full force and effect; f. Guarantor has paid all taxes and other charges imposed by any governmental agency or authority due and payable by Guarantor other than those which are being challenged in good faith by appropriate proceedings and for which adequate reserves have been established; g. Guarantor is not in violation of any Requirement of Law or Contractual Obligation other than any violation the consequences of which could not have a Material Adverse Effect; and h. Guarantor is neither an investment company (as defined in the Investment Company Act of 1940) nor controlled by an investment company; and i. no action, proceeding, investigation or litigation is pending or, to the knowledge of Guarantor, overtly threatened against Guarantor which, if adversely determined, could have a Material Adverse Effect. 16. Guarantor Financial Information. Guarantor will provide Lender in writing such financial and other information with respect to Guarantor's assets and liabilities as Lender shall reasonably request from time to time, in form satisfactory to Lender. 17. Binding Upon Successors. This Continuing Guaranty shall be binding upon Guarantor and Guarantor's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. All references herein to Borrower shall be deemed to include its successors and assigns, and all references herein to Guarantor shall be deemed to include Guarantor and Guarantor's successors and assigns. In addition and notwithstanding anything to the contrary contained in this Continuing Guaranty or in any other document, instrument or agreement between or among any of Lender, Borrower, Guarantor or any third party, the obligations of Guarantor with respect to the Liabilities shall be joint and several with any other person or entity that now or hereafter executes a guaranty of any of the Liabilities separate from this Continuing Guaranty. 18. Notices. All notices required or permitted to be given hereunder shall be in writing and shall be either personally delivered, transmitted by facsimile to the facsimile numbers provided herein or sent by United States certified or registered mail, return receipt requested, addressed to Guarantor or Lender at their respective addresses stated below or at such other address as either party hereafter notifies the other party as 7 9 herein provided. Notices shall be deemed received on the earlier of (i) the date noted on the return receipt as delivered if mail delivery of the notice is successful or the date inscribed on a confirmation of successful transmission, if sent by facsimile; (ii) the last date of attempted delivery, as noted by the United States Postal Service on the envelope containing the notice, if mail delivery is unsuccessful; or (iii) the date of the actual delivery if personally delivered. 19. Governing Law; Additional Waivers. This Continuing Guaranty has been delivered and shall be governed by and construed in accordance with the internal laws (as opposed to the conflicts of law provisions) of the State of California. GUARANTOR HEREBY (i) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS CONTINUING GUARANTY, AND ACKNOWLEDGES THAT LENDER ALSO WAIVES SUCH RIGHT; (ii) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN LOS ANGELES COUNTY, CALIFORNIA, OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS CONTINUING GUARANTY; (iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT GUARANTOR MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdictions by suit on the judgment or in any other manner provided by law; and (v) agrees not to institute any legal action or proceeding against Lender or any of Lender's directors, officers, employees, agents or property concerning any matter arising out of or relating to this Continuing Guaranty in any court other than one located in Los Angeles County, California. Nothing herein shall affect or impair Lender's right to serve legal process in any manner permitted by law or Lender's right to bring any action or proceeding against Guarantor or its property in the courts of any other jurisdiction. Wherever possible each provision of this Continuing Guaranty shall be interpreted as to be effective and valid under applicable law, but if any provision of this Continuing Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Continuing Guaranty. 8 10 20. ADVICE OF COUNSEL. GUARANTOR ACKNOWLEDGES THAT IT HAS EITHER OBTAINED THE ADVICE OF COUNSEL OR HAS HAD THE OPPORTUNITY TO OBTAIN SUCH ADVICE IN CONNECTION WITH THE TERMS AND PROVISIONS OF THIS CONTINUING GUARANTY. 21. Entire Agreement. This Continuing Guaranty contains the complete understanding of the parties hereto with respect to the subject matter herein. Guarantor acknowledges that it is not relying upon any statements or representations of Lender not contained in this Continuing Guaranty and that such statements or representations, if any, are of no force or effect and are fully superseded by this Continuing Guaranty. This Continuing Guaranty may only be modified by a writing executed by Guarantor and Lender. [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK] 9 11 IN WITNESS WHEREOF, Guarantor has caused this Continuing Guaranty to be duly executed as of this 8 day of November, 1995. "Guarantor" Xircom, Inc. By: R. Holliday ---------------------------------- Title: Secretary Guarantor's address for notices: Xircom, Inc. 2300 Corporate Center Drive Thousand Oaks, CA 91320-1420 Lender's address for notices: The CIT Group/Credit Finance, Inc. 300 South Grand Avenue, Third Floor Los Angeles, California 90071 Facsimile: 213/613-2537 10 EX-10.29C 5 PATENT SECURITY AGREEMENT BY XIRCOM 1 PATENT SECURITY AGREEMENT EXHIBIT 10.29C 2 PATENT SECURITY AGREEMENT THIS PATENT SECURITY AGREEMENT ("Security Agreement"), dated as of November ___, 1995, is executed by XIRCOM, INC., a California corporation ("Grantor"), in favor of THE CIT GROUP/CREDIT FINANCE, INC. ("Lender"). RECITALS A. Pursuant to a Loan and Security Agreement of even date herewith (the "Loan Agreement"), between Grantor and Lender, Lender has extended or agreed to extend certain credit facilities to Grantor upon the terms and subject to the conditions set forth therein. B. Lender's obligation to extend or continue to extend the credit facilities to Grantor under the Loan Agreement is subject, among other conditions, to receipt by Lender of this Security Agreement duly executed by Grantor. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Lender as follows: 1. Definitions and Interpretation. When used in this Security Agreement, the following terms shall have the following respective meanings: "Affiliate" shall mean any person or entity controlling, controlled by or under common control with another person or entity. "Collateral" shall have the meaning given to that term in Paragraph 2 hereof. "Obligations" shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Grantor to Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising pursuant to the terms of the Loan Agreement or any of the other Loan Documents, including without limitation all interest, fees, charges, expenses, attorneys' fees and accountants' fees chargeable to and payable by Grantor hereunder and thereunder. 3 "Patent and Trademark Office" shall mean the United States Patent and Trademark Office or any successor office or agency thereto. "Patent Applications" means and refers to all applications made by, or on behalf of, the Company to the Patent and Trademark Office or to any similar office or agency of any foreign country or political subdivision thereof for the registration of a Patent. "Patent Registrations" means and refers to all Patents registered with the Patent and Trademark Office or with any similar office or agency of any foreign country or political subdivision and all Patent Applications. "Patents" shall have the meaning given to that term in Attachment I hereto. "UCC" shall mean the Uniform Commercial Code as in effect in the State of California from time to time. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Loan Agreement shall have the respective meanings given to those terms in the Loan Agreement, and all terms defined in the UCC shall have the respective meanings given to those terms in the UCC. 2. Grant of Security Interest. As security for the Obligations, Grantor hereby pledges, mortgages and grants to Lender a security interest in the property described in Attachment I annexed hereto (collectively and severally, the "Collateral"), which Attachment I is incorporated herein by this reference. 3. Representations and Warranties. Grantor represents and warrants to Lender that: (a) Grantor is the owner of the Collateral (or, in the case of after-acquired Collateral, at the time Grantor acquires rights in the Collateral, will be the owner thereof) and that no other Person has (or, in the case of after-acquired Collateral, at the time Grantor acquires rights therein, will have) any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral; (b) Lender has (or in the case of after-acquired Collateral, at the time Grantor acquires rights therein, will have) a first priority perfected security interest in the Collateral; (c) Grantor has full corporate power and authority to grant the security interest herein granted, and the execution and delivery of this Security Agreement by Grantor and the performance of its obligations hereunder, 2 4 have been duly authorized by all necessary corporate action on the part of Grantor; (d) Grantor does not own any Patents registered in, or the subject of pending applications in, the Patent and Trademark Office or any similar offices or agencies in any other country or any political subdivision thereof, other than those described inSchedule A or Schedule B to Attachment I hereto; (e) Grantor has the sole and full right, title and interest in and to each of the Patents shown on Schedule A to Attachment , unencumbered except as set forth in Schedule C to Attachment I, and the registrations thereof are valid and enforceable and in full force and effect, and none of the Patents has been abandoned or dedicated; (f) There is no claim by any third party that any Patents are invalid or unenforceable or do or may violate the rights of any Person; (g) All licenses of Patents which Grantor has granted to any Person are set forth in Schedule C to Attachment I hereto; (h) All licenses of Patents which any Person has granted to Grantor are set forth in Schedule D to Attachment I hereto; and (i) Grantor has obtained from each employee who may be considered the inventor of patentable inventions (invented within the scope of such employee's employment) an assignment to Grantor of all rights to such inventions, including, without limitation, Patents. 4. Covenants of Grantor. Grantor hereby agrees: (a) Grantor shall perform all acts and execute all documents, including, without limitation, Grants of Security Interest substantially in the form of Attachment II annexed hereto, that may be necessary or desirable to record, maintain, preserve, protect and perfect Lender's interest in the Collateral, the Lien granted to Lender in the Collateral and the first priority of such Lien; (b) Except to the extent that Lender shall give its prior written consent, (i) Grantor shall not do any act, or omit to do any act whereby the Patent Registrations may become abandoned or dedicated or the remedies available against potential infringers weakened and shall notify Lender immediately if it knows of any reason or has reason to know that any application or registration may become abandoned or dedicated; 3 5 (ii) Grantor shall not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or Lien upon, encumber, grant an exclusive or non-exclusive license, or otherwise dispose of any of the Collateral, and nothing in this Security Agreement shall be deemed a consent by Lender to any such action except as expressly permitted herein; (c) Grantor shall promptly pay Lender for any and all sums, costs, and expenses which the Lender may pay or incur pursuant to the provisions of this Security Agreement or in enforcing the Obligations, the Collateral or the security interest granted hereunder, including, without limitation, all filing or recording fees, court costs, collection charges, travel, and reasonable attorneys' fees and expenses, all of which together with interest at the highest rate then payable on the Obligations shall be part of the Obligations and be payable on demand; (d) Grantor shall promptly notify Lender upon the filing, either by Grantor or through any agent, employee, licensee or designee of Grantor, of (i) an application for the registration of any Patent with the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof or (ii) any assignment to Grantor of any patent, which Grantor may acquire from a third party, with the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof. Upon the request of Lender, Grantor shall execute and deliver any and all documents, instruments and agreements as Lender may request to evidence Lender's security interest in such Patent, and Grantor authorizes Lender to amend an original counterpart of the notice of security interest executed pursuant toSubparagraph 4(a) of this Security Agreement without first obtaining Grantor's approval of or signature to such amendment and to record such security interest with the Patent and Trademark Office; (e) Grantor shall keep the Collateral free of all Liens, except in favor of Lender; (f) Grantor shall take all necessary steps in any proceeding before the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, to diligently prosecute or maintain, as applicable, each application and registration of the Patents; (g) So long as any of the Obligations are outstanding, Grantor shall make application to the Patent and Trademark Office to register any material unpatented but patentable inventions developed by Grantor or its employees (within the scope of their employment), unless Grantor, in 4 6 the exercise of its prudent business judgment, deems any such Patent not to have any significant commercial value or determines that its rights thereunder are better preserved as a trade secret; (h) Grantor shall use proper statutory notice in connection with its use of the Patents; (i) Grantor shall at all times keep at least one complete set of its records concerning the Collateral at its chief executive office and shall make such records available for inspection by Lender at such times as Lender may reasonably request. 5. Authorized Action by Lender. (a) Lender may, in its sole discretion, pay any amount or do any act required of Grantor hereunder or requested by Lender to preserve, defend, protect, maintain, record or enforce Grantor's obligations contained herein, the Obligations, the Collateral, or the right, title and interest granted Lender by this Security Agreement, and which Grantor fails to do or pay, and any such payment shall be deemed an advance by Lender to Grantor and shall be payable on demand together with interest at the highest rate then payable on the Obligations. Lender will promptly notify Grantor of any payment by Lender referred to in this Section 5(a). (b) Grantor agrees to execute and deliver to Lender three originals of a Special Power of Attorney in substantially the form ofAttachment III to this Agreement for the implementation of the recording, giving of notice, preservation, assignment, sale or other disposal of the Collateral pursuant toParagraph 2 and Subparagraphs 5(a) and 7(a). 6. Litigation and Other Proceedings (a) Grantor shall have the obligation to commence and diligently prosecute such suits, proceedings or other actions for infringement or other damage, or reexamination or reissue proceedings, or opposition or cancellation proceedings as are reasonable, in Grantor's exercise of its prudent business judgement, to protect any of the Patents. No such suit, proceeding or other actions shall be settled or voluntarily dismissed, nor shall any party be released or excused of any claims of or liability for infringement, without the prior written consent of Lender, which consent shall not be unreasonably withheld. (b) Upon the occurrence and during the continuation of an Event of Default, Lender shall have the right but not the obligation to bring suit or institute proceedings in the name of Grantor or Lender to enforce any 5 7 rights in the Collateral, including any license thereunder, in which event Grantor shall at the request of Lender do any and all lawful acts and execute any and all documents required by Lender in aid of such enforcement. If Lender elects not to bring suit to enforce any right under the Collateral, including any license thereunder, Grantor agrees to use all reasonable measures, whether by suit, proceeding or other action, to prevent the infringement of any right under the Collateral by any Person and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. 7. Default and Remedies. (a) Grantor shall be deemed in default under this Security Agreement upon the occurrence of an Event of Default. Upon the occurrence and during the continuation of any such Event of Default, Lender may, at its option, and (except if otherwise specified below) without notice to or demand on Grantor, and in addition to all rights and remedies available to Lender under the Loan Agreement or the other Loan Documents, do any one or more of the following: (i) upon ten (10) Business days' prior notice to Grantor, direct Grantor not to make any further use of the Patents for any purpose; (ii) at any time and from time to time, upon ten (10) Business days' prior notice to Grantor, license, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, any of the Patents, throughout the world for such term or terms, on such conditions, and in such manner, as Lender shall in its sole discretion determine; (iii) at any time and from time to time, enforce (and upon notice to Grantor have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of Grantor in, to and under any one or more license agreements with respect to the Collateral (without assuming any obligations or liability thereunder), and take or refrain from taking any action under any thereof; (iv) at any time and from time to time, upon ten (10) Business days' prior notice to Grantor, assign, sell, or otherwise dispose of, the Collateral or any of it, either with or without special or other conditions or stipulations, with power to buy the Collateral or any part of it, and with power also to execute assurances, and do all other acts and things for completing the assignment, sale or disposition which Lender shall, in its sole discretion, deem appropriate or proper; 6 8 (v) in addition to the foregoing, in order to implement the assignment, sale or other disposal of any of the Collateral pursuant to clause (a)(iv) hereof, Lender may, at any time, pursuant to the authority granted in the Power of Attorney executed pursuant to Subparagraph 5(b) hereof, execute and deliver on behalf of Grantor, one or more instruments of assignment of the Patents, in form suitable for filing, recording or registration in any country; and (vi) in furtherance of Lender's rights hereunder, Grantor hereby grants to Lender an irrevocable, non-exclusive license (exercisable without royalty or other payment by Lender) to use, license or sublicense any Patent or other intellectual property in which Debtor now or hereafter has any right, title or interest, together with the right of access to all media in which any of the foregoing may be recorded or stored. (b) Grantor agrees to pay when due all reasonable costs incurred in any such transfer of the Patents, including, without limitation, any taxes, fees and reasonable attorneys' fees and expenses, and all such costs shall be added to the Obligations. Lender may apply the proceeds actually received from any such license, assignment, sale or other disposition to the reasonable costs and expenses thereof, including, without limitation, reasonable attorneys' fees and all legal, travel and other expenses which may be incurred by Lender, and then to the Obligations, in such order as to principal or interest as Lender may desire; and Grantor shall remain liable and will pay Lender on demand any deficiency remaining, together with interest thereon at a rate equal to the highest rate then payable on the Obligations and the balance of any expenses unpaid. Nothing herein contained shall be construed as requiring Lender to take any such action at any time. In the event of any such license, assignment, sale or other disposition of the Collateral, or any of it, after the occurrence or continuation as hereinabove provided of an Event of Default, Grantor shall supply its know-how and expertise relating to the manufacture and sale of the products bearing or in connection with which the Patents are used, and its consumer or customer lists and other records relating to the Patents and to the distribution of products or the provisions of services, to Lender or its designee. (c) In furtherance of Lender's rights hereunder, Grantor hereby grants to Lender an irrevocable, non-exclusive license (exercisable without royalty or other payment by Lender) to use, license or sublicense any Patent in which Grantor now or hereafter has any right, title or interest together with the right of access to all media in which any Patent may be recorded or stored. Such license shall be exercisable only upon the occurrence and during the continuation of an Event of Default. 7 9 8. Indemnification and Release. (a) Grantor assumes all responsibility and liability arising from the use of the Patents, and Grantor hereby indemnifies and holds Lender and its directors, officers, employees, agents and any of their respective Affiliates ("Indemnitees") harmless from and against any claim, suit, loss, damage or expense (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with any alleged infringement of any patent or alleged defect in any product manufactured, promoted or sold by Grantor (or any Affiliate of Grantor) in connection with any Patent or out of the manufacture, promotion, labeling, sale or advertisement of any product or service by Grantor (or any Affiliate of Grantor). Grantor agrees that Lender does not assume, and shall have no responsibility for, the payment of any sums due or to become due under any agreement or contract included in the Collateral or the performance of any obligations to be performed under or with respect to any such agreement or contract by Grantor, and Grantor hereby agrees to indemnify and hold each Indemnitee harmless with respect to any and all claims by any Person relating thereto. (b) Grantor agrees to indemnify and hold each Indemnitee harmless and against any claim, suit, loss, damage or expense (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with any action taken or omitted to be taken by Lender pursuant toclause 7(a)(iii) hereof with respect to any license agreement of Grantor. (c) Grantor agrees to indemnify and hold each Indemnitee harmless from and against any claim, suit, loss, damage or expense (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with (i) any claim, suit or proceeding instituted by Grantor or (ii) any action taken or omitted to be taken by Lender pursuant to Subparagraph 6(b). (d) Grantor hereby releases from any claims, causes of action and demands at any time arising out of or with respect to any actions taken or omitted to be taken by the Indemnitees under the powers of attorney granted under the Special Power of Attorney executed pursuant toSubparagraph 5(b) herein, other than actions taken or omitted to be taken through the willful misconduct of such Indemnitees. (e) Grantor agrees to cause Lender to be named as an additional insured with respect to any policy of insurance held by Grantor from time to time covering product liability or intellectual property infringement risk. 8 10 9. Miscellaneous. (a) Notices. Except as otherwise provided herein, all notices, requests, demands or other communications to or upon Lender or Grantor hereunder shall be addressed to Lender or Grantor at the respective addresses indicated below or at such other address as Lender or Grantor may designate by written notice to the other party, and shall be deemed to have been given (i) in the case of notice by letter, three (3) days after deposited in the mails registered and return receipt requested, or (ii) in the case of notice given by telecommunication, when sent with appropriate confirmation received: Lender: The CIT Group/Credit Finance, Inc. 300 South Grand Avenue, Third Floor Los Angeles, California 90071 Attention: Grace Kim Bowen, Esq. Telephone: (213) 613-2511 Telecopy: (213) 613-2537 Grantor: Xircom, Inc. 2300 Corporate Center Drive Thousand Oaks, California 91320 Attention: General Counsel Telephone: (805) 376-6910 Telecopy: (805) 376-9120 (b) Nonwaiver. No failure or delay on Lender's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) Amendments and Waivers. Except with respect to action by the Lender pursuant to Subparagraph 4(d), this Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Grantor and Lender as required by the Loan Agreement. Each waiver or consent under any provision hereof shall be effective only in the specific instances and for the purpose for which given. (d) Assignments. This Security Agreement shall be binding upon and inure to the benefit of Lender and Grantor and their respective successors and assigns; provided, however, that Grantor and Lender may sell, assign and delegate their respective rights and obligations hereunder only as permitted by the Loan Agreement. (e) Cumulative Rights, etc. The rights, powers and remedies of Lender under this Security Agreement shall be in addition to all rights, powers and remedies given to 9 11 Lender by virtue of any applicable law, rule or regulation of any governmental authority, the Loan Agreement, any other Loan Document or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Lender's rights hereunder. Grantor waives any right to require Lender to proceed against any Person or to exhaust any Collateral or to pursue any remedy in Lender's power. (f) Payments Free of Taxes, Etc. All payments made by Grantor under this Security Agreement shall be made by Grantor free and clear of and without deduction for any and all present and future taxes, levies, charges, deductions and withholdings. In addition, Grantor shall pay upon demand any stamp or other taxes, levies or charges of any jurisdiction with respect to the execution, delivery, registration, performance and enforcement of this Security Agreement. Upon request by Lender, Grantor shall furnish evidence satisfactory to Lender that all requisite authorizations and approvals by, and notices to and filings with, governmental authorities and regulatory bodies have been obtained and made and that all requisite taxes, levies and charges have been paid. (g) Partial Invalidity. If at any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (h) Governing Law. This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. (i) Submission to Jurisdiction. Grantor hereby irrevocably and unconditionally: (i) Submits for itself and its property in any legal action or proceeding relating to this Security Agreement, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive jurisdiction of the courts located in Los Angeles County, California and consents and agrees to suit being brought in such courts as Lender may elect; (ii) Waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such proceeding was brought in an inconvenient court and agrees not to plead or claim the same; 10 12 (iii) Agrees as an alternate means of service of process in any such legal action or proceeding to service by mailing of copies thereof (by registered or certified mail, if practicable) postage prepaid, to the then active agent or to Grantor at its address set forth in Subparagraph 9(a) hereof or at such other address of which Lender shall have been notified pursuant thereto, and agrees that failure to receive such copy or notice shall not affect or impair the validity of such service or of any judgment rendered in any action or proceeding based thereon; and (iv) Agrees that nothing herein shall affect Lender's right to effect service of process in any other manner permitted by law, and that Lender shall have the right to bring any legal proceedings (including a proceeding for enforcement of a judgment entered by any of the aforementioned courts) against Grantor in such courts or in any other court or jurisdiction in accordance with applicable law. (j) Jury Trial. EACH OF GRANTOR AND LENDER, AND TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. 11 13 IN WITNESS WHEREOF, Grantor and Lender have caused this Security Agreement to be executed as of the day and year first above written. XIRCOM, INC. By: R. Holliday ------------------------------- Name: Randall H. Holliday ------------------------- Title: Secretary ------------------------ THE CIT GROUP/CREDIT FINANCE, INC. By: Thomas Hayes ------------------------------ Name: Thomas Hayes ------------------------ Title: Vice President ----------------------- 12 14 ATTACHMENT I TO PATENT SECURITY AGREEMENT (a) All patentable inventions, patent rights, shop rights, letters patent of the United States or any other country, all right, title and interest therein and thereto, and all registrations and recordings thereof, now or hereafter in effect, including, without limitation, (i) all Patent Applications, Patent Registrations and recordings in the Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or political subdivision thereof, all whether now owned or hereafter acquired by Grantor, including, but not limited to, those described in Schedules A and B to this Attachment I annexed hereto, which Schedules A and B are incorporated herein by this reference, and (ii) all reissues, continuations, continuations-in-part or extensions thereof and all licenses thereof (collectively, the "Patents"); and (b) All proceeds of the foregoing (including, without limitation, whatever is receivable or received when Collateral or proceeds is sold, collected, exchanged, licensed or otherwise disposed of, whether such disposition is voluntary or involuntary, including rights to payment and return premiums and insurance proceeds under insurance with respect to any Collateral, and all rights to payment with respect to any cause of action affecting or relating to the Collateral). I-1 15 SCHEDULE A TO ATTACHMENT I TO PATENT SECURITY AGREEMENT PATENTS
Title Number Date ----- ------ ---- 1) ADAPTER FOR CONNECT- D336,467 6-15-93 ING AN ELECTRONIC COMPUTER TO A LOCAL AREA NETWORK 2) NETWORK ADAPTER FOR USE 5,299,314 3-29-94 WITH STANDARD PC PARALLEL PORT 3) PARALLEL PORT MULTI- D339,116 9-7-93 PLEXOR FOR USE WITH A COMPUTER 4) PARALLEL PORT MULTI- 5,276,443 1-4-94 PLEXOR FOR PC PARAL- LEL PORT 5) MODEM ADAPTER FOR USE 5,408,614 4-18-95 WITH STANDARD PC PARAL- LEL PORT
I-2 16 SCHEDULE B TO ATTACHMENT I TO PATENT SECURITY AGREEMENT PATENT APPLICATIONS
Title Ser. Number Filing Date ----- ----------- ----------- 1. Virtual Carrier 08/082,313 06/25/93 Detection for Wireless Local Area Network 1a. Divisional App- 08/439,083 05/11/95 lication of above 2a. Divisional App- 08/440,436 05/12/95 lication of above 3a. Divisional App- 08/439,563 05/11/95 lication of above 4a. Divisional App- 08/439,337 05/11/95 lication of above 2. Modem Adapter 08/308,601 09/19/94 Having Shared Memory Interface
I-3 17 SCHEDULE C TO ATTACHMENT I TO PATENT SECURITY AGREEMENT LICENSES GRANTED BY GRANTOR TO THIRD PARTIES Various nonexclusive licenses have been granted to third parties payments for which, in the aggregate, do not exceed $70,000.00 per year. The forgoing include the following:
Licensee Date of License Subject - -------- --------------- ------- 1. Accton Technology 09/30/94 Nonexclusive rights Corporation to Parallel Port Network Adapter Patent (U.S. Patent No. 5,299,314) 2. D-Link Systems 09/28/94 Nonexclusive rights to Parallel Port Network Adapter Patent (U.S. Patent No. 5,299,314) 3. Advanced Micro 02/23/94 Nonexclusive rights Devises, Inc. to broad range of Wireless LAN tech- nology, to include rights under U.S. Patent Application 08/082,213, and re- lated divisional applications 4. NEC Corporation 11/22/94 Nonexclusive rights as supplemented to broad range of by agreement Wireless LAN tech- March 14, 1995 nology, to include rights under U.S. Patent Application 08/082,213 and related divisional applications
[I]C-1 18 SCHEDULE D TO ATTACHMENT I TO PATENT SECURITY AGREEMENT LICENSES GRANTED BY THIRD PARTIES TO GRANTOR
Licensor Date of License Subject - -------- --------------- ------- 1. Aladdin Systems, Inc. 7/14/95 "InstallerMaker" software 2. AT&T 2/16/94 AT&T "ETC" software 3. British Tele- 8/3/93 V.42bis modems, communications, Inc. Patent No. 5,153,591 4. Control Alt Design 8/31/93 "Tractor Grip" U.S. Patent No. 5,098,312 5. Delrina Corporation 6/27/95 "WinFax LITE" software 6. IBM 4/1/93 V.42bis modems, U.S. Patent No. 4,814,746 7. Madge 9/7/90 Software license used in Token Ring adapters 8. Shiva Corporation 6/12/95 "Shiva PPP" software license 9. SPCO Management, Inc. 6/1/92 2.4ghz frequency hopping radio design for wire- less LAN adapter 10. Symbionics 10/27/94 Wireless LAN adapter radio design 11. Unisys Corporation 8/13/93 V.42bis modems, U.S. Patent No. 4,558,302 12. Willemjin 12/1/89 Token Ring adap- ter technology, U.S. Patent No. 31,852 (Reissue)
[I]D-1 19 ATTACHMENT II TO PATENT SECURITY AGREEMENT GRANT OF SECURITY INTEREST (PATENTS) THIS GRANT OF SECURITY INTEREST, dated as of November ___, 1995, is executed by XIRCOM, INC., a California corporation ("Grantor"), in favor of THE CIT GROUP/CREDIT FINANCE, INC. ("Lender"). A. Pursuant to a Loan and Security Agreement of even date (the "Loan Agreement"), between Grantor and Lender, Lender has agreed to extend certain credit facilities to Grantor upon the terms and subject to the conditions set forth therein. B. Grantor owns the letters patent, and/or applications for letters patent, of the United States, more particularly described on Schedules 1-A and 1-B annexed hereto as part hereof (the "Patents"); C. Grantor has entered into a Patent Security Agreement dated the date hereof (the "Security Agreement") in favor of Lender; and D. Pursuant to the Security Agreement, Grantor has granted to Lender a security interest in all right, title and interest of Grantor in and to the Patents, together with any reissue, continuation, continuation-in-part or extension thereof, and all proceeds thereof, including, without limitation, any and all causes of action which may exist by reason of infringement thereof for the full term of the Patents (the "Collateral"), to secure the prompt payment, performance and observance of the Obligations, as defined in the Security Agreement; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Grantor does hereby further grant to Lender a security interest in the Collateral to secure the prompt payment, performance and observance of the Obligations. Grantor does hereby further acknowledge and affirm that the rights and remedies of Lender with respect to the security interest in the Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are hereby incorporated herein by reference as if fully set forth herein. II-1 20 Lender's address is: THE CIT GROUP/CREDIT FINANCE, INC. 300 South Grand Avenue, Third Floor Los Angeles, California 90071 Attn: Grace Kim Bowen, Esq. IN WITNESS WHEREOF, Grantor has caused this Grant of Security Interest to be executed as of the day and year first above written. XIRCOM, INC. By: --------------------------- Name: --------------------- Title: --------------------- II-2 21 STATE OF CALIFORNIA ) ) SS. COUNTY OF LOS ANGELES ) On November ___, 1995, before me, ______________________, personally appeared ____________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature _________________________________ (Seal) II-3 22 SCHEDULE 1-A TO ASSIGNMENT FOR SECURITY PATENTS
Title Number Date ----- ------ ---- 1) ADAPTER FOR CONNECT- D336,467 6-15-93 ING AN ELECTRONIC COMPUTER TO A LOCAL AREA NETWORK 2) NETWORK ADAPTER FOR USE 5,299,314 3-29-94 WITH STANDARD PC PARALLEL PORT 3) PARALLEL PORT MULTI- D339,116 9-7-93 PLEXOR FOR USE WITH A COMPUTER 4) PARALLEL PORT MULTI- 5,276,443 1-4-94 PLEXOR FOR PC PARAL- LEL PORT 5) MODEM ADAPTER FOR USE 5,408,614 4-18-95 WITH STANDARD PC PARAL- LEL PORT
II-4 23 SCHEDULE 1-B TO ASSIGNMENT FOR SECURITY PATENT APPLICATIONS
Title Ser. Number Filing Date ----- ----------- ----------- None.
II-5 24 ATTACHMENT III TO PATENT SECURITY AGREEMENT SPECIAL POWER OF ATTORNEY STATE OF CALIFORNIA ) ) ss.: COUNTY OF LOS ANGELES ) KNOW ALL MEN BY THESE PRESENTS, THAT XIRCOM, INC., a California corporation ("Grantor"), pursuant to a Patent Security Agreement, dated as of November ___, 1995 (the "Security Agreement"), between Grantor and Lender (as hereinafter defined), hereby appoints and constitutes THE CIT GROUP/CREDIT FINANCE, INC. ("Lender"), its true and lawful attorney, with full power of substitution, and with full power and authority to perform the following acts on behalf of Grantor: 1. For the purpose of assigning, selling, licensing or otherwise disposing of all right, title and interest of Grantor in and to any letters patent of the United States or any other country or political subdivision thereof, and all registrations, recordings, reissues, continuations, continuations-in-part and extensions thereof, and all pending applications therefor, and for the purpose of the recording, registering and filing of, or accomplishing any other formality with respect to, the foregoing, to execute and deliver any and all agreements, documents, instruments of assignment or other papers necessary or advisable to effect such purpose; 2. For the purpose of evidencing and perfecting Lender's interest in any patent not previously assigned to Lender as security, or in any patent which Grantor may acquire from a third party, and for the purpose of the recording, registering and filing of, or accomplishing any other formality with respect to, the foregoing, to execute and deliver any and all agreements, documents, instruments of assignment or other papers necessary or advisable to effect such purpose. 3. To execute any and all documents, statements, certificates or other papers necessary or advisable in order to obtain the purposes described above as Lender may in its sole discretion determine. III-1 25 This power of attorney is made pursuant to the Security Agreement and takes effect solely for the purposes of Paragraph 2 and Subparagraphs 5(a) and 7(a) thereof and is subject to the conditions thereof and may not be revoked until the payment in full of all "Obligations" as defined in the Security Agreement. Dated: November ___, 1995 XIRCOM, INC. By: ------------------------------ Name: ------------------------ Title: ----------------------- III-2 26 STATE OF CALIFORNIA ) ) SS. COUNTY OF LOS ANGELES ) On November ___, 1995, before me, ______________________, personally appeared ____________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature _________________________________ (Seal) III-3 EX-10.29D 6 TRADEMARK SECURITY AGREEMENT BETWEEN CIT & XIRCOM 1 TRADEMARK SECURITY AGREEMENT EXHIBIT 10.29D 2 TRADEMARK SECURITY AGREEMENT THIS TRADEMARK SECURITY AGREEMENT ("Security Agreement"), dated as of November 8, 1995, is executed by and between XIRCOM, INC., a California corporation ("Grantor"), and THE CIT GROUP/CREDIT FINANCE, INC. ("Lender"). RECITALS A. Pursuant to a Loan and Security Agreement of even date herewith (the "Loan Agreement"), between Grantor and Lender, Lender has extended or agreed to extend certain credit facilities to Grantor upon the terms and subject to the conditions set forth therein. B. Lender's obligation to extend or continue to extend the credit facilities to Grantor under the Loan Agreement is subject, among other conditions, to receipt by Lender of this Security Agreement duly executed by Grantor. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Lender as follows: 1. Definitions and Interpretation. When used in this Security Agreement, the following terms shall have the following respective meanings: "Affiliate" shall mean any person or entity controlling, controlled by or under common control with another person or entity. "Collateral" shall have the meaning given to that term in Paragraph 2 hereof. "Obligations" shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Grantor to Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising pursuant to the terms of the Loan Agreement or any of the other Loan Documents, including without limitation all interest, fees, charges, expenses, attorneys' fees and accountants' fees chargeable to and payable by Grantor hereunder and thereunder. 3 "Patent and Trademark Office" shall mean the United States Patent and Trademark Office or any successor office or agency thereto. "Trademarks" shall have the meaning given to that term in Attachment I hereto. "UCC" shall mean the Uniform Commercial Code as in effect in the State of California from time to time. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Loan Agreement shall have the respective meanings given to those terms in the Loan Agreement, and all terms defined in the UCC shall have the respective meanings given to those terms in the UCC. 2. Grant of Security Interest. As security for the Obligations, Grantor hereby pledges, mortgages and grants to Lender a security interest in the property described in Attachment I annexed hereto (collectively and severally, the "Collateral"), which Attachment I is incorporated herein by this reference. 3. Representations and Warranties. Grantor represents and warrants to Lender that: (a) Grantor is the owner of the Collateral (or, in the case of after-acquired Collateral, at the time Grantor acquires rights in the Collateral, will be the owner thereof) and that no other Person has (or, in the case of after-acquired Collateral, at the time Grantor acquires rights therein, will have) any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral; (b) Lender has (or in the case of after-acquired Collateral, at the time Grantor acquires rights therein, will have) a first priority perfected security interest in the Collateral; (c) Grantor has full corporate power and authority to grant the security interest herein granted, and the execution and delivery of this Security Agreement by Grantor and the performance of its obligations hereunder, have been duly authorized by all necessary corporate action on the part of Grantor; (d) Grantor does not own any Trademarks registered in, or the subject of pending applications in, the Patent and Trademark Office or any similar offices or agencies in any other country or any political subdivision thereof, other than those described inSchedule A or Schedule B to Attachment I hereto; (e) Grantor has the sole and full right, title and interest in and to each of the Trademarks shown on Schedule A to Attachment I hereto for the goods and services covered by the registrations thereof, unencumbered except as set forth in Schedule C to Attachment I hereto, and such registrations are valid and enforceable and in full force and effect; 2 4 (f) There is no claim by any third party that any Trademarks are invalid or unenforceable or do or may violate the rights of any Person; (g) All licenses of Trademarks which Grantor has granted to any Person are set forth in Schedule C to Attachment Ihereto; (h) All licenses of Trademarks which any Person has granted to Grantor are set forth in Schedule D to Attachment I hereto. 4. Covenants of Grantor. Grantor hereby agrees: (a) Grantor shall perform all acts and execute all documents, including, without limitation, Grants of Security Interest substantially in the form of Attachment II annexed hereto, that may be necessary or desirable to record, maintain, preserve, protect and perfect Lender's interest in the Collateral, the Lien granted to Lender in the Collateral and the first priority of such Lien; (b) Except to the extent that Lender shall give its prior written consent, (i) Grantor shall continue to use the Trademarks in connection with each and every trademarked class of goods or services applicable to its current line as reflected in its current catalogs, brochures, price lists or similar materials in order to maintain the Trademarks in full force and effect free from any claim of abandonment for nonuse, and Grantor shall not (and will not permit any licensee thereof to) do any act or omit to do any act whereby any Trademark may become invalidated and shall notify Lender immediately if Grantor knows of any reason or has reason to know that any application or registration may become invalidated; and (ii) Grantor shall not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or Lien upon, encumber, grant an exclusive or non-exclusive license, or otherwise dispose of any of the Collateral, and nothing in this Security Agreement shall be deemed a consent by Lender to any such action except as expressly permitted herein; (c) Grantor shall promptly pay Lender for any and all sums, costs, and expenses which Lender may pay or incur pursuant to the provisions of this Security Agreement or in enforcing the Obligations, the Collateral or the security interest granted hereunder, including, without limitation, all filing or recording fees, court costs, collection charges, travel, and reasonable attorneys' fees and expenses, all of which together with interest at the highest rate then payable on the Obligations shall be part of the Obligations and be payable on demand; (d) Grantor shall promptly notify Lender upon the filing with the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, either by Grantor or by any agent, employee, 3 5 licensee or designee of Grantor, of (i) an application for the registration of any Trademark with the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof or (ii) any assignment of any Trademark which Grantor may acquire from a third party. Upon the request of Lender, Grantor shall execute and deliver any and all documents, instruments, and agreements as Lender may request to evidence Lender's security interest in such Trademark (and the goodwill and general intangibles of Grantor relating thereto or represented thereby), and Grantor authorizes Lender to amend an original counterpart of the applicable Grant of Security Interest executed pursuant to Subparagraph 4(a) of this Security Agreement without first obtaining Grantor's approval of or signature to such amendment, and to record such security interest with the Patent and Trademark Office; (e) Grantor shall keep the Collateral free of all Liens, except in favor of Lender; (f) Grantor shall take all necessary steps in any proceeding before the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, to diligently prosecute or maintain, as applicable, each application and registration of the Trademarks; (g) So long as any of the Obligations are outstanding, Grantor shall make application to the Patent and Trademark Office (and assign any such application to Lender as security) to register any registerable but unregistered material Trademarks used by Grantor in connection with its products or services, unless Grantor, in the exercise of its prudent business judgment, deems any such Trademark not to have any significant commercial value or determines that its rights are better used as a common law trademark; (h) Grantor shall (i) use proper statutory notice in connection with any use of the Trademarks, and (ii) maintain consistent standards of quality in its manufacture of products sold under the Trademarks or provision of services in connection with the Trademarks; (i) Grantor agrees that if it or any Affiliate learns of any use by any Person of any term or design likely to cause confusion with any Trademark, Grantor shall promptly notify Lender of such use and of all steps taken and to be taken to remedy any infringement of any Trademark; and (j) Grantor shall at all times keep at least one complete set of its records concerning the Collateral at its chief executive office and shall make such records available for inspection by Lender at such times as Lender may reasonably request. 5. Authorized Action by Lender. 4 6 (a) Lender may, in its sole discretion, pay any amount or do any act required of Grantor hereunder or requested by Lender to preserve, defend, protect, maintain, record or enforce Grantor's obligations contained herein, the Obligations, the Collateral, or the right, title and interest granted Lender by this Security Agreement, and which Grantor fails to do or pay, and any such payment shall be deemed an advance by Lender to Grantor and shall be payable on demand together with interest at the highest rate then payable on the Obligations. Lender will promptly notify Grantor of any payment by Lender referred to in this Section 5(a). (b) Grantor agrees to execute and deliver to Lender three originals of a Special Power of Attorney in substantially the form ofAttachment III to this Agreement for the implementation of the recording, giving of notice, preservation, assignment, sale or other disposal of the Collateral pursuant toParagraph 2 and Subparagraphs 5(a) and 7(a). (c) Grantor hereby grants to Lender and its employees and agents the right to visit Grantor's business facilities during normal business hours and with proper notice at which Grantor manufactures products or provides services, which products or services are sold under or provided in connection with any of the Trademarks, and to inspect such products and the quality control records relating thereto or observe the provision of such services. 6. Litigation and Other Proceedings. (a) Grantor shall have the obligation to commence and diligently prosecute such suits, proceedings or other actions for infringement or other damage, or reexamination or reissue proceedings, or opposition or cancellation proceedings as are reasonable, in Grantor's exercise of its prudent business judgement, to protect any of the Trademarks. No such suit, proceeding or other actions shall be settled or voluntarily dismissed, nor shall any party be released or excused of any claims of or liability for infringement, without the prior written consent of Lender, which consent shall not be unreasonably withheld. (b) Upon the occurrence and during the continuation of an Event of Default, Lender shall have the right but not the obligation to bring suit or institute proceedings in the name of Grantor or Lender to enforce any rights in the Collateral, including any license thereunder, in which event Grantor shall at the request of Lender do any and all lawful acts and execute any and all documents required by Lender in aid of such enforcement. If Lender elects not to bring suit to enforce any right under the Collateral, including any license thereunder, Grantor agrees to use all reasonable measures, whether by suit, proceeding or other action, to prevent the infringement of any right under the Collateral by any Person and for that purpose 5 7 agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. 7. Default and Remedies. (a) Grantor shall be deemed in default under this Security Agreement upon the occurrence of an Event of Default. Upon the occurrence and during the continuation of any such Event of Default, Lender may, at its option, and (except if otherwise specified below) without notice to or demand on Grantor, and in addition to all rights and remedies available to Lender under the Loan Agreement or the other Loan Documents, do any one or more of the following: (i) upon ten (10) Business days' prior notice to Grantor, direct Grantor not to make any further use of the Trademarks (or any mark similar thereto) for any purpose; (ii) at any time and from time to time, upon ten Business (10) days' prior notice to Grantor, license, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, any of the Trademarks throughout the world for such term or terms, on such conditions, and in such manner, as Lender shall in its sole discretion determine; (iii) at any time and from time to time, enforce (and upon notice to Grantor have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of Grantor in, to and under any one or more license agreements with respect to the Collateral (without assuming any obligations or liability thereunder), and take or refrain from taking any action under any thereof; (iv) at any time and from time to time, upon ten (10) Business days' prior notice to Grantor, assign, sell, or otherwise dispose of, the Collateral or any of it, either with or without special or other conditions or stipulations, with power to buy the Collateral or any part of it, and with power also to execute assurances, and do all other acts and things for completing the assignment, sale or disposition which Lender shall, in its sole discretion, deem appropriate or proper; and (v) in addition to the foregoing, in order to implement the assignment, sale or other disposal of any of the Collateral pursuant to clause (a)(iv) hereof, Lender may, at any time, pursuant to the authority granted in the Power of Attorney executed pursuant to Subparagraph 5(b) hereof, execute and deliver on behalf of Grantor, one or more instruments of assignment of the Trademarks (or any application for registration thereof), in form suitable for filing, recording or registration in any country. 6 8 (b) Grantor agrees to pay when due all reasonable costs incurred in any such transfer of the Trademarks, including, without limitation, any taxes, fees and reasonable attorneys' fees and expenses, and all such costs shall be added to the Obligations. Lender may apply the proceeds actually received from any such license, assignment, sale or other disposition to the reasonable costs and expenses thereof, including, without limitation, reasonable attorneys' fees and all legal, travel and other expenses which may be incurred by Lender, and then to the Obligations, in such order as to principal or interest as Lender may desire; and Grantor shall remain liable and will pay Lender on demand any deficiency remaining, together with interest thereon at a rate equal to the highest rate then payable on the Obligations and the balance of any expenses unpaid. Nothing herein contained shall be construed as requiring Lender to take any such action at any time. In the event of any such license, assignment, sale or other disposition of the Collateral, or any of it, after the occurrence or continuation as hereinabove provided of an Event of Default, Grantor shall supply its know-how and expertise relating to the manufacture and sale of the products bearing the Trademarks or in connection with which the Trademarks are used, and its consumer or customer lists and other records relating to the Trademarks and to the distribution of products or the provisions of services, to Lender or its designee. 8. Reassignment. Upon the payment in full of the Obligations and the termination of the Loan Agreement and Lender's obligation to provide advances thereunder, Lender shall execute and deliver to Grantor all assignments and other instruments as may be necessary to vest in Grantor full right, title and interest in and to the Collateral, subject to any disposition thereof which may have been made by Lender pursuant to the provisions of this Security Agreement. 9. Indemnification and Release. (a) Grantor assumes all responsibility and liability arising from the use of the Trademarks, and Grantor shall indemnify and hold Lender and its directors, officers, employees, agents and any of their respective Affiliates (Indemnitees") harmless from and against any claim, suit, loss, damage or expense (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with any alleged infringement of any trademark or alleged defect in any product manufactured, promoted or sold by Grantor (or any Affiliate of Grantor) in connection with any Trademark, or out of the manufacture, promotion, labeling, sale or advertisement of any product or service by Grantor (or any Affiliate of Grantor). Grantor agrees that Lender does not assume, and shall have no responsibility for, the payment of any sums due or to become due under any agreement or contract included in the Collateral or the performance of any obligations to be performed under or with respect to any such agreement or contract by Grantor, and Grantor hereby agrees to indemnify and hold each Indemnitee harmless with respect to any and all claims by any Person relating thereto. 7 9 (b) Grantor agrees to indemnify and hold each Indemnitee harmless from and against any claim, suit, loss, damage or expense (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with any action taken or omitted to be taken by Lender pursuant to clause 7(a)(iii) hereof with respect to any license agreement of Grantor. (c) Grantor agrees to indemnify and hold each Indemnitee harmless from and against any claim, suit, loss, damage or expense (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with (i) any claim, suit or proceeding instituted by Grantor or (ii) any action taken or omitted to be taken by Lender pursuant to Subparagraph 6(b). (d) Grantor hereby releases the Indemnitees from any claims, causes of action and demands at any time arising out of or with respect to any actions taken or omitted to be taken by the Indemnitees under the powers of attorney granted under the Special Power of Attorney executed pursuant to Subparagraph 5(b) herein, other than actions taken or omitted to be taken through the gross negligence or willful misconduct of such Indemnitees. (e) Grantor agrees to cause Lender to be named as an additional insured with respect to any policy of insurance held by Grantor from time to time covering product liability or intellectual property infringement risk. 10. Miscellaneous. (a) Notices. Except as otherwise provided herein, all notices, requests, demands or other communications to or upon Lender or Grantor hereunder shall be addressed to Lender or Grantor at the respective addresses indicated below or at such other address as Lender or Grantor may designate by written notice to the other party, and shall be deemed to have been given (i) in the case of notice by letter, three (3) days after deposited in the mails registered and return receipt requested, or (ii) in the case of notice given by telecommunication, when sent with appropriate confirmation received: Lender: The CIT Group/Credit Finance, Inc. 300 South Grand Avenue, Third Floor Los Angeles, California 90071 Attention: Grace Kim Bowen, Esq. Telephone: (213) 613-2511 Telecopy: (213) 613-2537 8 10 Grantor: Xircom, Inc. 2300 Corporate Center Drive Thousand Oaks, California 91320 Attention: General Counsel Telephone: (805) 376-6910 Telecopy: (805) 376-9120 (b) Nonwaiver. No failure or delay on Lender's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) Amendments and Waivers. Except with respect to action by Lender pursuant to Subparagraph 4(d), this Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Grantor and Lender as required by the Loan Agreement. Each waiver or consent under any provision hereof shall be effective only in the specific instances and for the purpose for which given. (d) Assignments. This Security Agreement shall be binding upon and inure to the benefit of Lender and Grantor and their respective successors and assigns;provided, however, that Grantor and Lender may sell, assign and delegate their respective rights and obligations hereunder only as permitted by the Loan Agreement. (e) Cumulative Rights, etc. The rights, powers and remedies of Lender under this Security Agreement shall be in addition to all rights, powers and remedies given to Lender by virtue of any applicable law, rule or regulation of any governmental authority, the Loan Agreement, any other Loan Document or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Lender's rights hereunder. Grantor waives any right to require Lender to proceed against any Person or to exhaust any Collateral or to pursue any remedy in Lender's power. (f) Payments Free of Taxes, Etc. All payments made by Grantor under this Security Agreement shall be made by Grantor free and clear of and without deduction for any and all present and future taxes, levies, charges, deductions and withholdings. In addition, Grantor shall pay upon demand any stamp or other taxes, levies or charges of any jurisdiction with respect to the execution, delivery, registration, performance and enforcement of this Security Agreement. Upon request by Lender, Grantor shall furnish evidence satisfactory to Lender that all requisite authorizations and approvals by, and notices to and filings with, governmental authorities and regulatory bodies have been obtained and made and that all requisite taxes, levies and charges have been paid. 9 11 (g) Partial Invalidity. If at any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (h) Governing Law. This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. (i) Submission to Jurisdiction. Grantor hereby irrevocably and unconditionally: (i) Submits for itself and its property in any legal action or proceeding relating to this Security Agreement, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive jurisdiction of the courts of the State of Illinois and the courts of the United States of America located in Los Angeles County, California and consents and agrees to suit being brought in such courts as Lender may elect; (ii) Waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) Agrees as an alternate means of service of process in any such legal action or proceeding to service by mailing of copies thereof (by registered or certified mail, if practicable) postage prepaid, to the then active agent or to Grantor at its address set forth in Subparagraph 10(a) hereof or at such other address of which Lender shall have been notified pursuant thereto, and agrees that failure to receive such copy or notice shall not affect or impair the validity of such service or of any judgment rendered in any action or proceeding based thereon; and (iv) Agrees that nothing herein shall affect Lender's right to effect service of process in any other manner permitted by law, and that Lender shall have the right to bring any legal proceedings (including a proceeding for enforcement of a judgment entered by any of the aforementioned courts) against Grantor in such courts or in any other court or jurisdiction in accordance with applicable law. 10 12 (j) Jury Trial. EACH OF GRANTOR AND LENDER, AND TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. IN WITNESS WHEREOF, Grantor and Lender have caused this Security Agreement to be executed as of the day and year first above written. "GRANTOR" XIRCOM, INC. By: R. Holliday ------------------------------ Name: Randall H. Holliday ------------------------ Title: Secretary ----------------------- "LENDER" THE CIT GROUP/CREDIT FINANCE, INC. By: Grace Bowen ------------------------------ Name: Grace Bowen ------------------------ Title: Vice President ----------------------- 11 13 ATTACHMENT I TO TRADEMARK SECURITY AGREEMENT (a) All trademarks, trade names, trade styles and service marks, and all prints and labels on which said trademarks, trade names, trade styles and service marks have appeared or appear, and all designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all right, title and interest therein and thereto, all registrations and recordings thereof, including without limitation, (i) all applications, registrations and recordings in the Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, or any foreign country or any political subdivision thereof, all whether now owned or hereafter acquired by Grantor, including, but not limited to, those described in Schedules A and B to this Attachment I, which Schedules A and B are incorporated herein by this reference, and (ii) all reissues, extensions or renewals thereof and all licenses thereof (collectively, the "Trademarks"); (b) All goodwill of Grantor's business symbolized by the Trademarks and all customer lists and other records of Grantor relating to the distribution of products or provision of services bearing or covered by the Trademarks; (c) All claims by Grantor against any Person for past, present or future infringement of the Trademarks, including, without limitation, the right to take any action to enforce such claims; (d) All proceeds of the foregoing (including, without limitation, whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged, licensed or otherwise disposed of, whether such disposition is voluntary or involuntary, including, without limitation, rights to payment and return premiums and insurance proceeds under insurance with respect to any Collateral, and all rights to payment with respect to any cause of action affecting or relating to the Collateral). I-1 14 SCHEDULE A TO ATTACHMENT I TO TRADEMARK SECURITY AGREEMENT TRADEMARKS
Trademark Jurisdiction Reg. Date Reg. No. - --------- ------------ --------- -------- Xircom U.S. Patent and 10-30-90 1,619,539 Trademark Office
[I]A-1 15 SCHEDULE B TO ATTACHMENT I TO TRADEMARK SECURITY AGREEMENT APPLICATIONS FOR TRADEMARKS
Mark Application Date Application No. - ---- ---------------- --------------- Netwave 11/04/94 74/595,458
[I]A-2 16 SCHEDULE C TO ATTACHMENT I TO TRADEMARK SECURITY AGREEMENT LICENSES GRANTED BY GRANTOR TO THIRD PARTIES From time to time, Grantor issues nonexclusive licenses. [I]A-3 17 SCHEDULE D TO ATTACHMENT I TO TRADEMARK SECURITY AGREEMENT LICENSES GRANTED BY THIRD PARTIES TO GRANTOR LICENSED LOGOS 1. AT&T Virtual WorkPlace 2. Delrina 3. ETC 4. Madge (SmartRing) 5. Microsoft Network (OnLine Services) 6. Novell Certified 7. OS/2 Ready 8. PC Card Solutions 9. Shiva PPP 10. SCO OK, Tested and Supported 11. Windows95 Certified 12. Network Global Navigator AWARD LOGOS 1. Best of Byte-Comdex/Fall 94 2. LAN Mag 1995 Product of Year 3. Mobility Award Winner 4. PC Mag Tech Excellence [I]D-1 18 ATTACHMENT II TO TRADEMARK SECURITY AGREEMENT GRANT OF SECURITY INTEREST TRADEMARKS THIS GRANT OF SECURITY INTEREST, dated as of November ___, 1995 is executed by XIRCOM, INC., a California corporation ("Grantor"), in favor of THE CIT GROUP/CREDIT FINANCE, INC. ("Lender"). A. Pursuant to a Loan and Security Agreement of even date herewith (the "Loan Agreement"), between Grantor and Lender, Lender has extended and agreed to extend certain credit facilities to Grantor upon the terms and subject to the conditions set forth therein; B. Grantor has adopted, used and is using certain trademarks, more particularly described on Schedules 1-A and 1-B annexed hereto as part hereof, which trademarks are registered or subject to an application for registration in the United States Patent and Trademark Office (collectively, the "Trademarks"); C. Grantor has entered into a Trademark Security Agreement dated the date hereof (the "Security Agreement") in favor of Lender; and D. Pursuant to the Security Agreement, Grantor has granted to Lender a security interest in all right, title and interest of Grantor in and to the Trademarks, together with the goodwill of the business symbolized by the Trademarks and the customer lists and records related to the Trademarks and the applications and registrations thereof, and all proceeds thereof, including, without limitation, any and all causes of action which may exist by reason of infringement thereof (the "Collateral"), to secure the prompt payment, performance and observance of the Obligations, as defined in the Security Agreement; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Grantor does hereby further grant to Lender a security interest in the Collateral to secure the prompt payment, performance and observance of the Obligations. II-1 19 Grantor does hereby further acknowledge and affirm that the rights and remedies of Lender with respect to the security interest in the Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are hereby incorporated herein by reference as if fully set forth herein. Lender's address is: The CIT Group/Credit Finance, Inc. 300 South Grand Avenue, Third Floor Los Angeles, California 90071 Attention: Grace Kim Bowen, Esq. Telephone: (213) 613-2511 Telecopy: (213) 613-2537 IN WITNESS WHEREOF, Grantor has caused this Grant of Security Interest to be executed as of the day and year first above written. "GRANTOR" XIRCOM, INC. By: ------------------------------ Name: ------------------------ Title: ----------------------- II-2 20 STATE OF CALIFORNIA ) ) ss.: COUNTY OF LOS ANGELES ) On November ___, 1995 before me, ______________________, personally appeared ___________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on such instrument the person(s) or the entity on behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature __________________________________ (Seal) 21 SCHEDULE 1-A TO GRANT OF SECURITY INTEREST TRADEMARKS
Mark Registration Date Registration No. - ---- ----------------- ---------------- Xircom 10-30-90 1,619,539
1-A-1 22 SCHEDULE 1-B TO GRANT OF SECURITY INTEREST TRADEMARK APPLICATIONS
Mark Application Date Application No. - ---- ---------------- --------------- Netwave 11/04/94 74/595,458
1-A-2 23 ATTACHMENT III TO TRADEMARK SECURITY AGREEMENT SPECIAL POWER OF ATTORNEY STATE OF CALIFORNIA ) ) ss.: COUNTY OF LOS ANGELES ) KNOW ALL PERSONS BY THESE PRESENTS, THAT XIRCOM, INC., a California corporation ("Grantor"), pursuant to a Trademark Security Agreement, dated as of November ___, 1995 (the "Security Agreement"), by and between Grantor and THE CIT GROUP/CREDIT FINANCE, INC. ("Lender"), hereby appoints and constitutes Lender its true and lawful attorney, with full power of substitution, and with full power and authority to perform the following acts on behalf of Grantor: 1. For the purpose of assigning, selling, licensing or otherwise disposing of all right, title and interest of Grantor in and to any trademarks, trade names, trade styles and service marks, and all registrations, recordings, reissues, extensions and renewals thereof, and all pending applications therefor, and for the purpose of the recording, registering and filing of, or accomplishing any other formality with respect to, the foregoing, to execute and deliver any and all agreements, documents, instruments of assignment or other papers necessary or advisable to effect such purpose; 2. For the purpose of evidencing and perfecting Lender's interest in any trademark not previously assigned to Lender as security, or in any trademark which Grantor may acquire from a third party, and for the purpose of the recording, registering and filing of, or accomplishing any other formality with respect to, the foregoing, to execute and deliver any and all agreements, documents, instruments of assignment or other papers necessary or advisable to effect such purpose. 3. To execute any and all documents, statements, certificates or other papers necessary or advisable in order to obtain the purposes described above as Lender may in its sole discretion determine. 1-A-3 24 This power of attorney is made pursuant to the Security Agreement and takes effect solely for the purposes of Paragraph 2 and Subparagraphs 5(a) and 7(a) thereof and is subject to the conditions thereof and may not be revoked until the payment in full of all "Obligations" as defined in the Security Agreement. Dated: November ___, 1995 "GRANTOR" XIRCOM, INC. By: ------------------------------ Name: ------------------------ Title: ----------------------- 1-A-4 25 STATE OF CALIFORNIA ) ) ss.: COUNTY OF LOS ANGELES ) On November ___, 1995 before me, ______________________, personally appeared ________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on such instrument the person(s) or the entity on behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature __________________________________ (Seal) EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1995 OCT-01-1994 SEP-30-1995 13,658 0 17,279 5,687 19,174 63,262 30,774 13,186 88,742 34,816 831 19 0 0 53,076 88,742 126,565 126,565 86,080 86,080 106,728 0 68 (65,804) (7,000) (58,804) 0 0 0 (58,804) (3.44) (3.44)
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