<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-19856
XIRCOM, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA (State or other jurisdiction of incorporation or
organization)
95-4221884 (IRS Employer Identification No.)
2300 Corporate Center Drive
Thousand Oaks, California 91320
(Address of principal executive offices & zip code)
Registrant's telephone number: (805) 376-9300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
There were 23,015,768 shares of the registrant's $.001 par value
Common Stock outstanding as of August 5, 1998.
<PAGE>
XIRCOM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Form 10-Q
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER ITEMS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
XIRCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
(In thousands) JUNE 30, 1998 September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 82,068 $ 75,109
Accounts receivable, net 31,917 10,897
Income tax receivable - 5,006
Inventories 17,699 28,962
Deferred income taxes 7,075 7,075
Other current assets 2,928 2,476
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 141,687 129,525
Equipment and improvements, net 26,091 17,819
Other assets 528 586
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 168,306 $ 147,930
- ------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 14,020 $ 10,431
Accrued liabilities 22,434 20,107
Current portion of long-term obligations - 2,541
Accrued income taxes 4,681 945
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 41,135 34,024
Deferred income taxes 479 479
Shareholders' equity:
Common stock 23 23
Paid-in capital 143,745 140,892
Accumulated deficit ( 17,076) ( 27,488)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 126,692 113,427
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Total liabilities and shareholders' equity $ 168,306 $ 147,930
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $71,312 $ 50,226 $187,991 $163,675
Cost of sales 47,001 33,315 123,923 104,208
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 24,311 16,911 64,068 59,467
Operating expenses:
Research and development 3,904 3,162 11,319 8,841
Sales and marketing 11,907 11,579 33,702 32,062
General and administrative 2,434 2,018 6,853 5,607
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 18,245 16,759 51,874 46,510
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Operating income from continuing operations 6,066 152 12,194 12,957
Other income, net 657 479 2,680 565
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Income from continuing operations before income taxes 6,723 631 14,874 13,522
Provision for income taxes 2,018 189 4,462 4,056
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Income from continuing operations 4,705 442 10,412 9,466
Discontinued operations:
Operating loss, net of income taxes - - - ( 226)
Loss on disposal, net of income taxes - ( 6,275) - ( 6,275)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,705 $( 5,833) $ 10,412 $ 2,965
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Continuing operations $ .21 $ .02 $ .46 $ .45
Discontinued operations - ( .28) - ( .31)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .21 $( .26) $ .46 $ .14
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Continuing operations $ .20 $ .02 $ .45 $ .43
Discontinued operations - ( .27) - ( .29)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .20 $( .25) $ .45 $ .14
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Income from continuing operations $ 10,412 $ 9,466
Adjustments to derive cash flows from continuing operating activities:
Depreciation and amortization 5,677 4,928
Foreign currency exchange gain ( 636) ( 180)
Changes in assets and liabilities:
Accounts receivable (21,020) (14,636)
Income tax receivable 5,006 2,652
Inventories 11,263 ( 8,711)
Other current assets ( 452) 413
Accounts payable and accrued liabilities 6,552 8,230
Income taxes payable 4,122 3,727
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 20,924 5,889
Net cash used in operating activities of discontinued operations - ( 5,985)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 20,924 ( 96)
- ----------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from sale of Netaccess, Inc. - 11,000
Purchases of equipment and improvements (14,028) ( 4,659)
Other 137 89
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing investing activities (13,891) 6,430
Net cash used in investing activities of discontinued operations - ( 501)
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Net cash provided by (used in) investing activities (13,891) 5,929
- ----------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of capital stock 2,467 56,123
Proceeds from issuance of debt obligations - 960
Repayment of debt obligations ( 2,541) ( 6,061)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ( 74) 51,022
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,959 56,855
Cash and cash equivalents at beginning of period 75,109 21,377
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 82,068 $ 78,232
- ----------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash paid for interest $ 72 $ 399
Cash paid for income taxes $ 148 $ 82
Tax benefit related to employee stock options $ 386 $ 2,078
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
XIRCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet
information as of September 30, 1997, which was derived from audited
consolidated financial statements) pursuant to Securities and Exchange
Commission regulations. In the opinion of management, the financial
statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the condensed
consolidated financial position at June 30, 1998, the condensed
consolidated results of operations for the three- and nine-month
periods ended June 30, 1998 and 1997, and condensed consolidated cash
flows for the nine-month periods ended June 30, 1998 and 1997, in
accordance with generally accepted accounting principles. The
accompanying financial statements are condensed and do not include
footnotes and certain financial presentations normally required under
generally accepted accounting principles and, therefore, should be
read in conjunction with the audited financial statements included in
the Company's 1997 annual report on Form 10-K.
The results of operations for the three- and nine-month periods ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less
at the date of purchase are considered to be cash equivalents and are
carried at cost plus accrued interest.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30 September 30
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 4,792 $17,984
Sub-assemblies 1,665 2,441
Work-in-process 5,364 1,253
Component parts 5,878 7,284
- -----------------------------------------------------------------------------
$17,699 $28,962
- -----------------------------------------------------------------------------
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from product sales when shipped. The
Company generally provides a lifetime limited warranty against defects
in the hardware component and a two-year limited warranty on the
software component of its network adapters and modem products. In
addition, the Company provides telephone support to purchasers of its
products as needed to assist them in installation or use of the
products. The Company makes provisions for these costs in the period
of sale. The Company also has contractual agreements which permit
distributors and dealers to return products or receive price
protection credits under certain circumstances. The Company makes a
provision for the estimated amount of product returns or credits that
may occur under these contracts in the period of sale.
EARNINGS PER SHARE
During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," ("SFAS 128") which required a change in
6
<PAGE>
XIRCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
the method used to compute earnings per share. SFAS 128 simplifies the
calculation of earnings per share data by replacing primary and fully
diluted earnings per share with basic and diluted earnings per share,
respectively. Basic earnings per share is calculated using the
weighted average common shares outstanding for the period, and
excludes dilutive securities. Diluted earnings per share reflects the
dilution to earnings that would occur if securities, stock options and
other dilutive securities resulted in the issuance of common stock. As
required by SFAS 128, all prior period amounts have been restated to
conform to the new presentation. The weighted average number of shares
used for basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of shares:
Basic 22,865,000 22,682,000 22,782,000 21,190,000
Effect of dilutive securities, employee stock options 626,000 234,000 266,000 618,000
- ----------------------------------------------------------------------------------------------------------------------------
Diluted 23,491,000 22,916,000 23,048,000 21,808,000
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
DISCONTINUED OPERATIONS
On June 30, 1997, the Company completed the sale of Netaccess, Inc.
("Netaccess"), its remote access subsidiary. The accompanying
condensed consolidated financial statements have been prepared to
reflect the historical results of operations of Netaccess as
discontinued operations. Net sales and loss before income taxes from
discontinued operations were $3,120,000 and $2,052,000, respectively,
during the three-month period ended June 30, 1997 and $13,185,000 and
$2,375,000, respectively, during the nine-month period ended June 30,
1997.
7
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Actual results could differ materially from
those projected in the trend analysis and other forward-looking
statements contained herein, as a result of the risk factors set forth
below and elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth the statements of operations as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.9% 66.3% 65.9% 63.7%
- ------------------------------------------------------------------------------------------
Gross profit 34.1% 33.7% 34.1% 36.3%
Operating expenses:
Research and development 5.5% 6.3% 6.0% 5.4%
Sales and marketing 16.7% 23.1% 17.9% 19.6%
General and administrative 3.4% 4.0% 3.7% 3.4%
- ------------------------------------------------------------------------------------------
Total operating expenses 25.6% 33.4% 27.6% 28.4%
- ------------------------------------------------------------------------------------------
Operating income from continuing
operations 8.5% 0.3% 6.5% 7.9%
Other income, net 0.9% 1.0% 1.4% 0.4%
- ------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes 9.4% 1.3% 7.9% 8.3%
Provision for income taxes 2.8% 0.4% 2.4% 2.5%
- ------------------------------------------------------------------------------------------
Income from continuing operations 6.6% 0.9% 5.5% 5.8%
Discontinued operations:
Operating loss, net of income taxes - - - (0.2%)
Loss on disposal, net of income taxes - (12.5%) - (3.8%)
- ------------------------------------------------------------------------------------------
Net income (loss) 6.6% (11.6%) 5.5% 1.8%
- ------------------------------------------------------------------------------------------
</TABLE>
NET SALES
The Company sells its products primarily through domestic and
international distributors (the "branded business") as well as to
original equipment manufacturers ("OEMs"). Net sales of LAN adapters,
modems and multifunction LAN and modem cards ("Combo cards") for the
three- and nine-month periods ended June 30, 1998 increased 42% and
15%, respectively, from the corresponding prior-year periods. The
increase was primarily due to an increase in unit shipments by the
Company to distributors and OEMs during the third quarter of fiscal
1998, as compared to the third quarter of fiscal 1997, offset by lower
average selling prices. In addition, the Company began shipping the
first product in its RealPort Integrated PC Card family during the
third quarter of fiscal 1998, although, because shipments commenced
late in the quarter, this product has had limited sales to date.
During the fourth quarter of fiscal 1997, the Company implemented a
plan to reduce the levels of inventories maintained by the Company's
distributors and to enable it to react more quickly to market changes.
Implementation of this plan resulted in slightly lower unit shipments
by the Company to its distributors during the first nine months of
8
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
fiscal 1998 as compared to the first nine months of fiscal 1997. The
resulting lower revenues in the branded business were more than offset
by higher revenues in the OEM business for the comparable periods.
Total unit shipments for the three- and nine-month periods ended June
30, 1998 increased 53% and 26%, respectively, from the corresponding
prior year periods. Average selling prices declined, however, due to a
higher mix of modem product shipments, which have lower average
selling prices than Combo cards, and an increase in shipments to OEM
customers, which typically have lower average selling prices than
branded sales for comparable products, as compared to the prior year
periods.
INTERNATIONAL SALES. Total international sales (shipments to
customers located outside the U.S.) were 48% and 52% of total net
sales for the three- and nine-month periods ended June 30, 1998,
compared to 44% and 47% for each of the comparable prior year periods.
PC Card sales in Europe grew at a faster rate than in the Asia-Pacific
region during the first nine months of fiscal 1998, which the Company
believes is attributable to economic uncertainty in the Asian region.
However, PC Card sales in the Asia-Pacific region grew at a comparable
rate to that of Europe during the third quarter of fiscal 1998.
GROSS PROFIT
Gross profit margins for the three- and nine-month periods ended June
30, 1998 were each 34.1%, compared to 33.7% and 36.3%, respectively,
for the comparable prior-year periods. The increase in gross profit
as a percentage of net sales for the quarter ended June 30, 1998, as
compared to the prior year period, was primarily attributable to a
decrease in fixed manufacturing costs as a percentage of sales and an
increased amount of revenues derived from Combo card and RealPort
Integrated PC Card products which have higher gross profit margins
than modem products, offset partially by an increase in modem product
sales to the Company's OEM customers at lower gross profit margins
than those of products sold in the branded business. The decrease in
gross profit as a percentage of net sales for the nine-month period
ended June 30, 1998 was due to a higher percentage of sales to the
Company's OEM customers at lower gross profit margins than those of
products sold in the branded business.
OPERATING EXPENSES
Total operating expenses for the three- and nine-month periods ended
June 30, 1998 increased by 9% and 12%, respectively, compared to the
corresponding prior-year periods, primarily due to the continued
expansion of product lines and an increase in certain sales and
marketing programs. Total operating expenses as a percentage of sales
for the three- and nine-month periods ended June 30, 1998 decreased
compared to the prior year periods primarily due to an increase during
the 1998 periods in shipments to the Company's OEM customers, as OEM
sales typically require lower sales and marketing expenses than
branded sales. Total operating expenses are expected to increase
throughout the remainder of fiscal 1998, and may remain consistent as
a percentage of net sales.
Research and development expenses for the three- and nine-month
periods ended June 30, 1998 increased by 23% and 28%, respectively, as
compared to the corresponding prior-year periods. These increased
expenses were due to additional staffing to support expanded branded
and OEM product offerings. Research and development expenses are
expected to continue to increase due to planned expenditures on
product enhancements and new product introductions, and may increase
as a percentage of net sales.
9
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales and marketing expenses for the three- and nine-month periods
ended June 30, 1998 increased by 3% and 5%, respectively, but
decreased as a percentage of sales compared to the corresponding
prior-year periods. The increases were primarily due to additional
staffing and sales and marketing activities required to support
expanding branded markets and increased OEM sales levels. Partially
offsetting these increases were the lower sales and marketing
expenditures that generally are associated with OEM sales versus
branded business sales, as well as reduced expenses associated with
lower levels of inventories maintained by distributors. Sales and
marketing expenses are expected to increase through the remainder of
fiscal 1998 as further product and market expansion activities are
pursued.
General and administrative expenses for the three- and nine-month
periods ended June 30, 1998 increased by 21% and 22%, respectively,
compared to the corresponding prior-year periods. The increase was to
support growth in the organization and, to a lesser extent, continued
expenditures on information systems hardware and software, including
Year 2000 upgrades. General and administrative expenses are expected
to increase modestly for the remainder of fiscal 1998 but may decrease
as a percentage of net sales.
OTHER INCOME, NET
Net other income includes interest income from the investment of
available cash, foreign currency transaction gains and losses, and
early payment discounts taken by the Company on trade payable
payments, offset by early payment discounts taken by customers and
interest expense on notes payable. The increase in net other income
for the fiscal 1998 periods compared to the prior year periods was due
primarily to higher interest income and lower interest expense as a
result of increased cash balances and reduced borrowings under credit
facilities.
INCOME TAXES
The Company's effective tax rate for the three- and nine-month periods
ended June 30, 1998 and 1997 was 30.0%. The difference between the
effective tax rates and the 35% federal statutory tax rate was due
primarily to benefits from the tax holiday status of the Company's
operations in Malaysia.
DISCONTINUED OPERATIONS
The financial results of Netaccess, the Company's remote access
subsidiary which was sold on June 30, 1997, have been reported as
discontinued operations in the Condensed Consolidated Statements of
Operations. The sale resulted in a loss of $6.3 million or $0.27 per
diluted share. Operating loss from discontinued operations, net of
income taxes, was $226,000 for the nine-month period ended June 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had $82.1 million in cash and cash
equivalents. The Company's operating activities provided cash of
$20.9 million during the nine-month period ended June 30, 1998,
primarily as a result of income from operations, decreases in
inventories and income tax receivable and increases in accounts
payable and other accrued liabilities and income taxes payable, offset
partially by an increase in accounts receivable. Accounts receivable
increased and inventories decreased due to higher quarterly revenue in
the June 1998 quarter compared to the September 1997 quarter.
Accounts payable and other accrued liabilities increased primarily due
to an increase in the volume of business.
10
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company used $13.9 million in cash in its investing activities
during the nine-month period ended June 30, 1998, primarily for
capital expenditures. These capital expenditures were for the
purchase of and improvements to the Company's manufacturing facility
in Penang, Malaysia, manufacturing equipment for use in the Malaysian
facility, equipment for increased headcount, and information systems
hardware and software. The Company has no material fixed commitments
and does not expect an increase in the rate of capital expenditures in
the normal course of business during the remainder of fiscal 1998.
The Company used $74,000 in cash in its financing activities during
the nine-month period ended June 30, 1998, to repay all outstanding
long-term debt, partially offset by proceeds from issuance of capital
stock through its employee stock purchase and stock option plans. The
Company has a bank credit facility allowing borrowings up to $25.0
million. Loans under the agreement are advanced based on the
Company's accounts receivable and inventories, subject to borrowing
formulas, and are secured by all U.S.-based assets of the Company. The
Company also has a credit facility totaling $10.8 million, denominated
in Malaysian ringgit, with a bank in Malaysia. All amounts under this
facility were repaid by the Company in November 1997. The Company had
approximately $22.3 million in borrowings available under all credit
facilities at June 30, 1998. As of June 30, 1998, the Company had no
borrowings outstanding under these agreements.
The Company believes that cash on hand, borrowings available under its
existing facilities or from other financing sources and cash provided
by operations will be sufficient to support its working capital and
capital expenditure requirements for at least the next twelve months.
However, there can be no assurances that future cash requirements to
fund operations will not require the Company to seek additional
capital sooner than the twelve months, or that such additional capital
will be available when required on terms acceptable to the Company.
RISK FACTORS
The market for portable PC LAN adapters has grown rapidly since the
Personal Computer Memory Card International Association (PCMCIA)
introduced a standard form factor for PC Card (originally "PCMCIA")
LAN adapters in 1993. Companies with greater name recognition in the
PC, desktop LAN adapter and PC Card modem industries and with greater
financial resources than the Company, now have a significant presence
in the PC Card adapter market. As a result, the Company's net sales
and gross profit margins have been and are expected to continue to
remain subject to adverse competitive pressure. Continuing
competitive factors include price competition, new product
introductions by competitors, promotional efforts by competitors, and
changes in the level of inventories in the Company's and its
competitors' distribution channels. Competition is expected to remain
intense and the Company could experience fluctuations in its market
share. Moreover, the Company believes that the market for PC Card LAN
adapters, modems and Combo cards will continue to be price competitive
and thus could continue to result in lower selling prices, lower gross
profit margins and reduced profitability levels than the Company has
earned from such products in the past.
The Company believes that its in-house manufacturing facility is
operating at a greater efficiency level than during fiscal 1997. This
manufacturing facility, located in Malaysia, began volume production
in early fiscal 1996 and is now producing all of the Company's
products. While the manufacturing facility and increased production
volumes are expected to continue to have a positive impact on cost
reduction efforts, the Company may not be able to achieve significant
11
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
additional efficiencies from this facility. There can be no assurances
that the Company will be able to achieve additional cost reductions
through increased manufacturing efficiencies in order to keep pace
with competitors' cost reductions or in an amount sufficient in the
event of competitive price reductions to allow price reductions
required to maintain or increase market share without adversely
affecting gross profit margins. Because all PC Card products are being
manufactured at the Company's own facilities, interruptions in supply
of products could occur if the Company is unable to accurately
forecast or react to changes in product demand, which in turn could
adversely affect future sales. In addition, the Company faces risks
associated with operations overseas, including management of a distant
manufacturing facility, currency fluctuations and potential
instability in the local country, particularly in light of recent
economic and political uncertainty in Malaysia and in Asia generally.
All of the Company's international sales are denominated in U.S.
dollars and may be subject to government controls and other risks,
including in some cases, export licenses, federal restrictions on
export, currency fluctuations, political instability, trade
restrictions, and changes in tariff and freight rates. The recent
economic instability, currency fluctuations and other factors
impacting Asian markets in particular could result in difficulties in
accessing new markets in the region and increased credit risks,
insolvencies or other impairments of customers' ability to repay
existing obligations. The Company has and may continue to implement
certain strategies to limit the impact of foreign currency
fluctuations on its Asian distributors, and in doing so may assume
greater foreign currency risk in the future. Continued instability or
other adverse changes in local economies could impact future
operations.
Revenues derived from the Company's Combo and modem-only PC Cards
typically have lower gross profit margins than LAN PC Cards. In
addition, shipments to OEMs generally result in lower average selling
prices and gross profit margins than sales made through the Company's
distribution partners. Increases in the proportion of modem-only and
Combo PC Cards and in shipments to OEMs have negatively impacted
overall gross margins and may continue to offset any improvements from
manufacturing and design efficiencies. This trend may continue as the
Company does not anticipate a significantly reduced mix of OEM
revenues as a percentage of sales. In addition, the increased
percentage of revenue to OEM customers during the first nine months of
fiscal 1998 as compared to the first nine months of fiscal 1997 has
resulted in an increased concentration in the Company's customer base.
With this increased customer concentration, the Company has increased
its dependency on a limited number of customers at lower average
selling prices and gross profit margins than sales made through the
Company's branded business.
The Company generally ships products within one to four weeks after
receipt of orders and therefore its sales backlog is typically
minimal. Accordingly, the Company's expectations of future net sales
are based largely on its own estimate of future demand and not on firm
customer orders. If net sales do not meet expectations, the Company
may not be able to reduce expenses commensurately in the near-term,
and profitability would be adversely affected.
The Company's net sales may be affected by its distributors' decisions
as to the quantity of the Company's products to be maintained in their
inventories. Since the fourth quarter of fiscal 1997, the Company
has taken steps to reduce the levels of inventories maintained by its
distributors and to enable the Company to react more quickly to market
changes. As a result, the Company may be more directly affected by
changes in the market, including the impact on the
12
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OEPRATIONS
Company of any slowdown in end user demand, as well as any potentially
reduced ability of the Company to satisfy rapid increases in market
demand. Notwithstanding the Company's efforts to reduce channel
inventory exposure, there can be no assurance that distributors will
not choose to reduce their inventories below the already reduced
levels, which would adversely affect net sales.
The Company's continued success is dependent on its ability to
continue to introduce new products offering advanced features,
functionality and solutions demanded by end users. There can be no
assurances that the Company will be able to continue to introduce
advanced products in a timely manner, that new products the Company
may introduce will achieve market acceptance or sell through to end
users in sufficient quantities to make them viable for the long-term,
or that sales of such new products will not negatively impact sales of
the Company's existing products. In addition, the Company may have
difficulty in establishing its products' presence in markets in which
it does not currently have significant brand recognition.
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, and accordingly are subject to
the risk of reduced availability due to manufacturing constraints,
allocations due to an excess of demand versus supply, and other risks
not within the Company's control. Interruptions in supply could also
occur due to political or economic changes around the world. 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.
In summary, gross profit margins are impacted by a number of factors
including the rate of sales growth, competitive pricing pressures, the
mix of product sales, the mix of sales made through various channels,
component costs and manufacturing costs. In addition, new products
often have lower margins until market acceptance and increased volumes
permit component cost reductions and manufacturing efficiencies.
Frequent product transitions also increase the risk of inventory
obsolescence and interruptions of sales.
A number of additional factors could have an impact on the Company's
future operating results. The industry in which the Company operates
is characterized by rapid technological change and short product life
cycles, and includes competitors with greater financial and technical
resources than the Company. 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 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, the laptop
computer market and the notebook-to-network connection rate, as well
as the Company's ability to retain its market share.
There can be no assurance that the Company's patents, copyrights,
trademarks and other efforts to protect its intellectual property will
prevent duplication of the Company's technology or that they will
provide a competitive advantage. The Company is also aware that there
can be no assurance that a patent issued to the Company would be
upheld as valid if litigation over a patent were initiated. The
Company believes that, due to the rapid pace of technological change
in the
13
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
communications industry, the Company's success is likely to depend
more upon continued innovation, technical expertise, marketing skills
and customer support and service than upon legal protection of the
Company's proprietary rights.
With the proliferation of new products and rapidly changing technology
in the PC Card market, there is a significant volume of patents or
similar intellectual property rights held by third parties. Given the
nature of the Company's products and development efforts, there are
risks that claims associated with such patents or intellectual
property rights could be asserted by third parties. These risks may
include the following: the cost of licensing a given technology if the
Company believes it may be prudent to secure such rights; the refusal
by a claimant to offer such a license on terms acceptable to the
Company; incurring a substantial cost of litigation or settlement of
such claims regardless of the merits of the allegations; and failure
by the Company to prevail in the event of litigation which could lead
to the Company being required to pay significant damages, and/or to
cease sales and production of infringing products, and only make
future sales of a noninfringing design.
The Company currently includes software licensed from third parties in
certain of its Combo, modem-only and Token Ring products which, in the
aggregate, accounted for 71% of revenues in the third quarter of
fiscal 1998. The Company's operating results could be adversely
affected by a number of factors relating to this third-party software.
Such factors include failure by a licensor to promote or support the
software, delays in shipment of the Company's products as a result of
delays in the introduction of licensed software or errors in the
licensed software, excess customer support costs or product returns
experienced by the Company due to errors in licensed software, or
termination of the Company's relationship with such licensors.
The Company has reviewed its own products and believes they do not
present any Year 2000 issues. However, some of the older third-party
computer programs used by the Company for internal purposes were
written using two digits rather than four to define the applicable
year. As a result, those computer programs have time-sensitive
software that always assumes the century is "19". This could cause a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions or engage in similar normal business activities. The
Company has performed an initial analysis of the impact of computer
software issues associated with the Year 2000 and initiated
modification efforts so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The
total Year 2000 project cost is estimated to be approximately
$750,000, which includes approximately $300,000 for the purchase of
new software that will be capitalized and the remainder expensed as
incurred. The repair or replacement is estimated to be completed not
later than June 30, 1999, which is prior to any anticipated impact on
its operating systems, however, there can be no assurance that the
estimated cost and timing will be achieved. In addition, there can be
no assurance that the Company's sales and results of operations will
not be adversely impacted indirectly as a result of Year 2000 issues
that may affect the Company's suppliers and customers.
The market price of the Company's common stock has been, and may
continue to be, subject to a high degree of volatility. Factors such
as general conditions in the networking and computer industries,
announcements of quarterly operating results, acquisitions, pricing,
new products or technological innovations by the Company or its
competitors, and other events or factors may have a significant impact
on the market price of the Company's common stock. In addition,
14
<PAGE>
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market
price of securities issued by many high technology companies, in many
cases for reasons unrelated to the operating performance of the
specific companies, and the Company's common stock has experienced
volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may also adversely affect the
market price of the Company's common stock.
The Company is also subject to additional risk factors as identified
in its Annual Report to Shareholders and filing on Form 10-K for the
year ended September 30, 1997.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER ITEMS
In May 1998, Carl Russo resigned as executive vice president and chief
operating officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
XIRCOM, INC.
------------------------------------------
(Registrant)
Date: August 13, 1998 /s/ Dirk I. Gates
---------------- ------------------------------------------
Dirk I. Gates
Chairman of the Board, President and Chief
Executive Officer
Date: August 13, 1998 /s/ Steven F. DeGennaro
--------------- ---------------------------------
Steven F. DeGennaro
Vice President, Finance and Chief
Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XIRCOM,
INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 82,068
<SECURITIES> 0
<RECEIVABLES> 38,281
<ALLOWANCES> 6,364
<INVENTORY> 17,699
<CURRENT-ASSETS> 141,687
<PP&E> 46,176
<DEPRECIATION> 20,085
<TOTAL-ASSETS> 168,306
<CURRENT-LIABILITIES> 41,135
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 126,669
<TOTAL-LIABILITY-AND-EQUITY> 168,306
<SALES> 187,991
<TOTAL-REVENUES> 187,991
<CGS> 123,923
<TOTAL-COSTS> 123,923
<OTHER-EXPENSES> 51,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,874
<INCOME-TAX> 4,462
<INCOME-CONTINUING> 10,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,412
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
</TABLE>
