<PAGE>
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1999
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-19856
XIRCOM, INC.
2300 Corporate Center Drive
Thousand Oaks, California 91320
Telephone: (805) 376-9300
CALIFORNIA (State of Incorporation)
95-4221884 (IRS Employer Identification No.)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $.001 PAR VALUE
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. [X]
Based on the closing sale price of the Common Stock on the Nasdaq Stock Market
on November 1, 1999, the aggregate market value of the voting stock held by non-
affiliates of the Registrant was approximately $1,016,384,051. 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 24,915,495 as of November 1, 1999.
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 21, 2000.
<PAGE>
PART 1
Item 1. Business
This Annual Report contains trend analysis and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the trend
analysis and other forward-looking statements contained herein, as a result of
the risk factors set forth elsewhere in this report.
We are a leading global provider of mobile networking and information
access solutions for mobile professionals. Our products enable connectivity
between notebook and computers and handheld computer devices and corporate
networks, the Internet and other online services from a wide variety of
locations. We are focused on the design, development, manufacture, marketing
and support of mobile information access products for notebook and handheld PCs
and other computing devices. Our products are recognized for innovative
technology, high reliability and broad compatibility.
We were founded in 1988 and pioneered the use of the PC parallel port to
connect notebook PCs to local area networks ("LANs"). Our Pocket LAN
Adapter(TM) product established the mobile information access market and by 1992
had become the leading solution for connecting notebook PCs to LANs. In 1992, we
became the first company in the industry to ship a LAN adapter compliant with
the standards set by the Personal Computer Memory Card International Association
("PCMCIA" or "PC Card"). In 1994 and 1995 we expanded our offerings to include
multi-function LAN+Modem and modem-only PC Cards.
We introduced our family of RealPort Integrated PC Cards featuring built-in
connectors in 1998. The patented RealPort Integrated PC Card's built-in
connector system eliminates external cables and solves a major problem faced by
mobile users of PC Cards--broken, lost or forgotten cables and broken pop-out
jacks.
During February 1999, we began shipping 56K modems in the MiniPCI form
factor. MiniPCI provides original equipment manufacturers ("OEMs") a flexible
and low cost configuration alternative for communications functionality in
notebook computers and handheld PCs, and incorporates the same essential
electronics, functionality, and software drivers of standard PCI expansion
devices into a very small daughter card that OEMs can connect to the motherboard
within the device.
During June 1999, we began shipping our first products for handheld
computers--the CompactCard line for Windows CE machines. The Compact Card line
is compliant with the CompactFlash+ standard for plug-in peripherals for Windows
CE devices. Our CompactCard Ethernet 10(TM) connects Windows CE users to 10Mbps
Ethernet networks.
During the fourth quarter of 1999, we entered the universal serial bus
("USB") port expansion market with the introduction of our PortStation port
expansion system products. The Xircom PortStation port expansion system is a
line of configurable products designed to offer a broad set of access and port
expansion capabilities to both enterprise and small office/home office ("SOHO")
users through a single USB connection to a PC. On October 1, 1999, we acquired
Entrega Technologies, Inc. ("Entrega"), further expanding our USB port expansion
system product offerings. The Xircom PortStation port expansion system products
and the Entrega products, to be marketed as Xircom PortGear products,
collectively offer consumers a selection of standardized devices for peripheral-
to-PC connectivity, including USB hubs, port converters and cables for PC and
Apple platforms.
On September 27, 1999, we entered the market for sub-handheld or wearable
information accessory devices by purchasing the Rex PC Card Organizer product
line from Franklin Electronic Publishers, Incorporated. The Rex family of
products currently includes an organizer, contact list, to-do list and memo pad.
We plan to expand the functionality of the product and target specific
applications.
2 XIRCOM, INC.
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Market Background
Growth in Network Computing. LANs and the Internet 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. Wide area networking has
created "enterprise networks" of broadly interconnected PCs that can access to
LANs from almost any location.
Trends Toward Smaller, Mobile Computers. Simultaneous with the growth in
both LANs and the Internet, continuing technological advances have been made in
portable PCs, often referred to as laptop or notebook computers. An
increasingly mobile workforce requiring a higher level of productivity is
driving the growing use of notebook PCs. Today, mobile professionals travel
frequently among a variety of locations including office, home, airport,
automobile, hotel, branch office or customer sites. In addition, notebook PCs
are becoming the machines of choice in the education market.
Competitive and productivity demands are requiring an ever larger number of
mobile professionals to maintain continual connectivity to their corporate
intranets, email and the Internet. This trend toward mobile computing has
resulted in the increased use of notebook PCs and handheld computering devices
both on the road and in the office. International Data Corporation ("IDC")
estimates that the total remote and mobile computing workforce in the U.S.,
including work extenders, mobile professionals, telecommuters and mobile data
collectors, will be 37.8 million people in 2000, increasing to 47.1 million in
2003. These industry trends are creating a strong demand for notebook
computers. IDC further estimates that total worldwide notebook PC shipments
will be 22.3 million units in 2000 and 31.2 million in 2003.
The principal device for portable computing connectivity in the PC Card, a
credit card-sized electronic component that contains a modem, a local area
network ("LAN") connection, or a combination of these, can be inserted into a
slot on a portable computer. Cahners InStar Group estimates that in the year
2000 19.6 million PC Cards will be shipped worldwide.
Remote Access. Over the last several years, there has been a significant
increase in the number of PC users accessing a corporate network, the Internet
or an online service from a "remote" location. To do so requires a modem on the
client PC or other computing device and a remote access server or communications
server on the corporate network. The modem market has grown substantially over
the last several years and today nearly all notebook PCs are equipped with a
modem.
Products
Our products include Integrated PC Card and PC Card products with Ethernet
and Token Ring LAN, modem, and combination LAN and modem functionality. New
products include CompactCard Ethernet 10, MiniPCI, PortStation and PortGear port
expansion products, and Rex wearable information accessories.
PC Card/Integrated PC Card
We believe we offer the industry's broadest family of PC Card LAN adapters
that operate on Ethernet and Token Ring topologies and are compatible with all
widely used wiring. Our LAN adapters incorporate pre-configured software
drivers that support over 50 different network operating systems and
communication protocols. Most of our adapters include DOS-, Microsoft Windows-,
Windows 95-, Windows 98-, Windows NT 4.0, and Windows 2000-based menu-driven
software for simple, fast installation. Our CompactCard Ethernet 10(TM)
connects Windows CE users to 10Mbps Ethernet networks.
3 XIRCOM, INC.
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We shipped the industry's first external parallel port LAN adapter, the
Pocket Ethernet Adapter(TM), in May 1989, and shipped the first commercially
available parallel port adapter for Token Ring networks, the Xircom Pocket Token
Ring Adapter(TM), in December 1989. Net sales from Pocket LAN Adapter products
are now negligible, as the Integrated PC Card and PC Card have become the
preferred form factors for connecting peripheral devices to notebook PCs.
During 1991, the PCMCIA made possible the development of PC Cards by
defining certain dimensional interface standards for use by a variety of PC
peripherals, including memory cards, fax/modems, LAN adapters and disk drives.
The PC Card interface, or slot, is now incorporated into nearly all notebook
computers, allowing the PC Card peripheral device, which is the size of a thick
credit card, to be inserted. we were the first to ship an Ethernet LAN adapter
card compliant with the PCMCIA standard in early 1993. Other first customer
shipment dates of key LAN adapter products are as follows:
<TABLE>
<S> <C>
CreditCard Ethernet Adapter(TM) February 1993
CreditCard Token Ring Adapter(TM) December 1993
CreditCard Ethernet Adapter 10/100(TM) June 1996
CardBus Ethernet Adapter 10/100(TM) 32-bit October 1996
CreditCard Ethernet Adapter 10/100 (Second-generation) November 1996
RealPort(TM) Ethernet 10/100-- August 1998
Features a built-in Ethernet connector for cable-free Ethernet connections
RealPort(TM) CardBus Ethernet 10/100 August 1998
</TABLE>
Net sales from PC Card LAN adapters were 29% of total net sales in fiscal
1999 compared to 30% in 1998.
In February 1994, we began shipping the first PC Card offering both a LAN
adapter and a modem in a single PCMCIA card ("Combo card"). The CreditCard
Ethernet+Modem(TM) adapter quickly achieved market acceptance and received a
number of industry awards for technical excellence. We commenced shipments of
the second-generation CreditCard Ethernet+Modem II(TM) adapter in September 1994
and in July 1995 was the first to ship in volume a combination PC Card product
incorporating a V.34 modem with a LAN adapter. First customer shipment dates of
key Combo card products are as follows:
<TABLE>
<S> <C>
CreditCard Ethernet+Modem February 1994
CreditCard Ethernet+Modem II September 1994
CreditCard Ethernet+Modem 28.8 July 1995
GlobalACCESS(TM) CreditCard Ethernet 10/100+Modem 33.6(TM) adapter-- January 1997
Allows users to connect in over 160 countries
CreditCard Ethernet 10/100+Modem 56(TM) adapter-- July 1997
Incorporates a 56Kbps modem and 10/100Mbps Ethernet adapter
in a single PC Card
RealPort Ethernet 10/100+Modem 56(TM)-- May 1998
Features built-in modem, Ethernet and telephone pass-through connectors
for cable-free Ethernet and modem connections
RealPort CardBus Ethernet 10/100+Modem 56(TM) August 1998
</TABLE>
Net sales from Combo card products were 59% of total net sales in fiscal
1999 compared to 48% in 1998.
4 XIRCOM, INC.
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We commenced shipment of our first modem-only PC Card in September 1995.
The original CreditCard Modem 28.8(TM) adapter incorporated the latest V.34
standard and broadened our remote access solutions by adding a modem-only option
for notebook PC users who require high-speed remote access to corporate
networks, commercial online service, or the Internet. First customer shipment
dates of key modem-only adapters are as follows:
<TABLE>
<S> <C>
CreditCard Modem 28.8 September 1995
CreditCard Modem 33.6(TM) adapter-- October 1996
Features the V.34-1996 standard
GlobalACCESS(TM) CreditCard Modem 56(TM) adapter-- July 1997
Allows users to connect in over 160 countries
CreditCard GSM(TM) PC Card-- September 1997
Provides wireless data, fax and Short Message Service (SMS)
communications over GSM cellular phones
RealPort Modem 56-GlobalACCESS(TM)-- August 1998
Features built-in modem and telephone pass-through connectors
for cable-free modem connections
RealPort Modem 56(TM) October 1998
RealPort CardBus Modem 56-GlobalACCESS(TM) October 1998
</TABLE>
Net sales from PC Card Modem-only products were 10% of total net sales in
fiscal 1999 compared to 21% in 1998.
Form Factor Evolution
We integrate the latest global communications technologies into more
reliable and convenient form factors. Our first product, the Pocket Ethernet
Adapter, made it possible for notebook PC users to access their corporate
networks. As the mobile computing revolution began to take hold, smaller, less
cumbersome internal adapters, rather than external solutions were needed. We
modified our products to the PC Card form factor, an internal adapter that
required custom cable connectors. However, PC Card users cited cables as their
number one problem, as they are prone to breakage or loss when moving from place
to place.
We solved this problem for mobile users with the patented RealPort
Integrated PC Card. It allows users to plug standard RJ-45 Ethernet and RJ-11
telephone cords directly into the integrated PC Card's built-in connectors,
eliminating the need for proprietary cables.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1990 1994 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Pocket Adapter PC Card Integrated PC Card
(Fully External) (Internal Card, External (Fully Internal)
Cable Connectors)
- ----------------------------------------------------------------------------------------------
</TABLE>
Handheld Connectivity Solutions
During June 1999, We began shipping our first products for handheld
computers--the CompactCard line for Windows CE machines. Our CompactCard
Ethernet 10(TM) is a Type II CompactFlash+-compliant card that is inserted into
an external expansion slot on Windows CE handheld PCs to 10Mbps Ethernet
networks. The CompactCard line of products also ship with a Xircom CardCaddy
converter that enables the CompactCard to fit larger handheld Type II PC Card
slots. We plan to add modem and GSM products to the CompactCard line as well.
5 XIRCOM, INC.
<PAGE>
In September 1999, Handspring, Inc. launched the Visor handheld computer
platform, based on the Palm operating system. The Visor handheld computer
includes an external expansion slot that accepts devices referred to as
"Springboard Modules." The Springboard external expansion slot is the first
attempt to create a standardized expansion slot for Palm-based handheld devices,
and could become the de-facto standard. We are developing products based on
this Springboard standard for the Palm segment, to complement our handheld
connectivity products to support handheld computers using the Windows CE
operating system.
MiniPCI
During February 1999, we introduced our 56K modems in the MiniPCI form
factor. MiniPCI provides OEMs a flexible and low cost configuration alternative
for communications functionality in notebook computers and handheld PCs, and
incorporates the same essential electronics, functionality, and software drivers
of standard PCI expansion devices into a very small daughter card that OEMs can
connect to the motherboard within the device.
Port Expansion System
In September 1999, we shipped our first port expansion system products, the
Xircom PortStation. Port expansion system products include a line of
configurable products offering a broad set of access and port expansion
capabilities to both enterprise and SOHO users through a single USB connection
to a PC. USB capability is now standard on most new PCs. Dataquest, Inc.
projects that all notebook and PC shipments in 2001 will be USB compatible,
creating an installed base of 500 million USB-compatible PCs. Dataquest, Inc.
projects that this installed base of USB-equipped computer users will drive
shipment of nearly 500 million USB peripherals by 2003.
Xircom PortStation port expansion system products offer separate modules
with individual connection ports, such as Ethernet LAN, 56K modem, USB hub,
serial port, and parallel port, and connect to a single USB port on the host PC.
Mix and match port expansion modules snap together allowing the user to
configure the system for specific needs. Xircom PortStation port expansion
system products support a number of PC operating systems, including Microsoft
Windows 95 OSR2, Windows 98, Windows NT 4.0, and Windows 2000.
In October 1999, through our acquisition of Entrega, we further expanded
our USB-based port expansion system product offerings. These products offer a
selection of standardized devices for peripheral-to-PC connectivity, including
USB hubs and port converters for PC and Macintosh platforms. These products ,
to be marketed as Xircom PortGear products, are targeted at OEM customers and
the consumer market.
Wearable Information Accessories
In September 1999, we acquired the Rex PC Card Organizer product line, and
thereby entered the market for sub-handheld or "wearable information accessory"
devices. The Rex solution is focused on making personal data readily available
in a small form factor. Its functionality currently includes an organizer,
contact list, to-do list and memo pad, all of which synchronize through a PC
Card slot or a docking cradle, with similar data resident on a host PC.
We anticipate that this product will be the starting point for a line of
wearable information accessories that are targeted at specific applications with
tightly integrated access requirements. We plan to introduce an enterprise
version of the Xircom Rex wearable information accessory that combines its
current information management capabilities with two-factor authentication
technology to offer an integrated user authentication solution for corporate
networks.
6 XIRCOM, INC.
<PAGE>
Industry Leadership
We are a worldwide leader in simplifying the installation and configuration
of PC Card mobile information access products by incorporating certain
proprietary software coding in our installation routines. We have developed an
intelligent Windows-based installation utility now shipping with most Xircom
adapters. Although the Windows 95 operating system improved the installation
process for PC Card adapters and other peripherals, add-on hardware often
requires driver updates to enhance features or performance. Therefore,
installation utilities and related driver software remain an important feature
of the products.
We ship our products worldwide and have developed expertise in obtaining
worldwide homologation including local telephone approvals in over 25 countries
including: France, Germany, UK, Japan, Australia, the Netherlands, Denmark,
Belgium and Austria. We have developed a modem design, which is a single,
worldwide solution and has a programmable Data Access Arrangement ("DAA").
Xircom GlobalACCESS modem products offer notebook users one card for worldwide
use. Unique features include local approvals in the major business centers
around the world and CountrySelect software, which automatically configures the
modem DAA to local dialing conventions when traveling from country to country.
Device driver software is also a key component of our products. Device
drivers allow the hardware and firmware (the software code which provides
operating instructions to the hardware) to interact with the communications port
on the PC in which the LAN adapter or modem is being installed (e.g., the
parallel port, PCMCIA, or CardBus slot). Our leading products are designed by
us to operate with the major operating systems, including Microsoft Windows
2000, Windows 98, Windows 95, Windows NT and Windows 3.1. We have 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 our products. We
believe that our family of 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 our technical advancements and accomplishments since 1989 include:
. Pioneered the use of the PC parallel port for LAN connectivity;
. Participated with Zenith Data Systems and Intel Corp. in the development
of Enhanced Parallel Port ("EPP") technology;
. Were first to ship an Ethernet PC Card LAN adapter;
. Were first to ship a parallel port modem offering higher throughput than
a serial port modem;
. Were first to ship a PC Card combining a LAN adapter and a modem;
. Were first to incorporate full-duplex Ethernet technology in our PC Card
LAN adapters offering up to twice the data throughput on an Ethernet
network;
. Were first to incorporate and ship 100 Mbps Ethernet technology in a PC
Card;
. Were first to ship a 32-bit CardBus adapter for connecting CardBus-
equipped notebook computers to 10 Mbps and 100 Mbps networks;
. Were first to ship a 56 Kbps modem and a 100 Mbps Ethernet adapter on a
single PC Card;
. Were first to ship an Integrated PC Card featuring built-in connectors
and a 56 Kbps modem and a 10/100 Mbps Ethernet on a single PC Card.
Research and Development
We expect customers for our PC Card and port expansion system products to
continue to demand higher speeds and bandwidth. We are focusing our development
efforts on new versions of our Integrated PC Card and PC Card LAN adapters (both
16-bit PC Card and 32-bit CardBus buses), modem-only cards, multifunction cards
and port expansion systems. Such new versions may combine LAN, modem, ISDN,
digital subscriber line, cable modem, local and/or wide area wireless
communications, and home networking technologies.
7 XIRCOM, INC.
<PAGE>
The market for our products is characterized by rapidly changing
technology, short product life cycles and evolving industry standards. We
believe that technical innovation in our products is required to make them more
desirable than other notebook connectivity solutions. Our 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 our products, resulting in lower manufacturing
cost and higher product reliability. We use flash memory in our products to
allow implementation of enhancements or other changes through a download of
software by the user.
Our current research and development efforts include:
. Ongoing feature enhancement of current products;
. Cost reduction of current products;
. Continued development of higher-speed and higher bandwidth PC Cards,
integrated PC Cards and port expansion system modules;
. Continued development of communications adapters in the compact flash
form factor;
. Support for our OEM customers, including continued development of Mini-
PCI adapters; and,
. Development of wearable information accessory products, communications
subsystems and peripherals.
We continue to participate in leading organizations that drive industry
standards. As an active industry participant, we have been able to ensure
interoperability of our products with standard hardware platforms and operating
systems. These organizations include:
. PCMCIA, executive membership;
. Mobile Advisory Council ("MAC"), executive membership;
. Portable Computer and Communications Association ("PCCA");
. International Telecommunications Standards Users Group ("ITSUG") GSM
working party;
. European Telecommunications Standards Institute ("ETSI"), voting member;
. Bluetooth Special Interest Group;
. PCI Special Interest Group, Mini-PCI Working Group;
. USB Implementers Forum;
. IEEE 1384 Committee for high-speed serial expansion busses (FireWire);
. 1394 Trade Association;
. HiperLAN/2 Global Forum; and,
. Compact Flash Association.
We have adopted a Distributed Development Environment ("DDE") to facilitate
the remote physical location of some of our engineers. DDE provides structured
development methodologies and high-speed network links into our corporate
development network. A key component of DDE is the use of our products by the
engineers that develop and support them. It is believed that DDE results in
increased productivity and retention of key employees. Currently, program
participants include engineers located in Austin, Texas; Provo and Alpine, Utah;
and Kontich, Belgium.
Approximately 15% of our 1,500 employees were engaged in research and
development activities as of September 30, 1999. During fiscal years 1999, 1998
and 1997, we incurred research and development expenditures of $23,487,000,
$15,968,000 and $12,799,000, respectively.
8 XIRCOM, INC.
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Marketing
We sell our products primarily through domestic and international
distributors. U.S. distributors include major national distributors of
computers and networking equipment such as Ingram Micro Inc., Tech Data
Corporation and Merisel, Inc., and national reseller organizations such as
MicroAge, Inc. and Inacom Corp. We also sell to a number of original equipment
manufacturer customers including notebook computer manufacturers, such as Dell
Computer Corporation, Gateway Inc., Compaq Computer Corporation ("Compaq"),
International Business Machines ("IBM"), and Toshiba Corporation ("Toshiba"),
and Intel Corporation ("Intel"). Ingram Micro Inc. and Tech Data Corporation
accounted for 19% and 10%, respectively, of net sales for fiscal 1999. In 1998
and 1997, Ingram Micro Inc. accounted for 13% and 17%, respectively, of net
sales.
Internationally, we sell products through a worldwide network of
distributors. International sales (sales to customers outside the U.S.)
comprised 55% of total net sales in fiscal 1999 and 52% of total net sales in
fiscal 1998 and 1997 (see Note Eleven of the accompanying Consolidated Financial
Statements). During the 1999 and prior fiscal years, the majority of our
international sales were denominated in U.S. dollars. Beginning with fiscal
2000, the majority of our international sales are expected to be denominated in
the Euro.
We generally seek to develop the markets for our products through marketing
programs that promote end-user demand. We generate brand recognition through
trade advertising, participation in trade shows and public relations activities.
We have a field sales organization and have expanded our inside
sales/telemarketing function to create demand by calling directly on resellers,
VARs and end-users, but fulfill demand through its distributors. We also have
field sales persons and support engineers to sell our products to OEMs.
Backlog
We manufacture our products to our forecast of near-term demand and
maintain inventories of finished goods and top-level subassemblies to satisfy
customer orders. Product shipments are generally made within one week after
receipt of orders from distributors and within four weeks after receipt of
orders from OEM customers, although some OEM customers submit orders for
scheduled deliveries over a longer period. Under certain circumstances as
specified in applicable agreements, orders from distribution customers may be
cancelable without penalty and OEM customers may reschedule or cancel orders
outside a certain minimum time period. We generally do not seek to maintain any
significant backlog. Backlog was not significant at September 30, 1999 or 1998.
Competition
We believe that the principal competitive factors in the market for our PC
Card adapter products and indirectly competitive products are:
. Brand name recognition;
. Compatibility with many brands of notebook computers and software
applications;
. Quality and reliability;
. Ease of use;
. Low power consumption;
. Price; and,
. Customer support and service.
Additional principal competitive factors in the market for PC Card LAN
adapters and indirectly competitive products are:
. Support of commonly used topologies, network wiring systems and network
operating systems;
. Performance (including data transfer speeds); and,
. Size, especially with respect to the latest subnotebook and sub-handheld
PCs.
9 XIRCOM, INC.
<PAGE>
Additional principal competitive factors for PC Card modems are:
. Support of industry standards; and,
. Performance (primarily throughput, but also error control, connection
maintenance and compression).
The PC Card LAN adapter market has become significantly more competitive,
and is occupied by a number of competitors that have substantially greater
financial, development, manufacturing and marketing resources and market
presence than us, including 3Com Corporation, including its U.S. Robotics and
Megahertz brands (collectively "3Com") and Fujitsu Microelectronics, Inc.
In addition, our branded products compete for end-user customers with Intel
and IBM, which purchase these products through an OEM relationship with us and
market these products under their own brand names.
Other manufacturers of desktop LAN adapters offering PC Card adapters
include Standard Microsystems Corporation, Madge Networks Limited and Olicom
A/S. In the multifunction PC Card market (Ethernet+Modem), the Company's most
significant competitor is 3Com, although other companies, including TDK Systems
("TDK"), Ositech Communications Inc. and New Media, also offer Ethernet+Modem PC
Cards. Intel is also considered a competitor in this market, although they
purchase products through an OEM relationship with us. We are likely to
experience additional competition from large companies that address other
segments of the PC Card market.
Our PC Cards compete indirectly and our port expansion systems compete
directly with companies that provide alternative means to connect notebook
computers to LANs, such as docking stations or port replicators with built-in
networking capabilities. Compaq, Toshiba, IBM, NEC Corporation and others offer
docking stations for some of their notebook PCs. Although docking stations
historically enjoyed some competitive advantage because they provide a broader
range of functionality than just a LAN connection, the standardization provided
by PC Card slots reduces 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 notebook 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, we believe that PC Card solutions for networking notebook
computers will continue to dominate the market because of the performance,
flexibility and range of choices they offer to both users and PC manufacturers.
In the modem-only PC Card market, competition is significant. 3Com holds a
significant market share for PC Card modems and offers a proprietary feature
called XJack, which incorporates a pop out RJ-11 telephone jack into the PC Card
case. Other competitors in this market include Boca Research, Psion Dacom,
Ltd., TDK, and many others, including manufacturers who may hold leading or
significant market shares within specific countries. We believe that we can
continue to leverage our engineering, sales and manufacturing resources with our
RealPort Integrated PC Card 56K modems because of its patented built-in
connector system, as well as market recognition with our Ethernet+Modem
solutions. PC vendors are opting to include modems with their notebook PCs,
however, we believe that enterprise customers will continue to prefer a modem in
a PC Card slot, due to the cost of ownership benefits of standardization and
serviceability.
10 XIRCOM, INC.
<PAGE>
Manufacturing
We believe that high-volume, low-cost manufacturing has become a core
competency in competing effectively in the PC Card market. As a result, we
build all of our PC Card adapters at our manufacturing facility in Penang,
Malaysia. We purchase most key components in Penang directly from third-party
suppliers with local representation. We inspect these components for quality
and performs final assembly, test, packaging and shipping in Penang.
Although we generally use standard parts and components for our products,
certain key components used in our products are currently available from only
one source, and others are available from a limited number of sources.
Components currently available from one source include proprietary Ethernet
chipsets (used in the CreditCard Ethernet and Combo Adapters) fabricated by
Atmel Corp., a Token Ring chipset from Texas Instruments, and a standard modem
chipset (used in all modem and Combo products) from Lucent Technologies. In
addition, other components, including other semiconductor devices, transceivers,
transformers, injection molded plastic parts and metal stampings, are available
or acquired from a single source or a limited number of sources.
Proprietary Rights and Licenses
We seek to protect our intellectual property rights in certain of our
products and technologies through patents, copyrights, trade secrets, and
trademarks. We hold several United States patents relating to the RealPort
Integrated PC Card, parallel port, and PC Card operating, networking and data
transfer technologies. Other U.S. patent applications relating to our current
research and development efforts are in progress. We regularly evaluate the
applicability of our patents to other products of third parties. We have
several license agreements with third parties granting rights related to our
parallel port data transfer technology in return for license fee payments. We
also seek to protect our proprietary rights through a combination of employee
and third party nondisclosure agreements.
Employees
As of September 30, 1999, we employed 1,527 persons, including 384 in
sales, marketing and customer support; 197 in engineering and product
development; 825 in operations; and 121 in finance and other administrative
areas.
Our success depends on our continued ability to attract and retain
qualified personnel. Competition for such personnel in the computer networking
industry is intense and we must provide competitive salary, stock incentive and
benefit packages to attract such personnel. We perform development activities
in Thousand Oaks, California; Austin, Texas; Provo and Alpine, Utah; and,
Kontich, Belgium. None of our employees is represented by a collective
bargaining arrangement. We believe that our relations with our employees are
good.
Factors Affecting Stock Price
As discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 15 to 26 of this document, the market price
of our common stock may fluctuate substantially over short time periods due to a
number of factors, including factors that could affect our future financial
performance. The price may also be affected by factors that influence the
overall market for stocks, or the market for stocks of high technology companies
in particular.
11 XIRCOM, INC.
<PAGE>
Executive Officers of the Registrant
The following presents certain information with respect to our executive
officers and their ages as of November 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Dirk I. Gates 38 Chairman of the Board, President and Chief Executive
Officer
Steven F. DeGennaro 36 Vice President, Finance and Chief Financial Officer
Robert W. (Sam) Bass 53 Senior Vice President, Worldwide Operations
Marc M. Devis 39 Senior Vice President, Worldwide Sales and Marketing
Randall H. Holliday 49 General Counsel and Secretary
</TABLE>
Mr. Gates has served as our Chairman of the Board since January 1995 and as
our President and a Director since its incorporation in November 1988. He has
also served as our Chief Executive Officer since October 1991.
Mr. DeGennaro has served as our Vice President, Finance and Chief Financial
Officer since June 1996. He had previously served from May 1995 to June 1996 as
our Vice President, Finance and Chief Accounting Officer and previously since
January 1994 as our 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-five accounting firm. Mr. DeGennaro is a CPA.
Mr. Bass has served as our Senior Vice President, Worldwide Operations
since August 1997, Vice President, Operations since January 1992. From
September 1990 until joining us, Mr. Bass served as Vice President of Operations
for Fibermux Corporation, a provider of intelligent hubs to the LAN market.
Mr. Devis has served as our Senior Vice President, Worldwide Sales and
Marketing since April 1999, our Senior Vice President, Worldwide Sales since
July 1997, our Senior Vice President, Europe and Asia-Pacific Sales and
Marketing since August 1996 and our Vice President, Europe and Asia-Pacific
Sales and Marketing since January 1995. He had previously served, since June
1991, as Managing Director of Xircom Europe NV.
Mr. Holliday has served as our General Counsel since January 1995. In
December 1993, Mr. Holliday joined us as Corporate Counsel. From March 1990 to
December 1993, Mr. Holliday was Division Counsel of Abex Aerospace Division,
Pneumo Abex Corporation, a manufacturer of aircraft hydraulic components.
Item 2. Properties
Our 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. In December 1999, the
headquarters will be temporarily expanding into 50,000 square feet of a nearby
leased facility. Distribution is conducted in a portion of an adjacent 50,000
square-foot leased facility. We own a manufacturing and distribution facility
in Penang, Malaysia and lease facilities for our European subsidiaries in
Kontich, Belgium; Paris, France; Basingstoke, England; Grassbrunn, Germany; and
Stockholm, Sweden; and facilities for our Asia-Pacific sales and marketing
operations in Singapore; Hong Kong; Tokyo, Japan; and Sydney, Australia. We are
currently negotiating a facilities lease for a new 200,000 square foot permanent
headquarters building to be constructed in Thousand Oaks. We believe our
existing facilities together with our planned facilities expansions, are
adequate for our current needs. Additional facilities proximate to our existing
facilities are also available for lease to meet future needs.
Financial information regarding leases and lease commitments are contained
in Note 10 of Notes to Consolidated Financial Statements.
12 XIRCOM, INC.
<PAGE>
Item 3. Legal Proceedings
No material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Our Common Stock began trading on The Nasdaq Stock Market(SM) on March 31,
1992 under the symbol XIRC. We have not paid cash dividends on its Common Stock
and do not plan to pay cash dividends for the foreseeable future. Under the
terms of our credit agreement, we are prohibited from declaring or paying
dividends without the prior consent of the lender. As of November 1, 1999,
there were 259 holders of record and approximately 14,200 beneficial holders of
our Common Stock. The following table presents the high and low closing stock
price for our Common Stock as quoted on The Nasdaq National Market System.
<TABLE>
<CAPTION>
Fiscal 1999 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First quarter $35-17/32 $ 17-1/2
Second quarter 45-1/4 23-15/16
Third quarter 30-1/16 18-13/16
Fourth quarter $ 47-7/16 $ 30-7/32
<CAPTION>
Fiscal 1998 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First quarter $ 12-3/8 $ 9
Second quarter 14-1/4 9-9/16
Third quarter 17-5/16 13-3/8
Fourth quarter $ 27-1/16 $ 14-3/4
</TABLE>
13 XIRCOM, INC.
<PAGE>
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, 1995 through 1999.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $408,890 $276,056 $184,575 $166,757 $119,528
Cost of sales 228,943 178,426 126,300 107,437 79,048
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 179,947 97,630 58,275 59,320 40,480
Research and development expenses 23,487 15,968 12,799 9,537 13,085
Sales and marketing expenses 81,485 49,882 43,012 32,723 37,086
General and administrative expenses 12,983 9,857 8,259 6,543 7,031
In-process research and development and
other nonrecurring charges/(1)/ 4,596 - 2,163 1,505 5,745
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) from continuing
operations 57,396 21,923 (7,958) 9,012 (22,467)
Other income (expense), net 2,331 4,250 3,172 (1,338) 435
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 59,727 26,173 (4,786) 7,674 (22,032)
Income tax provision (benefit) 16,723 7,852 (1,437) 2,506 (7,000)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations/(1)/ 43,004 18,321 (3,349) 5,168 (15,032)
Discontinued operations:
Operating income (loss), net of income
taxes - - (226) 784 (43,772)
Loss on disposal, net of income taxes - - (6,275) - -
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 43,004 $ 18,321 $ (9,850) $ 5,952 $(58,804)
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share/(1)/:
Continuing operations $1.69 $.78 $ (.16) $ .26 $ (.88)
Net income (loss) $1.69 $.78 $ (.46) $ .30 $ (3.44)
Balance sheet data
Working capital $145,389 $118,625 $ 95,501 $ 34,711 $ 25,909
Total assets $269,318 $195,224 $147,930 $107,201 $ 85,649
Long-term obligations, net of current
portion $ - $ - $ - $ 1,860 $ 597
Shareholders' equity $184,139 $136,718 $113,427 $ 65,603 $ 53,095
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1999 includes $4,596 ($3,309, net of tax benefit) or $.13 per share
for write-off of in-process research and development and other non-recurring
charges. Fiscal 1997 includes $2,163 ($1,514, net of tax benefit) or $.07 per
share for write-off of in-process research and development. Fiscal 1996
includes $1,505 ($1,023 net of tax benefit) or $.05 per share for loss on sale
of Netwave product line. Fiscal 1995 includes $5,745 ($3,561 net of tax
benefit) or $.21 per share for other nonrecurring charges.
14 XIRCOM, INC.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report contains trend analysis and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the trend analysis and other
forward-looking statements contained herein, as a result of the risk factors set
forth below and other cautionary language contained elsewhere in this report.
Results of Operations
- ---------------------
Net Sales
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $408,890 48% $276,056 50% $184,575
</TABLE>
Net sales -- 1999 versus 1998
Net sales increased 48% to $408.9 million in fiscal 1999 from $276.1 million in
fiscal 1998. We derive net sales principally from shipments of Ethernet PC Card
adapters, modems and multifunction Ethernet and modem cards ("Combo cards")
(collectively "adapter products"), which connect notebook PCs to networks, the
Internet and online services. The increase in net sales in 1999 from 1998 was
primarily due to increased shipments of Ethernet PC Cards and Combo cards. We
attribute this increase to growth in overall market demand for local and wide
area network connectivity products and an increase in unit sales of our adapter
products by our distribution customers (the "branded" business) and OEM
customers. We believe this growth in sales of our adapter products in our
branded business and by OEM customers may be indicative of several factors:
. An increased growth rate in shipments of notebook PCs, which in turn require
network and modem connections;
. An increase in the rate that notebook PCs are attached to information
sources;
. Continuing increased market acceptance of our Combo cards and Fast Ethernet
cards; and
. Increased market acceptance of our RealPort Integrated PC Card family of
products.
These increases were partially offset by a decrease in the volume of lower
margin modem-only product sales we made to our OEM customers. Unit shipments of
adapter products increased 47% in 1999 over 1998 but average selling prices
declined due to increased competition in the market for adapter products.
Revenues from our PC Card products as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
(percentage of total revenue) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LAN Adapters 29% 30% 42%
LAN+Modem 59% 48% 43%
Modem 10% 21% 11%
Other 2% 1% 4%
</TABLE>
International sales. Total international sales (shipments to our customers
located outside the U.S.) as a percentage of total sales was 55% in 1999 and 52%
in both 1998 and 1997. Sales of our PC Cards in Europe grew at a faster rate
than in the U.S.
15 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales -- 1998 versus 1997
Net sales increased 50% to $276.1 million in fiscal 1998 from $184.6 million in
fiscal 1997 due to increased shipments of our adapter products. We attribute the
increase in net sales primarily to growth in overall market demand for local and
wide area network connectivity products and an increase in unit sales of our
adapter products by our distribution and OEM customers. During the fourth
quarter of fiscal 1997, we reduced shipments to our distributors in order to
reduce the levels of inventories they hold and to enable us to quickly react to
market changes. Unit shipments of our adapter products increased 54% in 1998
over 1997 but average selling prices declined due to increased competition in
the PC Card LAN adapter market and a greater mix of revenue sold through OEM
partners where ASPs are generally lower.
Gross Profit
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit $179,947 84% $97,630 68% $58,275
Percentage of net sales 44.0% 35.4% 31.6%
</TABLE>
Gross profit -- 1999 versus 1998
Gross profit consists of net sales less cost of sales. Cost of sales includes
materials, labor, manufacturing overhead and other costs of sales. Other costs
of sales include provisions for excess and obsolete inventory, warranty expense
and royalty payments to licensers of software incorporated into our products.
The increase in gross profit as a percent of net sales in 1999 compared to 1998
was primarily attributable to:
. The higher gross margins of our RealPort Integrated PC Card family of
products, which began shipping in the third quarter of fiscal 1998, versus
the comparably featured Type II PC Card products,
. A decrease in our fixed manufacturing costs as a percentage of sales, and
. A decrease in the sales volume of our modem-only products, which typically
generate lower gross profit margins than our other products, and in
particular, reduced sales of modem-only products to our OEM customers, which
generate lower gross profit margins than sales made through our distribution
partners.
Gross profit -- 1998 versus 1997
The increase in gross profit as a percent of net sales in 1998 compared to 1997
was primarily attributable to a decrease in fixed manufacturing costs as a
percentage of sales. In addition, the RealPort Integrated PC Card family of
products, which began shipping in the third quarter of fiscal 1998, has higher
gross margins than the comparably featured Type II PC Card products. This
increase in the gross profit percentage was partially offset by the increase in
modem-only product sales to our OEM customers at lower gross profit margins than
sales made through the Company's distribution partners, and by lower average
selling prices on adapter products.
Research and Development
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $23,487 47% $15,968 25% $12,799
Percentage of net sales 5.8% 5.8% 6.9%
</TABLE>
Our research and development expenses increased in 1999 in absolute dollars
compared to 1998 as a result of our decision to increase staffing and
expenditures to support expanded branded and OEM product offerings, including
our PortStation(TM) port expansion system and the CompactCard(TM) line of
products. Research and
16 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
development expenses increased in 1998 in absolute dollars compared to 1997 as a
result of additional staffing and expenditures to support expanded branded and
OEM product offerings, including our RealPort Integrated PC Card family of
products. We expect total expenditures for research and development to increase
in fiscal 2000 due to our planned expenditures on product enhancements and new
product introductions.
Sales and Marketing
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and marketing $81,485 63% $49,882 16% $43,012
Percentage of net sales 19.9% 18.1% 23.3%
</TABLE>
We increased sales and marketing expenses in 1999 in both absolute dollars and
as a percentage of net sales as compared to 1998 primarily due to:
. Additional staffing and sales and marketing activities required to support
expanded branded markets;
. The opening and operation of a new regional headquarters in Tokyo, Japan;
. Expansion of our OEM sales organization; and
. Expenses to support the launch of new products such as the PortStation(TM)
Port expansion system and the CompactCard(TM) line of products.
As we pursue further product and market expansion activities, we expect sales
and marketing expenses for fiscal 2000 to increase.
Our sales and marketing expenses increased in 1998 and decreased as a percentage
of net sales as compared to 1997. The increase in expenses were due to sales and
marketing activities and additional staffing required to support expanded
branded markets and expansion of our OEM sales organization. Partially
offsetting these increases were the lower sales and marketing expenditures that
generally are associated with OEM sales versus branded business sales, reduced
expenses associated with lower levels of inventories maintained by distributors,
and cooperative advertising reimbursements. Sales and marketing expenses were
higher as a percentage of net sales in 1997 because we reduced the volume of our
shipments to our distributors during the fourth quarter of fiscal 1997 in order
to reduce the levels of inventories they held.
General and Administrative
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General and administrative $12,983 32% $9,857 19% $8,259
Percentage of net sales 3.2% 3.6% 4.5%
</TABLE>
Our general and administrative expenses increased in 1999 as compared to 1998 to
support growth in our organization and, to a lesser extent, continued
expenditures on our information systems hardware and software, including Year
2000 upgrades. During 1998, we initiated modification efforts of computer
software issues associated with the Year 2000 project. We expect general and
administrative expenses to increase during fiscal 2000 due to the need to
support growth in our organization and continued expansion of information
systems hardware and software. In addition, during the first quarter of
fiscal 2000, we expect to incur transaction- and transition-related expenses for
Entrage of approximately $2,500,000 to $3,000,000. See Risk Factors for a
further discussion of our Year 2000 project.
17 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In-process Research and Development and Other Nonrecurring Charges
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In-process research and development
and other nonrecurring charges $4,596 N/A $ - N/A $2,163
Percentage of net sales 1.1% 0.0% 1.2%
</TABLE>
In the fourth quarter of fiscal 1999, we recorded a charge to operations of
$2,364,000 ($1,702,000, net of tax benefit) for future operating lease payments
related to facilities we will vacate, and a charge of $2,232,000 ($1,607,000,
net of tax benefit) for the write-off of in-process research and development in
connection with the purchase of the Rex product line. The total lease payment
accrual is net of expected sublease income and does not include any period in
which we will continue to occupy the facility. The Rex product line was acquired
from Franklin Electronic Publishers Incorporated, a developer and marketer of
handheld electronic reference products. In fiscal 1997, we recorded a charge to
operations of $2,163,000 ($1,514,000, net of tax benefit) for the write-off of
in-process research and development in connection with the purchase of certain
assets from Angia Communications, Inc., a developer and manufacturer of PC Card
products.
We based the amounts allocated to in-process research and development on
established valuation techniques in the high technology industry. At the date of
each acquisition mentioned above, the projects associated with the in-process
efforts had not yet reached technological feasibility and the research and
development in process had no alternative future uses. Accordingly, we charged
these amounts to expense on the respective dates of each acquisition.
Other Income, Net
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other income, net $2,331 (45%) $4,250 34% $3,172
Percentage of net sales 0.6% 1.5% 1.7%
</TABLE>
Net other income includes interest income from the investment of available cash
and net gains on our foreign currency transactions. This amount is offset by
discounts earned by our customers on early payments and losses on disposals of
fixed assets. Our interest income was $4,911,000, $4,256,000 and $2,195,000, and
our net foreign currency transaction gains were $438,000, $1,426,000 and
$2,119,000, in 1999, 1998 and 1997, respectively. Net other income for 1999
decreased as compared to 1998 primarily due to an increase in discounts earned
by our customers on early payments to us and a decrease in gains on our foreign
currency transactions. Net other income for 1998 increased as compared to 1997
primarily due to higher interest income and lower interest expense in 1998 as a
result of increased cash and cash equivalents and reduced borrowings under
credit facilities.
18 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Provision (Benefit)
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax provision (benefit) $16,723 113% $7,852 N/A $(1,437)
Effective tax rate 28.0% 30.0% 30.0%
</TABLE>
Our effective tax rate was 28.0% in 1999 and 30.0% in each of 1998 and 1997. The
difference between our effective tax rates during these years and the 35%
federal statutory tax rate was due primarily to benefits we received from the
tax holiday status of our manufacturing operations in Malaysia, which expires in
2000. We intend to seek renewal of this tax holiday before its expiration but
cannot assure that this renewal will be received. In fiscal 1999 we began using
tax preferred investment vehicles for our cash equivalents to further reduce our
effective tax rate. We expect an effective tax rate of 28% for our 2000 fiscal
year.
Discontinued Operations
Discontinued operations in 1997 include the financial results of Netaccess, our
subsidiary, which included remote access server and multi-port modem products
sold to OEMs and through two-tier distribution channels. On June 30, 1997, we
completed the sale of Netaccess resulting in a loss of $6,275,000, net of income
tax benefit. Operating loss from discontinued operations, net of income taxes,
for 1997 was $226,000.
Net Income
Net income and net income per diluted share for 1999, excluding acquisition-
related costs and other nonrecurring charges, was $46,313,000 and $1.82,
respectively, compared to $18,321,000 and $0.78, respectively, for 1998. Net
income and net income per diluted share for 1999 was $43,004,000 and $1.69,
respectively, compared to $18,321,000 and $0.78, respectively, for 1998.
RISK FACTORS
We face the risk of being unable to remain competitive in the mobile information
access industry.
Companies in the PC, desktop LAN adapter and modem industries with greater
name recognition and greater financial resources than us, have a significant
presence in the PC Card adapter market, including, in particular, 3Com. As a
result, we have faced significant competition in our industry. Actions by our
competitors which continue to influence this competitive environment include
price reductions, new product introductions, promotional efforts, and changes in
the level of channel inventory. We expect competition to remain intense and as a
result, we may lose some of our business to our competitors. Further, we believe
that the market for our products will continue to be price competitive and thus
we could continue to experience lower selling prices, lower gross profit margins
and reduced profitability levels than earned from such products in the past.
We face the risk of being unable to compete if our manufacturing facility
becomes unable to produce our products efficiently.
Our manufacturing facility, located in Malaysia, produces all of our PC Card
adapter products. We may be unable to achieve significant additional
efficiencies from this facility. If we are unable to achieve additional cost
reductions through increased production or manufacturing efficiencies we may be
unable to keep pace with our competitors' cost or price reductions to an extent
necessary to maintain or increase our market share without adversely affecting
gross profit margins. In addition, interruptions in the supply of products
could occur if we are unable to accurately forecast demand levels or react
sufficiently rapidly to changes. This in turn could adversely affect future
sales. We also face risks associated with maintaining production failures
overseas, including management of a distant and remote manufacturing facility,
currency fluctuations and potential instability in the local country. This is
particularly of concern to us in light of recent economic and political
uncertainty in Malaysia and in Asia generally.
19 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We face the risk of declining margins resulting from changes in the mix of
products we sell and in the types of customers to whom we sell.
Certain of our products have lower gross profit margins than others. As a
result, changes in our product mix could result in variations in overall gross
profit margin. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" for a discussion of the relative margins
of our different products. In addition, shipments to our OEM customers
generally result in lower average selling prices and gross profit margins than
sales made through our distribution partners. Furthermore, the increased
percentage of revenue from OEM customers during fiscal 1999 as compared to
fiscal 1998 has resulted in an increased concentration in our customer base.
With this increased customer concentration, we have increased our dependency on
a more limited number of customers at lower average selling prices and gross
profit margins than sales made through our distribution partners. These trends
may continue, as we anticipate a continuing increase in OEM revenues as a
percentage of sales.
We face certain risks as a result of our international sales and manufacturing
activities.
Our sales may be subject to government controls and other risks such as:
. Federal restrictions on export;
. Export licenses;
. Trade restrictions;
. Changes in tariff and freight rates;
. Currency fluctuations; and,
. Political instability.
As a result of recent and potential factors such as currency fluctuations and
economic instability impacting international markets, we could encounter
difficulties in accessing new and existing international markets or experience
increased credit risks. Such credit risks could include insolvency of customers
or other impairments of customers' ability to repay amounts owed to us. These
credit risks could also include insolvency of vendors or other impairments of
vendors' ability to supply materials to us.
Foreign currency fluctuations could adversely affect our results.
We do all our manufacturing at our facility in Malaysia and our European
sales headquarters is located in Belgium. As a result, a significant portion of
our operating expenses are currently denominated in the Malaysian ringgit and
the Belgian franc. The majority of our international sales have been denominated
in U.S. dollars in 1999 and prior fiscal years. However, beginning with fiscal
year 2000, we expect that the majority of our international sales will be
denominated in the Euro. We do not engage in foreign currency hedging
transactions, although we do mitigate our operating expense exposure to some
extent by purchasing in advance a portion of the currency expected to be needed
for overseas operating expenses. Accordingly, our results of operations could be
adversely affected as a result of foreign currency fluctuations. In particular,
in September 1998, the Malaysian government fixed the exchange rate of the
Malaysian currency at 3.8 ringgits per U.S. dollar. Any potential reversion to a
floating exchange rate could have an adverse effect on our results of
operations.
We face the risk of incurring unnecessary expenses if we are unable to
accurately predict sales of our products.
We generally ship products within one to four weeks after receipt of orders.
Therefore, our sales backlog is typically minimal. Accordingly, our expectations
of future net sales are based largely on our own estimates of future demand and
not on firm customer orders. If our net sales do not meet expectations,
profitability would be adversely affected, as we may not be able to reduce
expenses at the same pace in the near term.
20 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We face the risk of a reduction in our sales if we are unable to respond quickly
to changes in demand for our products.
Our net sales can be affected by changes in the quantity of products that our
distributor and OEM customers maintain in their inventories. Due to steps we
took beginning in the fourth quarter of fiscal 1997, we believe that our
distribution partners carry relatively low quantities of our inventory compared
to our competitors'. We also have taken steps, beginning in the second quarter
of fiscal 1999, to reduce the levels of inventory maintained by our OEM
customers. We believe that these actions enable us to react more quickly to
changes in market demand. However, we may also be more directly and more
rapidly affected by changes in the market, including the impact of any slowdown
or rapid increase in end user demand. Despite our efforts to reduce channel
inventory exposure, distribution partners and OEM customers may still choose to
reduce their inventories below current levels, which could cause a reduction in
our net sales.
We face the risk of being unable to compete if we are not able to develop new
products in a timely manner.
Our continued success is dependent on our ability to continue to introduce
new products with advanced features, functionality and solutions that our
customers demand. We may not be able to continue to introduce new products on a
timely basis that are accepted by the market, or that sell through to end users
in quantities sufficient to make the products viable for the long-term. Sales
of our new products may negatively impact sales of existing products. In
addition, we may have difficulty establishing our products' presence in markets
where we do not currently have significant brand recognition.
We face the risk of being unable to manufacture our products because we are
dependent on a limited number of qualified suppliers for our components.
Because of frequent technology changes and rapid industry growth, the cost
and availability of components used to manufacture our products may fluctuate.
Because some components, including custom chipsets, are available from sole
suppliers, we risk having an inadequate supply of components due to a number of
factors, including:
. Supplier manufacturing constraints;
. Excess of demand versus supply;
. National political or economic changes; and,
. Other risks not within our control.
Although we have not experienced any significant parts shortages over the past
year, many components we use require long-lead purchase orders thereby limiting
our flexibility to change order quantities in the event of changes in demand.
Any supply source interruptions, limitations on availability, or inability to
develop alternative sources as needed could adversely affect our ability to
deliver products and, in turn, our future earnings.
21 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We face the risk that rapid technological changes and short product life cycles
in our industry could harm our business.
Rapid technological change and short product life cycles characterize the
industry in which we operate. The industry includes competitors with greater
financial and technical resources than us, including, in particular, 3Com.
While we have historically been successful in developing or integrating leading
technology into our products, ongoing investment in research and development is
required for us to maintain our technological position. We may need to increase
the rate of such investment depending on competitive factors, and we may not be
able to innovate as quickly as our competitors.
If networking capability is included in extension modules to PCs or in the PC
itself, it could result in a reduction in the demand for add-on networking
devices. Our operating results and ability to retain our market share are also
dependent on continued growth in the underlying markets for notebook networking
products, and notebook computers, and the notebook-to-network connection rate.
We face the risk that we could become involved in intellectual property disputes
and may be unable to enforce our intellectual property rights.
We may not be able to protect our intellectual property adequately through
patent, copyright, trademark and other protection. For example, patents issued
to us may not be upheld as valid if litigation over the patent were initiated.
If we are unable to protect our intellectual property adequately, it could allow
competitors to duplicate our technology or may otherwise limit any competitive
technological advantage we may have. Because of the rapid pace of technological
change in the communications industry we believe our success is likely to depend
more upon continued innovation, technical expertise, marketing skills and
customer support and service rather than upon legal protection of our
proprietary rights. However, we will aggressively assert our intellectual
property rights when necessary.
With the proliferation of new products and rapidly changing technology in the
mobile information access market, there has been a significant volume of patents
or similar intellectual property rights held by third parties. Given the nature
of our products and development efforts, there are risks that claims associated
with such patents or intellectual property rights could be asserted against us
by third parties. These risks include the cost of licensing or designing around
a given technology. If a claimant refuses to offer such a license on terms
acceptable to us, there is a risk of incurring substantial litigation or
settlement costs regardless of the merits of the allegations. In the event of
litigation, if we do not prevail we may be required to pay significant damages
and/or to cease sales and production of infringing products.
We currently use software licensed from third parties in certain of our
Combo, modem-only and Token Ring products. Our operating results could be
adversely affected by a number of factors relating to this third-party software,
including:
. Failure by a licensor to accurately develop, timely introduce, promote or
support the software;
. Delays in shipment of our products;
. Excess customer support or product return costs experienced by us due to
errors in licensed software; or,
. Termination of our relationship with such licensors.
We face the risk of being unable to attract and retain qualified managerial and
other skilled personnel.
Our continued success depends, in part, on our ability to identify, attract,
motivate and retain qualified managerial, technical and sales personnel.
Because our future success is dependent on our ability to manage effectively the
enhancement and introduction of existing and new products and the marketing of
such products, we are particularly dependant on our ability to identify,
attract, motivate and retain qualified managers, engineers and salespersons.
The loss of the services of a significant number of our engineers or sales
people or one or more of our senior officers or managers could be disruptive to
our development efforts or business relationships and could seriously harm our
business.
22 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We face the risk of being unable to integrate effectively processes, products or
businesses that we create or acquire.
The recent acquisition of Entrega and certain assets of the Rex product line,
including intellectual property, inventory and fixed assets, from Franklin
Electronic Publishers must be integrated with our existing business structure.
If we fail to integrate Entrega and the Rex assets within our business
effectively or fail to do so with acquisitions that we have made in the past or
may make in the future, we may face disruptions to our business activities and
our business may be seriously harmed.
We face the risk of being unable to renew our tax holiday status in Malaysia.
We have received tax holiday status on our manufacturing operations in
Malaysia. Under this tax holiday, the earnings of our manufacturing subsidiary
are not taxable in Malaysia. This tax holiday expires in 2000, and we cannot be
assured that we will be able to renew or extend this tax holiday.
We face the risk that Year 2000 compliance issues could harm our business.
The Year 2000 issue is the result of computer programs and hardware using two
digits rather than four to define the applicable year. Such computer programs
and hardware may have date-sensitive software or embedded chips that always
assume the century is "19". This could cause miscalculations or failure in our
affected information systems and/or manufacturing equipment. Such system
miscalculations or failure could disrupt our business operations by, for
example, causing a temporary inability to process transactions or engage in our
normal business activities. Such disruptions may also occur if our key suppliers
or customers experience disruptions in their ability to transact with us due to
Year 2000 issues.
Products
We have reviewed and tested our PC Card, PortStation port expansion system,
and Rex products and believe they do not present any Year 2000 issues. Products
associated with the Entrega acquisition had been tested independently by Entrega
prior to our acquisition. Pursuant to that testing, Entrega had issued its own
statement on Year 2000 readiness of its products, in which Entrega noted that
its products were found to be fully Year 2000 compliant. In addition, as part of
our acquisition of the Rex product line, we have, where applicable, secured
representations, warranties, and/or certifications of Year 2000 compliance from
key suppliers of operating software contained in such products, and from parties
selling products to us for our resale. We do not believe any of our products
will present any Year 2000 issues. All of our products are used primarily as
accessories to, and operate in dependence upon, related systems. The related
systems may themselves contain or demonstrate Year 2000 issues. We do not
believe that any such Year 2000 issues in such systems are or may be
attributable to our products.
23 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Internal IT and Non-IT Systems
In relation to our internal systems, our plan to manage the Year 2000 issue
has involved four phases: inventory/assessment, remediation, testing, and
contingency planning.
During late fiscal 1998 through early fiscal 1999, we performed our
inventory/assessment phase which analyzed the major information systems that
could be significantly affected by the Year 2000 issue and we engaged personnel
and resources to resolve potential issues. Through this initial analysis, we
concluded that the Year 2000 issue could be mitigated with respect to our
internal information systems and manufacturing equipment with modifications or
replacements of certain existing software and hardware where necessary or
advisable. Based on our analysis, we determined that we would be required to
modify or replace certain portions of our internal hardware and software so that
those systems would properly use dates beyond December 31, 1999.
Our inventory/assessment plan for both information technology ("IT") and non-
IT systems is essentially completed. As part of the inventory/assessment phase,
we initiated communications to create awareness, both internally and externally,
of the need to identify Year 2000 issues and the risks the issues create. We
have collected and analyzed inventories of systems, equipment, and processes
from our global locations. Based on our inventory/assessment phase, most of our
significant systems were determined to be Year 2000 compliant. The
inventory/assessment indicated, however, that our customer interaction system
could be affected. This system was successfully replaced with a Year 2000
compliant system in May 1999 as part of the remediation phase of our project
noted below.
The remediation phase involves reprogramming or replacing inventoried items.
We have completed the remediation phase with respect to our internal systems'
(IT and non-IT) Year 2000 exposure. Remediation of all systems classified as
"mission critical" was completed by March 31, 1999 and remediation of all
systems classified as "priority" was completed by June 30, 1999. Remediation of
the remaining systems, classified as "low impact", was completed by September
30, 1999.
The testing phase included defining test plans, establishing appropriate test
environments, developing test cases, performing testing with appropriate
personnel, and certifying/documenting the results. The certification process
entailed having applicable in-house subject matter experts (i.e. functional
managers) review test results, including computer screens and printouts, against
pre-established criteria to ensure system(s) compliance. Additionally, in
relation to equipment used in our manufacturing lines, we engaged qualified
personnel from the applicable equipment manufacturer to perform run time on-site
testing in our manufacturing facility of the given manufacturer's equipment.
Services performed by such equipment manufacturer personnel included
installation of any applicable patches, upgrades, or other modifications, if
any, as necessary to ensure full Year 2000 compliance on the applicable
manufacturer's equipment. As of September 30, 1999, our testing phase was
substantially completed.
We are developing a contingency plan for organizing responses in case of
shutdown of certain of our critical applications due to Year 2000 issues. This
contingency plan involves, among other things, IT and non-IT systems and
external systems. In addition, we have initiated plans to secure certain
contingent levels of key materials and components for stocking purposes near the
end of calendar year 1999. These efforts are intended to provide for any
unanticipated disruption in the supply chain affecting suppliers of designated
critical components. We believe that the most likely worst case of a Year 2000-
related failure within systems we manage, given our state of readiness today,
would be a temporary (i.e. recoverable and correctable) loss of 10% of our
internal IT capability with no material impact on our ability to conduct normal
revenue-generating operations.
External relationships
Our global operations rely heavily on the infrastructures within the
countries in which they do business. The Year 2000 readiness within
infrastructure suppliers (utilities, government agencies, and shipping
organizations) will be crucial to our ability to avoid disruption of operations.
We have queried our significant suppliers regarding their Year 2000
readiness. To date, we are not aware of any such significant supplier with a
Year 2000 issue that would materially affect our operating results. While we
have no means of ensuring that all of our significant suppliers will be Year
2000 ready, we performed secondary evaluations, of our most critical suppliers
including site visits where deemed necessary, and found no Year 2000 issues that
we believe would lead to an interruption of our manufacturing schedules. We
could be materially impacted if our significant suppliers are unable to resolve
their Year 2000 issues in a timely fashion. The adverse effect on us of non-
compliance by these parties could adversely affect us.
Costs
We have used both internal and external resources to replace, test and implement
IT and non-IT systems needing Year 2000 modifications. The total cost of the
Year 2000 project has been approximately $1.4 million and was funded by cash
flows from operations. Of the amounts incurred, approximately $660,000 was
expensed and $702,000 was capitalized for new software. As our Year 2000 efforts
are substantially complete, we do not expect to incur significant future costs
related to this project.
24 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of September 30, 1999 we had $134.3 million in cash and cash equivalents.
Our continuing operating activities provided cash of approximately $66.1 million
in 1999, primarily due to net income and increases in accounts payable and other
accrued liabilities, partially offset by increases in accounts receivable,
inventories and other current assets. Income taxes payable increased primarily
due to the timing of payments for income taxes. Accounts payable and other
accrued liabilities increased primarily due to the timing of payments for
component inventory purchases. Accounts receivable increased due to higher
fourth quarter net sales in 1999 versus that of 1998. Other current assets
increased due to a deposit paid during fiscal 1999 for securing contingent
rights to use certain intangible assets. Our use of these rights was contingent
upon approval of the transfer of these rights by the court having jurisdiction
over the assets. In September 1999 the court denied such approval and we became
entitled to a refund of the deposit, which was received in October 1999.
We used $42.0 million in cash in investing activities in 1999, primarily for
capital expenditures and for an acquisition. The capital expenditures were for
the purchase of manufacturing equipment for use in our Penang, Malaysia
facility, information systems hardware and software, and equipment for increased
headcount. We used $13.3 million in cash to acquire the Rex product line from
Franklin Electronic Publishers Incorporated. We have no material fixed
commitments and do not expect an increase in the rate of capital expenditures in
the normal course of business during fiscal 2000.
Our financing activities provided $4.3 million in cash in 1999, primarily for
the repurchase of capital stock offset by the issuance of capital stock through
our stock option and employee stock purchase plans. On February 18, 1999, Intel
Corporation exercised its warrant to purchase additional shares of our common
stock. Under the terms of the warrant agreement, Intel elected to receive
514,314 shares at no additional cost in lieu of purchasing 1,509,903 shares at
an exercise price of $27.01. Concurrent with the warrant exercise, we
repurchased 514,314 shares of common stock held by Intel for a total price of
$19.8 million, or $38.45 per share. We generated cash of $15.6 million from the
issuance of capital stock through our stock option and employee stock purchase
plans.
We have a bank credit facility for borrowings up to $25.0 million. Loans under
the agreement are secured by all of our U.S.-based assets. The agreement
expires in December 2000. We also have credit facilities totaling $5.3 million,
denominated in Malaysian ringgits, with banks in Malaysia. We had no borrowings
outstanding and approximately $30.3 million in borrowings available under our
credit facilities as of September 30, 1999.
We announced on November 5, 1999 our intention to file a registration statement
with the Securities and Exchange Commission for an underwritten public offering
of approximately 3,500,000 shares of Common Stock. In the announcement, we
indicated that we plan to file the registration statement during November
25 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1999. Proceeds of the offering would be used for general corporate purposes and
potentially for acquisition opportunities that may arise in the future.
We believe that cash on hand, borrowings available under our existing facilities
or from other financing sources and cash provided by operations will be
sufficient to support our working capital and capital expenditure requirements
for at least the next twelve months. However, we cannot assure that future cash
requirements to fund operations will not require us to seek additional capital
sooner than the twelve months, or that such additional capital will be available
when required on terms acceptable to us.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about our market risk disclosures involves forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements.
Given the short-term nature of our portfolio of highly liquid cash equivalents,
and that we have no borrowings outstanding, we are not subject to significant
interest rate risk.
We manufacture our products in Malaysia and sell our products worldwide. Our
financial results, therefore, could be significantly impacted by factors such as
changes in foreign currency exchange rates and weak economic conditions in
foreign markets. Our operating results are exposed to the impact of weakening
economic conditions in the countries in which we sell our products.
Since the majority of our sales are denominated in U.S. dollars, our foreign
operations are net payers of currencies other than the U.S. dollar, particularly
the Malaysian ringgit and the Belgian franc. As such, our operating results may
be adversely affected by the impacts of a stronger Malaysian ringgit or Belgian
franc relative to the U.S. dollar. To mitigate the short-term effect of changes
in currency exchange rates on our foreign currency based expenses, we purchase
and hold Malaysian ringgits and Belgian francs in advance of the due date of the
underlying obligations. We do not otherwise engage in any foreign currency risk
hedging activity.
26 XIRCOM, INC.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Xircom, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Fiscal Years Ended September 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $408,890 $276,056 $184,575
Cost of sales 228,943 178,426 126,300
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 179,947 97,630 58,275
Research and development expenses 23,487 15,968 12,799
Sales and marketing expenses 81,485 49,882 43,012
General and administrative expenses 12,983 9,857 8,259
In-process research and development and
other nonrecurring charges 4,596 - 2,163
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 122,551 75,707 66,233
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss) from continuing operations 57,396 21,923 (7,958)
Other income, net 2,331 4,250 3,172
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes 59,727 26,173 (4,786)
Income tax provision (benefit) 16,723 7,852 (1,437)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 43,004 18,321 (3,349)
Discontinued operations:
Operating loss, net of income taxes - - (226)
Loss on disposal, net of income taxes - - (6,275)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 43,004 $ 18,321 $ (9,850)
- ----------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Continuing operations $ 1.80 $ .80 $ (.16)
Discontinued operations - - (.30)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.80 $ .80 $ (.46)
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Continuing operations $ 1.69 $ .78 $ (.16)
Discontinued operations - - (.30)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.69 $ .78 $ (.46)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes 27 XIRCOM, INC.
<PAGE>
Xircom, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share and per share information)
September 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $134,294 $105,796
Accounts receivable, net of allowances for sales returns and
bad debts of $11,201 ($8,492 in 1998) 36,832 29,280
Income tax receivable 300 285
Inventories 20,840 16,121
Deferred income taxes 15,195 11,659
Prepaid expenses and other current assets 9,447 4,874
- --------------------------------------------------------------------------------------------------------------------
Total current assets 216,908 168,015
Property and equipment, net 39,864 26,730
Other assets 12,546 479
- --------------------------------------------------------------------------------------------------------------------
Total assets $269,318 $195,224
- --------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 27,824 $ 17,269
Accrued liabilities 39,743 28,813
Accrued income taxes 3,952 3,308
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 71,519 49,390
Deferred income taxes 13,660 9,116
Commitments and contingencies
Shareholders' equity:
Preferred Stock, 2,000,000 shares authorized, none issued - -
Common Stock, $.001 par value, 50,000,000 shares authorized;
24,297,420 shares outstanding at September 30, 1999
(23,081,374 in 1998) 24 23
Paid-in capital 150,278 145,862
Retained earnings (accumulated deficit) 33,837 (9,167)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 184,139 136,718
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $269,318 $195,224
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes 28 XIRCOM, INC.
<PAGE>
Xircom, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
----------------- Paid-in (Accumulated
(In thousands) Shares Amount Capital Deficit) Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 19,731 $20 $ 83,221 $(17,638) $ 65,603
Issuance of Common Stock 2,516 3 51,358 - 51,361
Issuance of Common Stock under
Employee Stock Purchase Plan 125 - 1,259 - 1,259
Exercise of stock options 450 - 4,050 - 4,050
Tax benefit related to employee stock
options - - 1,062 - 1,062
Repurchase of Common Stock, net (150) - (58) - (58)
Net loss - - - (9,850) (9,850)
- ----------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 22,672 23 140,892 (27,488) 113,427
Issuance of Common Stock under
Employee Stock Purchase Plan 160 - 1,370 - 1,370
Exercise of stock options 249 - 2,688 - 2,688
Tax benefit related to employee stock
options - - 912 - 912
Net income - - - 18,321 18,321
- ----------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 23,081 23 145,862 (9,167) 136,718
Issuance of Common Stock under
Employee Stock Purchase Plan 123 - 2,066 - 2,066
Repurchase of Common Stock (514) - (19,775) - (19,775)
Exercise of stock warrants 514 - - - -
Exercise of stock options 1,093 1 13,492 - 13,493
Tax benefit related to employee stock
options - - 8,549 - 8,549
Compensation expense related to stock
options - - 84 - 84
Net income - - - 43,004 43,004
- ----------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 24,297 $24 $150,278 $ 33,837 $184,139
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes 29 XIRCOM, INC.
<PAGE>
Xircom, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
Fiscal Years Ended September 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) from continuing operations $ 43,004 $ 18,321 $ (3,349)
Adjustments to derive cash flows from continuing
operating activities:
Depreciation and amortization 13,658 7,955 6,499
Deferred income taxes 1,008 4,053 2,043
Foreign currency exchange gains, net (438) (1,426) (2,119)
In-process research and development and other
nonrecurring charges 4,596 - 2,163
Loss on disposal of fixed assets 320 153 320
Other 85 3 -
Changes in assets and liabilities, net of the effect of
acquisitions and disposition:
Accounts receivable (9,547) (18,383) 14,109
Income tax receivable (15) 4,721 (2,354)
Inventories (1,810) 12,841 (15,191)
Prepaid expenses and other current assets (4,573) (2,398) 854
Accounts payable and accrued liabilities 19,186 17,709 1,996
Income taxes payable 644 2,363 (121)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 66,118 45,912 4,850
Net cash used in discontinued operating activities - - (5,984)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 66,118 45,912 (1,134)
Investing activities
Purchases of property and equipment (26,855) (17,964) (6,437)
Proceeds from sale of fixed assets 113 203 35
(Increase) decrease in other assets (1,960) 107 (17)
Proceeds from sale of Netaccess, Inc. - - 11,000
Cash paid for acquisition (13,250) - (1,463)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing investing (41,952) (17,654) 3,118
activities
Net cash used in discontinued investing activities - - (501)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (41,952) (17,654) 2,617
Financing activities
Proceeds from issuance of common stock 15,558 4,058 56,612
Tax benefit related to employee stock options 8,549 912 1,062
Repurchase of Common Stock (19,775) - -
Proceeds from issuance of debt obligations - - 960
Repayment of debt obligations - (2,541) (6,385)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,332 2,429 52,249
Net increase in cash and cash equivalents 28,498 30,687 53,732
Cash and cash equivalents at beginning of period 105,796 75,109 21,377
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $134,294 $105,796 $ 75,109
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes 30 XIRCOM, INC.
<PAGE>
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, develops, manufactures, markets and supports products that
enable users to connect mobile and remote notebook and handheld computers to
corporate networks, the Internet, intranets and other online resources from a
variety of locations.
Reclassifications
Certain reclassifications of previously reported amounts have been made to
conform to the current year's presentation.
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 which approximates market value. Beginning in 1999, the
Company changed its investment strategy and began investing its excess cash
balances primarily in tax preferred investment vehicles. Interest income
totaled $4,911,000, $4,256,000 and $2,195,000 for fiscal 1999, 1998 and 1997,
respectively, and is included in Other income, net in the accompanying
Consolidated Statements of Operations.
Concentration of credit risk
The Company sells its products primarily through two-tier distributors or
original equipment manufacturers. The Company makes periodic evaluations of the
creditworthiness of its customers and generally does not require collateral. To
date, the Company has not experienced any material bad debts or collection
problems. As of September 30, 1999 and 1998, three customers accounted for a
total of 35% and 34%, respectively, of total trade accounts receivable. The
carrying amounts reported in the balance sheets for accounts receivable and
accounts payable approximate their fair value.
Inventories
Inventories are carried at the lower of cost (determined on a first-in, first-
out basis) or market.
Property and equipment
Property and equipment is 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 ten years. Leasehold improvements are amortized
using the straight-line method over the term of the related lease or the useful
life of the asset, whichever is shorter.
Revenue recognition
The Company recognizes revenue from product sales when shipped. The Company
makes a provision for the estimated amount of product returns or credits that
may occur under these contracts in the period of sale and has a policy of
reserving channel inventory held by its customers in excess of one month supply.
The Company also has contractual agreements that permit distributors and dealers
to return products or receive price protection credits under certain
circumstances. 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. The Company makes
provisions for these costs in the period of sale. In addition, the Company
provides telephone support to purchasers of its products as needed to assist
them in installation or use of the products.
31 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Research and development
Research and development costs are expensed as incurred.
Advertising costs
The Company expenses advertising costs as incurred. Advertising expense, net,
totaled $9,758,000, $3,860,000 and $4,753,000 for fiscal 1999, 1998 and 1997,
respectively.
Nonrecurring charges
In the fourth quarter of fiscal 1999, the Company recorded a charge to
operations of $2,364,000 ($1,702,000, net of tax benefit) for future operating
lease payments related to facilities it will vacate, and a charge of $2,232,000
($1,607,000, net of tax benefit) for the write-off of in-process research and
development in connection with the purchase of the Rex product line (see Note
Thirteen). The total lease payment accrual is net of estimated sublease income
and does not include any period in which the Company will continue to occupy the
facility.
In fiscal 1997, the Company recorded a charge to operations of $2,163,000
($1,514,000, net of tax benefit) for the write-off of in-process research and
development in connection with the purchase of certain assets from Angia
Communications, Inc. (see Note Thirteen).
Foreign currency exchange gain
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. The majority of the Company's sales are denominated in U.S. dollars.
Net gains from foreign currency transactions and re-measurement totaled
$438,000, $1,426,000 and $2,119,000 for fiscal 1999, 1998 and 1997,
respectively, and are recognized currently in the Consolidated Statements of
Operations.
Earnings per share
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 stock options
and other dilutive securities resulted in the issuance of common stock. The
weighted average number of shares used for basic and diluted earnings per share
were as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of shares--basic 23,895,000 22,834,000 21,560,000
Effect of dilutive securities:
Employee stock options 1,432,000 508,000 -
Warrant 86,000 - -
- ----------------------------------------------------------------------------------------------------------------------
Diluted 25,413,000 23,342,000 21,560,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain shares issuable under stock options in fiscal 1999, 1998 and 1997, and
warrants of 1,509,903 in fiscal 1998 and 1997 have been excluded from the
computation of diluted earnings per share because the effect would be
antidilutive.
32 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effects of recent accounting pronouncements
In June 1997, Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information ("SFAS 131") was issued.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers, as presented in Notes One and Eleven.
Based on the provisions of SFAS 131 and the manner in which management analyzes
its business, the Company has determined that it has two separately reportable
operating segments, as presented in Note Eleven.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1, which was
adopted as of the beginning of fiscal 1999, requires capitalization of certain
costs incurred in connection with developing or obtaining internal use software.
The Company's previous accounting policy for internal use software was generally
consistent with the requirements of SOP 98-1. Accordingly, the adoption of SOP
98-1 did not have a significant impact on the Company's operating results or
financial position.
In June 1998, Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133") was issued, which
the Company is required to adopt effective October 1, 2000. Subsequently,
Statement No. 137, Accounting for Derivative Instruments and Hedging Activities-
- -Deferral of the Effective Date of FASB Statement No. 133 was issued, which
deferred the effective date of SFAS 133 for one year. SFAS 133 will require the
Company to record all derivatives as assets or liabilities at fair value. Gains
or losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivatives and whether it qualifies
for hedge accounting. The impact of SFAS 133 on the Company's financial
statements will depend on a variety of factors, including, the extent of the
Company's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. The effect of adopting SFAS 133 is currently
being evaluated, however, the Company does not believe the effects of adoption
will be material to its financial position or results of operations.
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Rapid technological change and short product life cycles
characterize the industry in which the Company operates. As a result, estimates
are required to provide for product returns, price protection, product
obsolescence and warranty returns. Historically, actual amounts recorded under
these programs have not varied significantly from estimated amounts. Actual
results may differ, however, from those estimates, although management does not
believe that any differences would materially affect the Company's financial
position or reported results.
Stock options
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant. The Company generally awards options for a fixed
number of shares at an option price equal to the fair value at the date of
grant. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." See Note Eight.
33 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE TWO: DISCONTINUED OPERATIONS
On March 31, 1997, the Company decided to discontinue its multi-port modem and
remote access server business, and on June 30, 1997, completed the sale of
Netaccess, Inc. ("Netaccess"), its remote access server subsidiary. Proceeds of
the sale were $11,000,000. Net sales of discontinued operations were
$13,185,000 for the year ended September 30, 1997. The accompanying financial
statements have been prepared to reflect the historical results of operations
and cash flows of Netaccess as discontinued operations for all periods
presented. See Note Nine for cash flow information for the discontinued
operations.
NOTE THREE: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $12,139 $ 4,165
Sub-assemblies 492 1,092
Work-in-process 3,578 5,383
Component parts 4,631 5,481
- ----------------------------------------------------------------------------------------------------------------------
$20,840 $16,121
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOUR: PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,300 $ 541
Building and improvements 4,709 3,925
Leasehold improvements 6,873 6,235
Equipment 53,024 34,082
Furniture and fixtures 4,671 3,676
- -----------------------------------------------------------------------------------------------------------------------
70,577 48,459
Less accumulated depreciation and amortization (30,713) (21,729)
- -----------------------------------------------------------------------------------------------------------------------
$ 39,864 $ 26,730
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FIVE: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payroll and related benefits $ 8,420 $ 6,828
Warranty reserve 8,751 6,225
Accrued marketing costs 6,162 5,567
Other 16,410 10,193
- ----------------------------------------------------------------------------------------------------------------------
$39,743 $28,813
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE SIX: BANK BORROWINGS
The Company has a credit facility with a bank for borrowings up to $25,000,000
at the prime rate or at a LIBOR-based rate. Loans under the agreement are
secured by all U.S.-based assets of the Company. The agreement expires in
December 2000. As of September 30, 1999, there were no borrowings outstanding
34 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the agreement. The Company has credit facilities, denominated in Malaysian
ringgit, with other banks that permit borrowings of up to $5,300,000 under
bankers acceptance agreements at the banks' prevailing market rate, and on a
revolving credit and term loan basis at the banks' reference rate plus 1.0%
(7.8% as of September 30, 1999). As of September 30, 1999, no amounts were
outstanding under these credit facilities.
The Company had approximately $30,271,000 available under its credit facilities
as of September 30, 1999. Interest expense totaled $9,000, $56,000 and $478,000
for fiscal 1999, 1998 and 1997, respectively, and is included in Other income,
net.
NOTE SEVEN: INCOME TAXES
The income tax provision (benefit) includes the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 12,164 $ 441 $(3,785)
State 1,627 351 -
Foreign 3,440 2,516 945
- ------------------------------------------------------------------------------------------------------------------------
17,231 3,308 (2,840)
Deferred:
Federal 1,515 4,544 1,403
State 447 752 (1,754)
Valuation allowance (2,470) (752) 1,754
- ------------------------------------------------------------------------------------------------------------------------
(508) 4,544 1,403
- ------------------------------------------------------------------------------------------------------------------------
$ 16,723 $7,852 $(1,437)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
September 30 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Book reserves not deductible for tax $ 14,632 $ 11,302
Book in excess of tax depreciation 1,517 1,246
Net operating loss carryforward and credit - 3,155
- -----------------------------------------------------------------------------------------------------------------------
Total deferred tax asset 16,149 15,703
Valuation allowance - (2,470)
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax asset, net 16,149 13,233
- -----------------------------------------------------------------------------------------------------------------------
Foreign operations (12,489) (9,662)
Other (609) (1,028)
- -----------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (13,098) (10,690)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 3,051 $ 2,543
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Balance sheet classification of the net deferred tax asset is as follows (in
thousands):
<TABLE>
<CAPTION>
September 30 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax asset $ 15,195 $ 11,659
Noncurrent deferred tax asset, included in Other assets 1,516 -
Noncurrent deferred tax liability (13,660) (9,116)
- -----------------------------------------------------------------------------------------------------------------------
$ 3,051 $ 2,543
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
35 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In prior years, the Company established a valuation allowance against its state
net operating loss carryforwards to reflect the uncertainty of realizing such
deferred tax assets. In fiscal 1998, the valuation allowance was reduced due to
the realization of certain of these loss carryforwards. In fiscal 1999, the
remainder of the loss carryforwards was realized and, accordingly, the related
valuation allowance of $2,470,000 was eliminated. A reconciliation of the
provision (benefit) for income taxes with the tax (benefit) computed by applying
the 35% federal statutory tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax (benefit) $ 20,905 $ 9,160 $(1,675)
State income taxes, net of federal benefit 1,272 227 -
Research and development credit (832) (1,082) -
Foreign operations (1,302) 280 (566)
Valuation allowance on deferred tax asset (2,470) (793) 680
Tax exempt interest income (936) - -
Other 86 60 124
- -------------------------------------------------------------------------------------------------------------------------
$ 16,723 $ 7,852 $(1,437)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, foreign earnings of $40,382,000 have been retained
indefinitely by subsidiary companies for reinvestment, on which no additional
U.S. tax has been provided. If repatriated, additional taxes of approximately
$13,766,000 on these earnings, net of available foreign tax credit
carryforwards, would be due. The Company has tax holiday status on its
operations in Malaysia, which expires in 2000. Income before income taxes for
all foreign operations was $23,837,000, $17,337,000 and $12,282,000 for fiscal
1999, 1998 and 1997, respectively.
NOTE EIGHT: COMMON STOCK AND RELATED PLANS
The Company's Stock Option Plan (1992 Plan), as amended, authorizes a total of
up to 7,500,000 shares of Common Stock for issuance as either incentive stock
options with exercise prices which may not be less than fair market value at the
date of grant, or nonqualified stock options. The options generally vest over
three to four years and have terms of five to seven years. The 1992 Director
Stock Option Plan (Director Plan) provides for the grant of nonqualified options
for a total of up to 725,000 shares of Common Stock to non-employee members of
the Board of Directors. The options are granted at fair market value as of the
date of grant and vest over a four-year period. The 1995 Stock Option Plan
authorizes a total of up to 1,049,857 shares of Common Stock for issuance as
nonqualified stock options with vesting rights similar to the 1992 Plan. The
Patent Award Stock Option Plan authorizes a total of up to 250,000 shares of
Common Stock for issuance as nonqualified stock options with vesting periods
similar to the 1992 Plan. As of September 30, 1999, the Company had 1,229,090
shares of common stock available for future grant under its stock option plans.
Information regarding stock options outstanding as of September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Contractual Exercise
Shares Price Life (Years) Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $14.00 1,538,410 $11.44 4.43 619,340 $11.30
$14.00-$25.00 2,044,185 $18.88 6.01 166,437 $15.85
Over $25.00 877,553 $34.11 6.99 7,180 $27.08
</TABLE>
36 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 1999, 1998 and 1997, stock options to purchase 792,957,
1,002,368 and 568,030 shares were exercisable at weighted average exercise
prices of $12.40, $12.52 and $11.32, respectively. The following table is a
summary of activity for the Company's stock option plans:
<TABLE>
<CAPTION>
Option price per share
-----------------------------------------
Number of Weighted-
shares Low High Average
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at October 1, 1996 2,319,494 $ 1.29 $17.13 $11.04
Granted 1,428,900 $ 8.63 $29.00 $14.17
Exercised (449,493) $ 1.29 $15.50 $ 9.01
Canceled (593,777) $ 1.86 $29.00 $13.42
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1997 2,705,124 $ 7.63 $27.75 $12.48
Granted 1,514,200 $ 9.00 $26.00 $12.42
Exercised (249,516) $ 7.63 $20.25 $10.78
Canceled (380,586) $ 8.63 $27.75 $12.42
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1998 3,589,222 $ 8.63 $27.75 $12.57
Granted 2,437,420 $17.50 $46.94 $25.18
Exercised (1,093,177) $ 8.63 $27.75 $12.34
Canceled (473,317) $ 9.06 $35.31 $13.77
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1999 4,460,148 $ 8.63 $46.94 $19.31
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's 1994 Employee Stock Purchase Plan (ESPP) allows employees to
purchase Common Stock of the Company, through payroll deductions, at 85% of the
market value of the shares at the beginning or end of the offering period,
whichever is lower. The plan provides for the grant of rights to employees to
purchase up to a total of 1,400,000 shares of common stock. As of September 30,
1999, 818,627 shares were available for issuance under this plan. Information
regarding shares issued under the plan is as follows:
<TABLE>
<CAPTION>
Price per share
-------------------------
Number of
Fiscal Years Ended September 30 shares issued Low High
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 122,869 $14.66 $19.13
1998 160,036 $ 8.50 $ 8.61
1997 124,782 $ 7.86 $14.45
</TABLE>
Had the Company recognized employee stock option-related compensation expense in
accordance with SFAS 123 and used the Black-Scholes option valuation model for
determining the weighted average fair value of options granted after September
30, 1995, its net income (loss) and earnings (loss) per share would have been as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 43,004 $ 18,321 $ (9,850)
Pro forma stock compensation expense, net (6,638) (3,495) (2,056)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 36,366 $ 14,826 $(11,906)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma basic earnings (loss) per share $ 1.52 $ .65 $ (.55)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma diluted earnings (loss) per share $ 1.47 $ .65 $ (.55)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
37 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The pro forma effect on net
income (loss) for fiscal 1999, 1998 and 1997 is not representative of the pro
forma effect on net income (loss) in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
fiscal 1996. Pro forma information in future years will reflect the
amortization of a larger number of stock options granted in succeeding years.
The fair value of the options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1999, 1998 and 1997: risk-free interest rates of 5.04%, 5.55% and 6.10%,
respectively; dividend yields of 0%; volatility factors of the expected market
price of the Company's common stock from .60 to .67; and expected life of the
options of 4 years. These assumptions resulted in weighted-average fair values
of $13.75, $6.85 and $7.30 for each stock option granted in 1999, 1998 and 1997,
respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
On February 28, 1997, the Company sold to Intel Corporation 2,516,405 newly
issued shares of the Company's common stock (representing a 12.5 percent
interest at the date of issuance) and a warrant to purchase an additional
1,509,903 newly issued shares of the Company's common stock. In consideration,
the Company received net cash proceeds of $51,361,000. On February 18, 1999,
Intel exercised its warrant and, pursuant to the terms of the warrant agreement,
elected to receive 514,314 shares at no additional cost in lieu of purchasing
1,509,903 shares at an exercise price of $27.01. Concurrent with the warrant
exercise, Xircom repurchased 514,314 shares of common stock held by Intel for a
total price of $19,775,000, or $38.45 per share. As of September 30, 1999,
Intel owned 2,516,405 shares of the Company's common stock.
During fiscal 1997, the Company purchased 150,000 shares of Common Stock from a
director of the Company, with substantially all of the proceeds contributed by
the director to the Company as capital.
The Company maintains a defined contribution 401(k) plan under which its U.S.
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company makes matching contributions based on a participant's
contribution up to a specified maximum percentage of the participant's
contribution. Participants vest in the Company's contributions based on years
of service. Company contributions were $370,000, $261,000 and $174,000 for
fiscal 1999, 1998 and 1997, respectively.
NOTE NINE: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 (in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid:
Interest $ 9 $ 56 $ 491
Income taxes $7,534 $807 $ 82
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
38 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net cash used in 1997 in discontinued operating activities of $5,984,000 was
comprised of loss from discontinued operating activities of $6,501,000,
depreciation and amortization of $1,777,000, deferred income taxes of $2,329,000
and change in net assets of discontinued operations of $1,069,000. Cash flows
from investing activities of discontinued operations of $501,000 were the result
of purchases of equipment and improvements.
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 $1,604,000, $1,649,000
and $1,512,000 for fiscal 1999, 1998 and 1997, respectively. As of September
30, 1999, minimum future rental payments under all noncancelable operating
leases for facilities and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Fiscal Year Ended September 30 leases
- -----------------------------------------------------------------------------------
<S> <C>
2000 $ 2,743
2001 2,529
2002 2,140
2003 2,053
2004 2,100
Thereafter 3,294
- -----------------------------------------------------------------------------------
$14,859
- -----------------------------------------------------------------------------------
</TABLE>
Future minimum rentals to be received under noncancelable subleases as of
September 30, 1999 totaled $269,000.
Under certain license agreements (see Note One), the Company is required to pay
specified amounts of per unit royalties based on sales of certain of its
products. Some of these agreements also contain minimum quarterly and annual
volume requirements. Certain of these agreements expire on specific dates,
others continue in effect as long as the technology is incorporated into the
Company's products, and some can be terminated by either party after specified
notice periods. Royalties under these agreements amounted to $569,000,
$640,000, and $740,000 for fiscal 1999, 1998 and 1997, respectively.
The Company is involved in certain claims and legal proceedings that 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 two industry segments within its business of the design,
development, manufacture, marketing and support of mobile information access
products for notebook computers and handheld devices. For management purposes,
the Company is divided into two primary business segments: the "OEM" business,
which includes operations specific to the Company's domestic and international
original equipment manufacturer customers, and the "Branded" business, which
includes operations specific to the Company's domestic and international
distribution customers. The Company sells most of its products in each of its
segments. The OEM business has a vice president who reports directly to the
Senior Vice President of Worldwide Sales and Marketing ("SVP"), and the Branded
business has three vice presidents, each of whom report directly to the SVP.
The SVP reports directly to the Chief Executive Officer ("CEO"), who is the
Chief Operating Decision Maker as defined by SFAS 131. The measures of
profitability reviewed by the CEO for these segments consist of net sales, gross
profit, and certain identifiable operating expenses. The majority of the
Company's operating expenses are not allocated to these segments, but are
treated as corporate expenses
39 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unallocated). Fiscal year 1999, 1998 and 1997 revenues and expenses
attributable to each business segment are presented in the table below. In
addition, there is no allocation, direct or indirect, of assets and liabilities
to these business segments. The Company had no inter-segment sales during the
periods presented.
<TABLE>
<CAPTION>
(in thousands) Branded OEM Unallocated Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Net sales $334,833 $74,057 $ - $408,890
Cost of sales 177,167 51,776 - 228,943
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 157,666 22,281 - 179,947
Research and development expenses - - 23,487 23,487
Sales and marketing expenses 66,857 3,863 10,765 81,485
General and administrative expenses - - 12,983 12,983
In-process research and development and other
nonrecurring charges - - 4,596 4,596
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 66,857 3,863 51,831 122,551
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 90,809 18,418 (51,831) 57,396
Other income, net - - 2,331 2,331
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes $ 90,809 $18,418 $(49,500) $ 59,727
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Net sales $221,461 $54,595 $ - $276,056
Cost of sales 132,840 45,586 - 178,426
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 88,621 9,009 - 97,630
Research and development expenses - - 15,968 15,968
Sales and marketing expenses 40,236 2,365 7,281 49,882
General and administrative expenses - - 9,857 9,857
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 40,236 2,365 33,106 75,707
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 48,385 6,644 (33,106) 21,923
Other income, net - - 4,250 4,250
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes $ 48,385 $ 6,644 $(28,856) $ 26,173
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
Net sales $167,212 $17,363 $ - $184,575
Cost of sales 112,219 14,081 - 126,300
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 54,993 3,282 - 58,275
Research and development expenses - - 12,799 12,799
Sales and marketing expenses 39,170 220 3,622 43,012
General and administrative expenses - - 8,259 8,259
In-process research and development - - 2,163 2,163
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 39,170 220 26,843 66,233
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 15,823 3,062 (26,843) (7,958)
Other income, net - - 3,172 3,172
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes $ 15,823 $ 3,062 $(23,671) $ (4,786)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Two customers accounted for 19% and 10%, respectively, of net sales for fiscal
1999. In 1998 and 1997, a single customer accounted for 13% and 17%,
respectively, of net sales. All such customers were in the
40 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
branded business. Net sales to Intel were 2.0%, 2.6%, and 5.3% of total net
sales for fiscal 1999, 1998 and 1997, respectively. Accounts receivable from
Intel were 2.3% and 4.4% of total accounts receivable as of September 30, 1999
and 1998, respectively. Net sales are attributed to the following locations and
were derived from the location of the Company's regional operating unit having
invoiced the sale.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 (in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $200,047 $144,021 $ 98,677
Belgium 151,811 90,017 53,941
Singapore 57,032 42,018 31,957
- ----------------------------------------------------------------------------------
$408,890 $276,056 $184,575
- ----------------------------------------------------------------------------------
</TABLE>
Net sales from the Company's PC Card products as a percentage of total net sales
were as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1999 1998 1997
(percentage of total revenue)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
LAN Adapters 29% 30% 42%
LAN+Modem 59% 48% 43%
Modem 10% 21% 11%
Other 2% 1% 4%
- ----------------------------------------------------------------------------------
</TABLE>
Long-lived assets were located in the following countries:
<TABLE>
<CAPTION>
September 30 (in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $14,703 $ 7,712 $ 9,018
Malaysia 22,297 17,784 7,514
Other foreign countries 2,864 1,234 1,287
- ----------------------------------------------------------------------------------
$39,864 $26,730 $17,819
- ----------------------------------------------------------------------------------
</TABLE>
NOTE TWELVE: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------
(in thousands, except per share data) Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Net sales $96,022 $97,684 $103,073 $112,111 $408,890
Gross profit 39,562 42,313 46,238 51,834 179,947
Net income 9,774 10,829 12,083 10,318/(1)/ 43,004
Diluted earnings per share $ .39 $ .42 $ .48 $ .40/(1)/ $ 1.69
- -------------------------------------------------------------------------------------------------------
Fiscal 1998
Net sales $52,545 $64,134 $ 71,312 $88,065 $276,056
Gross profit 18,128 21,629 24,311 33,562 97,630
Net income 2,430 3,277 4,705 7,909 18,321
Diluted earnings per share $ .11 $ .14 $ .20 $ .33 $ .78
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) In the fourth quarter of fiscal 1999, net income includes $3,309,000 or
$.13 per share for the write-off of in-process research and development and
other non-recurring charges for future operating lease payments related to
facilities to be vacated.
41 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE THIRTEEN: ACQUISITIONS
On September 27, 1999, the Company purchased the Rex product line from Franklin
Electronic Publishers Incorporated, a developer and marketer of handheld
electronic reference products. The acquisition was accounted for as a purchase
with the results of operations included in the Company's financial statements
from the date of acquisition. Pro forma results for fiscal 1999 and 1998,
assuming the acquisition occurred on October 1, would not be materially
different from the results reported. Cash paid for the acquisition was
$13,250,000, comprised of fair value of assets acquired of $15,618,000 less
liabilities assumed of $2,368,000. Of the assets acquired, $2,232,000
($1,607,000, net of tax benefit) was written off as in-process research and
development, and $10,291,000 was recorded as goodwill and other intangible
assets and classified as Other assets in the accompanying Consolidated Balance
Sheets. Amortization of intangibles is provided using the straight-line method
over five years.
In fiscal 1997, the Company purchased certain assets from Angia Communications,
Inc., a developer and manufacturer of PC Card products. Cash paid for the
acquisition in 1997 was $1,463,000 and was comprised of fair value of assets
acquired of $2,463,000 net of liabilities assumed of $1,000,000. In connection
with the purchase, the Company recorded a charge to operations of $2,163,000
($1,514,000, net of tax benefit) for the write-off of in-process research and
development.
The amounts allocated to in-process research and development were based on
established valuation techniques in the high technology industry. At the date
of each acquisition mentioned above, the projects associated with the in-process
efforts had not yet reached technological feasibility and the research and
development in process had no alternative future uses. Accordingly, these
amounts were expensed on the respective dates of each acquisition.
NOTE FOURTEEN: SUBSEQUENT EVENT, ACQUISITION OF ENTREGA TECHNOLOGIES, INC.
On October 1, 1999, the Company completed its acquisition of Entrega
Technologies, Inc. ("Entrega"). Incorporated in January 1998, Entrega designs
and manufactures a selection of standardized devices for connecting peripherals
to personal computers, including Universal Serial Bus hubs, port converters and
cables that complement the Company's own product offerings. The acquisition
will be accounted for as a pooling-of-interests. The Company issued 266,195
shares of its common stock in exchange for all of the outstanding shares of
Entrega, and assumed and exchanged all options to purchase Entrega stock for
options to purchase an aggregate of 76,914 shares of the Company's common stock.
The Company also issued 142,397 shares of its common stock to repay certain
indebtedness of Entrega. There were no intercompany transactions between the two
companies.
42 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental financial information of Entrega on a separate basis and assuming
pooling is shown below.
<TABLE>
<CAPTION>
Supplemental
(in thousands) Xircom Entrega combined
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 1999
Net sales $408,890 $15,546 $424,436
Operating income (loss) 57,396 (7,852) 49,544
Net income (loss) 43,004 (8,399) 34,605
Total assets 269,318 6,178 275,496
Total liabilities $ 85,179 $15,397 $100,576
- --------------------------------------------------------------------------------------------------
Fiscal 1998
Net sales $276,056 $ 891 $276,947
Operating income (loss) 21,923 (2,408) 19,515
Net income (loss) 18,321 (2,467) 15,854
Total assets 195,224 2,711 197,935
Total liabilities $ 58,506 $ 4,678 $ 63,184
- --------------------------------------------------------------------------------------------------
</TABLE>
Earnings per share on a combined basis would have been $1.35 and $0.68 for
fiscal 1999 and 1998, respectively.
NOTE FIFTEEN: EVENT SUBSEQUENT TO THE DATE OF AUDITORS' REPORT (UNAUDITED)
On November 5, 1999, the Company announced its intention to file a registration
statement with the Securities and Exchange Commission for an underwritten public
offering of approximately 3,500,000 shares of Common Stock. In the announcement,
the Company indicated that it planned to file the registration statement during
November 1999.
43 XIRCOM, INC.
<PAGE>
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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1999, 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 18, 1999
44 XIRCOM, INC.
<PAGE>
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 2000 Annual Meeting of Shareholders.
Information with respect to executive officers of Xircom is incorporated by
reference to described in Item 1 of this Annual Report on Form 10-K.
Information with respect to delinquent filings under Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders.
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 2000 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--NomineesSecurity Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for its 2000
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Executive
Officer Compensation" in the Company's Proxy Statement for its 2000 Annual
Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page in Form 10-K
<C> <S> <C>
(a) (1) The following consolidated financial statements of Xircom, Inc. and the
Report of Independent Auditors, are included in Item 8 of this document:
Consolidated Statements of Operations - Years ended
September 30, 1999, 1998 and 1997 27
Consolidated Balance Sheets at September 30, 1999 and 1998 28
Consolidated Statements of Shareholders' Equity - Years ended
September 30, 1999, 1998 and 1997 29
Consolidated Statements of Cash Flows - Years ended
September 30, 1999, 1998 and 1997 30
Notes to Consolidated Financial Statements 31-43
Report of Ernst & Young LLP, Independent Auditors 44
(2) Consolidated financial statement schedule:
Schedule II - Valuation and Qualifying Accounts 46
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K) 47-48
</TABLE>
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on February 18, 1999 pursuant to Item 5
of Form 8-K ("Other Events"). The report related to a press release issued by
the Company on February 18, 1999 regarding the Company's announcement that Intel
Corporation exercised a warrant to purchase additional shares of Xircom common
stock and Xircom's concurrent repurchase of an equivalent number of shares held
by Intel. A copy of the press release was filed as an exhibit to such report.
45 XIRCOM, INC.
<PAGE>
SCHEDULE II
Xircom, Inc.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
----------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts/(1)/ Deductions End of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Deducted from asset accounts:
Allowance for sales returns $7,256 $14,835 $1,995 $14,334 $ 9,752
Allowance for bad debts 1,236 269 - 56 1,449
- ---------------------------------------------------------------------------------------------------------------------------------
Total allowance $8,492 $15,104 $1,995 $14,390 $11,201
- ---------------------------------------------------------------------------------------------------------------------------------
Liability reserves:
Warranty $6,225 $ 5,404 $ 313 $ 3,191 $ 8,751
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Deducted from asset accounts:
Allowance for sales returns $5,757 $15,401 $ - $13,902 $ 7,256
Allowance for bad debts 497 750 - 11 1,236
- ---------------------------------------------------------------------------------------------------------------------------------
Total $6,254 $16,151 $ - $13,913 $ 8,492
- ---------------------------------------------------------------------------------------------------------------------------------
Liability reserves:
Warranty $4,041 $ 6,328 $ - $ 4,144 $ 6,225
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
Deducted from asset accounts:
Allowance for sales returns $2,980 $28,597 $ - $25,820 $ 5,757
Allowance for bad debts 454 275 - 232 497
- ---------------------------------------------------------------------------------------------------------------------------------
Total $3,434 $28,872 $ - $26,052 $ 6,254
- ---------------------------------------------------------------------------------------------------------------------------------
Liability reserves:
Warranty $3,204 $ 3,170 $ - $ 2,333 $ 4,041
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts in 1999 were assumed in connection with the purchase of the Rex
product line.
46 XIRCOM, INC.
<PAGE>
EXHIBITS INCLUDED HEREIN (NUMBERED IN ACCORDANCE WITH ITEM 601 OF
REGULATION S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization By and Among Xircom, Inc., a California Corporation, Xircom, Inc., a Delaware
Corporation, and Primary Rate Incorporated, a Delaware Corporation, dated April 12, 1995 (incorporated by reference to
Exhibit 2.1 of the Company's report on Form 8-K dated June 22, 1995, No. 0-19856)
3.1 Amended Articles of Incorporation of Xircom, Inc. (incorporated by reference to Exhibit 3.1 of the Company's report on
Form 10-Q for the quarter ended March 31, 1992)
3.2 Bylaws of Xircom, Inc. (incorporated by reference to Exhibit 3.3 of Amendment No. 3 to the Company's registration
statement on Form S-1, No. 33-45667)
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 3 to the Company's
registration statement on Form S-1, No. 33-45667)
10.1 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.3 of the Company's report on Form 10-Q for the
quarter ended March 31, 1992)
10.9 Stock Option Plan of the Company, as amended and restated on January 23, 1998, and forms of agreement thereunder
(incorporated by reference to Exhibit 4.1 of the Company's registration statement on Form S-8 filed on April 21, 1998,
No. 333-50591)
10.10 1992 Director Stock Option Plan of the Company, as amended and restated on January 22, 1999, and forms of agreement
thereunder (incorporated by reference to Exhibit 4.2 of the Company's registration statement on Form S-8 filed on April
20, 1999, No. 333-76621)
10.15 Form of Distributor Agreement/(1)/t (incorporated by reference to corresponding exhibit number of the Company's
registration statement on Form S-1, No. 33-45667)
10.26 1994 Employee Stock Purchase Plan, as amended and restated as of January 22, 1999, and forms of agreement thereunder
(incorporated by reference to Exhibit 4.2 of the Company's registration statement on Form S-8 filed on April 20, 1999, No.
333-76621)
10.27 Facility lease agreement, dated as of March 29, 1994, between Metropolitan Life Insurance Company and the Company
(incorporated by reference to Exhibit 10.1 of the Company's report on From 10-Q for the quarter ended March 31, 1994)
10.28 Facility lease agreement, dated as of March 29, 1994, between Metropolitan Life Insurance Company and the Company
(incorporated by reference to Exhibit 10.2 of the Company's report on From 10-Q for the quarter ended March 31, 1994)
10.30 Credit Agreement Among Xircom, Inc., Certain Lenders Named Herein and NationsBank of Texas, N.A. as Administrative Agent,
dated as of December 30, 1996 (incorporated by reference to Exhibit 10.30 of the Company's report on Form 10-Q for the
quarter ended December 31, 1996)
</TABLE>
47 XIRCOM, INC.
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S>
10.30a Security Agreement Between Xircom, Inc. as Debtor and NationsBank of Texas, N.A. as Administrative Agent, dated as of
December 30, 1996 (incorporated by reference to Exhibit 10.30 of the Company's report on Form 10-Q for the quarter ended
December 31, 1996)
10.30c Intellectual Property Security Agreement Between Xircom, Inc. as Debtor and NationsBank of Texas, N.A. as Administrative
Agent, dated as of December 30, 1996 (incorporated by reference to Exhibit 10.30 of the Company's report on Form 10-Q for
the quarter ended December 31, 1996)
10.31 Xircom, Inc. Common Stock and Warrant Purchase Agreement, of January 13, 1997, between Xircom, Inc. and Intel Corporation
(incorporated by reference to Exhibit 10.31 of the Company's report on Form 10-Q for the quarter ended March 31, 1997)
10.31a Warrant to Purchase Shares of Common Stock of Xircom, Inc., dated February 28, 1997 (incorporated by reference to Exhibit
10.31 of the Company's report on Form 10-Q for the quarter ended March 31, 1997)
10.31b Investor Rights Agreement, dated February 28, 1997, between Xircom, Inc. and Intel Corporation (incorporated by reference
to Exhibit 10.31 of the Company's report on Form 10-Q for the quarter ended March 31, 1997)
10.32 Asset Purchase Agreement by and among BTINH Operating Company, Inc. as Buyer, Brooktrout Technology, Inc. as Parent,
Netaccess, Inc. as Seller and Xircom, Inc. as Seller's Sole Stockholder, dated June 30, 1997 (incorporated by reference to
Exhibit 10.32 of the Company's report on Form 10-Q for the quarter ended June 30, 1997)
10.33 1995 Stock Option Plan, as amended and restated on December 18, 1998, and forms of agreement thereunder (incorporated by
reference to Exhibit 4.3 of the Company's registration statement on Form S-8 filed on April 20, 1999, No. 333-76621)
10.34 1997 Patent Award Stock Option Plan, adopted July 25, 1997, and forms of agreement thereunder (incorporated by reference
to Exhibit 4.4 of the Company's registration statement on Form S-8 filed on April 21, 1998, No. 333-50591)
10.35 Entrega Technologies, Inc. Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 of the Company's
registration statement on Form S-8 filed on October 15, 1999, No. 333-89099)
21.1 Subsidiaries of Xircom, Inc. (see page 49)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 50)
24.1 Power of Attorney (see page 51)
27.1 Financial Data Schedule
</TABLE>
48 XIRCOM, INC.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Xircom International, Ltd.
Xircom International Holdings PTE LTD
Xircom Acquisition Corporation
Xircom Operations (Malaysia) Sdn. Bhd.
Master-Pack (PG) Sdn. Bhd.
Xircom Europe N.V.NV
Xircom U.K., Ltd.
Xircom France, S.A.R.L.
Xircom Deutschland GmbH
Rehis SRL
Xircom AB
Xircom Asia PTE LTD
Xircom Asia Limited
Xircom Asia Pacific Ltd.
Xircom Australia Pty. Ltd.
Xircom Japan KK
49 XIRCOM, INC.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-76621, 333-50591, and 333-89099) pertaining to the 1992
Director Stock Option Plan, 1992 Stock Option Plan, 1995 Stock Option Plan, 1994
Employee Stock Purchase Plan and Entrega Technologies, Inc. Stock Option Plan
and in the Registration Statement (Form S-3 No. 33-93972) of Xircom, Inc. and in
the related Prospectus of our report dated October 18, 1999, 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, 1999.
Ernst & Young LLP
Woodland Hills, California
November 8, 1999
50 XIRCOM, INC.
<PAGE>
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 8, 1999 By: /s/ Dirk I. Gates
-------------------------------------
Dirk I. Gates
Chairman of the Board
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dirk I. Gates and Steven F. DeGennaro, jointly
and severally, his attorneys-in-fact, each with the power of substitution for
him in any and all capacities, to sign any amendments to this Report on Form 10-
K, and to file the same, with exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ DIRK I. GATES Chairman of the Board, November 8, 1999
- --------------------------- President and Chief Executive Officer
Dirk I. Gates (Principal Executive Officer)
/s/ STEVEN F. DEGENNARO Vice President, Finance and November 8, 1999
- --------------------------- Chief Financial Officer
Steven F. DeGennaro (Principal Financial Officer and
Principal Accounting Officer))
/s/ MICHAEL F.G. ASHBY
- --------------------------- Director November 8, 1999
Michael F.G. Ashby
/s/ KENNETH J. BIBA
- --------------------------- Director November 8, 1999
Kenneth J. Biba
/s/ GARY J. BOWEN
- --------------------------- Director November 8, 1999
Gary J. Bowen
/s/ J. KIRK MATHEWS
- --------------------------- Director November 8, 1999
J. Kirk Mathews
/s/ CARL E. RUSSO
- --------------------------- Director November 8, 1999
Carl E. Russo
/s/ WILLIAM J. SCHROEDER
- --------------------------- Director November 8, 1999
William J. Schroeder
/s/ DELBERT W. YOCAM
- --------------------------- Director November 8, 1999
Delbert W. Yocam
</TABLE>
51 XIRCOM, INC.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XIRCOM,
INC.'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 134,294
<SECURITIES> 0
<RECEIVABLES> 48,033
<ALLOWANCES> 11,201
<INVENTORY> 20,840
<CURRENT-ASSETS> 216,908
<PP&E> 70,577
<DEPRECIATION> 30,713
<TOTAL-ASSETS> 269,318
<CURRENT-LIABILITIES> 71,519
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 184,115
<TOTAL-LIABILITY-AND-EQUITY> 265,318
<SALES> 408,890
<TOTAL-REVENUES> 408,890
<CGS> 228,943
<TOTAL-COSTS> 228,943
<OTHER-EXPENSES> 122,551
<LOSS-PROVISION> 269
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 59,727
<INCOME-TAX> 16,723
<INCOME-CONTINUING> 43,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,004
<EPS-BASIC> 1.80
<EPS-DILUTED> 1.69
</TABLE>
