<PAGE>
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
Date of Report November 10, 1999 (Date of earliest event reported)
Commission file number 0-19856
XIRCOM, INC.
2300 Corporate Center Drive
Thousand Oaks, CA 91320-1420
Telephone: (805) 376-9300
CALIFORNIA (State or other jurisdiction of incorporation)
95-4221884 (I.R.S. Employer Identification No.)
<PAGE>
ITEM 5. OTHER EVENTS
As reported in the annual report on Form 10-K filed with the Securities and
Exchange Commission on November 10, 1999 (the "10-K"), on October 1, 1999,
Xircom, Inc. ("Xircom" or the "Company") acquired 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. This current report on Form 8-K is
being filed to provide supplemental financial statements and related
disclosures, which reflect the combined entity for all periods presented. This
current report on Form 8-K should be read in conjunction with the 10-K. In
particular, the accompanying supplemental consolidated balance sheets of the
Company and its subsidiaries and the related consolidated supplemental
statements of operations, shareholders' equity and cash flows, including the
notes thereto, as well as the supplemental financial statement schedule,
selected financial data and management's discussions and analysis of financial
condition and results of operations have been restated to reflect the
combination of the Company and Entrega under pooling-of-interests accounting.
These supplemental financial statements and other information are based on those
items originally contained in the Company's Annual Report on Form 10-K for the
year ended September 30, 1999.
INDEX
<TABLE>
<CAPTION>
Page in Form 8-K
<S> <C>
Supplemental Consolidated Financial Statements and Financial Information
Supplemental Consolidated Statements of Operations -
Years ended September 30, 1999, 1998 and 1997 3
Supplemental Consolidated Balance Sheets at September 30, 1999 and 1998 4
Supplemental Consolidated Statements of Shareholders' Equity -
Years ended September 30, 1999, 1998 and 1997 5
Supplemental Consolidated Statements of Cash Flows -
Years ended September 30, 1999, 1998 and 1997 6
Notes to Supplemental Consolidated Financial Statements 7-20
Report of Ernst & Young LLP, Independent Auditors 21
Selected Supplemental Financial Data 22
Management's Discussion and Analysis of Financial 23-34
Qualitative and Quantitative Disclosures About Market Risk 34-35
Supplemental Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 36
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
</TABLE>
2 XIRCOM, INC.
<PAGE>
Xircom, Inc.
SUPPLEMENTAL 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 $424,436 $276,947 $184,575
Cost of sales 243,248 179,377 126,300
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 181,188 97,570 58,275
Research and development expenses 24,557 16,599 12,799
Sales and marketing expenses 87,348 50,699 43,012
General and administrative expenses 15,143 10,757 8,259
In-process research and development and
other nonrecurring charges 4,596 - 2,163
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 131,644 78,055 66,233
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss) from continuing operations 49,544 19,515 (7,958)
Other income, net 1,785 4,191 3,172
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes 51,329 23,706 (4,786)
Income tax provision (benefit) 16,724 7,852 (1,437)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 34,605 15,854 (3,349)
Discontinued operations:
Operating loss, net of income taxes - - (226)
Loss on disposal, net of income taxes - - (6,275)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 34,605 $ 15,854 $ (9,850)
- ----------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Continuing operations $ 1.44 $ .69 $ (.16)
Discontinued operations - - (.30)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.44 $ .69 $ (.46)
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Continuing operations $ 1.35 $ .68 $ (.16)
Discontinued operations - - (.30)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.35 $ .68 $ (.46)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
3 XIRCOM, INC.
<PAGE>
Xircom, Inc.
SUPPLEMENTAL 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 $135,630 $105,814
Accounts receivable, net of allowances for sales returns and
bad debts of $11,891 ($8,614 in 1998) 38,012 30,499
Income tax receivable 300 285
Inventories 23,563 16,965
Deferred income taxes 15,195 11,659
Prepaid expenses and other current assets 9,696 4,908
- --------------------------------------------------------------------------------------------------------------------
Total current assets 222,396 170,130
Property and equipment, net 40,536 27,283
Other assets 12,564 522
- --------------------------------------------------------------------------------------------------------------------
Total assets $275,496 $197,935
- --------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Notes payable $ 9,138 $ 3,125
Accounts payable 31,591 18,558
Accrued liabilities 42,235 29,077
Accrued income taxes 3,952 3,308
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 86,916 54,068
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;
24,563,614 shares outstanding at September 30, 1999
(23,211,478 in 1998) 24 23
Paid-in capital 151,925 146,362
Retained earnings (accumulated deficit) 22,971 (11,634)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 174,920 134,751
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $275,496 $197,935
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
4 XIRCOM, INC.
<PAGE>
Xircom, Inc.
SUPPLEMENTAL 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 123 - 500 - 500
Issuance of Common Stock under
Employee Stock Purchase Plan 160 - 1,370 - 1,370
Exercise of stock options 256 - 2,688 - 2,688
Tax benefit related to employee
stock options - - 912 - 912
Net income - - - 15,854 15,854
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 23,211 23 146,362 (11,634) 134,751
Issuance of Common Stock 126 - 741 - 741
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 1,104 1 13,552 - 13,553
Tax benefit related to employee
stock options - - 8,549 - 8,549
Compensation expense related to
stock options and stock
appreciation rights - - 430 - 430
Net income - - - 34,605 34,605
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 24,564 $24 $151,925 $ 22,971 $174,920
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
5 XIRCOM, INC.
<PAGE>
Xircom, Inc.
SUPPLEMENTAL 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 $ 34,605 $ 15,854 $(3,349)
Adjustments to derive cash flows from continuing
operating activities:
Depreciation and amortization 13,939 7,993 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 non-cash charges 652 23 -
Changes in assets and liabilities, net of the effect of
acquisitions and disposition:
Accounts receivable (9,508) (19,602) 14,109
Income tax receivable (15) 4,721 (2,354)
Inventories (3,689) 11,997 (15,191)
Prepaid expenses and other current assets (4,573) (2,398) 854
Accounts payable and accrued liabilities 23,892 19,262 1,996
Income taxes payable 644 2,363 (121)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 61,433 42,993 4,850
Net cash used in discontinued operating activities - - (5,984)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 61,433 42,993 (1,134)
Investing activities
Purchases of property and equipment (27,255) (18,555) (6,437)
Proceeds from sale of fixed assets 113 203 35
(Increase) decrease in other assets (2,150) 30 (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 activities (42,542) (18,322) 3,118
Net cash used in discontinued investing activities - - (501)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (42,542) (18,322) 2,617
Financing activities
Proceeds from issuance of common stock 15,638 4,538 56,612
Tax benefit related to employee stock option and stock
purchase plans 8,549 912 1,062
Repurchase of Common Stock (19,775) - -
Proceeds from issuance of debt obligations 8,538 3,125 960
Repayment of debt obligations (2,025) (2,541) (6,385)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,925 6,034 52,249
Net increase in cash and cash equivalents 29,816 30,705 53,732
Cash and cash equivalents at beginning of period 105,814 75,109 21,377
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $135,630 $105,814 $75,109
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
6 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL 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. As further
described in Note Fourteen, the Company acquired Entrega Technologies, Inc.
("Entrega") on October 1, 1999. The acquisition was accounted for as a pooling-
of-interests. Accordingly, the supplemental consolidated financial statements
give retroactive effect to the merger of the Company and Entrega for all dates
and periods presented. The supplemental consolidated financial statements will
become the historical financial statements upon issuance of financial statements
for the period that includes the date of the merger.
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
Supplemental 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 36% and 34%, respectively, of total trade accounts receivable. The
carrying amounts reported in the balance sheets for accounts receivable,
accounts payable and notes 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
7 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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.
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 $9,861,000, $4,032,000 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 gains
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 Supplemental 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 24,104,000 22,931,000 21,560,000
Effect of dilutive securities:
Employee stock options 1,456,000 485,000 -
Warrant 86,000 - -
Other dilutive securities 36,000 40,000 -
- ----------------------------------------------------------------------------------------------------------------------
Diluted 25,682,000 23,456,000 21,560,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
8 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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.
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
9 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." See Note Eight.
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 $12,757 $ 4,478
Sub-assemblies 492 1,092
Work-in-process 3,578 5,383
Component parts 6,736 6,012
- -------------------------------------------------------------------------------------------------------------
$23,563 $16,965
- -------------------------------------------------------------------------------------------------------------
</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 6,877 6,238
Equipment 53,945 34,633
Furniture and fixtures 4,737 3,713
- -------------------------------------------------------------------------------------------------------------
71,568 49,050
Less accumulated depreciation and amortization (31,032) (21,767)
- -------------------------------------------------------------------------------------------------------------
$ 40,536 $ 27,283
- -------------------------------------------------------------------------------------------------------------
</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 $ 8,469 $ 6,828
Warranty reserve 9,301 6,264
Accrued marketing costs 6,618 5,607
Other 17,847 10,378
- -------------------------------------------------------------------------------------------------------------
$42,235 $29,077
- -------------------------------------------------------------------------------------------------------------
</TABLE>
10 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE SIX: BANK BORROWINGS AND NOTES PAYABLE
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
under this 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.
Entrega had a $5,000,000 revolving line of credit with a bank at the prime rate.
Loans under the agreement were secured by Entrega's accounts receivable,
inventory, fixed assets, and general intangibles, and guaranteed by the former
principal shareholder of Entrega. As of September 30, 1999, borrowings of
$4,988,000 were outstanding under this agreement. The agreement expired and was
fully repaid on October 1, 1999. Entrega had notes payable to its former
principal shareholder bearing interest at 8% and subordinated to its line of
credit. During the year ended September 30, 1999, $500,000 of such notes were
converted into 85,817 shares of Common Stock. As of September 30, 1999,
borrowings of $4,150,000 were outstanding under such notes. On October 1, 1999,
the notes were converted into 108,071 shares of Xircom Common Stock.
The Company had approximately $30,271,000 available under its credit facilities
as of September 30, 1999. Interest expense totaled $555,000, $115,000 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
- ---------------------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 12,164 $ 441 $(3,785)
State 1,628 351 -
Foreign 3,440 2,516 945
- ---------------------------------------------------------------------------------------------------------------------------
17,232 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
- ---------------------------------------------------------------------------------------------------------------------------
$ 16,724 $7,852 $(1,437)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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>
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) $17,965 $ 8,297 $(1,675)
State income taxes, net of federal benefit 1,273 227 -
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) - -
S-Corporation losses of Entrega 2,940 863 -
Other 86 60 124
- ----------------------------------------------------------------------------------------------------------------------------
$16,724 $ 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.
12 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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.
The Entrega Technologies, Inc. Stock Option Plan, as amended, authorizes a total
of up to 76,914 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
four years, or became fully vested and exercisable upon change in control on
October 1, 1999. The options have terms of five to ten years.
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 1,615,324 $11.18 4.69 672,267 $10.87
$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>
As of September 30, 1999, 1998 and 1997, stock options to purchase 845,884,
1,002,368 and 568,030 shares were exercisable at weighted average exercise
prices of $11.99, $12.52 and $11.32, respectively.
13 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 1,600,689 $5.83 $26.00 $12.06
Exercised (256,044) $5.83 $20.25 $10.65
Canceled (380,586) $8.63 $27.75 $12.42
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1998 3,669,183 $5.83 $27.75 $12.42
Granted 2,445,008 $5.83 $46.94 $25.12
Exercised (1,103,812) $5.83 $27.75 $12.28
Canceled (473,317) $8.63 $35.31 $13.74
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1999 4,537,062 $5.83 $46.94 $19.08
- -----------------------------------------------------------------------------------------------------------------------------
</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) $34,605 $15,854 $ (9,850)
Pro forma stock compensation expense, net (6,836) (3,545) (2,056)
- ----------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $27,769 $12,309 $(11,906)
- ----------------------------------------------------------------------------------------------------------------------------
Pro forma basic earnings (loss) per share $ 1.15 $ .54 $ (.55)
- ----------------------------------------------------------------------------------------------------------------------------
Pro forma diluted earnings (loss) per share $ 1.11 $ .54 $ (.55)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
14 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 $13.72, $6.63 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.
Entrega has a plan under which stock appreciation rights have been granted to
certain of its employees or other associates. As of September 30, 1999, stock
appreciation rights based on 12,872 shares were outstanding at a weighted
average strike price of $10.88. The rights vest over a four-year period
following the date of grant and certain of the rights vested in full upon the
acquisition of Entrega by the Company. Compensation expense based upon the
vested portion of these rights amounted to $346,000 in 1999.
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. Entrega has similar defined
contribution 401(k) plan for its U.S. employees. Entrega made no company
contributions during the 1999 and 1998 fiscal years.
15 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 $ 380 $ 74 $ 491
Income taxes $7,535 $ 807 $ 82
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $1,693,000, $1,665,000
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 $ 2,763
2001 2,515
2002 2,140
2003 2,053
2004 2,100
Thereafter 3,294
- -----------------------------------------------------------------------------------
$14,865
- -----------------------------------------------------------------------------------
</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 $594,000,
$649,000, 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
16 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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
(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 $350,379 $74,057 $ - $424,436
Cost of sales 191,472 51,776 - 243,248
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 158,907 22,281 - 181,188
Research and development expenses - - 24,557 24,557
Sales and marketing expenses 72,720 3,863 10,765 87,348
General and administrative expenses - - 15,143 15,143
In-process research and development and other
nonrecurring charges - - 4,596 4,596
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 72,720 3,863 55,061 131,644
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 86,187 18,418 (55,061) 49,544
Other income, net - - 1,785 1,785
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes $ 86,187 $18,418 $(53,276) $ 51,329
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Net sales $222,352 $54,595 $ - $276,947
Cost of sales 133,791 45,586 - 179,377
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 88,561 9,009 - 97,570
Research and development expenses - - 16,599 16,599
Sales and marketing expenses 41,076 2,365 7,258 50,699
General and administrative expenses - - 10,757 10,757
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 41,076 2,365 34,614 78,055
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 47,485 6,644 (34,614) 19,515
Other income, net - - 4,191 4,191
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes $ 47,485 $ 6,644 $(30,423) $ 23,706
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
17 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(in thousands) Branded OEM Unallocated Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 20% 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 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 $213,490 $144,912 $ 98,677
Belgium 151,811 90,017 53,941
Singapore 57,032 42,018 31,957
Other 2,103 - -
- ----------------------------------------------------------------------------------------------------------------------
$424,436 $276,947 $184,575
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales from the Company's 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 28% 30% 42%
LAN+Modem 57% 48% 43%
Modem 10% 21% 11%
Port expansion system products 4% -% -%
Other 1% 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 $15,361 $ 8,261 $ 9,018
Malaysia 22,297 17,784 7,514
Other foreign countries 2,878 1,238 1,287
- ----------------------------------------------------------------------------------------------------------------------
$40,536 $27,283 $17,819
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
18 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 $98,498 $101,872 $108,439 $115,627 $424,436
Gross profit 39,434 43,229 46,805 51,720 181,188
Net income 7,609 9,461 9,864 7,671(1) 34,605
Diluted earnings per share $ .30 $ .37 $ .39 $ .29(1) $ 1.35
- -----------------------------------------------------------------------------------------------------
Fiscal 1998
Net sales $52,545 $ 64,134 $ 71,312 $ 88,956 $276,947
Gross profit 18,128 21,588 24,194 33,660 97,570
Net income 2,430 3,002 3,763 6,659 15,854
Diluted earnings per share $ .11 $ .13 $ .16 $ .27 $ .68
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) In the fourth quarter of fiscal 1999, net income includes $3,309,000 or
$0.13 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.
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, 1997, 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 Supplemental
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 EVENTS
Acquisition of Entrega Technologies, Inc.
On October 1, 1999, the Company completed its acquisition of 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
19 XIRCOM, INC.
<PAGE>
Xircom, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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.
Separate financial information of the combined entities for fiscal 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
(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>
Separate diluted earnings per share for Xircom were $1.69 and $0.78 for fiscal
1999 and 1998, respectively.
Registration Statement
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.
20 XIRCOM, INC.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Xircom, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Xircom, Inc. (formed as a result of the consolidation of Xircom, Inc. and
Entrega Technologies, Inc.) as of September 30, 1999 and 1998, and the related
supplemental consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended September 30, 1999.
The supplemental consolidated financial statements give retroactive effect to
the merger of Xircom, Inc. and Entrega Technologies, Inc. on October 1, 1999,
which has been accounted for using the pooling-of-interests method as described
in the notes to the supplemental consolidated financial statements. Our audits
also included the supplemental financial statement schedule listed in the Index
at Item 5. These supplemental financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental 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 supplemental 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, after giving retroactive effect to the merger of Entrega
Technologies, Inc., as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Woodland Hills, California
November 5, 1999
21 XIRCOM, INC.
<PAGE>
Xircom, Inc.
SUPPLEMENTAL 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 $424,436 $276,947 $184,575 $166,757 $119,528
Cost of sales 243,248 179,377 126,300 107,437 79,048
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 181,188 97,570 58,275 59,320 40,480
Research and development expenses 24,557 16,599 12,799 9,537 13,085
Sales and marketing expenses 87,348 50,699 43,012 32,723 37,086
General and administrative expenses 15,143 10,757 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 49,544 19,515 (7,958) 9,012 (22,467)
Other income (expense), net 1,785 4,191 3,172 (1,338) 435
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 51,329 23,706 (4,786) 7,674 (22,032)
Income tax provision (benefit) 16,724 7,852 (1,437) 2,506 (7,000)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations/(1)/ 34,605 15,854 (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) $ 34,605 $ 15,854 $ (9,850) $ 5,952 $(58,804)
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share/(1)/:
Continuing operations $ 1.35 $ .68 $ (.16) $ .26 $ (.88)
Net income (loss) $ 1.35 $ .68 $ (.46) $ .30 $ (3.44)
Balance sheet data
Working capital $135,480 $116,062 $ 95,501 $ 34,711 $ 25,909
Total assets $275,496 $197,935 $147,930 $107,201 $ 85,649
Long-term obligations, net of current
portion $ - $ - $ - $ 1,860 $ 597
Shareholders' equity $174,920 $134,751 $113,427 $ 65,603 $ 53,095
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1999 includes $4,596 ($3,309, net of tax benefit) or $0.13 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 $0.07
per share for write-off of in-process research and development. Fiscal 1996
includes $1,505 ($1,023 net of tax benefit) or $0.05 per share for loss on
sale of Netwave product line. Fiscal 1995 includes $5,745 ($3,561 net of tax
benefit) or $0.21 per share for other nonrecurring charges.
22 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Current 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 $424,436 53% $276,947 50% $184,575
</TABLE>
Net sales -- 1999 versus 1998
Net sales increased 53% to $424.4 million in fiscal 1999 from $276.9 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:
. 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.
We also introduced our port expansion system products in 1999 through the
acquisition of Entrega Technologies, Inc. ("Entrega") on October 1, 1999, which
was accounted for as a pooling of interests, and in addition, we began shipping
Xircom PortStation port expansion system products in September 1999.
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 products as a percentage of total revenues were as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30
(percentage of total revenue) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LAN Adapters 28% 30% 42%
LAN+Modem 57% 48% 43%
Modem 10% 21% 11%
Port expansion system products 4% -% -%
Other 1% 1% 4%
- --------------------------------------------------------------------------------------------------------
</TABLE>
23 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
International sales. Total international sales (shipments to our customers
located outside the U.S.) as a percentage of total sales was 53% 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.
Net sales -- 1998 versus 1997
Net sales increased 50% to $276.9 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 average selling prices are generally lower.
Gross Profit
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit $181,188 86% $97,570 67% $58,275
Percentage of net sales 42.7% 35.2% 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.
This increase in gross profit as a percent of net sales was partially offset by
the relatively lower gross profit as a percent of net sales earned by Entrega
during 1999, as compared to that of Xircom's traditional products.
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.
24 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Research and Development
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $24,557 48% $16,599 30% $12,799
Percentage of net sales 5.8% 6.0% 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 development expenses increased in 1998 in absolute
dollars compared to 1997. This increase was a result of additional staffing and
expenditures to support expanded branded and OEM product offerings, including
our RealPort Integrated PC Card family of products, and expenditures by Entrega
during 1999. 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 $87,348 72% $50,699 18% $43,012
Percentage of net sales 20.6% 18.3% 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;
. Expenses to support the launch of new products such as the PortStation(TM)
Port expansion system and the CompactCard(TM) line of products; and,
. Expenses incurred by Entrega during 1999, to support the launch of its line
of port expansion system 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 establishment 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.
25 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General and Administrative
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General and administrative $15,143 41% $10,757 30% $8,259
Percentage of net sales 3.6% 3.9% 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. General and
administrative expenses include costs incurred by Entrega to build its
infrastructure and grow its operations. 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 Entrega of approximately
$2,500,000 to $3,000,000. See Risk Factors for a further discussion of our Year
2000 project.
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 $1,785 (57%) $4,191 32% $3,172
Percentage of net sales 0.4% 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, interest
26 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
expense, 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,
a decrease in gains on our foreign currency transactions, and an increase in
interest expense relating to Entrega. 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.
Income Tax Provision (Benefit)
<TABLE>
<CAPTION>
(in thousands) 1999 Change 1998 Change 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax provision (benefit) $16,724 113% $7,852 N/A $(1,437)
Effective tax rate 32.6% 33.1% 30.0%
</TABLE>
Our effective tax rate was 32.6% in 1999, 33.1% in 1998, and 30.0% in 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. An income tax benefit has not been recorded for the losses
attributable to Entrega during the 1999 and 1998 fiscal years since such losses
have been utilized at the shareholder level based on Entrega's S-Corporation
status during those periods. 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 $37,914,000 and $1.48,
respectively, compared to $15,854,000 and $0.68, respectively, for 1998. Net
income and net income per diluted share for 1999 was $34,605,000 and $1.35,
respectively, compared to $15,854,000 and $0.68, respectively, for 1998.
Risk Factors
- ------------
We Face the Risk of Being Unable to Remain Competitive in the Mobile Information
Access Industry.
The market for notebook PC Card adapters has grown rapidly since the Personal
Computer Memory Card International Association (PCMCIA) introduced a standard
form factor for PC Card LAN adapters in 1993. 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. As
a result, we have faced increased 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 PC Card LAN adapters, modems and Combo cards 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.
27 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 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.
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
28 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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.
29 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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;
30 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
. 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.
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
31 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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
32 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
Liquidity and Capital Resources
As of September 30, 1999 we had $135.6 million in cash and cash equivalents.
Our continuing operating activities provided cash of approximately $61.4 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 $42.5 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 $10.9 million in cash in 1999, primarily from
the issuance of capital stock through our stock option and employee stock
purchase plans, tax benefits related to employee stock option and stock purchase
plans, and increases in notes payable, offset by net payment under warrant
agreement. 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. In addition, we generated $8,549,000
in cash in 1999 from tax benefits from our employee stock option and stock
purchase plans.
33 XIRCOM, INC.
<PAGE>
Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. As of September 30,
1999, Entrega had borrowings of $4,988,000 outstanding under a line of credit
with a bank. This agreement expired and was fully repaid on October 1, 1999.
As of September 30, 1999, Entrega also had borrowings outstanding of $4,150,000
under notes payable to its former principal shareholder. On October 1, 1999,
the notes were converted into 142,397 shares of Xircom Common Stock. We had
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 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.
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 the majority of 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.
34 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 $7,378 $17,517 $1,995 $16,448 $10,442
Allowance for bad debts 1,236 269 - 56 1,449
- -----------------------------------------------------------------------------------------------------------------------
Total allowance $8,614 $17,786 $1,995 $16,504 $11,891
- -----------------------------------------------------------------------------------------------------------------------
Liability reserves:
Warranty $6,264 $ 5,915 $ 313 $ 3,191 $ 9,301
- -----------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Deducted from asset accounts:
Allowance for sales returns $5,757 $15,523 $ - $13,902 $ 7,378
Allowance for bad debts 497 750 - 11 1,236
- -----------------------------------------------------------------------------------------------------------------------
Total $6,254 $16,273 $ - $13,913 $ 8,614
- -----------------------------------------------------------------------------------------------------------------------
Liability reserves:
Warranty $4,041 $ 6,367 $ - $ 4,144 $ 6,264
- -----------------------------------------------------------------------------------------------------------------------
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.
35 XIRCOM, INC.
<PAGE>
ITEM 7. EXHIBITS
The following exhibits are filed with this current report on Form 8-K:
Exhibit
Number
- ------
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedules
36 XIRCOM, INC.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
XIRCOM, INC.
Dated: November 9, 1999 By: /s/ RANDALL H. HOLLIDAY
-----------------------
Randall H. Holliday
Secretary and General Counsel
37 XIRCOM, INC.
<PAGE>
EXHIBIT 23
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 November 5, 1999, with respect to the
supplemental consolidated financial statements and schedule of Xircom, Inc.,
included in this Current Report (Form 8-K) dated November 10, 1999.
/s/ Ernst & Young LLP
Woodland Hills, California
November 10, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XIRCOM,
INC.'S ("XIRCOM") FORM 8-K FILED ON NOVEMBER 9, 1999, WHICH INCLUDED
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
SEPTEMBER 30, 1999 AND 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS. XIRCOM ACQUIRED ENTREGA
TECHNOLOGIES, INC. ("ENTREGA") ON OCTOBER 1, 1999. THE ACQUISITION WAS ACCOUNTED
FOR AS A POOLING OF INTERESTS. ACCORDINGLY, THE SUPPLEMENTARY CONSOLIDATED
FINANCIAL STATEMENTS HAVE BEEN RESTATED TO REFLECT THE COMBINED FINANCIAL
POSITION AND OPERATIONS OF XIRCOM, INC. AND ENTREGA FOR ALL PERIODS PRESENTED
SINCE THE INCEPTION OF ENTREGA.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 135,630 105,814
<SECURITIES> 0 0
<RECEIVABLES> 49,903 39,113
<ALLOWANCES> 11,891 8,614
<INVENTORY> 23,563 16,965
<CURRENT-ASSETS> 222,396 170,130
<PP&E> 71,568 49,050
<DEPRECIATION> 31,032 21,767
<TOTAL-ASSETS> 275,496 197,935
<CURRENT-LIABILITIES> 86,916 54,068
<BONDS> 0 0
0 0
0 0
<COMMON> 24 23
<OTHER-SE> 174,896 134,728
<TOTAL-LIABILITY-AND-EQUITY> 275,496 197,935
<SALES> 424,436 276,947
<TOTAL-REVENUES> 424,436 276,947
<CGS> 243,248 179,377
<TOTAL-COSTS> 243,248 179,377
<OTHER-EXPENSES> 131,644 78,055
<LOSS-PROVISION> 269 750
<INTEREST-EXPENSE> 460 116
<INCOME-PRETAX> 51,329 23,706
<INCOME-TAX> 16,724 7,852
<INCOME-CONTINUING> 34,605 15,854
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 34,605 15,854
<EPS-BASIC> 1.44 0.69
<EPS-DILUTED> 1.35 0.68
</TABLE>
