<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-90783
Registration No. 333-92387
4,000,000 Shares
[LOGO OF XIRCOM APPEARS HERE]
Common Stock
------------
Our common stock is listed on The Nasdaq National Market under the symbol
"XIRC." On December 8, 1999, the last reported sale price of our common stock
was $51.25 per share.
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Xircom, Inc.
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share.................................. $51.25 $2.56 $48.69
Total...................................... $205,000,000 $10,250,000 $194,750,000
</TABLE>
Delivery of the shares of common stock will be made on or about December 14,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
CIBC World Markets
SG Cowen
The date of this prospectus is December 8, 1999.
<PAGE>
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TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Price Range of Common Stock.............................................. 14
Capitalization........................................................... 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Description of Capital Stock............................................... 25
Underwriting............................................................... 26
Notice to Canadian Residents............................................... 28
Legal Matters.............................................................. 29
Experts.................................................................... 29
Additional Information .................................................... 29
Index to Supplemental Consolidated Financial Statements.................... F-1
</TABLE>
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You should rely only on information contained in this document or to which we
have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
3
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information concerning our company and the common stock being sold in this
offering and our financial statements and related material appearing in this
prospectus and in the documents incorporated by reference in this prospectus.
Because this is only a summary, you should read the rest of this prospectus,
including the documents incorporated by reference in this prospectus, before
you invest in our common stock. Read this entire prospectus carefully,
especially the risks described under "Risk Factors." Unless otherwise stated,
information in this prospectus assumes that the underwriters' over-allotment
option to purchase an additional 600,000 shares of common stock is not
exercised.
XIRCOM, INC.
We are a leading global provider of mobile networking and information access
solutions for mobile professionals. Our products enable connectivity between
notebook computers and handheld computer devices and corporate networks, the
Internet and other online services from a wide variety of locations.
Our Market
Competitive and productivity demands are requiring an ever larger number of
professionals to maintain remote and mobile connectivity to their corporate
databases, intranets, email and the Internet. This trend toward mobile
computing has resulted in the increased use of notebook PCs and handheld
computing devices both on the road and in the office. International Data
Corporation ("IDC") estimates that the total remote and mobile computing
workforce in the U.S., including work extenders, mobile professionals,
telecommuters and mobile data collectors, will be 37.8 million people in 2000,
increasing to 47.1 million in 2003. These industry trends are creating a strong
demand for notebook computers. IDC further estimates that total annual
worldwide notebook PC shipments will be 22.3 million units in 2000 and 31.2
million units in 2003.
The principal device for portable computing connectivity is the PC Card, a
credit card-sized electronic component that contains a modem, a local area
network ("LAN") connection, or a combination of these, and which can be
inserted into a slot on a portable computer. IDC estimates that in the year
2000, 19.6 million PC Cards will be shipped worldwide. In addition, we believe
there will be a significant market for connectivity devices smaller than PC
Cards, for use with new generations of sub-notebook PCs and handheld computing
devices.
Our Products
We have consistently pioneered the development of new mobile networking
technologies and products. In 1992, we were the first company to ship a LAN
adapter in the PC Card form factor, compliant with the standards set by the
Personal Computer Memory Card International Association (also known as PCMCIA
Cards). We expanded our product offerings in 1994 to include the first combo
LAN and modem PC Cards. We believe combo cards continue to represent the
fastest growing segment of the PC Card market. In 1998, we introduced our
RealPort family of Integrated PC Cards, which eliminate the need for pop-out
jacks and external cables. In 1999, we introduced Universal Serial Bus ("USB")
port expansion systems, both through our own internal product offering
introduced in August 1999 and through our acquisition of Entrega Technologies,
Inc. ("Entrega") in October 1999. Through our acquisition in September 1999 of
the Rex personal information manager product line from Franklin Electronic
Publishers, we have also entered the market for sub-handheld information
accessories.
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Our products, which are recognized for innovative technology, high
reliability and broad compatibility, currently include:
. PC Cards and Integrated PC Cards. Our PC Cards and Integrated PC Cards
enable LAN, modem or combination LAN and modem connectivity for portable
PCs. Our line of RealPort Integrated PC Cards features a patented
connection point consisting of a built-in, standard connector,
eliminating the need for pop-out jacks and external cables, which are
often broken or lost.
. Mini PCI Cards. Our Mini PCI Cards provide to OEMs a flexible and low-
cost means to add internal communication functionality to notebook and
sub-notebook computers and handheld computing devices.
. Handheld Connectivity Cards. We have recently introduced a line of LAN
and modem connectivity cards for handheld information appliances,
including our CompactCards for Windows CE devices.
. USB Port Expansion Systems. Our recently introduced PortGear and
PortStation products are USB port expansion systems that provide
peripheral-to-PC connectivity, including modem, LAN and Ethernet
connectivity. Our PortStation products consist of mix-and-match modular
connectivity ports that can be individually configured and snapped
together, connecting to a single USB port on the host PC. PortStation
products are targeted for the enterprise market. PortGear products are
USB connection devices targeted for value-focused OEM and consumer
markets.
. Wearable Information Accessories. Our Rex line of sub-handheld
information accessories provides convenient mobile information access by
combining a personal organizer into a PC Card.
Our technological leadership and innovative product designs are reflected in
the numerous industry awards our products have received. These include:
. RealPort Ethernet 10/100+Modem 56: Notebook & Organizer "Best PC Card
Modem 1999"
. RealPort CardBus Ethernet 10/100+Modem 56: PC Computing "1998 MVP Award"
Hardware, PC Card Network Adapter
. CreditCard Ethernet 10/100+Modem 56: PC Computing "1997 MVP Winner"
. CreditCard Ethernet Adapter 10/100: Network Computing 1996 Editor's
Choice
. CreditCard Ethernet+Modem: PC Magazine 1995 Technical Excellence Award--
Networking Hardware category
We sell our products primarily through domestic and international
distributors. Domestic distributors include Ingram Micro Inc., Tech Data
Corporation and Merisel, Inc., and reseller organizations such as MicroAge,
Inc. and Inacom Corp. International distributors include Tech-Pacific Ltd.,
LANDIS and C2000/Tech Data and international resellers such as Computacenter
Ltd. We also sell our products to a number of large OEM customers, such as
Compaq Computer Corporation, Dell Computer Corporation, Gateway Inc.,
International Business Machines, Intel Corporation and Toshiba Corporation.
U.S. enterprise customers standardized on our products include Wal-Mart Stores,
Inc., AT&T Corp., Bell Atlantic Corporation, Lucent Technologies, Inc., The
Walt Disney Company, Bank One Corporation, Pfizer Inc., McDonald's Corporation
and the Federal Reserve Board. Examples of customers standardized globally on
our products include Oracle Corporation, PricewaterhouseCoopers LLP, Cisco
Systems Inc., McKinsey & Company Inc., Microsoft Corporation, DaimlerChrysler
AG, Hewlett-Packard Company, Volvo AB, Novartis AG and BP Amoco Plc.
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We intend to continue to develop our existing product offerings to support
leading edge connectivity standards. We expect customers for our PC Card and
port expansion system products to continue to demand higher speeds and
bandwidth. We are focusing our development efforts on new versions of
Integrated PC Card and PC Card LAN adapters, modem-only cards, multifunction
cards and port expansion systems. Such new versions may combine LAN, modem,
ISDN, digital subscriber line, cable modem, local and/or wide area wireless
communications, and home networking technologies. We also plan to introduce an
enterprise version of the Xircom Rex wearable information accessory that
combines its current information management capabilities with two-factor
authentication technology to offer an integrated user authentication solution
for corporate networks.
We also intend to continue to develop new product lines to complement our
existing product offerings and capitalize on opportunities created by
advancements in notebook PC and handheld computer technology. For example, the
Palm-based Visor handheld computer, launched by Handspring, Inc. in September
1999, includes an external expansion slot that accepts devices referred to as
"Springboard Modules." The Springboard external expansion slot is the first
attempt to create a standardized expansion slot for Palm-based handheld
devices, and could become the de-facto standard. We are developing products
based on this Springboard standard for the Palm segment, to complement our
handheld connectivity products to support handheld computers using the
Windows CE operating system.
Recent Developments
We recently completed two acquisitions, enhancing our leading position in the
mobile networking market. On September 27, 1999, we completed the acquisition
of certain assets of the Rex product line, including intellectual property,
inventory and fixed assets, from Franklin Electronic Publishers for $13.25
million in cash. The Rex product line allows us to enter the wearable
information accessory market. These products, which will be marketed under the
Xircom Rex brand name, are expected to be offered through leading retail
channels as well as our worldwide distributor network. On October 1, 1999, we
completed the acquisition of Entrega, a leader in the consumer USB port
expansion market. Entrega's products will be marketed as Xircom PortGear
products and are expected to be offered worldwide through mass merchandise,
retail and OEM channels. We expect from time to time to continue to evaluate
the acquisition of additional businesses, products and technologies.
We were incorporated in 1988 in California. Our principal executive offices
are located at 2300 Corporate Center Drive, Thousand Oaks, California 91320.
Our telephone number is (805) 376-9300.
The Offering
<TABLE>
<C> <S>
Common Stock Offered........................ 4,000,000 shares
Common Stock Outstanding after this
Offering................................... 28,958,610
Use of Proceeds............................. General corporate purposes and
potentially for acquisition
opportunities that may arise in
the future. See "Use of
Proceeds."
Nasdaq National Market Symbol............... XIRC
</TABLE>
6
<PAGE>
Summary Financial Data
The following summary consolidated financial data gives retroactive effect to
our acquisition of Entrega on October 1, 1999. The acquisition was accounted
for as a pooling-of-interests.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales...................... $119,528 $166,757 $184,575 $276,947 $424,436
Gross profit................... 40,480 59,320 58,275 97,570 181,188
In-process research and
development and other
nonrecurring charges(1)....... 5,745 1,505 2,163 -- 4,596
Operating income (loss) from
continuing operations......... (22,467) 9,012 (7,958) 19,515 49,544
Income (loss) from continuing
operations(1)................. (15,032) 5,168 (3,349) 15,854 34,605
Discontinued operations:
Operating income (loss) net
of income taxes............. (43,772) 784 (226) -- --
Loss on disposal, net of
income taxes................ -- -- (6,275) -- --
Net income (loss).............. $(58,804) $ 5,952 $ (9,850) $ 15,854 $ 34,605
Diluted earnings (loss) per
share(1):
Continuing operations........ $ (0.88) $ 0.26 $ (0.16) $ 0.68 $ 1.35
Net income (loss)............ $ (3.44) $ 0.30 $ (0.46) $ 0.68 $ 1.35
Balance Sheet Data:
Working capital................ $ 25,909 $ 34,711 $ 95,501 $116,062 $135,480
Total assets................... $ 85,649 $107,201 $147,930 $197,935 $275,496
Long-term obligations, net of
current portion............... $ 597 $ 1,860 $ -- $ -- $ --
Shareholders' equity........... $ 53,095 $ 65,603 $113,427 $134,751 $174,920
</TABLE>
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(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 nonrecurring
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.
7
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RISK FACTORS
We face the risk of being unable to remain competitive in the mobile
information access industry.
Companies in the PC, desktop LAN adapter and modem industries with greater
name recognition and greater financial resources than us have a significant
presence in the PC Card adapter market, including, in particular, 3Com. As a
result, we have faced significant competition in our industry. Actions by our
competitors which continue to influence this competitive environment include
price reductions, new product introductions, promotional efforts, and changes
in the level of channel inventory. We expect competition to remain intense and
as a result, we may lose some of our business to our competitors. Further, we
believe that the market for our products will continue to be price competitive
and thus we could continue to experience lower selling prices, lower gross
profit margins and reduced profitability levels for such products than in the
past.
We face the risk of being unable to compete if our manufacturing facility
becomes unable to produce our products efficiently.
Our manufacturing facility, located in Malaysia, produces all of our PC Card
adapter products. We may be unable to achieve significant additional
efficiencies from this facility. If we are unable to achieve additional cost
reductions through increased production or manufacturing efficiencies we may be
unable to keep pace with our competitors' cost or price reductions to an extent
necessary to maintain or increase our market share without adversely affecting
gross profit margins. In addition, interruptions in the supply of products
could occur if we are unable to accurately forecast demand levels or react
sufficiently rapidly to changes. This in turn could adversely affect future
sales. We also face risks associated with maintaining production facilities
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 Condition
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
8
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experience increased credit risks. Such credit risks could include insolvency
of customers or other impairments of customers' ability to repay amounts owed
to us. These credit risks could also include insolvency of vendors or other
impairments of vendors' ability to supply materials to us.
Foreign currency fluctuations could adversely affect our results.
We do all our manufacturing at our facility in Malaysia and our European
sales headquarters is located in Belgium. As a result, a significant portion of
our operating expenses are currently denominated in the Malaysian ringgit and
the Belgian franc. The majority of our international sales have been
denominated in U.S. dollars in 1999 and prior fiscal years. However, beginning
with fiscal year 2000, we expect that the majority of our international sales
will be denominated in the Euro. We do not engage in foreign currency hedging
transactions, although we do mitigate our operating expense exposure to some
extent by purchasing in advance a portion of the currency expected to be needed
for overseas operating expenses. Accordingly, our results of operations could
be adversely affected as a result of foreign currency fluctuations. In
particular, in September 1998, the Malaysian government fixed the exchange rate
of the Malaysian currency at 3.8 ringgits per U.S. dollar. Any potential
reversion to a floating exchange rate could have an adverse effect on our
results of operations.
We face the risk of incurring unnecessary expenses if we are unable to
accurately predict sales of our products.
We generally ship products within one to four weeks after receipt of orders.
Therefore, our sales backlog is typically minimal. Accordingly, our
expectations of future net sales are based largely on our own estimates of
future demand and not on firm customer orders. If our net sales do not meet
expectations, profitability would be adversely affected, as we may not be able
to reduce expenses at the same pace in the near term.
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
9
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chipsets, are available from sole suppliers, we risk having an inadequate
supply of components due to a number of factors, including:
. Supplier manufacturing constraints;
. Excess of demand versus supply;
. National political or economic changes; and
. Other risks not within our control.
Although we have not experienced any significant parts shortages over the past
year, many components we use require long-lead purchase orders thereby limiting
our flexibility to change order quantities in the event of changes in demand.
Any supply source interruptions, limitations on availability, or inability to
develop alternative sources as needed could adversely affect our ability to
deliver products and, in turn, our future earnings.
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. In addition, while we believe our Realport connection port is a
competitive strength, as computing devices become ever smaller, connectivity
device form factors may become too small to permit use of the Realport
connector. 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.
10
<PAGE>
We currently use software licensed from third parties in certain of our
Combo, modem-only and Token Ring products. Our operating results could be
adversely affected by a number of factors relating to this third-party
software, including:
. Failure by a licensor to accurately develop, timely introduce, promote
or support the software;
. Delays in shipment of our products;
. Excess customer support or product return costs experienced by us due to
errors in licensed software; or
. Termination of our relationship with such licensors.
We face the risk of being unable to attract and retain qualified managerial
and other skilled personnel.
Our continued success depends, in part, on our ability to identify, attract,
motivate and retain qualified managerial, technical and sales personnel.
Because our future success is dependent on our ability to manage effectively
the enhancement and introduction of existing and new products and the marketing
of such products, we are particularly dependent 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 businesses or
assets that we 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 of continued high volatility in our stock price.
The market price of our common stock has been, and may continue to be,
subject to a high degree of volatility. Numerous factors relating to us or our
competitors may have a significant impact on the market price of our common
stock, including:
. General conditions in the networking and computer industries;
. Product pricing;
. New products;
. Market growth forecasts;
. Technological innovations;
. Acquisitions; and
. Announcements of quarterly operating results.
In addition, stock markets have experienced extreme price volatility and broad
market fluctuations in recent years. This volatility has had a substantial
effect on the market price of securities issued by many high technology
companies, including ours, in many cases for reasons unrelated to the operating
performance of the specific companies. Our common stock has experienced
volatility not necessarily related to announcements of our performance.
11
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We face the risk that Year 2000 compliance issues could harm our business.
The Year 2000 issue is the result of computer programs and hardware using two
digits rather than four to define the applicable year. Such computer programs
and hardware may have date-sensitive software or embedded chips that always
assume the century is "19". This could cause miscalculations or failure in our
affected information systems and/or manufacturing equipment. Such system
miscalculations or failure could disrupt our business operations by, for
example, causing a temporary inability to process transactions or engage in our
normal business activities. Such disruptions may also occur if our key
suppliers or customers experience disruptions in their ability to transact with
us due to Year 2000 issues.
Products
We have reviewed and tested our PC Card, PortStation port expansion system,
and Rex products and believe they do not present any Year 2000 issues. Products
associated with the Entrega acquisition had been tested independently by
Entrega prior to our acquisition. Pursuant to that testing, Entrega had issued
its own statement on Year 2000 readiness of its products, in which Entrega
noted that its products were found to be fully Year 2000 compliant. In
addition, as part of our acquisition of the Rex product line, we have, where
applicable, secured representations, warranties, and/or certifications of Year
2000 compliance from key suppliers of operating software contained in such
products, and from parties selling products to us for our resale. We do not
believe any of our products will present any Year 2000 issues. All of our
products are used primarily as accessories to, and operate in dependence upon,
related systems. The related systems may themselves contain or demonstrate Year
2000 issues. We do not believe that any such Year 2000 issues in such systems
are or may be attributable to our products.
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.
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The testing phase included defining test plans, establishing appropriate test
environments, developing test cases, performing testing with appropriate
personnel, and certifying/documenting the results. The certification process
entailed having applicable in-house subject matter experts (i.e. functional
managers) review test results, including computer screens and printouts,
against pre-established criteria to ensure system(s) compliance. Additionally,
in relation to equipment used in our manufacturing lines, we engaged qualified
personnel from the applicable equipment manufacturer to perform run time on-
site testing in our manufacturing facility of the given manufacturer's
equipment. Services performed by such equipment manufacturer personnel included
installation of any applicable patches, upgrades, or other modifications, if
any, as necessary to ensure full Year 2000 compliance on the applicable
manufacturer's equipment. As of September 30, 1999, our testing phase was
substantially completed.
We are developing a contingency plan for organizing responses in case of
shutdown of certain of our critical applications due to Year 2000 issues. This
contingency plan involves, among other things, IT and non-IT systems and
external systems. In addition, we have initiated plans to secure certain
contingent levels of key materials and components for stocking purposes near
the end of calendar year 1999. These efforts are intended to provide for any
unanticipated disruption in the supply chain affecting suppliers of designated
critical components. We believe that the most likely worst case of a Year 2000-
related failure within systems we manage, given our state of readiness today,
would be a temporary (i.e. recoverable and correctable) loss of 10% of our
internal IT capability with no material impact on our ability to conduct normal
revenue-generating operations.
External relationships
Our global operations rely heavily on the infrastructures within the
countries in which they do business. The Year 2000 readiness within
infrastructure suppliers (utilities, government agencies, and shipping
organizations) will be crucial to our ability to avoid disruption of
operations.
We have queried our significant suppliers regarding their Year 2000
readiness. To date, we are not aware of any such significant supplier with a
Year 2000 issue that would materially affect our operating results. While we
have no means of ensuring that all of our significant suppliers will be Year
2000 ready, we performed secondary evaluations, of our most critical suppliers
including site visits where deemed necessary, and found no Year 2000 issues
that we believe would lead to an interruption of our manufacturing schedules.
We could be materially impacted if our significant suppliers are unable to
resolve their Year 2000 issues in a timely fashion. The adverse effect on us of
non-compliance by these parties could adversely affect us.
Costs
We have used both internal and external resources to replace, test and
implement IT and non-IT systems needing Year 2000 modifications. The total cost
of the Year 2000 project has been approximately $1.4 million and was funded by
cash flows from operations. Of the amounts incurred, approximately $660,000 was
expensed and $702,000 was capitalized for new software. As our Year 2000
efforts are substantially complete, we do not expect to incur significant
future costs related to this project.
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of securities offered by this prospectus will
be used for general corporate purposes, including capital expenditures. We
expect from time to time to evaluate the acquisition of businesses, products
and technologies for which a portion of the net proceeds may be used. Pending
such uses, we will invest the net proceeds in interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividend on the corporation's capital
stock and do not anticipate paying any cash dividends on such stock in the
foreseeable future. We currently intend to retain future earnings, if any, for
use in our business.
PRICE RANGE OF COMMON STOCK
The following table presents the high and low closing stock price for
Xircom's Common Stock as quoted on The Nasdaq National Market for fiscal years
1998 and 1999 and fiscal year 2000 to date.
<TABLE>
<CAPTION>
High Low
Fiscal 2000 --------- ---------
<S> <C> <C>
October 1 to December 8, 1999.......................... $55 1/2 $43 1/4
Fiscal 1999
July 1 to September 30................................. $47 7/16 $30 7/32
April 1 to June 30..................................... $30 1/16 $18 13/16
January 1 to March 31.................................. $45 1/4 $23 15/16
October 1 to December 31, 1998......................... $35 17/32 $17 1/2
Fiscal 1998
July 1 to September 30................................. $27 1/16 $14 3/4
April 1 to June 30..................................... $17 5/16 $13 3/8
January 1 to March 31.................................. $14 1/4 $ 9 9/16
October 1 to December 31, 1997......................... $12 3/8 $ 9
</TABLE>
14
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. our capitalization as of September 30, 1999, after giving retroactive
effect to the acquisition of Entrega consummated on October 1, 1999,
accounted for using the pooling-of-interests accounting method; and
. our capitalization as adjusted to give effect to (i) our repayment on
October 1, 1999 of Entrega's indebtedness of $9.138 million in part by
cash and in part in shares, and (ii) the sale of the 4,000,000 shares of
common stock we are offering hereby at an initial offering price of
$51.25 per share after deducting underwriter's discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
September 30, 1999
------------------------
Actual As Adjusted
---------- -------------
(in thousands, except
share information)
<S> <C> <C>
Cash and cash equivalents............................... $ 135,630 $ 324,842
Notes payable........................................... 9,138 --
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, 28,671,685 shares outstanding as
adjusted(1).......................................... 24 29
Paid-in capital....................................... 151,925 350,270
Retained earnings..................................... 22,971 22,971
---------- ----------
Total shareholders' equity.......................... 174,920 373,270
---------- ----------
Total capitalization................................ $ 184,058 $ 373,270
========== ==========
</TABLE>
- --------
(1) Excludes 4,537,062 shares issuable upon exercise of outstanding stock
options as of September 30, 1999 (which number includes shares issuable
upon exercise of assumed Entrega options), and excludes 34,327 shares
issued to Entrega's financial advisors upon the closing of the Entrega
transaction.
In October 1999, the Board of Directors approved an amendment to our
Amended and Restated Articles of Incorporation to increase our authorized
shares of common stock from 50,000,000 shares to 125,000,000 shares, which
amendment is subject to our shareholders' approval. See "Description of
Capital Stock".
15
<PAGE>
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. This data gives retroactive effect to our acquisition of Entrega on
October 1, 1999. The acquisition was accounted for as a pooling-of-interests.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales...................... $119,528 $166,757 $184,575 $276,947 $424,436
Cost of sales.................. 79,048 107,437 126,300 179,377 243,248
-------- -------- -------- -------- --------
Gross profit................... 40,480 59,320 58,275 97,570 181,188
Operating Expenses:
Research and development
expenses.................... 13,085 9,537 12,799 16,599 24,557
Sales and marketing
expenses.................... 37,086 32,723 43,012 50,699 87,348
General and administrative
expenses.................... 7,031 6,543 8,259 10,757 15,143
In-process research and
development and other
nonrecurring charges(1)..... 5,745 1,505 2,163 -- 4,596
-------- -------- -------- -------- --------
Operating income (loss) from
continuing operations......... (22,467) 9,012 (7,958) 19,515 49,544
Other income (expense), net.... 435 (1,338) 3,172 4,191 1,785
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes......................... (22,032) 7,674 (4,786) 23,706 51,329
Income tax provision
(benefit)..................... (7,000) 2,506 (1,437) 7,852 16,724
-------- -------- -------- -------- --------
Income (loss) from continuing
operations(1)................. (15,032) 5,168 (3,349) 15,854 34,605
Discontinued operations:
Operating income (loss), net of
income taxes.................. (43,772) 784 (226) -- --
Loss on disposal, net of income
taxes......................... -- -- (6,275) -- --
-------- -------- -------- -------- --------
Net income (loss)(1)........... $(58,804) $ 5,952 $ (9,850) $ 15,854 $ 34,605
======== ======== ======== ======== ========
Diluted earnings (loss) per
share(1):
Continuing operations........ $ (0.88) $ 0.26 $ (0.16) $ 0.68 $ 1.35
Net income (loss)............ $ (3.44) $ 0.30 $ (0.46) $ 0.68 $ 1.35
Balance Sheet Data:
Working capital................ $ 25,909 $ 34,711 $ 95,501 $116,062 $135,480
Total assets................... $ 85,649 $107,201 $147,930 $197,935 $275,496
Long-term obligations, net of
current portion............... $ 597 $ 1,860 $ -- $ -- $ --
Shareholders' equity........... $ 53,095 $ 65,603 $113,427 $134,751 $174,920
</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 nonrecurring
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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion 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 prospectus.
Overview
We are a leading global provider of mobile networking and information access
solutions for mobile professionals. Our products enable connectivity between
notebook and handheld computer devices and corporate networks, the Internet and
other online services from a wide variety of locations.
We were incorporated in 1988 and shipped our first product in 1989. In 1992,
we were the first company in the industry to ship a LAN adapter in the PC Card
form factor, compliant with the standards set by the Personal Computer Memory
Card International Association (also known as PCMCIA Cards). We expanded our
product offerings in 1994 to include the first combo LAN and modem PC Cards. We
believe combo cards continue to represent the fastest growing segment of the PC
Card market. In 1998, we introduced our RealPort family of Integrated PC Cards,
which eliminates the need for pop-out jacks and external cables. During
February 1999, we began shipping 56K modems in the MiniPCI form factor,
providing OEMs a flexible and low cost configuration alternative for
communications functionality in notebook computers and handheld PCs. During
June 1999, we began shipping our first products for handheld computers--the
CompactCard line for Windows CE machines. In 1999, we entered the USB port
expansion market with the introduction of our PortStation port expansion system
products, a line of configurable products designed to offer a broad set of
access and port expansion capabilities to both enterprise and small office/home
office users through a single USB connection to a PC.
We recently completed two acquisitions intended to expand our product
offerings and enhance our leading position in the mobile networking market. On
September 27, 1999, we completed the acquisition of certain assets of the Rex
product line, including intellectual property, inventory and fixed assets, from
Franklin Electronic Publishers. The Rex line of portable information devices
allows customers to access personal data at any location. On October 1, 1999,
we completed the acquisition of Entrega, a leader in the USB port expansion
market. Entrega provides standardized devices for peripheral-to-PC
connectivity, including USB hubs, port converters and cables for PC and
Macintosh platforms. We expect from time to time to continue to evaluate the
acquisition of additional businesses, products and technologies.
Our net sales consist primarily of sales of our mobile networking and
information access products. We recognize revenue from product sales when
shipped. We make a provision for the estimated amount of product returns or
credits that may occur under these contracts in the period of sale and have a
policy of reserving channel inventory held by our customers in excess of one
month supply. We record a provision for product returns and credits based on
both contractual agreements, which allows distributors and dealers to return
products or receive price protection credits under certain circumstances, and
historical return rates. We sell our products primarily through domestic and
international distributors as well as to a number of OEM customers.
Our cost of sales consists of 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 licensors of
software incorporated into our products. Our gross margin is affected by our
product mix and from the proportion of net sales derived from sales to OEMs,
which typically carry lower gross margins than sales through our distribution
partners.
Research and development expenses consist primarily of labor and project
materials and are expensed as incurred.
17
<PAGE>
Sales and marketing expenses consist primarily of salaries, commissions and
marketing, advertising and promotional activities.
General and administrative expenses consist primarily of salaries and related
expenses, finance, accounting and human resources expenses, professional fees,
bad debt expenses and other general corporate expenses.
Quarterly Results of Operations
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1997 1998 1998 1998 1998 1999 1999 1999(1)
------------ --------- -------- ------------- ------------ --------- -------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales............... $52,545 $64,134 $71,312 $88,956 $98,498 $101,872 $108,439 $115,627
Cost of sales........... 34,417 42,546 47,118 55,296 59,064 58,643 61,634 63,907
------- ------- ------- ------- ------- -------- -------- --------
Gross profit............ 18,128 21,588 24,194 33,660 39,434 43,229 46,805 51,720
Operating expenses:
Research and
development expenses.. 3,539 3,940 4,120 5,000 5,549 5,439 6,520 7,049
Sales and marketing
expenses.............. 10,277 11,545 12,172 16,705 19,419 20,928 22,604 24,397
General and
administrative
expenses.............. 2,071 2,491 2,763 3,432 3,340 3,668 3,671 4,464
In-process research and
development and other
nonrecurring charges.. -- -- -- -- -- -- -- 4,596
------- ------- ------- ------- ------- -------- -------- --------
Total operating
expenses............... 15,887 17,976 19,055 25,137 28,308 30,035 32,795 40,506
------- ------- ------- ------- ------- -------- -------- --------
Income from operations.. 2,241 3,612 5,139 8,523 11,126 13,194 14,010 11,214
Other income, net....... 1,224 799 642 1,526 284 478 554 469
------- ------- ------- ------- ------- -------- -------- --------
Income from operations
before income taxes.... 3,465 4,411 5,781 10,049 11,410 13,672 14,564 11,683
Income tax provision.... 1,035 1,409 2,018 3,390 3,801 4,211 4,700 4,012
------- ------- ------- ------- ------- -------- -------- --------
Net income.............. $ 2,430 $ 3,002 $ 3,763 $ 6,659 $ 7,609 $ 9,461 $ 9,864 $ 7,671
======= ======= ======= ======= ======= ======== ======== ========
Basic earnings per
share.................. $ 0.11 $ 0.13 $ 0.16 $ 0.29 $ 0.32 $ 0.39 $ 0.41 $ 0.31
======= ======= ======= ======= ======= ======== ======== ========
Diluted earnings per
share.................. $ 0.11 $ 0.13 $ 0.16 $ 0.27 $ 0.30 $ 0.37 $ 0.39 $ 0.29
======= ======= ======= ======= ======= ======== ======== ========
As a Percentage of Net Revenues:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 34.5 33.7 33.9 37.8 40.0 42.4 43.2 44.7
Research and development
expenses............... 6.7 6.1 5.7 5.6 5.6 5.3 6.0 6.1
Sales and marketing
expenses............... 19.6 18.0 17.1 18.8 19.7 20.6 20.8 21.1
General and
administrative
expenses............... 3.9 3.9 3.9 3.8 3.4 3.6 3.5 3.8
In-process research and
development and other
non-recurring charges.. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.0
------- ------- ------- ------- ------- -------- -------- --------
Total operating
expenses............... 30.2 28.0 26.7 28.2 28.7 29.5 30.3 35.0
------- ------- ------- ------- ------- -------- -------- --------
Income from operations.. 4.3 5.6 7.2 9.6 11.3 12.9 12.9 9.7
Other income, net....... 2.3 1.3 0.9 1.7 0.3 0.5 0.5 0.4
------- ------- ------- ------- ------- -------- -------- --------
Income from operations
before income taxes.... 6.6 6.9 8.1 11.3 11.6 13.4 13.4 10.1
Income tax provision.... 2.0 2.2 2.8 3.8 3.9 4.1 4.3 3.5
------- ------- ------- ------- ------- -------- -------- --------
Net income.............. 4.6% 4.7% 5.3% 7.5% 7.7% 9.3% 9.1% 6.6%
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
- -------
(1) The fourth quarter of fiscal 1999 includes $4,596 ($3,309 net of tax
benefit) or $0.13 per diluted share for write-off of in-process research
and development and other nonrecurring charges.
18
<PAGE>
Net sales
Over the eight quarters ended September 30, 1999, our quarterly sales
increased from $52.5 million to $115.6 million. Our quarterly sales have grown
in each of the eight quarters ended September 30, 1999 primarily due to growth
in the overall demand for local and wide area network connectivity products,
increasing unit sales of our adapter products by our distributors and OEM
customers and the introduction of new products such as our RealPort Integrated
PC Card family of products.
Gross profit
Over the eight quarters ended September 30, 1999, our quarterly gross profit
increased from 34.5% of quarterly sales to 44.7% of quarterly sales. Our gross
profit as a percentage of net sales has increased in each of the eight
quarters, except the quarter ended March 31, 1998, primarily due to:
. The higher gross margins of our RealPort Integrated PC Card family of
products, which began shipping in the quarter ended June 30, 1998, versus
the comparably featured Type II PC Card products;
. Increased mix and sales volumes of our PC Card LAN adapters and PC Card
LAN+Modem adapters, which typically generate higher gross profit margins
than our other products, and decreased sales of modem-only products to
our OEM customers, which generate lower gross profit margins than sales
made through our distribution partners; and
. Decreased fixed manufacturing costs as a percentage of sales.
Operating expenses
Operating expenses increased in absolute amounts in each of the eight
quarters ended September 30, 1999, and as a percentage of net sales, these
expenses increased in each of these quarters, except in the quarters ended
December 31, 1997, and March 31, 1998, due to increased staffing and the
expansion of sales and marketing activities.
Results of Operations
<TABLE>
<CAPTION>
Year ended
September 30,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
As a Percentage of Net Revenue:
Net sales............................................... 100.0 % 100.0% 100.0%
Cost of sales........................................... 68.4 64.8 57.3
----- ----- -----
Gross profit............................................ 31.6 35.2 42.7
Operating expenses:
Research and development expenses..................... 6.9 6.0 5.8
Sales and marketing expenses.......................... 23.3 18.3 20.6
General and administrative expenses................... 4.5 3.9 3.5
In-process research and development and other
nonrecurring charges................................... 1.2 0.0 1.1
----- ----- -----
Operating income (loss) from continuing operations...... (4.3) 7.0 11.7
Other income, net....................................... 1.7 1.5 0.4
----- ----- -----
Income (loss) from continuing operations before income
taxes.................................................. (2.6) 8.5 12.1
Provision for income taxes.............................. (0.8) 2.8 3.9
----- ----- -----
Income (loss) from continuing operations................ (1.8)% 5.7% 8.2%
===== ===== =====
</TABLE>
19
<PAGE>
Net Sales
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 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>
Year ended
September 30,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
PC Card LAN+Modem Adapters.................................... 43% 48% 57%
PC Card LAN Adapters.......................................... 42% 30% 28%
PC Card Modem Adapters........................................ 11% 21% 10%
Port expansion system products................................ -- -- 4%
Other......................................................... 4% 1% 1%
</TABLE>
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.
20
<PAGE>
Gross Profit
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.
Research and Development
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 port expansion system and the CompactCard 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
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
Port expansion system and the CompactCard line of products; and
. Expenses incurred by Entrega during 1999, to support the launch of its
line of port expansion system products.
21
<PAGE>
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.
General and Administrative
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
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
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 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.
22
<PAGE>
Income Tax Provision
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.
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 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
23
<PAGE>
$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.
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 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.
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.
24
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of (1) 50,000,000 shares designated as
common stock, $0.001 par value, and (2) 2,000,000 shares designated as
preferred stock, $0.001 par value. The only equity securities currently
outstanding are shares of common stock. As of October 1, 1999, there were
approximately 24,671,685 shares of common stock issued and outstanding.
Recent Developments
On October 22, 1999, the Board of Directors approved a new stock option plan
(the "2000 Plan") and related agreements. This plan is subject to shareholder
approval, which will be sought at our Annual Meeting of Shareholders in January
2000. The Board of Directors reserved for issuance under the 2000 Plan a number
of shares of common stock equal to the sum of (i) 1,200,000 shares plus (ii)
any shares that are reserved but unissued under the 1992 Stock Option Plan as
of the date of the shareholders' approval of the 2000 Plan and any shares of
our common stock subsequently returned to us under the 1992 Plan. After
adoption of the new plan by the shareholders, options will no longer be issued
under the 1992 Plan.
On October 22, 1999, the Board of Directors approved an amendment to our
Amended and Restated Articles of Incorporation to increase the total number of
shares the Board of Directors is authorized to issue from 52,000,000 shares to
127,000,000 shares and to increase the authorized number of shares of common
stock from 50,000,000 shares to 125,000,000 shares. This amendment is subject
to shareholder approval, which will be sought at our Annual Meeting of
Shareholders in January 2000.
Common Stock
Holders of common stock are entitled to receive dividends declared by the
Board of Directors, out of funds legally available for the payment of
dividends, subject to the rights of holders of preferred stock. Currently, we
are not paying a dividend. Each holder of common stock is entitled to one vote
per share. Upon any liquidation, dissolution or winding up of our business, the
holders of common stock are entitled to share equally in all assets available
for distribution after payment of all liabilities and provision for liquidation
preference of shares of preferred stock then outstanding. The holders of common
stock have no preemptive rights and no rights to convert their common stock
into any other securities. There are also no redemption or sinking fund
provisions applicable to the common stock.
All outstanding shares of common stock are fully paid and nonassessable.
Our common stock is listed on The Nasdaq National Market under the symbol
"XIRC." The transfer agent and registrar for the common stock is Equiserve.
Preferred Stock
There are no shares of preferred stock outstanding. The Board of Directors
has the authority, without further action by the shareholders, to issue up to
2,000,000 shares of preferred stock in one or more series and to fix the
following terms of the preferred stock:
. designations, powers, preferences, privileges,
. relative participating, optional or special rights, and
. the qualifications, limitations or restrictions, including dividend
rights, conversion rights, voting rights, terms of redemption and
liquidation preferences.
Any or all of these rights may be greater than the rights of the common
stock.
The Board of Directors, without stockholder approval, can issue preferred
stock with voting, conversion or other rights that could negatively affect the
voting power and other rights of the holders of common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
in control of Xircom or make it more difficult to remove our management.
Additionally, the issuance of preferred stock may have the effect of decreasing
the market price of the common stock.
25
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated December 8, 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, CIBC World
Markets Corp. and SG Cowen Securities Corporation are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation............................ 1,890,000
CIBC World Markets Corp........................................... 990,000
SG Cowen Securities Corporation................................... 720,000
Advest, Inc....................................................... 50,000
E*Offering Corp................................................... 50,000
First Albany Corporation.......................................... 50,000
Invemed Associates LLC............................................ 50,000
OLDE Discount Corporation......................................... 50,000
Raymond James & Associates, Inc................................... 50,000
SunTrust Equitable Securities Corporation......................... 50,000
U.S. Bancorp Piper Jaffray Inc.................................... 50,000
---------
Total........................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of the non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro-rata
basis up to 600,000 additional shares at the public offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $1.54 per share. The underwriters
and selling group members may allow a discount of $0.10 per share on sales to
other broker/dealers. After the public offering of the common stock, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- -----------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions paid by us...... $2.56 $2.56 $10,250,000 $11,787,500
Expenses payable by us........... $0.14 $0.12 $ 550,000 $ 550,000
</TABLE>
We and our directors and executive officers have agreed that we and they will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to any shares of our common stock
or securities convertible into or exchangeable or exercisable for any shares of
our common stock, whether now owned or hereafter acquired, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 90 days after the
26
<PAGE>
date of this prospectus, except in the case of issuances as a result of the
grant of employee stock options outstanding on the date of this prospectus,
issuances of our common stock upon any exercise of such options or the exercise
of any other employee stock options outstanding on the date of this prospectus.
In addition, a transfer of such securities to a family member or a trust will
be permitted, provided that the transferee agrees to be bound in writing by the
restrictions in this paragraph.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.
Our common stock is listed on The Nasdaq National Market under the symbol
XIRC.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the shares of the
common stock in the open market after the distribution has been completed
in order to cover syndicate short positions.
. Penalty bids permit the underwriters to reclaim a selling concession from
a syndicate member when the shares of common stock originally sold by
that syndicate member are purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
. In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
27
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to us and the dealer from whom such purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such common stock without the benefit of
a prospectus qualified under such securities laws, (ii) where required by law,
that such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions".
Rights of Actions (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
28
<PAGE>
LEGAL MATTERS
The validity of the issuance of the securities we are offering by this
prospectus will be passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California and for the underwriters by
Shearman & Sterling, Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K,
and have audited our supplemental consolidated financial statements and
schedule included herein and in our Current Report on Form 8-K for the year
ended September 30, 1999, as set forth in their reports, which are included and
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and supplemental financial statements, and
related schedules are included and incorporated by reference in reliance on
Ernst & Young LLP's reports, given on their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the Commission,
in accordance with the Securities Exchange Act of 1934. You may read and copy
our reports, proxy statements and other information filed by us at the public
reference facilities of the Commission in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information about the public reference rooms. Our reports, proxy statements and
other information filed with the Commission are available to the public over
the Internet at the Commission's World Wide Web site at http://www.sec.gov. Our
web address is http://www.xircom.com. Information on our website is not
incorporated by reference.
We have filed a registration statement on Form S-3 under the Securities Act
of 1933 with respect to our common stock. This prospectus, which forms a part
of the registration statement, does not contain all of the information included
in the registration statement. Some information is omitted and you should refer
to the registration statement and its exhibits.
The Commission allows us to "incorporate by reference" the information we
filed with them, which means that we can disclose important information by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made by us with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act until our offering is complete:
. Our Annual Report on Form 10-K for the fiscal year ended September 30,
1999;
. Our Current Report on Form 8-K dated November 10, 1999; and
. Our Proxy Statement dated December 11, 1998 from Annual Meeting of
Shareholders held on January 22, 1999.
You may request a copy of these filings, at no cost, by writing or calling us
at the following address:
Steven F. DeGennaro
Chief Financial Officer
Xircom, Inc.
2300 Corporate Center Drive
Thousand Oaks, California 91320
(805) 376-9300
29
<PAGE>
XIRCOM, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Supplemental Consolidated Statements of Operations--Years ended September
30, 1999, 1998 and 1997................................................. F-3
Supplemental Consolidated Balance Sheets at September 30, 1999 and 1998.. F-4
Supplemental Consolidated Statements of Shareholders' Equity--Years ended
September 30, 1999, 1998 and 1997....................................... F-5
Supplemental Consolidated Statements of Cash Flows--Years ended September
30, 1999, 1998 and 1997................................................. F-6
Notes to Supplemental Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<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. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements 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.
/s/ Ernst & Young LLP
Woodland Hills, California
November 5, 1999
F-2
<PAGE>
XIRCOM, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended
September 30
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands, except per
share amounts)
<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
F-3
<PAGE>
XIRCOM, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30
-----------------
1999 1998
-------- --------
(In thousands,
except share and
per share
information)
<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
F-4
<PAGE>
XIRCOM, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
-------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------ ------ -------- ------------ --------
(In thousands)
<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
F-5
<PAGE>
XIRCOM, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended
September 30
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<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
F-6
<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 to reflect the
combined financial position and operations 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
F-7
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
are amortized using the straight-line method over the term of the related lease
or the useful life of the asset, whichever is shorter.
Revenue recognition
The Company recognizes revenue from product sales when shipped. The Company
makes a provision for the estimated amount of product returns or credits that
may occur under these contracts in the period of sale and has a policy of
reserving channel inventory held by its customers in excess of one month
supply. The Company also has contractual agreements that permit distributors
and dealers to return products or receive price protection credits under
certain circumstances. The Company generally provides a lifetime limited
warranty against defects in the hardware component and a two-year limited
warranty on the software component of its network adapters and modem products.
The Company makes provisions for these costs in the period of sale. In
addition, the Company provides telephone support to purchasers of its products
as needed to assist them in installation or use of the products.
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.
F-8
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
F-9
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Rapid technological change and short product life cycles
characterize the industry in which the Company operates. As a result, estimates
are required to provide for product returns, price protection, product
obsolescence and warranty returns. Historically, actual amounts recorded under
these programs have not varied significantly from estimated amounts. Actual
results may differ, however, from those estimates, although management does not
believe that any differences would materially affect the Company's financial
position or reported results.
Stock options
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant. The Company generally awards options for a fixed
number of shares at an option price equal to the fair value at the date of
grant. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." See Note Eight.
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>
F-10
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
F-11
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
------- ------ -------
<S> <C> <C> <C>
Current:
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>
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>
F-12
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 2,249,857 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.
F-13
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Options Outstanding Exercisable
------------------------------- -----------------
Weighted-
Average
Weighted- Remaining Weighted-
Average Contractual Average
Exercise Life Exercise
Shares Price (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.
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>
F-14
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-15
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
NOTE NINE: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Fiscal Years
Ended September
30
----------------
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.
F-16
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-17
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Branded OEM Unallocated Total
-------- ------- ----------- --------
(in thousands)
<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
======== ======= ======== ========
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>
F-18
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<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
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
<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>
F-19
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE TWELVE: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal Year
------- -------- -------- -------- -----------
(in thousands, except per share data)
<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
F-20
<PAGE>
XIRCOM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
computers, including Universal Serial Bus hubs, port converters and cables that
complement the Company's own product offerings. The acquisition will be
accounted for as a pooling-of-interests. The Company issued 266,195 shares of
its common stock in exchange for all of the outstanding shares of Entrega, and
assumed and exchanged all options to purchase Entrega stock for options to
purchase an aggregate of 76,914 shares of the Company's common stock. The
Company also issued 142,397 shares of its common stock to repay certain
indebtedness of Entrega. There were no intercompany transactions between the
two companies.
Separate financial information of the combined entities for fiscal 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
Xircom Entrega Combined
-------- ------- --------
(in thousands)
<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.
F-21
<PAGE>
[LOGO OF XIRCOM APPEARS HERE]
