-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A1CHFsdZGW9P86K9JdXRKkb8CAmTipG6tA/J/QeKYPnf2dfTDJoK9yDxS5ropXo6 k0iR987x1gbA/5mVwlzuUA== 0000891618-00-001411.txt : 20000314 0000891618-00-001411.hdr.sgml : 20000314 ACCESSION NUMBER: 0000891618-00-001411 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XICOR INC CENTRAL INDEX KEY: 0000319191 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942526781 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09653 FILM NUMBER: 568270 BUSINESS ADDRESS: STREET 1: 1511 BUCKEYE DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084328888 MAIL ADDRESS: STREET 1: 1511 BUCKEYE DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 0-9653 XICOR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2526781 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1511 BUCKEYE DRIVE MILPITAS, CALIFORNIA 95035 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-8888 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock (Common Stock, without par value) held by non-affiliates of the Registrant was approximately $480,915,000 on March 9, 2000. The aggregate number of outstanding shares of Common Stock, without par value, of the Registrant was 21,108,485 on March 9, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of Shareholders is incorporated by reference in Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 XICOR, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 9 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters..................................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 12 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 20 Item 8. Consolidated Financial Statements and Supplementary Data.... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 36 PART III Item 10. Directors and Executive Officers of the Registrant.......... 37 Item 11. Executive Compensation...................................... 37 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 37 Item 13. Certain Relationships and Related Transactions.............. 37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 37 Signatures............................................................ 38 Index to Exhibits..................................................... 39
2 3 PART I This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "anticipate," "believes," "expects," "future," "intends," "assuming," "projected," "plans" and similar expressions are used to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Actual results could differ materially from those projected in the forward-looking statements for many reasons, including the risk factors listed in the "Factors Affecting Future Results" section of "Management's Discussion & Analysis of Financial Conditions and Results of Operations" of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1999 included in Part II, Item 7 of this report and the risk factors included in Item 1 below. ITEM 1. BUSINESS OVERVIEW Xicor, Inc. designs, develops, manufactures and markets reprogrammable nonvolatile semiconductor integrated circuits containing digital, analog and reprogrammable nonvolatile elements. Xicor's devices offer a comprehensive set of features to its customers. By virtue of their nonvolatility, Xicor's devices retain their information content when power is lost or turned off. Reprogramming is accomplished by "writing" over the old data without a need for first "erasing" the old data. Xicor's devices can be reprogrammed bit by bit or in larger groups of bits called "bytes", "words" and "pages" without being removed from the system and operate from the same power source used in microcontroller and microprocessor-based systems, or even lower voltages common in hand-held and portable products. Xicor products are sold in a variety of packages, including plastic, ceramic and chip scale packages for small footprint and height. The combination of reprogrammability and nonvolatility has enabled Xicor's customers to develop products which have characteristics that can be altered from a remote location by a technician or on-site by a non-technical user through a keyboard, or which are automatically self-calibrating, thereby reducing field service costs. Microcontroller and microprocessor-based products incorporating Xicor's devices can be customized by either the distributor or the end user subsequent to the production process. This simplifies production control, reduces the lead-time required for such customization and permits lower inventory levels to be maintained. Xicor products also offer programmable security locks enabling system producers to prevent changes to embedded programs. Xicor products are grouped in two categories: Memory Products and Mixed Signal Products. Xicor is continuing to apply its electrically reprogrammable memory technology to develop innovative products combining nonvolatility and in-system data alterability. More recently, various Xicor products are also incorporating analog or mixed signal elements. Xicor products are used by manufacturers of electronic products throughout the world in a wide range of applications, including telecommunications, consumer, computer, industrial, automotive electronics and military products. NONVOLATILE MEMORY INDUSTRY BACKGROUND Manufacturers have introduced a variety of nonvolatile semiconductor memories offering different degrees of programming flexibility. Currently available nonvolatile memory devices include read-only memories or ROMs, programmable read only memories or PROMs, electrically programmable read-only memories or EPROMs, electrically erasable programmable ROMs or EEPROMs, and Flash Memories. A brief description of these nonvolatile devices follows: ROMs and PROMs are one time programmable. ROMs have the data permanently programmed into the memory during the manufacturing process according to customer specifications, making necessary long-range planning before introducing a new product incorporating ROMs. PROMs are programmable one time after manufacture. However, programming a PROM is complex and in practice is only done at the factory or by distributors. 3 4 EPROMs can be reprogrammed several times. However, reprogramming an EPROM is a two-step process, erasing the old data by exposing it to ultraviolet light and then programming the new data into the system using voltages higher than 5 volts, the voltage most common in microprocessor-based products. Since ultraviolet light and an auxiliary power source are required, the erasure and reprogramming generally are performed outside the system, thus requiring physical removal of the EPROM from the printed circuit board. The development of EEPROMs provided significant programming flexibility. These nonvolatile memories can be reprogrammed in-system hundreds of thousands of times and can be altered one byte or several bytes at a time. EEPROMs are termed serial or parallel depending on their connection to the system's processor. Serial EEPROM devices transmit data through a single input-output port while parallel devices transmit data through multiple ports concurrently. Devices called Flash memories offer a middle ground in price and features between EPROMs and EEPROMs. Unlike EPROMs, Flash memories can be reprogrammed while in a system. However, unlike the more flexible EEPROMs that can be altered one byte or several bytes at a time, Flash memories can only be altered all at once or in larger groups of bytes. In nonvolatile reprogrammable memory chips containing less than 256K bits, the memory cell array takes up less than half of the chip area and the support circuitry the balance. Accordingly, manufacturers of Flash memories have focused on parallel interface high density devices where customers are willing to forgo the ease of use of the full featured EEPROMs for the lower cost of a Flash memory or where the Flash memory has achieved higher density due to its smaller memory cell size. As the cost per bit of Flash memory has come down, the emulation of EEPROM functionality by using software combined with high density Flash has emerged for certain applications. XICOR MEMORY PRODUCTS AND APPLICATIONS Xicor's nonvolatile memory products include: Serial Interface EEPROMs. Xicor supplies a broad line of serial interface EEPROMs which include password-secured serial EEPROMs, standard serial EEPROMs and proprietary serial EEPROMs. Many of these memory products are used in space-limited hand held applications. To enhance Xicor's customers' ability to further miniaturize their products, in 1998 Xicor introduced a serial EEPROM encapsulated in an advanced chip-scale package which has essentially the same footprint and height of the chip itself. Parallel Interface EEPROMs. Xicor supplies a broad line of parallel interface EEPROMs with densities ranging from 64K to 1 megabit. Xicor also offers an extended temperature version parallel EEPROM that operates to 185 degrees C. Parallel interface EEPROMs are generally used to contain frequently updated data in communications infrastructure equipment, instrumentation, transportation and other industrial applications. XICOR MIXED SIGNAL PRODUCTS AND APPLICATIONS Xicor's Mixed Signal Product Group combines analog and digital design. Xicor has three product families within its Mixed Signal business, namely System Tuning, System Management and Timekeeping and Battery Management. Mixed Signal products represented approximately 20% of sales in 1997; 22% in 1998; and 26% in 1999. System Tuning. The System Tuning family, comprised primarily of Digitally Controlled Potentiometers (XDCP's), is the most established product line in Xicor's Mixed Signal Product Group. XDCP's are digitally controlled solid state electronic variable resistors that give the designer and the system more accuracy and flexibility. Since XDCP's are integrated circuits and are controlled electronically, greater system reliability can be realized. Furthermore, XDCP's eliminate the disadvantages of mechanical potentiometers associated with manual adjustment and moving parts. In 1999 Xicor expanded the XDCP line with products targeted at the fiber optic market. Additionally, a product was announced as a replacement for widely used cost sensitive single turn mechanical potentiometers. System Management and Timekeeping. Complementing Xicor's System Tuning family is an evolving line of System Management products offering supervisory chips for microcontroller based systems. System management products are targeted for embedded systems that require controlled powerup and orderly, 4 5 predictable powerdown, reliable recovery in the event of system failure and the capability of knowing the time and date of an event. Products include NOVRAMs, Central Processing Unit or CPU supervisors and timekeeping products. Battery Management. Consumers and manufacturers of portable electronic devices are affected by battery performance. Both the length of time between battery recharges and the useful life of expensive Lithium Ion batteries are leading customer satisfaction issues. In the fourth quarter of 1999 Xicor entered the battery management integrated circuit market with the announcement of its first battery management product, a smart safety unit chip. The part, which contributed no revenue in 1999, is targeted at the laptop Personal Computer or PC market. Xicor plans to expand this product line in 2000. MARKETING AND SALES Xicor's products are sold worldwide for a broad range of applications, including telecommunications, consumer, computer, industrial, automotive and military applications. In new applications, particularly for newly introduced devices, Xicor's products generally require long "design-in" cycles for customer applications with extensive field application engineering support by Xicor. Xicor considers close support of its customers' design efforts to be an important aspect of its marketing strategy. Xicor markets its products directly from its headquarters in Milpitas, California and from regional domestic and foreign sales offices. Products are also marketed domestically through a national network of independent sales representatives, each of which has been granted an exclusive sales territory, and through national and regional stocking distributors which also handle competitive products. Xicor's products are also marketed abroad through an international network of independent non-exclusive stocking sales representatives. Generally, sales to distributors and stocking sales representatives are made under agreements allowing rights of return and price protection on unsold merchandise. Xicor's policy is to defer recognition of sales and related costs on such shipments until the products are sold by the distributors and stocking sales representatives. Xicor's international sales constituted approximately 56% of sales in 1999; 46% in 1998; and 44% in 1997. Xicor's international sales are generally denominated in U.S. dollars. Due to the magnitude of its international sales, Xicor is subject to risks common to all international economic activities, including currency fluctuations, governmental regulation and the risk of imposition of tariffs or other trade barriers. Further, export sales must be licensed by the Office of Export Administration of the US Department of Commerce. One distributor accounted for 14% of Xicor's sales in 1999; 15% in 1998; and 16% in 1997. Distributors are not themselves end users, but rather serve as a channel of sale to many end users of Xicor's products. One OEM customer represented 11% of sales in 1999. Customer "design-ins" may not result in volume purchase orders. Further, volume purchase orders received by Xicor do not necessarily result in sales as they are in most cases, consistent with industry practice, terminable by the customer without penalty. Consequently, backlog figures are not necessarily indicative of future sales. MANUFACTURING Historically, Xicor manufactured in-house all silicon wafers used to provide the semiconductor chips for its products. However, the rapidly escalating capital investments and the increasing need for larger factories in order to efficiently spread the high level of fixed costs associated with complex semiconductor manufacturing operations have led to the emergence of wafer fabrication foundries, enabling many semiconductor companies to outsource portions or all of their wafer requirements. During 1998 Xicor announced and began to implement a restructuring plan to change its manufacturing and procurement strategies to significantly increase outsourcing of wafer fabrication and product testing to overseas subcontractors and to streamline operations. Xicor's initial foundry, Yamaha Corporation of Japan, was qualified as an outside foundry for Xicor in the third quarter of 1998. In the second quarter of 1999 Xicor entered into agreements with Sanyo Electric Co., Ltd. of Japan and ZMD GmbH of Germany to fabricate 5 6 wafers for Xicor. In the second half of 1999, Yamaha produced more than one-third of Xicor's wafer requirements. In the fourth quarter of 1999, the first wafers from Sanyo and ZMD GmbH were received by Xicor and passed initial quality criteria. In December 1999, Xicor's Board of Directors approved Xicor's plan to become completely fabless and cease in-house wafer fabrication by the middle of 2000. Wafer fabrication processes are highly complicated, utilize numerous highly toxic and corrosive chemicals and gases, and require stringent control of many extremely precise steps. The sensitivity of the manufacturing process to dust and other contaminants requires the production process to take place in a highly controlled, clean environment. Sophisticated computer-controlled testing equipment is used to test each chip on the wafer to identify those potentially meeting the desired electrical criteria. Although the wafer manufacturing process is highly controlled, minute impurities, difficulties in the process or defects in the masks can cause wafers to be rejected or a substantial percentage of individual chips to be non-functional, a problem indigenous to the semiconductor industry. From time to time Xicor and its foundries experience a variety of technical issues in the manufacturing processes which adversely affect manufacturing yields until they are corrected. Maintaining and improving manufacturing yields is essential for profitability. Each chip on the fabricated wafer is tested and the nonfunctional chips are identified. The wafers are then shipped to subcontractors in various countries including Taiwan, Thailand, South Korea, the Philippines, China or Malaysia, where the wafers are separated into individual chips. Each functional chip is encapsulated in a plastic or ceramic package having external leads to which the chip is connected by extremely fine wires. The packaged chips undergo comprehensive electrical testing offshore at one of Xicor's independent subcontractors located in various countries including Taiwan, Thailand, South Korea, the Philippines and China. A limited amount of testing is also performed in Milpitas. Chip-scale packaged products are encapsulated by subcontractors based in Israel and the United States and tested in Milpitas. In accordance with industry practice, Xicor provides a limited warranty for its devices against defects in materials and workmanship for periods ranging from 90 days to one year. Reliance on overseas wafer fabrication, sort, assembly and test contractors and Xicor's maintenance of inventories at contractors' facilities entails certain political and economic risks, including political instability and expropriation, currency controls and exchange fluctuations, and changes in tariff and freight rates. Furthermore, in the event Xicor's overseas wafer fabrication, sort, assembly or test operations, or air transportation to or from foreign foundries or contractors, were disrupted for any reason, Xicor's operations could be severely harmed. The principal raw materials utilized in the production process are polished silicon wafers, ultra-pure metals, chemicals and gases. Encapsulation materials that enclose the chip and provide the external connecting leads are provided by the independent assembly contractors or are purchased by Xicor and shipped to such contractors. Shortages could occur in various essential materials due to interruption of supply or due to increased demand in the industry. Shortages have occurred in Xicor's history and lead times have been extended in the industry on occasion without significantly harming Xicor. However, future shortages, if any, could severely harm Xicor's operations. Compliance with Environmental Regulations The manufacture of semiconductors requires the use and storage of substantial amounts of toxic chemicals, solvents and gases. Government regulations impose various environmental controls on the storage, use and disposal of such materials. Such regulations have grown more complex and enforcement more rigorous over time as increasing attention has been focused on the environmental impact of semiconductor manufacturing operations. While Xicor to date has not experienced any materially adverse effect on its business from environmental regulations, changes in such regulations could necessitate the acquisition of more costly equipment or require more costly procedures or process changes to be initiated. RESEARCH AND DEVELOPMENT Continuing development of more advanced processes and products is essential to maintaining and enhancing Xicor's competitive position. Such development activities are difficult and lengthy. They may not 6 7 be successfully completed and future products may not be available on a timely basis or achieve market acceptance. Research and development activities require a high degree of complexity of design and manufacturing process, and consequently a significant percentage of sales is continuously invested in research and development and in the pre-production engineering activity related to new products and technologies. Xicor's research and development expenditures were $14,560,000 in 1999; $17,429,000 in 1998; and $18,475,000 in 1997. PATENTS AND LICENSES Xicor holds numerous United States patents and corresponding foreign patents covering various circuit designs and the structure of its devices. Further, additional patent applications for such products are pending in the United States and abroad. However, patents granted or pending may not provide Xicor with any meaningful protection. Similar to other semiconductor manufacturers, Xicor has granted licenses under its patents and may continue to do so in the future. Xicor believes that, due to the rapidly changing technology in the semiconductor industry, its future success will be dependent primarily upon the technical expertise and creative skills of its personnel rather than patent protection. As is the case with many companies in the semiconductor industry, it may become necessary or desirable for Xicor to obtain licenses relating to its products from others. Xicor has received notices claiming infringement of patents from several semiconductor manufacturers with respect to certain aspects of Xicor's processes and devices and these matters are under investigation and review. Although patent holders typically offer licenses and Xicor has entered into such license agreements, licenses may not be obtainable on acceptable terms and any dispute may not be resolved without costly litigation. COMPETITION The semiconductor industry is highly competitive and characterized by steadily declining prices, particularly during periods of industry oversupply. Numerous companies are currently selling products that compete with those of Xicor. In addition to price, important elements determining success in competition include product performance, quality and reliability, delivery capability, diversity of product line, application support, financial strength and the ability to respond rapidly to technological innovations. Xicor may be at a disadvantage in competing with major domestic and foreign concerns that have significant financial resources, established and diverse product lines, worldwide vertically integrated production facilities and extensive research and development staffs. Further, the semiconductor industry is characterized by rapid technological change and Xicor will be required to continually develop or have access to new and improved manufacturing processes and products to remain competitive. EMPLOYEES At December 31, 1999 Xicor had approximately 500 employees. None of the employees are represented by a labor organization and Xicor considers its employee relations to be good. Many of Xicor's employees are highly skilled and Xicor's success will depend in significant part on its ability to attract and retain such employees in the highly competitive semiconductor industry and in Silicon Valley. 7 8 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth each executive officer of Xicor, their ages (as of December 31, 1999) and position with Xicor:
NAME AGE OFFICE ---- --- ------ Raphael Klein........................ 56 Chairman of the Board and Chief Executive Officer Bruce Gray........................... 49 President and Chief Operating Officer Ralph Griffin........................ 42 Vice President, Wafer Operations and Technology Development Geraldine N. Hench................... 42 Vice President, Finance and Chief Financial Officer Klaus G. Hendig...................... 60 Senior Vice President, Administration Timothy D. Kanemoto.................. 53 Vice President, Product Operations Michael P. Levis..................... 42 Vice President, Marketing Daniel L. Lewis...................... 50 Vice President, Worldwide Sales James McCreary....................... 53 Vice President, Engineering Ira McLain........................... 56 Vice President, Information Technology
Raphael Klein, Chairman of the Board and Chief Executive Officer. From August 1987 until January 1998 Mr. Klein was Xicor's President and Chief Executive Officer. Since January 1998 Mr. Klein has shared the Office of the President with Mr. Bruce Gray. Mr. Klein is Xicor's Chief Executive Officer with primary responsibility for finance and administration and shared responsibility for the direction of the company. Mr. Klein has been a director of the company since founding Xicor in August 1978 and its Chairman of the Board since August 1982. Mr. Klein received the degree of Master of Science in Physics from the Israeli Institute of Technology, or Technion, and is the inventor or co-inventor of two patented inventions. Bruce Gray, President and Chief Operating Officer. Mr. Gray joined Xicor in September 1996 as Vice President, Wafer Operations and since January 1998 has shared the Office of the President with Mr. Raphael Klein. Mr. Gray is Xicor's President and Chief Operating Officer with principal profit and loss responsibility and shared responsibility for the direction of the company. Mr. Gray has 28 years of experience in the semiconductor industry in engineering, manufacturing and management. From September 1994 through September 1996, Mr. Gray served as the Managing Director of the Advanced Technology Group at National Semiconductor Corporation. From August 1989 through September 1994, Mr. Gray was the Director of Santa Clara Operations and Services for National Semiconductor with operational responsibility for four high-volume wafer fabrication lines. Mr. Gray was also involved in advanced technology development and wafer foundry activities. Mr. Gray has a Bachelor of Science Degree in Metallurgy and Materials Science from the Massachusetts Institute of Technology (MIT) and is the inventor or co-inventor of three patented inventions. Ralph Griffin, Vice President, Wafer Operations and Technology Development. Mr. Griffin joined Xicor in December 1996 and became Vice President in 1999. Mr. Griffin has 19 years of experience in semiconductor manufacturing and engineering roles. From August 1990 to November 1996, Mr. Griffin worked at National Semiconductor with the Sematech Program, in research and development and built a 200mm wafer fabrication plant at National's Santa Clara site. Prior to 1990, Mr. Griffin held various positions in Process Engineering and Wafer Fab Management working for Siliconix, Inc, Data General Corp., and Fairchild Semiconductor. Mr. Griffin received the degrees of Bachelor of Science in Chemical Engineering from Stanford University and Master of Business Administration from San Jose State University. Geraldine N. Hench, Vice President, Finance and Chief Financial Officer. Ms. Hench, a certified public accountant, joined Xicor in November 1987 and became a Vice President in June 1993 and Xicor's Chief Financial Officer in January 1998. Ms. Hench received the degree of Bachelor of Science in Accounting from Santa Clara University and the degree of Master of Business Administration from St. Mary's College. Klaus G. Hendig, Senior Vice President, Administration. Mr. Hendig, a certified public accountant, has been employed by Xicor since February 1981 and became a Vice President in January 1983. Mr. Hendig served as Xicor's Chief Financial Officer from September 1987 until January 1998. Mr. Hendig received the degree of Bachelor of Science in Accounting and Finance from San Jose State University. 8 9 Timothy D. Kanemoto, Vice President, Product Operations. Mr. Kanemoto joined Xicor in January 1990, and became a Vice President in June 1994. He received the Degree of Bachelor of Science in Business Administration from California State University, Hayward. Michael P. Levis, Vice President, Marketing. Mr. Levis joined Xicor in January 1998 as Vice President, Marketing. Mr. Levis has 16 years of experience in marketing and business development. From 1996 through 1997, Mr. Levis served as General Partner at ASCII of America, a venture capital firm. From 1993 through 1996, Mr. Levis was the Vice President of Marketing at Crosspoint Solutions, Inc., a semiconductor company. Prior to 1993 Mr. Levis held various marketing and business development positions at Crosspoint Solutions, Inc., Samsung Semiconductors and Zilog, Inc. Mr. Levis received the degree of Bachelor of Science in Electrical Engineering from Purdue and the degree of Master of Science in Electrical Engineering from Stanford University. Daniel L. Lewis, Vice President, Worldwide Sales. Mr. Lewis joined Xicor in May 1998 as Vice President, Worldwide Sales. Mr. Lewis has 28 years of experience in various sales and marketing roles. From June 1991 through April 1998, Mr. Lewis was Vice President of Sales at Integrated Device Technology, Inc. Mr. Lewis received the degree of Bachelor of Science in Electrical Engineering from the University of Michigan. James McCreary, Vice President, Engineering. Mr. McCreary joined Xicor in October 1998 as Vice President, Engineering. From 1996 through 1998 Mr. McCreary was involved in private business ventures. In 1983 Mr. McCreary co-founded Micro Linear Corp. where he was Vice President of Engineering from 1983 through 1995. Mr. McCreary received the degrees of Master of Science in Electrical Engineering and Ph.D. from the University of California, Berkeley and is the inventor of several patents. Ira McLain, Vice President, Information Technology. Mr. McLain joined Xicor in May 1998 as Vice President, Information Technology (IT). Mr. McLain has 30 years of IT experience with National Semiconductor (NSC), Fairchild Semiconductor and Schlumberger. From 1987 to 1998, Mr. McLain was an IT Director with NSC. Mr. McLain received a Bachelor of Arts degree from Lamar University. INSURANCE Xicor presently carries various insurance coverage including property damage, business interruption and general liability including certain product liability coverage. Xicor has been unable to obtain pollution and earthquake insurance at reasonable costs and limits. ITEM 2. PROPERTIES Xicor leases a 43,834 square foot facility in Milpitas, California that contains Xicor's silicon wafer fabrication and process technology development operations. The lease, which expires in 2001, provides for an annual base rental of $626,145 and requires Xicor to pay all real estate taxes, utilities and insurance and to maintain the building and premises. Xicor has two successive five-year renewal options upon the same terms and conditions at increased rental rates based on the consumer price index, not to exceed 15% for the prior five-year period. Xicor plans to cease production at this facility and therefore does not plan to exercise the renewal options. Xicor leases a 56,293 square foot facility near its wafer fabrication facility that houses its product testing and distribution operations and a small quick-turn assembly line. The lease, which expires June 30, 2000, provides for a monthly base rental of $92,883. Xicor plans to vacate this facility at the end of the lease term and is in the process of negotiating a long-term lease for a 30,968 square foot facility adjacent to the facility described below. Xicor leases a 73,622 square foot facility adjacent to its existing wafer fabrication facility. This facility houses Xicor's design, research and development and reliability operations and executive, marketing and administrative offices and also serves as Xicor's main stockroom. This lease expires in 2010 and provides for an annual base rental of $1,148,508, increasing 3.25% annually, and requires Xicor to pay all real estate taxes, 9 10 utilities and insurance and to maintain the building and premises. Xicor has one five year renewal option upon the same terms and conditions at the higher of 95% of the then fair market value or $1,148,508 annually. ITEM 3. LEGAL PROCEEDINGS Xicor is not a party, nor is its property subject, to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Xicor's Common Stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market(SM) under the symbol XICO. The table below sets forth the high and low sales prices for the Common Stock as reported by Nasdaq for each calendar quarter.
HIGH LOW ---- --- FISCAL YEAR ENDED DECEMBER 31, 1999 First quarter............................................. $ 2 1/8 $1 1/8 Second quarter............................................ 4 3/8 1 9/32 Third quarter............................................. 9 2 13/16 Fourth quarter............................................ 16 9/16 5 5/32 FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW --- -- First quarter............................................. $ 3 5/8 $2 17/32 Second quarter............................................ 3 1/8 1 11/16 Third quarter............................................. 1 13/16 1 Fourth quarter............................................ 2 7/8 25/32
There were approximately 1,100 shareholders of record on December 31, 1999. Xicor has never paid cash dividends and does not anticipate paying any cash dividends in the foreseeable future. 10 11 ITEM 6. SELECTED FINANCIAL DATA FINANCIAL OPERATING INFORMATION
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operations Data: Net sales........................... $114,887 $106,147 $122,453 $123,514 $113,550 Cost of sales....................... 80,474 89,844 84,603 74,303 69,214 -------- -------- -------- -------- -------- Gross profit...................... 34,413 16,303 37,850 49,211 44,336 -------- -------- -------- -------- -------- Operating expenses: Research and development.......... 14,560 17,429 18,475 15,074 15,270 Selling, general and administrative................. 22,360 22,634 21,753 20,306 19,474 Restructuring charge.............. 23,719 4,985 -- -- -- -------- -------- -------- -------- -------- 60,639 45,048 40,228 35,380 34,744 -------- -------- -------- -------- -------- Income (loss) from operations....... (26,226) (28,745) (2,378) 13,831 9,592 Interest expense.................... (1,407) (1,872) (1,834) (1,421) (605) Interest income..................... 704 1,086 1,901 2,001 1,584 -------- -------- -------- -------- -------- Income (loss) before income taxes... (26,929) (29,531) (2,311) 14,411 10,571 Provision for income taxes.......... -- -- 220 576 535 -------- -------- -------- -------- -------- Net income (loss)................... $(26,929) $(29,531) $ (2,531) $ 13,835 $ 10,036 ======== ======== ======== ======== ======== Net income (loss) per share: Basic............................. $ (1.32) $ (1.53) $ (0.13) $ 0.74 $ 0.55 ======== ======== ======== ======== ======== Diluted........................... $ (1.32) $ (1.53) $ (0.13) $ 0.70 $ 0.53 ======== ======== ======== ======== ======== Shares used in per share calculations: Basic............................. 20,324 19,262 18,967 18,693 18,216 ======== ======== ======== ======== ======== Diluted........................... 20,324 19,262 18,967 19,820 19,031 ======== ======== ======== ======== ========
DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- Balance Sheet Data: Working capital.................. $ 3,573 $ 5,382 $ 28,248 $ 37,134 $ 30,525 Total assets..................... 54,794 78,862 115,261 108,214 79,439 Long-term debt, less current portion....................... 9,794 13,137 18,974 13,469 5,229 Accumulated deficit.............. (124,556) (97,627) (68,096) (65,565) (79,400) Shareholders' equity............. 4,449 30,605 56,108 57,957 43,031
11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing on pages 22 to 34. RESULTS OF OPERATIONS Xicor's sales were $114.9 million in 1999 compared to $106.1 million in 1998 and $122.5 million in 1997. Fiscal 1999 sales increased 8% compared to 1998 primarily due to increased sales of product into wireless communications applications and increased sales of digitally controlled potentiometer products. Fiscal year 1998 presented Xicor with a major challenge as sales declined sharply from 1997, primarily due to the global slowdown in demand that resulted from the Asian economic crisis. The substantial excess global capacity in the industry caused a severe erosion of memory chip prices, which also contributed to the decline in Xicor's sales. Gross profit as a percentage of sales was 30% in 1999; 15% in 1998; and 31% in 1997. The gross profit percentage improved in 1999 compared to 1998 due to product mix, higher average selling prices and a reduction in the overall average cost of products shipped due to increased outsourcing and cost reductions at Xicor's in-house manufacturing operations. The decline in the 1998 gross profit percentage compared to 1997 was primarily due to lower average selling prices as a result of competitive price pressures, Xicor's increased manufacturing cost level associated with increased production capacity and upgrading of the wafer fabrication operations during 1996 and 1997 and decreased factory utilization. During 1998 Xicor substantially reduced the production volume in its factory in response to ongoing weak business conditions. Unfavorable overhead variances that resulted from the fixed nature of certain manufacturing costs and the smaller number of units in production were expensed. Additionally, in the second quarter of 1998, Xicor wrote down inventories by $2.2 million to cover declining sales prices and inventories of certain devices that were discontinued as Xicor streamlined its product portfolio. In 1997, as a result of the economic crisis in Asia and declining global sales prices due to intense competition, Xicor established reserves of $6.2 million for inventories built for certain Asian customers and to write down inventory values due to lower expected selling prices. Excluding the inventory write down, 1997 gross profit as a percentage of sales was 36%. Research and development expenses were 13% of sales in 1999; 16% in 1998; and 15% in 1997. Research and development expenses decreased as a percentage of sales in 1999 compared to 1998 primarily due to lower personnel costs and higher sales and, to a lesser extent, lower depreciation. Research and development expenses were relatively consistent as a percentage of sales in 1998 compared to 1997. Selling, general and administrative expenses represented 19% of sales in 1999; 21% in 1998; and 18% in 1997. Selling, general and administrative expenses declined as a percentage of sales in 1999 compared to 1998 primarily due to higher sales. Selling, general and administrative expenses increased in 1998 compared to 1997 due to intensified sales and marketing activities. During 1998 Xicor began to revise its manufacturing and procurement strategies to significantly increase outsourcing of wafer fabrication and product testing to overseas subcontractors and to streamline operations. This change was in response to continuing market conditions that made it more economical to outsource manufacturing. Accordingly, Xicor recorded $5 million in restructuring charges in 1998, consisting of $2.4 million of equipment write-offs due to the shifting of activity to an outside wafer foundry and $2.6 million for severance costs relating to a reduction in workforce. Based on the progress made on the outsourcing program during 1999, in December 1999 Xicor's Board of Directors decided to close its Milpitas in-house wafer fabrication facility by mid-2000 and use third party foundries for all of Xicor's wafer fabrication production. In connection with the closure of this facility, which is expected to cease production by mid-2000, Xicor recorded a $23.7 million restructuring charge, consisting of a $16.3 million non-cash write-down of the wafer fabrication plant assets, $1.5 million for severance costs relating to a reduction in workforce, fab closure costs of $3.6 million, idle facilities charges of $0.8 million and equipment lease costs of $1.5 million. 12 13 The fabrication facility closure plans provide for production to cease at the facility by mid-2000 and closure and decommissioning activities to be conducted over the succeeding nine months. Xicor is currently pursuing the sale of the Milpitas manufacturing operations and at this time believes the most likely outcome would be a piecemeal sale of the equipment. Xicor expects that the majority of expenditures relating to the closure and decommissioning of the facility will be incurred during the second half of 2000 and are expected to be funded from working capital. Xicor expects annual savings compared to 1999 of approximately $20 million in production costs, which are currently recorded as cost of sales, as a result of the closure of the facility. Of this amount, annual savings of approximately $8 million related to reduced depreciation expense will begin to be realized in the first quarter of 2000. The balance of the estimated savings which relate principally to lower personnel and manufacturing support costs are expected to be fully realized after the closure of the facility. The estimated savings are expected to be partially offset by the cost of wafers purchased from the third-party foundries. Interest expense decreased in 1999 compared to 1998 due to normal principal payments of outstanding lease debt. Interest expense was relatively level in 1998 compared to 1997 due to normal monthly pay downs of debt, offset by additional interest expense associated with 1998 equipment financing of $1.5 million and 1997 equipment financing of $12.3 million. Interest income decreased in both 1999 and 1998 compared to the prior year due to a decrease in the average balance invested and in 1998, to a lesser extent, lower interest rates. No taxes were provided in 1999 and 1998 due to the net loss. The provision for income taxes for 1997 consisted primarily of federal and state minimum taxes, which resulted from limitations on the use of net operating loss carryforwards, and foreign taxes. Net deferred tax assets of $54.5 million at the end of 1999 remain fully reserved because of the uncertainty regarding the ultimate realization of these assets. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Xicor had $22.2 million in cash and cash equivalents. Corresponding balances at the end of 1998 and 1997 were $17.9 million and $32.5 million, respectively. In 1999 Xicor generated $12.7 million of cash from operating activities and used $7.5 million to repay long-term obligations and $1.6 million for equipment purchases. Additionally $0.7 million of cash was generated from employee stock plans. In 1998 Xicor used $7.1 million of cash for operating activities primarily due to the operating loss, $4.9 million for capital asset purchases and $6.6 million to repay long-term obligations. During 1998 Xicor received $4 million from the sale of unregistered common stock to ATMI, Inc. During 2000 Xicor expects to use cash to fund costs associated with the planned closure of the wafer fabrication plant, to repay long-term obligations and purchase equipment and software. Capital expenditures for 2000 are currently planned at approximately $5 million and are primarily related to product design, information technology and product testing. At December 31, 1999, Xicor had entered into commitments for equipment purchases aggregating less than $0.5 million. Xicor has a line of credit agreement with a financial institution that expires March 31, 2001, provides for borrowings of up to $7.5 million against eligible accounts receivable and is secured by all of Xicor's assets. Interest on borrowings is charged at the prime lending rate plus 2% and is payable monthly. At December 31, 1999, the entire $7.5 million was available to Xicor based on the eligible accounts receivable balances and the borrowing formulas. To date, no amounts have been borrowed under this line of credit. At December 31, 1999, $1.7 million of the line of credit was reserved to secure a standby letter of credit. Management believes that currently available cash and the existing line of credit facility will be adequate to support Xicor's operations for the next twelve months. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related 13 14 to those instruments as well as other hedging activities, and is effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. Xicor believes that adoption of this pronouncement will not have a material impact on its financial position and results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission. Xicor believes that adopting SAB 101 will not have a material impact on its financial position and results of operations. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding expected annual savings from Xicor's plan to close its Milpitas in-house wafer fabrication facility by mid-2000 and use third party foundries for all of Xicor's wafer fabrication production, the plans to manufacture wafers at our wafer fabrication plant during the first half of 2000 to produce sufficient inventory levels of certain products to prevent delays in meeting customer demands as the foundries ramp up the production of our products, the belief at this time that the most likely outcome of the currently pursued sale of the Milpitas manufacturing operations would be a piecemeal sale of the equipment, plans to expand the battery management product line in 2000, and the expectation that sufficient cash, working capital, and credit will be available to fund fiscal year 2000 operations, including costs associated with the planned closure of the wafer fabrication plant, repayment of long-term obligations and the purchase of equipment and software. Except for historical information, the matters discussed in this Annual Report are forward-looking statements that are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include the following; general economic conditions and conditions specific to the semiconductor industry; fluctuations in customer demand, including loss of key customers, order cancellations or reduced bookings; competitive factors such as pricing pressures on existing products and the timing and market acceptance of new product introductions (both by Xicor and its competitors); Xicor's ability to have available an appropriate amount of low cost foundry production capacity in a timely manner; our foundry partners' timely ability to successfully manufacture products for Xicor using Xicor's proprietary technology; any disruptions of our foundry relationships; manufacturing efficiencies; the ability to continue effective cost reductions; currency fluctuations; the timely development and introduction of new products and submicron processes, and the risk factors listed from time to time in Xicor's SEC reports, including but not limited to the "Factors Affecting Future Results" section following and Part I, Item 1 of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Xicor undertakes no obligation to publicly release or otherwise disclose the result of any revision to these forward-looking statements that may be made as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. FACTORS AFFECTING FUTURE RESULTS OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE IN REVENUE MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE NOT MATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. Our recent growth rate may not be sustainable and you should not use our past financial performance to predict future operating results. We have incurred net losses for the past three fiscal years. Our recent 14 15 quarterly and annual operating results have fluctuated, and will continue to fluctuate, due to the following factors, all of which are difficult to forecast and many of which are out of our control: - the cyclical nature of both the semiconductor industry and the markets addressed by our products; - competitive pricing pressures and related changes in selling prices; - new product announcements and introductions for competing products by us or our competitors; - market acceptance and subsequent design in of new products; - unpredictability of changes in demand for, or in the mix of, our products; - the timing of significant orders including the fact that the sales level in any specific quarter depends significantly on orders received during that quarter; - the gain or loss of significant customers; - the availability, timely deliverability and cost of wafers and other materials from our suppliers; - fluctuations in manufacturing yields and significant yield losses which affect our ability to fulfill orders; - product obsolescence; - lower of cost or market inventory adjustments; - changes in the channels through which our products are distributed; - exchange rate fluctuations; - general economic, political and environmental-related conditions, such as natural disasters; - difficulties in forecasting, planning and management of inventory levels; and - unanticipated research and development expenses associated with new product introductions. WE ARE IN THE PROCESS OF SHIFTING OUR MANUFACTURING STRATEGY TO A FABLESS BUSINESS MODEL AND WILL DEPEND ON A LIMITED NUMBER OF FOREIGN FOUNDRIES TO MANUFACTURE OUR PRODUCTS. THESE FOUNDRIES MAY NOT BE ABLE TO SATISFY OUR MANUFACTURING REQUIREMENTS, WHICH COULD CAUSE OUR SALES TO DECLINE. We plan to outsource all of our manufacturing by the second half of 2000 with the exception of limited testing activities. During 1999, substantially all of our wafers were manufactured at our wafer fabrication plant in Milpitas, California or Yamaha Corporation in Japan. During 2000 we plan to close our wafer fabrication plant in Milpitas and ramp up manufacturing at two additional wafer foundries, Sanyo in Japan and ZMD in Germany. If these suppliers fail to satisfy our requirements on a timely basis and at competitive prices we could suffer manufacturing delays, a possible loss of sales and higher than anticipated costs of sales, any of which could seriously harm our operating results. WE COULD EXPERIENCE PROBLEMS IN THE MANUFACTURING PROCESS AT OUR WAFER FABRICATION PLANT PRIOR TO CLOSURE WHICH WOULD IMPACT THE SUPPLY OF VARIOUS PRODUCTS, INCLUDING THOSE BUILT ON AN OLD PROCESS WHICH WILL NOT BE INSTALLED AT THE FOUNDRIES, WHICH WE PLAN TO MANUFACTURE AND CAUSE OUR SALES TO DECLINE AND COSTS TO INCREASE. During the first half of 2000, we plan to manufacture wafers at our wafer fabrication plant in Milpitas, California to produce sufficient inventory levels of certain products to prevent delays in meeting customer demands as the foundries ramp up the production of our products. Manufacturing problems during the final months of operations of the facility would reduce yields and increase costs. Due to the complex nature of the manufacturing process, some manufacturing problems may not be detected until the products are near completion. Significant yield loss could affect our ability to fulfill orders and result in reduced sales and gross margins. 15 16 OUR COST OF SALES MAY INCREASE IF WE ARE REQUIRED TO PURCHASE ADDITIONAL MANUFACTURING CAPACITY IN THE FUTURE. To obtain additional manufacturing capacity, we may be required to make deposits, equipment purchases, loans, enter into joint ventures, equity investments or technology licenses in or with wafer fabrication companies. These transactions could involve a commitment of substantial amounts of our capital and technology licenses in return for production capacity. We may be required to seek additional debt or equity financing in order to secure this capacity and we may not be able to obtain such financing. IF OUR FOUNDRIES FAIL TO ACHIEVE ACCEPTABLE WAFER MANUFACTURING YIELDS, WE WILL EXPERIENCE HIGHER COSTS OF SALES AND REDUCED PRODUCT AVAILABILITY. The fabrication of our products requires wafers to be produced in a highly controlled and ultra-clean environment. Semiconductor foundries that supply our wafers have at times experienced problems achieving acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a function of both design technology and manufacturing process technology. Low yields may result from marginal designs or manufacturing process drifts. Yield problems may not be identified until the wafers are well into the production process, which often makes these problems difficult, time consuming and costly to correct or replace. Furthermore, we rely on independent foreign foundries for our wafers which increases the effort and time required to identify, communicate and resolve manufacturing yield problems. If our foundries fail to achieve acceptable manufacturing yields, we will experience higher costs of sales and reduced product availability, which would harm our operating results. OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO SORT, ASSEMBLE AND TEST OUR PRODUCTS SUBJECTS US TO A NUMBER OF RISKS, INCLUDING AN INADEQUATE SUPPLY OF PRODUCTS AND HIGHER COSTS OF MATERIALS. We depend on independent subcontractors to sort, assemble and test our products. Our reliance on these subcontractors involves the following significant risks: - reduced control over delivery schedules and quality; - the potential lack of adequate capacity during periods of strong demand; - difficulties selecting and integrating new subcontractors; - limited warranties on products supplied to us; and - potential increases in prices due to capacity shortages and other factors; These risks may lead to increased costs, delayed product delivery or loss of competitive advantage, which would harm our profitability and customer relationships. OUR OPERATING EXPENSES ARE RELATIVELY FIXED, AND WE ORDER MATERIALS IN ADVANCE OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, WE HAVE LIMITED ABILITY TO REDUCE EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE SHORTFALLS. Our operating expenses are relatively fixed, and we therefore have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if our sales do not meet our revenue projections. We may experience revenue shortfalls for the following reasons: - significant pricing pressures that occur because of declines in selling prices over the life of a product; - sudden shortages of raw materials or fabrication, sort, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers which, in turn, harm our ability to meet our sales obligations; and - the reduction, rescheduling or cancellation of customer orders. 16 17 In addition, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we may order materials and produce finished products in advance of anticipated customer demand. This advance ordering and production may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. BECAUSE OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND DEVELOPMENT AND THE GENERATION OF SALES. Due to the length of the product design-in cycle we usually require more than nine months to realize volume shipments after we first contact a customer. We first work with customers to achieve a design win, which may take three months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period which typically lasts an additional six months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenue, if any, from volume purchasing of our products by our customers. WE FACE INTENSE COMPETITION FROM COMPANIES WITH SIGNIFICANTLY GREATER FINANCIAL, TECHNICAL AND MARKETING RESOURCES THAT COULD ADVERSELY AFFECT OUR ABILITY TO INCREASE SALES OF OUR PRODUCTS. We compete with major domestic and international semiconductor companies such as Atmel Corporation, ST Microelectronics, Dallas Semiconductor, Maxim and Texas Instruments, all of whom have substantially greater financial, technical, marketing, distribution, and other resources than we do. Many of our competitors have their own facilities for the production of semiconductor components and have recently added significant capacity for such production. In addition, we may in the future experience direct competition from our foundry partners. Some of our foundry partners have the right to fabricate certain products based on our process technology and co-developed circuit design, and to sell such products worldwide. OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS. The markets for our products are characterized by: - rapidly changing technologies; - evolving and competing industry standards; - changing customer needs; - frequent new product introductions and enhancements; - increased integration with other functions; and - rapid product obsolescence. To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. In addition, we must have our products designed into our customers' future products and maintain close working relationships with key customers in order to develop new products that meet their rapidly changing needs. Products for communications applications are based on continually evolving industry standards. Our ability to compete will depend on our ability to identify and ensure compliance with these industry standards. As a result, we could be required to invest significant time and effort and incur significant expense to redesign our products to ensure compliance with relevant standards. 17 18 We cannot assure you that we will be able to identify new product opportunities successfully, develop and bring to market new products at competitive costs, achieve design wins or respond effectively to new technological changes or product announcements by our competitors. Furthermore, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. Failure in any of these areas could harm our operating results. OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY DESIGN, ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO IDENTIFY, RECRUIT AND RETAIN PERSONNEL. There is intense competition for qualified personnel in the semiconductor industry, in particular for the highly skilled engineers involved in the development of our products. Competition is especially intense in Silicon Valley, where our design, research and development, and corporate headquarters are located. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employ in the future. The failure to recruit and retain key design engineers or other technical and management personnel could harm our business. OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO DO SUCCESSFULLY. We rely on a combination of patents, trade secrets, copyright and mask work production laws and rights, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Policing unauthorized use of our products, however, is difficult, especially in foreign countries. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources and could harm our business, operating results and financial condition regardless of the outcome of the litigation. We hold numerous United States patents and corresponding foreign patents covering various circuit designs and the structure of its devices. Further, additional patent applications for such products are pending in the United States and abroad. However, patents granted or pending may not provide us with any meaningful protection. Our operating results could be seriously harmed by the failure to be able to protect our intellectual property. IF WE ARE ACCUSED OF INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER PARTIES, WE MAY BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION. IF WE LOSE OR SETTLE CLAIMS, WE COULD SUFFER A SIGNIFICANT IMPACT ON OUR BUSINESS AND BE FORCED TO PAY DAMAGES. Third parties have and may continue to assert that our products infringe their proprietary rights, or may assert claims for indemnification resulting from infringement claims against us. Any such claims may cause us to delay or cancel shipment of our products or pay damages that could seriously harm our business, financial condition and results of operations. In addition, irrespective of the validity or the successful assertion of such claims, we could incur significant costs in defending against such claims. We have received notices claiming infringement of patents from several semiconductor manufacturers with respect to certain aspects of our processes and devices and these matters are under investigation and review. Although patent holders typically offer licenses and we have entered into such license agreements, we may not be able to obtain licenses on acceptable terms, and disputes may not be resolved without costly litigation. 18 19 OUR BUSINESS MAY SUFFER DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS. Our international sales accounted for approximately 56% of sales in 1999; 46% in 1998; and 44% in 1997. Our international business activities are subject to a number of risks, any of which could impose unexpected costs on us that would have an adverse effect on our operating results. These risks include: - difficulties in complying with regulatory requirements and standards; - tariffs and other trade barriers; - costs and risks of localizing products for foreign countries; - severe currency fluctuation and economic deflation; - reliance on third parties to distribute our products; - longer accounts receivable payment cycles; - potentially adverse tax consequences; and - burdens of complying with a wide variety of foreign laws. BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR A SUBSTANTIAL PORTION OF OUR SALES, OUR SALES COULD DECLINE SIGNIFICANTLY DUE TO THE LOSS OF ONE OF THESE CUSTOMERS. During 1999, 25% of our sales came from two customers. One distributor accounted for 14% of our sales and one OEM customer accounted for 11% of our sales. Distributors are not themselves end users, but rather serve as a channel of sale to many end users of our products. If we were to lose either of these customers or experience any substantial reduction in orders from these customers, our sales and operating results could suffer. In addition, the composition of our major customer base changes from year to year as the market demand for our customers' products change. WE DO NOT TYPICALLY ENTER INTO LONG-TERM CONTRACTS WITH OUR CUSTOMERS AND THE LOSS OF A MAJOR CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS. We do not typically enter into long-term contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. An early termination or delay in shipments by one of our major customers would harm our financial results as it is unlikely that we would be able to rapidly replace that revenue source. OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE, WHICH WOULD SERIOUSLY HARM OUR BUSINESS. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenue, could harm our business. IF AN EARTHQUAKE OR OTHER NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITY OR THOSE OF OUR FOUNDRIES OR OTHER MANUFACTURING SUBCONTRACTORS, WE WOULD BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND WE WOULD EXPERIENCE LOST SALES. Our corporate headquarters are located in California near major earthquake faults. In addition, some of our foundries and suppliers are located near fault lines. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed. Similarly, a major earthquake or other natural disaster near one or more of our major manufacturing subcontractors could disrupt the operations of those subcontractors, which could limit the supply of our products and harm our business. Xicor has been unable to obtain earthquake insurance at reasonable costs and limits. 19 20 IF WE DID NOT ADEQUATELY PREPARE FOR THE TRANSITION TO THE YEAR 2000, OUR BUSINESS COULD BE HARMED. Xicor uses a significant number of computer software programs and operating systems and intelligent hardware devices in its internal operations, including information technology (IT) systems and non-IT systems used in the design, manufacture and marketing of company products. Xicor completed all Year 2000 readiness work and to date has not experienced disruption in its business related to the Year 2000 Issue. However, Xicor cannot provide any assurance that no Year 2000 issues will impact its IT and non-IT systems or other aspects of its business in the future. Xicor's key suppliers have not experienced major disruptions in their businesses related to the Year 2000 issue. However, Xicor cannot provide any assurance that no Year 2000 issue will affect our suppliers in the future. WE MAY REQUIRE ADDITIONAL CAPITAL IN ORDER TO BRING NEW PRODUCTS TO MARKET, AND THE ISSUANCE OF NEW EQUITY SECURITIES WILL DILUTE YOUR INVESTMENT IN OUR COMMON STOCK. To implement our strategy of diversified product offerings, we need to bring new products to market. Bringing new products to market and ramping up production requires significant working capital. We have in place a credit agreement with Coast Business Credit Corporation to provide up to $7.5 million of additional capital to support potential ongoing working capital requirements. We may need to borrow under this credit facility at some time. We may also sell additional shares of our stock or seek additional borrowings or outside capital infusions. We cannot assure you that such financing options will be available on terms acceptable to us, if at all. In addition, if we issue shares of our common stock, our shareholders will experience dilution with respect to their investment. WE DEPEND ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS TO GENERATE A MAJORITY OF OUR SALES. We rely on manufacturers' representatives and distributors to sell our products and these entities could discontinue selling our products at any time. The loss of any significant manufacturers' representative or distributor could seriously harm our operating results by impairing our ability to sell our products. THE SELLING PRICES FOR OUR PRODUCTS ARE VOLATILE AND HAVE HISTORICALLY DECLINED OVER THE LIFE OF A PRODUCT. IN ADDITION, THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE FLUCTUATIONS IN OUR OPERATING RESULTS, AS WE EXPERIENCED IN 1997 AND 1998. The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Downturns of this type occurred in 1997 and 1998. These downturns have been characterized by diminished product demand, production over-capacity and accelerated decline of average selling prices, and in some cases have lasted for more than a year. Our continued success depends in large part on the continued growth of various electronics industries that use semiconductors, including manufacturers of computers, telecommunications equipment, automotive electronics, industrial controls, consumer electronics, data networking and military equipment, and a better supply and demand balance within the industry. Our business could be harmed in the future by cyclical conditions in the semiconductor industry or by slower growth in any of the markets served by our customer products. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Xicor does not use derivative financial instruments in its investment portfolio. Xicor has an investment portfolio of fixed income securities that are classified as "held-to-maturity securities". These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. Xicor attempts to limit this exposure by investing primarily in short-term securities. Due to the short duration and conservative nature of Xicor's investment portfolio a movement of 10% by market interest rates would not have a material impact on Xicor's operating results and the total value of the portfolio over the next fiscal year. 20 21 Xicor is exposed to risks associated with foreign exchange rate fluctuations due to our international manufacturing and sales activities. Xicor generally has not hedged currency exposures. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial condition. All of our sales are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand could reduce sales and/or result in operating losses. 21 22 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA XICOR, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, --------------------- 1999 1998 --------- -------- Current assets: Cash and cash equivalents................................. $ 22,233 $ 17,881 Accounts receivable....................................... 8,508 8,835 Inventories............................................... 13,003 12,770 Prepaid expenses and other current assets................. 380 1,016 --------- -------- Total current assets.............................. 44,124 40,502 Property, plant and equipment, at cost less accumulated depreciation.............................................. 8,835 38,074 Other assets................................................ 1,835 286 --------- -------- Total assets................................................ $ 54,794 $ 78,862 ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 8,018 $ 9,279 Accrued expenses.......................................... 14,343 9,504 Deferred income on shipments to distributors.............. 12,828 9,121 Current portion of long-term obligations.................. 5,362 7,216 --------- -------- Total current liabilities......................... 40,551 35,120 Long-term obligations....................................... 9,794 13,137 --------- -------- Total liabilities........................................... 50,345 48,257 --------- -------- Commitments and contingencies (Notes 4 and 9) Shareholders' equity: Preferred stock; 5,000 shares authorized; none issued or outstanding............................................ -- -- Common stock; 75,000 shares authorized; 20,595 and 20,134 shares issued and outstanding.......................... 129,005 128,232 Accumulated deficit....................................... (124,556) (97,627) --------- -------- Total shareholders' equity.................................. 4,449 30,605 --------- -------- Total liabilities and shareholders' equity.................. $ 54,794 $ 78,862 ========= ========
See accompanying notes to consolidated financial statements. 22 23 XICOR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Net sales.................................................. $114,887 $106,147 $122,453 Cost of sales.............................................. 80,474 89,844 84,603 -------- -------- -------- Gross profit............................................. 34,413 16,303 37,850 -------- -------- -------- Operating expenses: Research and development................................. 14,560 17,429 18,475 Selling, general and administrative...................... 22,360 22,634 21,753 Restructuring charge..................................... 23,719 4,985 -- -------- -------- -------- 60,639 45,048 40,228 -------- -------- -------- Income (loss) from operations.............................. (26,226) (28,745) (2,378) Interest expense........................................... (1,407) (1,872) (1,834) Interest income............................................ 704 1,086 1,901 -------- -------- -------- Income (loss) before income taxes.......................... (26,929) (29,531) (2,311) Provision for income taxes................................. -- -- 220 -------- -------- -------- Net income (loss).......................................... $(26,929) $(29,531) $ (2,531) ======== ======== ======== Net income (loss) per share: Basic.................................................... $ (1.32) $ (1.53) $ (0.13) ======== ======== ======== Diluted.................................................. $ (1.32) $ (1.53) $ (0.13) ======== ======== ======== Shares used in per share calculation: Basic.................................................... 20,324 19,262 18,967 ======== ======== ======== Diluted.................................................. 20,324 19,262 18,967 ======== ======== ========
See accompanying notes to consolidated financial statements. 23 24 XICOR, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ------------------ ACCUMULATED SHARES AMOUNT DEFICIT TOTAL ------ -------- ----------- -------- Balance at December 31, 1996.................... 18,873 $123,522 $ (65,565) $ 57,957 Exercise of stock options....................... 219 682 -- 682 Net loss........................................ -- -- (2,531) (2,531) ------ -------- --------- -------- Balance at December 31, 1997.................... 19,092 124,204 (68,096) 56,108 Issuance of shares: Private investor.............................. 1,000 3,973 -- 3,973 Exercise of stock options..................... 42 55 -- 55 Net loss........................................ -- -- (29,531) (29,531) ------ -------- --------- -------- Balance at December 31, 1998.................... 20,134 128,232 (97,627) 30,605 Issuance of shares under employee stock plans and other..................................... 461 773 -- 773 Net loss........................................ -- -- (26,929) (26,929) ------ -------- --------- -------- Balance at December 31, 1999.................... 20,595 $129,005 $(124,556) $ 4,449 ====== ======== ========= ========
See accompanying notes to consolidated financial statements. 24 25 XICOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income (loss)........................................ $(26,929) $(29,531) $ (2,531) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation.......................................... 13,235 12,521 11,380 Non-cash restructuring charge......................... 16,338 2,358 -- Changes in assets and liabilities: Accounts receivable................................. 327 2,168 608 Inventories......................................... (233) 11,163 (4,579) Prepaid expenses and other current assets........... 636 (3) 371 Other assets........................................ 5 (80) 94 Accounts payable and accrued expenses............... 3,578 (946) 2,534 Deferred income on shipments to distributors........ 3,707 (4,792) 188 Long-term obligations............................... 1,993 -- -- -------- -------- -------- Net cash provided by (used in) operating activities........ 12,657 (7,142) 8,065 -------- -------- -------- Cash flows from investing activities: Investments in plant and equipment, net.................. (1,555) (4,872) (11,761) Purchases of short-term investments...................... -- (4,356) (28,395) Maturities of short-term investments..................... -- 15,728 38,182 -------- -------- -------- Net cash provided by (used in) investing activities........ (1,555) 6,500 (1,974) -------- -------- -------- Cash flows from financing activities: Repayments of long-term obligations...................... (7,523) (6,611) (6,081) Proceeds from sale of common stock, net of issuance costs: To private investor................................... -- 3,973 -- To employees and others............................... 773 55 682 -------- -------- -------- Net cash used in financing activities...................... (6,750) (2,583) (5,399) -------- -------- -------- Increase (decrease) in cash and cash equivalents........... 4,352 (3,225) 692 Cash and cash equivalents at beginning of year............. 17,881 21,106 20,414 -------- -------- -------- Cash and cash equivalents at end of year................... $ 22,233 $ 17,881 $ 21,106 ======== ======== ======== Supplemental information: Cash paid (refunded) during the year for: Interest expense......................................... $ 1,472 $ 1,939 $ 1,713 Income taxes............................................. 100 (113) 415 Equipment acquired pursuant to long-term obligations....... 333 1,453 12,255
See accompanying notes to consolidated financial statements. 25 26 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: Xicor, Inc. (Xicor) develops, manufactures and sells semiconductor memory devices. Xicor operates in one reportable segment based on the company's internal organization. One distributor accounted for 14% of sales in 1999; 15% in 1998; and 16% in 1997. One OEM customer represented 11% of sales in 1999. Sales are attributed to geographic areas based on the location to which the product is shipped. Sales by country are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- (IN MILLIONS) United States......................................... $ 51 $ 57 $ 68 Korea................................................. 18 9 6 Japan................................................. 15 11 18 Other foreign countries............................... 31 29 30 ---- ---- ---- $115 $106 $122 ==== ==== ====
Xicor has adopted generally accepted accounting principles that are customary in the industry in which it operates. Following are Xicor's significant accounting policies: FISCAL YEAR Xicor's fiscal year ends on the Sunday nearest December 31. For purposes of financial statement presentation, each fiscal year is deemed to have ended on December 31. Fiscal years 1999 and 1997 each consisted of 52 weeks; 1998 consisted of 53 weeks. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Xicor and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The preparation of 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. Actual results could differ from those estimates. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents and short-term investments consist principally of United States Government Treasury Bills and certificates of deposit. Highly liquid investments with maturities of three months or less at the time of purchase are considered cash equivalents. All investments are classified as "held-to-maturity securities" and are valued at amortized cost, which approximates fair market value. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject Xicor to concentrations of credit risk consist principally of cash equivalents and short-term investments and accounts receivable. Xicor invests primarily in United States Government Treasury Bills and certificates of deposit and places its investments with high-credit-quality financial institutions. Xicor's accounts receivable are derived from sales to original equipment manufacturers and distributors serving a variety of industries located primarily in the United States, Europe and the Far East. Xicor performs ongoing credit evaluations of its customers and to date has not experienced any material losses. 26 27 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Xicor measures its financial assets and liabilities in accordance with generally accepted accounting principles. For financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for long-term obligations also approximate fair value. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out basis for raw materials and supplies, and a standard cost basis (which approximates first-in, first-out) for work in process and finished goods. PROPERTY AND EQUIPMENT Depreciation for financial reporting purposes is computed using the straight-line method and the assets' estimated useful lives, principally five years. Amortization of leasehold improvements is computed over the shorter of the remaining terms of the leases or the estimated useful lives of the improvements. Construction in progress consists of leasehold improvements not completed and equipment received but not yet placed in service. Xicor reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. REVENUE RECOGNITION Certain of Xicor's sales are made to distributors under agreements allowing rights of return and price protection on unsold merchandise. Because of frequent sales price reductions and rapid technological obsolescence in the industry, Xicor defers recognition of such sales until the distributors sell the merchandise. Amounts billed to the distributors are included as accounts receivable and the related gross profit is deferred and reflected as a current liability until the merchandise is sold by the distributors. Revenue from all other product sales is recognized upon shipment. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common shares and all dilutive potential common shares outstanding. The same net income (loss) amounts were used for Basic Earnings Per Share (EPS) and Diluted EPS for the three years ended December 31, 1999. For the years ended December 31, 1999, 1998 and 1997, the number of shares used in the calculations of both EPS amounts were the same since stock options aggregating 3,259,000 at a weighted average price of $3.02 per share, 2,576,000 at a weighted average price of $2.36 per share and 1,999,000 at a weighted average price of $5.16 per share, respectively, were excluded as they were antidilutive. ACCOUNTING FOR STOCK OPTIONS In accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", Xicor applies Accounting Principles Board Opinion No. 25 for purposes of accounting for employee stock options. Because the exercise prices of Xicor's employee stock options equal the market price of the underlying stock on the date of grant, no compensation expense is recognized in the financial statements. Xicor provides additional pro forma disclosures as required under SFAS 123 in Note 6. 27 28 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT REPORTING In 1998, Xicor adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "Industry Segment" approach with the "Management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of Xicor's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. Xicor operates in one industry segment comprising the design, development, manufacture and sale of integrated circuits. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities, and is effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. We believe that adoption of this pronouncement will not have a material impact on our financial position and results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission. We believe that adopting SAB 101 will not have a material impact on our financial position and results of operations. NOTE 2 -- RESTRUCTURING During 1998 Xicor began to revise its manufacturing and procurement strategies to significantly increase outsourcing of wafer fabrication and product testing to overseas subcontractors and to streamline operations. Accordingly, Xicor recorded $5 million in restructuring charges in 1998, consisting of $2.4 million of equipment write-offs associated with equipment not in service due to the shifting of activity to outside contractors and $2.6 million for severance costs relating to a 38% reduction in workforce primarily in manufacturing and related support groups and to a lesser extent in the selling, administrative and engineering functions. Equipment with a net book value of $2.8 million was written down to its estimated net realizable value of $0.4 million. Throughout 1999, products manufactured by the outside foundry comprised an increasing proportion of Xicor's production and during the fourth quarter of 1999, two other foundries successfully produced initial wafers based on specifications provided by Xicor. Since Xicor now had multiple third-party locations able to produce its products, at significantly lower unit costs than the Milpitas in-house facility, Xicor decided to close its Milpitas in-house wafer fabrication facility and use third party foundries for all of Xicor's wafer fabrication production. The decision to close the Milpitas facility was approved by Xicor's Board of Directors in December 1999 and the production at the Milpitas facility is expected to cease by mid-2000. The decision to close the Milpitas facility and the streamlining of operations resulted in the recording of a restructuring charge of $23.7 million. The restructuring charge relating to the write down of the carrying value of Xicor's fabrication equipment to its estimated fair value less costs to sell was $16.3 million. The cost and accumulated depreciation of fabrication equipment prior to the write down was $89.1 million and $71.2 million, respectively. The fair value of the fabrication equipment, based on third party estimates of fair value less costs to sell, was estimated to be $1.6 million and has been recorded as "other assets". Xicor is currently pursuing the sale of the Milpitas manufacturing operations and at this time believes the most likely outcome would be a piecemeal sale of the equipment. Given the current conditions in the used semiconductor 28 29 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) equipment market, Xicor is unable to predict the time needed to dispose of the equipment held for sale. Severance costs of $1.5 million were accrued during the year ended December 31, 1999. Costs associated with the closure of the fab totaling $3.6 million have been accrued. Fab closure costs include decommissioning and clean up costs, environmental closure costs and equipment decontamination and removal costs. The restructuring charge also includes a charge for idle facilities of $0.8 million and equipment lease costs of $1.5 million. Severance costs of $2.4 million are accrued at December 31, 1999 for planned reductions in workforce of approximately 200 employees, primarily in manufacturing and related support groups. A substantial proportion of the reductions are planned to occur primarily in the second half of 2000. The following table sets forth Xicor's activity for the restructuring accrual and charges taken against the accrual and the remaining restructuring accrual balance at December 31, 1999:
RESTRUCTURING ACCRUAL --------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, ------------------- DECEMBER 31, 1998 EXPENSE UTILIZED 1999 ------------ ------- -------- ------------ (IN THOUSANDS) Fab closure costs............................... $ -- $3,555 $ -- $3,555 Employee severance and other.................... 1,350 1,464 449 2,365 Equipment lease costs........................... -- 1,484 - 1,484 Idle facilities charge.......................... -- 878 -- 878 ------ ------ ---- ------ $1,350 $7,381 $449 8,282 ====== ====== ==== Less: long-term obligations..................... (1,993) ------ $6,289 ======
NOTE 3 -- BALANCE SHEET COMPONENTS:
DECEMBER 31, --------------------- 1999 1998 -------- --------- (IN THOUSANDS) Inventories: Raw materials and supplies................................ $ 1,061 $ 1,450 Work in process........................................... 7,419 7,036 Finished goods............................................ 4,523 4,284 -------- --------- $ 13,003 $ 12,770 ======== ========= Property, plant and equipment: Leasehold improvements.................................... $ 2,582 $ 17,674 Equipment................................................. 42,485 124,371 Furniture and fixtures.................................... 1,343 1,881 Construction in progress.................................. 1,223 1,501 -------- --------- 47,633 145,427 Accumulated depreciation.................................. (38,798) (107,353) -------- --------- $ 8,835 $ 38,074 ======== ========= Accrued expenses: Accrued wages and employee benefits....................... $ 3,907 $ 2,688 Accrued restructuring liabilities......................... 6,289 1,350 Other accrued expenses.................................... 4,147 5,466 -------- --------- $ 14,343 $ 9,504 ======== =========
29 30 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1999 and 1998 are presented net of an allowance for doubtful accounts of $0.5 million. NOTE 4 -- LEASE COMMITMENTS: Xicor leases its facilities and certain equipment under non-cancelable lease agreements. Xicor's major facility lease expires in 2010 and provides for a five-year renewal option. The base rental increases 3.25% annually. Equipment leases are for terms of four to six years and require Xicor to pay property taxes, insurance and maintenance and repair costs. Leases that meet certain specific criteria are considered capital leases and, accordingly, are accounted for as the acquisition of an asset and the incurrence of a liability. Upon expiration of the related lease, the then fully depreciated asset (and the related accumulated depreciation) is removed from the accounts. Assets recorded under capital leases were as follows:
DECEMBER 31, ------------------- 1999 1998 ------- -------- (IN THOUSANDS) Equipment................................................... $ 4,435 $ 33,045 Less: accumulated depreciation.............................. (2,465) (13,933) ------- -------- $ 1,970 $ 19,112 ======= ========
Minimum future lease payments under non-cancelable leases as of December 31, 1999 including $1,993,000 of future payments related to idle equipment and facilities were as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- Years: (IN THOUSANDS) 2000........................................................ $ 6,199 $ 2,750 2001........................................................ 5,423 1,284 2002........................................................ 3,718 1,300 2003........................................................ 1,438 1,283 2004........................................................ -- 1,305 2005 - 2010................................................. -- 7,191 ------- ------- Total minimum lease payments................................ 16,778 $15,113 ======= Less amount representing interest........................... (1,622) ------- Present value of minimum lease payments..................... 15,156 Less current portion........................................ (5,362) ------- Long-term lease obligation.................................. $ 9,794 =======
Total rental expense under operating leases was as follows (including month-to-month rentals): 1999 -- $4.6 million, 1998 -- $4.7 million, 1997 -- $4.5 million. NOTE 5 -- LINE OF CREDIT AGREEMENT: Xicor has a line of credit agreement with a financial institution that expires on March 31, 2001 and provides for borrowings of up to 80% of eligible accounts receivable, not to exceed $7.5 million. Interest is charged at the prime lending rate plus 2%, with a minimum rate of 8%, and is payable monthly. This credit facility is secured by all the assets of Xicor. The agreement contains restrictions that, among other things, 30 31 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) preclude the payment of dividends, stock repurchases and the sale of assets other than in the normal course of business. At December 31, 1999, there were no borrowings outstanding under this line of credit and $1.7 million of the line of credit was reserved to secure a standby letter of credit. NOTE 6 -- COMMON STOCK: OPTION PLANS Xicor has two stock option plans for its employees, the 1990 Plan and the 1998 Plan that excludes officers of the company. The 1995 Director Option Plan provides for an initial grant of 20,000 options to each of the Company's directors and automatic annual grants of 5,000 options thereafter. The total number of shares of common stock authorized for issuance under the 1990 Employee Plan, the 1998 Employee Plan and the 1995 Director Plan are 3,450,000, 1,250,000 and 200,000, respectively. Options under all plans generally are exercisable in 25% annual increments and expire no later than ten years from date of grant. All outstanding options were granted at 100% of the fair market value of the stock at the date of grant. The following table summarizes the option activity under all plans.
AVERAGE NUMBER OPTION PRICE OF SHARES PER SHARE ---------- ------------ (IN THOUSANDS) Outstanding at December 31, 1996............................ 1,953 $4.61 Granted..................................................... 463 6.80 Exercised................................................... (219) 3.12 Canceled.................................................... (198) 5.82 ------ Outstanding at December 31, 1997............................ 1,999 5.16 Granted..................................................... 2,203 2.31 Exercised................................................... (42) 1.28 Canceled.................................................... (1,584) 5.86 ------ Outstanding at December 31, 1998............................ 2,576 2.36 Granted..................................................... 1,488 3.85 Exercised................................................... (310) 1.90 Canceled.................................................... (495) 2.79 ------ Outstanding at December 31, 1999............................ 3,259 3.02 ======
In February 1998, substantially all outstanding options held by employees under the 1990 Plan with a share price in excess of $2.75 per share were repriced to $2.75 per share, the fair market value as of the date of the repricing. A total of 1,217,950 options were repriced and are included in the grant and cancellation activity for 1998. The number of stock options available for grant were 681,500 at December 31, 1999; 426,400 at December 31, 1998; and 827,000 at December 31, 1997. At December 31, 1999, 3,940,125 shares of common 31 32 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock were reserved for issuance upon exercise of stock options. Options outstanding at December 31, 1999 and related weighted average price and life information follows:
OPTIONS OUTSTANDING RANGE OF -------------------------------- OPTIONS EXERCISABLE EXERCISE REMAINING -------------------- PRICES SHARES PRICE LIFE (YEARS) SHARES PRICE - -------------- --------- ----- ------------ ---------- ------- $0.69 - $ 0.78.. 164,000 $0.78 8.6 43,000 $ 0.77 $1.09 - $ 1.62.. 1,015,000 $1.49 8.3 174,000 $ 1.41 $1.87 - $ 2.75.. 1,175,000 $2.66 6.5 777,000 $ 2.65 $3.44 - $ 3.81.. 264,000 $3.74 8.7 50,000 $ 3.44 $5.44 - $ 7.50.. 558,000 $5.90 9.7 7,000 $ 5.44 $9.00 - $11.50.. 83,000 $9.48 9.3 11,000 $11.50 --------- ----- --- --------- ------ $0.69 - $11.50.. 3,259,000 $3.02 8.0 1,062,000 $ 2.52 ========= ===== === ========= ======
The fair value of options at date of grant was estimated using the Black-Scholes model. The weighted average grant date fair value of options granted was $2.16, $0.79, and $3.59 for the three years ended December 31, 1999. The estimated stock-based compensation cost calculated using the assumptions indicated totaled $954,000 in 1999; $2,103,000 in 1998; and $1,364,000 in 1997. The following weighted average assumptions are included in the estimated fair value grant date calculation of Xicor's stock options:
1999 1998 1997 ----- ----- ----- Expected life (years).............................. 5 5 5 Interest rate...................................... 5.71% 5.31% 5.99% Volatility......................................... 78% 70% 70% Dividend yield..................................... 0% 0% 0%
STOCK PURCHASE PLAN In 1998, Xicor implemented an Employee Stock Purchase Plan ("ESPP"), which allows eligible employees to purchase shares of common stock through payroll deductions. The ESPP consists of consecutive 24-month Offering Periods composed of four 6-month Purchase Periods. The shares can be purchased at the lower of 85% of the fair market value of the common stock at the date of commencement of a two-year Offering Period or at the last day of each 6-month Purchase Period. Purchases are limited to the lesser of 10% of the employee's compensation or $25,000 per year and may not exceed 500 shares during each 6-month Offering Period. At December 31, 1999, 486,000 shares had been reserved for issuance under the ESPP. During 1999, 106,000 shares were issued under the ESPP. The fair value of purchase rights granted under the ESPP at grant date was estimated using the Black-Scholes model. The weighted average grant date fair value of purchase rights granted under the ESPP during the year ended December 31, 1999 was $52,000. The following weighted average assumptions are included in the estimated fair value grant date calculation of Xicor's ESPP:
1999 ----- Expected life (years)................................ 0.5 Interest rate........................................ 4.54% Volatility........................................... 78% Dividend yield....................................... 0%
32 33 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE The pro forma net income (loss) resulting from the increased compensation costs for awards granted under the stock option and employee stock purchase plans was ($27,935,000) or ($1.37) per share in 1999; ($31,634,000) or ($1.64) per share in 1998; and ($3,895,000) or $(0.21) per share in 1997. ISSUANCE OF SHARES TO PRIVATE INVESTOR In November 1998 Xicor and Advanced Technology Materials, Inc. (ATMI) entered into a strategic alliance focused on integrated circuit (IC) sales into smart card applications. ATMI, through its Emosyn division, has the right to become Xicor's exclusive sales channel for Xicor secure memory IC products in chip or module form to customers for use in smart card applications. Xicor will continue to sell these products worldwide to all customer applications other than smart cards. Additionally, Xicor and Emosyn will jointly define future IC products suitable for the smart card industry, to be manufactured by Xicor and sold by Emosyn. As part of this agreement, ATMI purchased from Xicor 1,000,000 unregistered shares of Xicor common stock at $4.00 per share, for which it has certain registration rights. Also, after achieving agreed upon goals, but not before the end of Year 2001, ATMI may purchase the rights to Xicor's Security IC product line for use only in smart card applications. The purchase price will be determined by an agreed upon formula. Following the purchase, Xicor will continue to supply such chips to Emosyn, and will also continue to sell its security products using its distribution channels to all applications other than smart cards. For the year ended December 31, 1999 sales to Emosyn were less than one percent of sales. NOTE 7 -- EMPLOYEE INCENTIVE CASH BONUS PROFIT SHARING PROGRAM: Xicor has an Employee Incentive Cash Bonus Profit Sharing Program (the "Program"). Under the Program, twice a year (two profit sharing periods) 5% to 15% of Xicor's consolidated operating income, excluding certain non-product sales and restructuring charges and credits, is distributed to employees. The exact percentage to be distributed is determined by a Committee of the Board of Directors. Profit sharing bonuses relating to 1999 and 1997 totaled $0.2 million and $0.3 million, respectively. No profit sharing bonuses were paid relating to 1998. NOTE 8 -- INCOME TAXES: The income tax provision consists of the following:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- (IN THOUSANDS) Federal................................................ $-- $-- $ 45 State.................................................. -- -- 25 Foreign................................................ -- -- 150 --- --- ---- $-- $-- $220 === === ====
The reconciliation between the amount computed by applying the U.S. Federal statutory rate and the reported tax expense is as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- Federal statutory rate.............................. (35.0)% (35.0)% (35.0)% Operating losses with no current benefit............ 35.0 35.0 35.0 Foreign, alternative minimum and other taxes........ -- -- 9.5 ----- ----- ----- 0.0% 0.0% 9.5% ===== ===== =====
33 34 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Deferred tax assets: Federal and state loss and credit carryforwards...... $ 27,189 $ 26,894 Capitalized research and development................. 6,084 4,778 Inventory reserves and basis difference.............. 5,869 6,577 Deferred income on shipments to distributors......... 3,119 873 Restructuring........................................ 10,088 1,460 Depreciation......................................... 3,174 3,293 Other................................................ 1,943 3,076 -------- -------- 57,466 46,951 Deferred tax liabilities............................... (2,958) (2,266) Deferred tax assets valuation allowance................ (54,508) (44,685) -------- -------- Net deferred taxes..................................... $ -- $ -- ======== ========
The deferred tax assets valuation allowance is attributed to U.S. Federal and state deferred tax assets. Management believes sufficient uncertainty exists regarding the realizability of the net deferred tax assets such that a full valuation allowance is required. At December 31, 1999, Xicor had Federal tax net operating loss carryforwards and general business credit carryforwards of approximately $61 million and $2.1 million, respectively. These carryforwards expire in varying amounts from 2000 through 2014. The net operating loss carryforward includes approximately $7 million resulting from employee exercises of non-incentive stock options, the tax benefit of which, when realized, will be accounted for as an addition to common stock rather than as a reduction of the provision for income taxes. At December 31, 1999, Xicor also had California state tax net operating loss and credit carryforwards of approximately $4 million and $3.5 million, respectively. These carryforwards expire in varying amounts from 2002 to 2007. Availability of the net operating loss and credit carryforwards may potentially be reduced in the event of certain substantial changes in equity ownership. NOTE 9 -- CONTINGENCIES: In the normal course of business, Xicor receives and makes inquiries with regard to possible patent infringement. Where deemed advisable, Xicor may seek to enter into or extend licenses or negotiate settlements. Outcomes of such negotiations may not be determinable at any one point in time; however, management currently does not believe that such licenses or settlements will materially affect Xicor's financial position or results of operations. 34 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Xicor, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Xicor, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------------------------------ PricewaterhouseCoopers LLP San Jose, California January 24, 2000 35 36 FINANCIAL INFORMATION BY QUARTER (UNAUDITED) The following table sets forth unaudited financial information for each quarterly reporting period in the fiscal years ended December 31, 1999 and 1998:
1999 ---------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales........................................... $25,656 $28,751 $29,542 $30,938 Cost of sales....................................... 21,001 21,305 18,840 19,328 Research and development............................ 3,559 3,683 3,581 3,737 Selling, general and administrative................. 5,262 5,553 5,864 5,681 Restructuring charge................................ -- -- -- 23,719 Net income (loss)(2)................................ (4,397) (1,993) 1,074 (21,613) Net income (loss) per share: Basic............................................. (0.22) (0.10) 0.05 (1.05) Diluted........................................... (0.22) (0.10) 0.05 (1.05) Shares used in per share calculations: Basic............................................. 20,173 20,257 20,364 20,500 Diluted........................................... 20,173 20,257 22,141 20,500
1998 ------------------------------------------ FIRST SECOND THIRD FOURTH(1) ------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales.......................................... $27,746 $26,787 $24,695 $26,919 Cost of sales...................................... 19,892 25,521 21,479 22,952 Research and development........................... 4,566 4,628 4,304 3,931 Selling, general and administrative................ 5,498 5,620 5,448 6,068 Restructuring charge............................... -- -- 1,267 3,718 Net income (loss)(2)............................... (2,354) (9,184) (8,038) (9,955) Net income (loss) per share: Basic............................................ (0.12) (0.48) (0.42) (0.51) Diluted.......................................... (0.12) (0.48) (0.42) (0.51) Shares used in per share calculations: Basic............................................ 19,095 19,108 19,123 19,689 Diluted.......................................... 19,095 19,108 19,123 19,689
- --------------- (1) All quarters consist of 13 weeks except for the fourth quarter of 1998 which consists of 14 weeks. (2) See Management's Discussion and Analysis of Financial Condition and Results of Operations for factors contributing to the losses. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. 36 37 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information concerning Xicor's directors and executive officers required by this Item is incorporated by reference to the information contained in the sections captioned "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Xicor's Proxy Statement. The information concerning Xicor's executive officers required by this Item is included in Part I hereof under the caption "Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information contained in the section captioned "Executive Compensation" in Xicor's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in Xicor's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information contained in the section captioned "Election of Directors" in Xicor's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) FINANCIAL STATEMENTS. PAGE ------- Consolidated Balance Sheets as of December 31, 1999 and 1998........................................................ 22 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999................. 23 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1999....... 24 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999................. 25 Notes to Consolidated Financial Statements.................. 26 - 34 Report of Independent Accountants........................... 35
(2) FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted since the required information is not applicable, not significant or because the information required is included in the consolidated financial statements or notes thereto. (3) EXHIBITS. The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report. (b) Reports on Form 8-K None. 37 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milpitas, State of California, on the 10th day of March 2000. XICOR, INC. Registrant By /s/ RAPHAEL KLEIN -------------------------------------- Raphael Klein Chairman of the Board and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Raphael Klein and Klaus G. Hendig, and each of them, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ RAPHAEL KLEIN Chairman of the Board and Chief March 10, 2000 - ----------------------------------------------------- Executive Officer (Raphael Klein) (Principal Executive Officer) /s/ BRUCE GRAY President, Chief Operating March 10, 2000 - ----------------------------------------------------- Officer and Director (Bruce Gray) /s/ JULIUS BLANK Director March 10, 2000 - ----------------------------------------------------- (Julius Blank) /s/ ANDREW W. ELDER Director March 10, 2000 - ----------------------------------------------------- (Andrew W. Elder) /s/ GEOFFREY WINKLER Director March 10, 2000 - ----------------------------------------------------- (Geoffrey Winkler) /s/ GERALDINE N. HENCH Vice President, Finance and March 10, 2000 - ----------------------------------------------------- Chief Financial Officer (Geraldine N. Hench) (Principal Financial Officer and Principal Accounting Officer)
38 39 XICOR, INC. INDEX TO EXHIBITS ITEM 14(A)3.
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Amended and Restated Articles of Incorporation dated December 9, 1987 filed as Exhibit 3.1 with Form 10-K for the year ended December 31, 1987, is hereby incorporated by reference. 3.2 By-laws, as amended to date, filed as Exhibit 3.2 with Form 10-K for the year ended December 31, 1987, is hereby incorporated by reference. 3.2A Certificate of Amendment of By-Laws effective as of January 28, 1998 filed as Exhibit 3.2A with Form 10-K for the year ended December 31, 1998, is hereby incorporated by reference. 3.2B Certificate of Amendment of By-Laws effective as of June 4, 1999 is filed herewith as Exhibit 3.2B. 10.1 Xicor, Inc. 1990 Incentive and Non-incentive Stock Option Plan (As Amended and Restated March 15, 1999) filed as Exhibit 4.2 with Form S-8 Registration Statement Number 333-83563 on July 23, 1999, is hereby incorporated by reference. 10.2 Lease dated July 2, 1980, Exhibit 13-E of the Exhibits filed with Form S-1 Registration Statement, File No. 2-69109, is hereby incorporated by reference. 10.2A Amendment to lease dated July 2, 1980 filed as Exhibit 10.2A with Form 10-K for the year ended December 31, 1990, is hereby incorporated by reference. 10.3 Lease dated November 23, 1983, Exhibit 1 of the Exhibits filed with Form 10-K for the year ended December 31, 1983, is hereby incorporated by reference. 10.3A Amendment to lease dated November 23, 1983 filed as Exhibit 10.3A with Form 10-K for the year ended December 31, 1990, is hereby incorporated by reference. 10.3B Amendment to lease dated November 23, 1983 is filed herewith as Exhibit 10.3B. 10.4 Lease dated February 15, 1984, Exhibit 10(v) of the Exhibits filed with Form 10-K for the year ended December 31, 1984, is hereby incorporated by reference. 10.4A Amendment to lease dated February 15, 1984 filed as Exhibit 10.4A with Form 10-K for the year ended December 31, 1994, is herein incorporated by reference. 10.6 Form of Indemnification Agreement entered into between Xicor, Inc. and each of its Officers and Directors filed as Exhibit 10.6A with Form 10-Q for the quarterly period ended June 30, 1996, is hereby incorporated by reference. 10.7 Lingsen-Xicor Dedicated Production Agreement dated September 21, 1988 as amended on March 11, 1989, April 14, 1989 and September 8, 1989 filed as Exhibit 10.8 with Form 10-K for the year ended December 31, 1989, is hereby incorporated by reference. 10.8 Loan and Security Agreement dated March 10, 1993 with CoastFed Business Credit Corporation filed as Exhibit 10.8 with Form 10-K for the year ended December 31, 1992, is hereby incorporated by reference. 10.8A Fourth Amendment to Loan Documents and Letter of Credit Collateral Agreement filed as Exhibit 10.8A with Form 10-Q for the quarterly period ended July 4, 1999, is hereby incorporated by reference. 10.9 Xicor, Inc. 1995 Director Option Plan filed as Exhibit 10.9 with Form 10-K for the year ended December 31, 1995, is hereby incorporated by reference. 10.10 * Xicor-Yamaha Semiconductor Manufacturing Foundry Agreement dated February 6, 1997 as filed as Exhibit 10.10 with Form 10-K for the year ended December 31, 1998, is hereby incorporated by reference. 10.11 Xicor, Inc. 1998 Employee Stock Purchase Plan as filed as Exhibit 10.11 with Form 10-K for the year ended December 31, 1998 is hereby incorporated by reference.
39 40
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.12 Xicor, Inc. 1998 Nonstatutory Stock Option Plan as filed as Exhibit 10.12 with Form 10-K for the year ended December 31, 1998 is hereby incorporated by reference. 10.13 ** Foundry Agreement by and between Xicor, Inc. and Zentrum Mikroelektronic Dresden GmbH dated April 8, 1999 is filed herewith as Exhibit 10.13. 10.14 ** Xicor - Sanyo Semiconductor Manufacturing Foundry Agreement dated May 1, 1999 is filed herewith as Exhibit 10.14 21. List of Subsidiaries. 23. Consent of PricewaterhouseCoopers LLP. 24. Powers of Attorney (included on the signature pages hereof). 27. Financial Data Schedule.
- --------------- * Confidential treatment has been granted as to certain portions of this Exhibit. ** Confidential treatment of certain portions has been requested. 40 EX-3.2(B) 2 CERTIFICATE OF AMENDMENT OF BY-LAWS 1 Exhibit 3.2B CERTIFICATE OF AMENDMENT OF BYLAWS OF XICOR, INC. Effective as of June 4, 1999 The undersigned, being the Secretary of Xicor, Inc., hereby certifies that: effective as of the date set forth above, pursuant to the affirmative vote of the holders of a majority of the outstanding shares entitled to vote, effective as of June 4, 1999, Article I of the Bylaws of Xicor, Inc. was amended as follows: the former Section 2 was deleted and replaced by Section 2 as set forth below: "Section 2. Number and Qualification The authorized number of directors of the corporation shall be no less than four (4) nor more than seven (7), with the exact number of directors to be fixed within the limits specified by approval of the Board of Directors or Shareholders. This number may be changed by amendment to the Articles of Incorporation or by an amendment to this Section 2, ARTICLE I, of these Bylaws, adopted by the vote or written assent of the Stockholders entitled to exercise majority voting power as provided in Sec. 212." /S/ JULIUS BLANK ------------------------------- Julius Blank, Secretary EX-10.3(B) 3 AMENDMENT TO LEASE 1 Exhibit 10.3B FOURTH AMENDMENT TO LEASE This Fourth Amendment to Lease ("Fourth Amendment"), dated as of January 7, 2000, is entered into by and between Callahan-Pentz Properties, Sycamore Four, a California general partnership ("Landlord") and Xicor, Inc., a California corporation ("Tenant"). RECITALS A. Landlord and Tenant entered into a Build to Suit Lease dated November 23, 1983, as amended by an Amendment to Lease dated May 23, 1986, a Second Amendment to Build to Suit Lease dated January 25, 1988, and a Third Amendment to Build to Suit Lease dated April 9, 1990 (collectively, the "Lease") for the premises commonly known as 1511 Buckeye Drive, Milpitas, California (the "Premises"). B. The term of the Lease is scheduled to expire on January 6, 2000. C. Landlord and Tenant now desire to extend the term of the Lease for a period of ten (10) years on the terms and conditions set forth herein. AGREEMENT In consideration of the mutual covenants set forth herein and other valuable consideration, Landlord and Tenant agree to amend the Lease as follows: 1. Term. Paragraph 6.A. of the Lease is amended to extend the Term of the Lease for a period of ten (10) years, commencing January 7, 2000 and ending January 6, 2010. 2. Rent. Effective January 7, 2000, the first sentence of Paragraph 5.A.(i) of the Lease is deleted and replaced with the following: Tenant shall pay to Landlord the Monthly Rent, in accordance with the schedule set forth below, in advance, upon the first day of each calendar month of Term at the address of Landlord set forth herein, or at such other place designated by Landlord, without prior demand and without deduction, offset or counterclaim:
Months of Term Net Monthly Rent --------------------- ----------------- Jan 7, 00 - Jan 6, 01 $ 95,709.00/month Jan 7, 01 - Jan 6, 02 $ 98,820.00/month Jan 7, 02 - Jan 6, 03 $102,032.00/month Jan 7, 03 - Jan 6, 04 $105,348.00/month Jan 7, 04 - Jan 6, 05 $108,772.00/month Jan 7, 05 - Jan 6, 06 $112,307.00/month Jan 7, 06 - Jan 6, 07 $115,957.00/month Jan 7, 07 - Jan 6, 08 $119,726.00/month Jan 7, 08 - Jan 6, 09 $123,617.00/month Jan 7, 09 - Jan 6, 10 $127,635.00/month
Paragraph 5.A.(ii) of the Lease is deleted in its entirety. 3. Options to Extend. Paragraph 7.A. of the Lease is deleted and replaced with the following: 2 A. Option Period. Provided that Tenant is not in default hereunder, either at the time of exercise or at the time the extended Term commences, Tenant shall have the option to extend the Term of the Lease for one (1) additional period of five (5) years ("Option Period") on the same terms, covenants and conditions provided herein, except that upon such renewal the Monthly Rent due hereunder shall be the greater of (i) $95,709.00 per month and (ii) ninety-five percent (95%) of the then fair market rental value of the Premises, determined pursuant to Paragraph 7.B. If Tenant elects to exercise the option, it shall do so by giving Landlord written notice ("Option Notice") at least one hundred eighty (180) days but not more than two hundred ten (210) days prior to the expiration of the Term of this Lease. Paragraph 7.B. of the Lease is deleted and replaced with the following: A. Option Period Monthly Rent. The Monthly Rent for the Option Period shall be determined as follows: (i) The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period. If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. If the parties are unable to agree on the Monthly Rent within fifteen (15) days, then, the initial Monthly Rent for the Option Period shall be the greater of (A) $95,709.00 per month and (B) ninety-five percent (95%) of the then current fair market rental value of the Premises as determined in accordance with Paragraph 7.B.(iii). The initial Monthly Rent shall be subject to such periodic increases in Monthly Rent as are then customary, in both amount or percentage amounts and frequency, for leases similar to this Lease taking into consideration the same items considered in determining the then fair market rental value of the Premises, but in no event less than three and 25/100ths percent (3.25%) per annum. (ii) The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Oak Creek Business Park. (iii) Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 7.B.(i), each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full-time commercial appraisal experience in the area in which the Premises are located to appraise and set the Monthly Rent. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the Monthly Rent. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the Monthly Rent. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the Monthly Rent. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then Presiding Judge of the Santa Clara County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the Monthly Rent. If a majority of the appraisers are unable to set the Monthly Rent within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the Monthly Rent. If, however, the low 3 appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the Monthly Rent. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, then only the middle appraisal shall be used as the result of the appraisal. After the Monthly Rent has been set, the appraisers shall immediately notify the parties and the parties shall amend this Lease to set forth the Monthly Rent for the Option Period. Except as set forth in this Fourth Amendment, the Lease is unmodified and in full force and effect. LANDLORD TENANT Callahan-Pentz Properties, Xicor, Inc., a California corporation Sycamore Four, a California general partnership By: /S/ George B. Pentz By: /S/ Klaus G. Hendig ------------------------------- ------------------------------- George B. Pentz, Managing General Partner Its: Vice President ------------------------------- EX-10.13 4 FOUNDRY AGREEMENT XICOR-ZENTRUM 1 CONFIDENTIAL TREATMENT REQUESTED Exhibit 10.13 - ---------------------------------------- *Portions denoted with an asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. - ---------------------------------------- FOUNDRY AGREEMENT THIS FOUNDRY AGREEMENT (the "Agreement") is made as of April 8, 1999. (the "Effective Date") by and between Xicor Inc., a California corporation, having its principal place of business at 1511 Buckeye Dr., Milpitas, CA 95035 ("Xicor") and Zentrum Mikroelektronik Dresden GmbH, a corporation organized under the laws of Germany, having its principal place of business at GrenzstraBe 28, 01109 Dresden, Germany ("ZMD"), with reference to the following facts: A. Xicor desires to have certain products of its design manufactured by ZMD for sale to Xicor. B. ZMD has the capability of manufacturing such products and desires to do so for sale to Xicor. C. Such products will be manufactured in a facility owned by ZMD and located at its principal place of business. D. Xicor may also in the future desire to transfer further production to the ZMD facility. NOW, THEREFORE, in consideration of the foregoing and the covenants contained below, the parties agree as follows: 1. DEFINITIONS: 1.1 "Products" shall mean fully processed silicon wafers containing finished die of Xicor's integrated circuit products. 1.2 "Update" shall mean changes to a Product that result in a new version of the Product with improved performance, reduced size and/or minor changes in functionality over previous versions of the Product. 1.3 "Production" shall mean the manufacturing of Products using a qualified Process. Milestones for Production operations are set forth in Exhibit 1.3 attached hereto and made a part hereof. 1.4"Process" shall mean the wafer manufacturing process used for manufacturing of the Products. 2. MANUFACTURING: 2.1 Initial Focus: The initial Production focus shall be Xicor's DCP product lines and processes, specifically the C5.64 and C5.67 Processes. 2.2 Foundry: ZMD owns a wafer fabrication facility (the "ZMD Fab") located at its principal place of business in Dresden, Germany that will be suitable for the purposes of this Agreement. 2.3 Qualification of ZMD Fab: Qualification of the ZMD Fab will occur upon completion of the quality & reliability requirements set forth in Exhibit 6.1 2.4 Manufacturing: Upon Xicor's orders therefor and subject to qualification pursuant to section 6 below, ZMD agrees to manufacture and sell Products, and Xicor agrees to purchase such Products from ZMD, on the terms and conditions set forth herein. The parties agree that the first Products to be manufactured hereunder shall be Xicor's DCP products on Xicor's C5.64 and C5.67 Processes with such additional Products or Processes as may from time to time be agreed to by the parties. If other Products or Processes are added, the appropriate Exhibits specific to the additional Products and Processes must be included. ZMD agrees to provide Xicor with appropriate documentation of the manufacturing Processes , which will include wafer and lot identification and traceability. 1 2 CONFIDENTIAL TREATMENT REQUESTED 2.5 Deliverables by Xicor: With respect to each Product that Xicor requires ZMD to manufacture hereunder, Xicor shall provide all necessary technical information. Such information is set forth in Exhibit 2.5 attached hereto and made a part hereof. 2.6 Mask Sets: Xicor shall provide to ZMD at Xicor's expense, all masks and GDS-II data required to enable ZMD to manufacture the Products hereunder. Xicor shall provide all information necessary for using Xicor's masks for manufacturing at ZMD. ZMD shall provide Xicor with the final sizing tables for approval by Xicor. If under any circumstances a mask or mask set is lost or broken by ZMD, ZMD shall pay for the replacement mask or mask set. Additional mask sets required by ZMD for manufacturing purposes shall be at ZMD's expense. 3. PRICE AND PAYMENT TERMS: 3.1 Price: Xicor shall purchase the Products manufactured under this Agreement at the prices and on the payment terms set forth in Exhibit 3.1 attached hereto and made a part hereof. Payment terms, shipping terms and obligation for taxes will be agreed to in Exhibit 3.1. 3.2 Yield: The parties agree that ZMD's initial target yield for each Product ("Initial Target Yield") shall be as set forth in Exhibit 3.2 attached hereto and made a part hereof. The Initial Target Yields will increase in accordance with Exhibit 3.2, subject to renegotiations as provided in Exhibit 3.2. 4. WAFER PROBE: ZMD shall perform wafer probe which shall be 100% electrical test at wafer sort as soon as practicable. The applicable data sheet and test requirements are set forth in Exhibit 4 attached hereto and made a part hereof. Prices for wafer probe shall be listed in Exhibit 3.1. 5. FORECAST AND ORDERS: 5.1 Six Month Rolling Forecast: During the term of this Agreement, Xicor shall provide to ZMD a 24 weeks rolling forecast setting forth its estimated requirements for wafer starts by week for Products. ZMD will review the forecast and will respond within one week. ZMD agrees to use its reasonable best efforts to meet all commitments for the period of the forecast unless otherwise agreed to by both ZMD and Xicor. The first 12 weeks of the forecast will be "firm" for 125 mm wafer starts. ZMD agrees that in exceptional cases, it will negotiate Xicor requested push-outs and cancellations of the firm backlog with Xicor. 5.2 Orders: A "blanket" purchase order shall be initiated by Xicor and maintained on an ongoing basis. All releases issued by Xicor against the blanket purchase order shall state unit quantities, unit descriptions, unit prices, requested delivery dates, and shipping instructions. Provided that the release is consistent with the forecast provided to ZMD under section 5.1 hereof, the cycle times under section 5.3(c) hereof, and the other terms and conditions hereof, ZMD shall accept the order. ZMD shall acknowledge on Monday morning (Germany time) of each week its acceptance of the "queued" loaded schedule. 5.3 Lots: Xicor shall order Products as specified below: (a) Engineering Lots: Xicor may order engineering lots where Xicor seeks the qualification of an Update or a Product not previously manufactured by ZMD, to seek or otherwise improve functionality and yield, or to make any other engineering changes. For purposes of this Agreement, an engineering lot shall contain at least six wafers. It shall be Xicor's responsibility to inform and provide ZMD with the specifications for the engineering changes to be made to an engineering lot before manufacturing begins. Specifications shall be attached to, or referenced by Xicor's purchase order. Any change to the specifications shall 2 3 CONFIDENTIAL TREATMENT REQUESTED be documented by Xicor to ZMD. The price for engineering lots are described in Exhibit 3.1. II. (b) Production Lots: Xicor shall order a Product by lot quantity. The normal wafer lot shall contain 25 wafers. (c) Production Cycle Times: The target cycle time for ZMD for each Product manufactured hereunder shall be as per Exhibit 5.3. 5.4 Process Termination: Xicor shall provide ZMD with at least twelve (12) months notice - but not sooner than Dec. 31st, 2000 -of the date on which Xicor will no longer schedule wafer starts on an existing process used to manufacture Products. 5.5 Delays: Subject to section 13.12, Xicor shall have the right to cancel any order, in whole or in part, when delivery is not made within four (4) weeks of the agreed date. Cancellation will be Xicor's sole remedy in this case. In the case of late delivery of certain high volume Products, the parties may mutually agree to extend said delivery date for an additional 4 weeks. 6. QUALIFICATION AND QUALITY CONTROL: 6.1 Qualification: Products to be manufactured and the manufacturing processes to be used under this Agreement are subject to qualification by Xicor and ZMD pursuant to qualification criteria and procedures set forth in Exhibit 6.1 attached hereto and made a part hereof ("Qualification"). The parties agree to use their best efforts to complete any Qualification required in this section 6.1 and under section 6.2 hereof as soon as possible. ZMD may not ship production wafers to Xicor until ZMD has a Quality Plan approved by the Xicor Quality Organization and has been formally audited by Xicor unless specifically authorized to do so by Xicor. 6.2 Changes: (a) ZMD Process Changes: After Qualification of a Product, ZMD may not make any process change without prior written consent from Xicor. Any such change must be in accordance with Exhibit 6.2 attached hereto and made a part hereof and will be subject to qualification according to the applicable criteria and procedures set forth in Exhibit 6.1. (b) Xicor Process Changes: If Xicor desires ZMD to make a process change, Xicor shall notify ZMD in writing thereof. ZMD will not implement or act on any verbal change instructions. Upon receipt of such written instructions, ZMD will review the proposed change and provide to Xicor a written evaluation stating the cost and schedule to implement the same. The parties will then mutually agree on the terms and conditions of the implementation of such change. All changes agreed to by ZMD and Xicor shall be reflected in an update to the ZMD documentation of the baseline manufacturing process. 6.3 Rework: ZMD may perform rework on wafers only to the extent that it has been authorized and approved by Xicor as set forth in Exhibit 6.3 attached hereto and made a part hereof. 6.4 Life Test and Reliability Monitors: Xicor may, at its option, from time to time, utilize life test and other agreed upon reliability monitors with respect to the Products manufactured by ZMD hereunder. These monitors, as per Exhibit 6.4 attached hereto and made a part hereof, will be established as soon as practicable. Commencing ninety (90) days after ZMD has begun manufacturing production lots of each Product, if these tests indicate that ZMD's manufacturing facility is not being maintained within required manufacturing parameters, the parties agree to confer with respect thereto, and ZMD agrees to take all reasonable measures to promptly correct any such problems. 3 4 CONFIDENTIAL TREATMENT REQUESTED 6.5 Manufacturing and Quality Audits: Xicor may, at its option, but no more often than two times in any calendar year, conduct a manufacturing and quality audit of the ZMD Fab. These audits will be conducted during normal business hours. Xicor agrees to provide ZMD reasonable prior notice of its intention to conduct such audit. ZMD agrees to cooperate fully with Xicor during the audit, to give Xicor auditing personnel access to the ZMD Fab, and to provide whatever documents and other information regarding the operation of the ZMD Fab in connection with this Agreement that they may reasonably request. ZMD shall not allow Xicor and its auditing personnel access to ZMD's other customers' data. Disclosure of Confidential Information (as hereinafter defined) of ZMD shall be subject to section 11.1 hereof. Each party shall pay its own expenses actually incurred due to any such audits. 6.6 Manufacturing Control Plan: ZMD shall develop and maintain a manufacturing control plan to identify the critical processes and implement SPC (Statistical Process Control) to monitor and control such critical processes. The critical processes will include, but not be limited to, facilities, environment, DI water and chemical purity, which ZMD shall monitor constantly to ensure consistent Product quality and reliability. These critical processes are set forth in Exhibit 6.6 attached hereto and made a part hereof. ZMD shall provide monthly SPC/Cpk data for all critical processes as applicable. For all Cpks less than 1.67, ZMD shall provide an action plan to achieve at least 1.67 as soon as practicable, but the eventual Cpk goal for ZMD shall be 2.0. For manufacturing processes with Cpk less than 1.0, ZMD shall develop a "containment" plan. ZMD will also install and maintain appropriate Y2k compliant systems to enable it to provide Xicor with WIP status for all lots at all times. 6.7 ISO 9000 Requirements: Quality systems defined by ISO 9000 shall be used as a part of manufacturing the Products hereunder. If any Xicor customers so require, QS-9000 certification shall also be required. In both cases, certification from an approved registrar shall be required. 7. OTHER TERMS AND CONDITIONS. 7.1 Controlling Document: The terms and conditions of this Agreement shall control all sales of Products hereunder, and any additional or different terms of conditions in either party's purchase order, acknowledgment, or similar document shall be of no effect. 7.2 Delivery and Lead Time: ZMD shall deliver Products on the delivery dates specified in the purchase order releases placed in accordance with section 5. The shipping window will be -5 to +5 days. 7.3 Shipping Documentation: All Products delivered pursuant to the terms of this Agreement shall be suitably packaged, marked and otherwise prepared in accordance with normal commercial practice while maintaining the safety of the Products. The Products shall be shipped as specified in Xicor's purchase order, and delivered to Xicor. Shipping and packing documents from ZMD shall include the Xicor Purchase Order and release number under which the contracted services shall be performed. Shipping documents shall include the following: 1) Product(s) being ordered, including Xicor Part Number; 2) Manufacturing Lot Number; 3) Quantity of Products; 4) Delivery Instructions, including designated carrier, if any; 5) Quantity of good die per wafer; and 6) yield, process, and/or parametric information as may be required under the terms of this Agreement, the exhibits hereto or the applicable purchase order. Shipping documents are set forth in Exhibit 7.3 attached hereto and made a part hereof. 7.4 Inspection and Acceptance: Product lots delivered by ZMD shall meet the quality requirements of Xicor and may be inspected and tested for verification. Quality requirements are defined in Exhibit 7.4 attached hereto and made a part hereof. Wafers and lots will be identifiable and traceable under the documentation provided under section 2.4 hereof. In the event any lot or wafer fails to meet the quality requirements of said Exhibit 7.4, Xicor shall have the right to reject such lot or wafer within thirty (30) days after invoice date and returns it to ZMD for replacement, provided that replacement is commercially reasonable. Replacement will be Xicor's exclusive remedy in this case. If replacement 4 5 CONFIDENTIAL TREATMENT REQUESTED is not commercially reasonable, Xicor may cancel that portion of the relevant purchase order relating to the defective wafers. 7.5 Warranty: (a) ZMD warrants to Xicor that from the date of delivery and for a period of 12 months thereafter, each Product will satisfactorily pass the acceptance criteria identified in Exhibit 7.4 attached hereto and shall be free from defects in material and workmanship under normal use and service. This warranty does not cover any failure resulting from (i) assembly not performed by ZMD, or (ii) misuse, abuse, abnormal conditions or shipment damage. This warranty is personal to Xicor and not transferable. (b) THE WARRANTY CONTAINED IN SECTION 7.5(a) IS THE ONLY WARRANTY GIVEN BY ZMD AND ZMD EXPRESSLY DISCLAIMS ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE, ANY WARRANTY OF NON-INFRINGEMENT, AND ANY WARRANTY THAT MAY ARISE BY REASON OF USAGE OF TRADE, CUSTOM OR COURSE OF DEALING, AND XICOR HEREBY EXPRESSLY WAIVES ANY AND ALL SUCH WARRANTIES. (c) Xicor's exclusive remedy, and ZMD's exclusive obligation and liability, with respect to any Product that does not conform to the express warranty set forth in Section 7.5(a) hereof, shall be to perform failure analysis and to replace (or repair if applicable) such Product, without charge, and deliver it to Xicor; provided, however, that in each such case, repair or replacement is commercially reasonable. If such remedy is not commercially reasonable, ZMD shall refund to Xicor the amount paid for such Product. Upon discovering such defect, Xicor shall promptly return the affected Products to ZMD, adequately packaged, within the warranty period at Xicor's expense with a detailed statement of the defect. Xicor shall obtain a return material authorization (RMA) number and show it on the packaging. Any replacement Product shall also be warranted for a period of 12 months from delivery. If ZMD's examination of the Products returned by Xicor does not disclose any warranty defect, Xicor agrees to pay ZMD's applicable charges for unpacking, testing and re-packing the Products for reshipment to Xicor. If ZMD's testing does disclose a warranty defect, ZMD will reimburse the return shipping charges paid by Xicor for such Products. 8. LIMITATION OF LIABILITY. 8.1 Under no circumstances shall ZMD be liable for the costs of procurement of substitute goods or services or for any special, indirect, incidental or consequential damages of any kind or nature whatsoever, arising out of or in any way related to this Agreement, the Products or the use or inability to use any Products, including, without limitation, lost goodwill, lost profits, work stoppage or impairment of other goods, and whether arising out of breach of warranty, breach of contract, tort (including negligence), strict liability or otherwise, even if advised of the possibility of such damage or if such damage could have been reasonably foreseen, and notwithstanding any failure of essential purpose of any exclusive remedy provided herein. 8.2 In no event shall ZMD's total liability relating to or in connection with any Products or this Agreement, whether based on contract, warranty, tort (including negligence), strict liability or otherwise, exceed the actual amount paid to ZMD by Xicor hereunder. 5 6 CONFIDENTIAL TREATMENT REQUESTED 9. INDEMNITY. 9.1 ZMD shall not be held responsible and Xicor shall defend, indemnify and hold harmless ZMD and its United States subsidiary from and against any and all claims, demands, liabilities, damages, costs and expenses, including, without limitation, reasonable attorneys' fees and other legal and expert expenses, arising out of or relating to any actual or alleged infringement upon any patent right, copyrights or mask work right of any third party by any Product manufactured by ZMD for Xicor hereunder or by any process, material or technology provided to ZMD by Xicor hereunder for the manufacture of the Products. ZMD will give to Xicor written notice of any claim for which Xicor is providing indemnification hereunder. Xicor will have (i) the right to assume, in a prompt fashion, sole control of the defense or settlement of such claim (provided that Xicor cannot commit ZMD to the payment of any sums in settlement or otherwise), and (ii) the right to receive reasonable assistance from ZMD, at Xicor's request and expense. ZMD may, at its expense, participate in such defense with counsel of its own choice. 9.2 Xicor shall not be held responsible and ZMD shall defend, indemnify and hold harmless Xicor from and against any and all claims, demands, liabilities, damages, costs and expenses, including, without limitation, reasonable attorneys' fees and other legal and expert expenses, arising out of or relating to any actual or alleged infringement upon any patent right, copyrights or mask work right of any third party by any process, material or technology used by ZMD in the performance of its obligations hereunder other than any process, material or technology provided to ZMD by Xicor hereunder for the manufacture of the Products. Xicor will give to ZMD written notice of any claim for which ZMD is providing indemnification hereunder. ZMD will have (i) the right to assume, in a prompt fashion, sole control of the defense or settlement of such claim (provided that ZMD cannot commit Xicor to the payment of any sums in settlement or otherwise), and (ii) the right to receive reasonable assistance from Xicor, at ZMD's request and expense. Xicor may, at its expense, participate in such defense with counsel of its own choice. 9.3 THE FOREGOING STATES THE ENTIRE LIABILITY OF EITHER PARTY AND ITS AFFILIATES, AND THE SOLE AND EXCLUSIVE REMEDY OF THE OTHER PARTY AND ITS AFFILIATES, WITH RESPECT TO INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS BY ANY PRODUCTS OR PROCESSES OF SUCH PARTY. 10. TECHNOLOGY OWNERSHIP AND NON-COMPETITION: Xicor shall retain ownership of all designs, process technology and other information and materials provided to ZMD for purposes of manufacturing Products. Xicor authorizes ZMD to use such proprietary information supplied by Xicor under this Agreement only for the purpose of manufacturing Products for sale to Xicor in accordance with the terms of this Agreement. ZMD agrees that ZMD will not directly compete with Xicor with products or semiconductor devices similar in nature and competitive to those Xicor Products listed in Exhibit 10.0 during the term of this agreement and one year after termination of the agreement (see Exhibit 10 for additional details). 11. CONFIDENTIALITY. 11.1 Confidential Information: (a) As used in this section 11.1, the term "Confidential Information" shall mean any information disclosed by one party to the other pursuant to this Agreement which is in written, graphic, machine-readable or other tangible form and is marked "Confidential," "Proprietary" or in some other manner to indicate its confidential nature. Confidential Information may also include oral information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and reduced to a written summary by the disclosing party within thirty (30) days after its oral disclosure, which is marked in a manner to indicate its confidential nature and delivered to the receiving party. Notwithstanding any failure to so identify it, however, all (i) technical materials, process technology and other information provided by Xicor to ZMD to enable or assist ZMD in manufacturing Products and (ii) ZMD processes that a Xicor 6 7 CONFIDENTIAL TREATMENT REQUESTED employee may observe as part of an audit or similar procedure, shall be deemed "Confidential Information" hereunder. (b) Each party shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except as expressly set forth herein or otherwise authorized in writing, shall implement reasonable procedures to prohibit the disclosure, unauthorized duplication, misuse, or removal of the other party's Confidential Information and shall not disclose such Confidential Information to any third party except as obligations of such party under this Agreement, and subject to confidentiality obligations at least as protective as those set forth herein. Without limiting the foregoing, each of the parties shall use at least the same procedures and degree of care which it uses to prevent the disclosure of its own confidential information of like importance to prevent the disclosure of Confidential Information disclosed to it by the other party under this Agreement, but in no event less than reasonable care. (c) Notwithstanding the above, neither party shall have liability to the other with regard to any Confidential Information of the other which: (i) was generally known and available in the public domain at the time it was disclosed or becomes generally known and available in the public domain through no fault of the receiver; (ii) was known to the receiver at the time of disclosure as shown by the files of the receiver in existence at the time of disclosure; (iii) is disclosed with the prior written approval of the discloser; (iv) was independently developed by the receiver without any use of the Confidential Information and by employees or other agents of the receiver who have not been exposed to the Confidential Information, provided that the receiver can demonstrate such independent development by documented evidence prepared contemporaneously with such independent development; (v) becomes known to the receiver from a source other than the discloser without breach of this Agreement by the receiver and otherwise not in violation of the discloser's rights; or (vi) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body, provided that the receiver shall provide prompt, advance notice thereof to enable the discloser to seek a protective order or otherwise prevent such disclosure. (d) "Residual Information" means information in non-tangible form that is or may be retained by persons who have had access to the Confidential Information of a party, including ideas, concepts, know-how or techniques contained therein. However, Residual Information shall not include (i) information which the employee knows, constitutes the Confidential Information of the other party hereunder, or (ii) information that is purposefully committed to memory by the employee for purposes of misappropriation. The parties acknowledge and agree that they and their respective employees may utilize for any purpose any Residual Information resulting from using or having access to Confidential Information. However, the non-disclosure obligations of this section 11 shall continue to apply to such Residual Information. (e) Each party shall obtain the execution of proprietary non-disclosure agreements with its employees, agents and consultants having access to Confidential Information of the other 7 8 CONFIDENTIAL TREATMENT REQUESTED party, and shall diligently enforce such agreements, or shall be responsible for the actions of such employees, agents and consultants in this respect. (f) If either party breaches any of its obligations with respect to confidentiality and unauthorized use of Confidential Information hereunder, the other party shall be entitled to equitable relief to protect its interest therein, including but not limited to injunctive relief, as well as money damages. 11.2 Publicity: All publicity regarding the announcement of this Agreement shall be coordinated by both parties. Neither party shall disclose the terms of this Agreement without the prior written approval of the other party, except as required as a matter of law. 12. TERM AND TERMINATION. 12.1 Term: This Agreement shall begin on the date noted above and shall remain in effect for five years from such date, unless otherwise terminated earlier as provided below. This Agreement may be extended for successive periods of two years beyond such time by the written consent of both parties. 12.2 Termination for Breach: If either party breaches any material term of condition of this Agreement and fails to cure that breach within thirty (30) days, or fails to cure such breach within a reasonable period of time if such breach can not reasonable be cured within the said thirty (30) day period, after receiving written notice of the breach, the other party shall have the right to terminate this Agreement, on written notice, at any time after the end of such thirty (30) day period or after such reasonable period if such breach could not reasonable be cured within the said thirty (30) day period. 12.3 Termination for Insolvency: If either party becomes the subject of a voluntary or involuntary petition in bankruptcy or of any proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if that petition or proceeding is not dismissed with prejudice within sixty (60) days after filing, the other party may terminate this Agreement on thirty (30) days' notice. 12.4 Return of Materials: Upon termination or expiration of this Agreement, ZMD shall return to Xicor all information, process technology and other items supplied to it under this Agreement. 12.5 Survival of Provisions: The rights and obligations of the parties pursuant to sections 3.1, 5.5, 7.2, 7.3, 7.4, 7.5, 8, 9, 10, 11, 12.6 and 13.2 shall survive the termination of this Agreement (as well as other provisions of this Agreement to the extent contemplated by section 12.6 hereof). 12.6 Effects of Termination: Except as and for the time period provided herein, upon the effective date of termination, ZMD shall cease manufacturing the Products. Xicor shall purchase, pay for and take delivery of Products in accordance paragraph 5.1. In addition, unless the parties agree otherwise (including agreement on appropriate payment to ZMD), Xicor shall take delivery of and pay, pursuant to the terms of this Agreement, for all Products affected by such termination, which at the time of the receipt of the applicable notice of termination are subject to purchase orders of Xicor that have been accepted by ZMD. Such addition delivery and payment includes the "die bank" and all in-process inventory in accordance with section 5.4 hereof and ZMD will either manufacture, complete and deliver such Products to Xicor in accordance with the provisions hereof, which may be after the effective date of termination, or, if requested by Xicor, Xicor may elect to compensate ZMD based on the percentage of mask layers completed. 13. MISCELLANEOUS. 13.1 Governing Law: This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without reference to conflict of laws principles. 8 9 CONFIDENTIAL TREATMENT REQUESTED 13.2 Arbitration: Any dispute or claim arising out of or in connection with this Agreement shall be finally settled by binding arbitration in the English language. If Xicor institutes the proceedings, they shall be held in Dresden, Germany under the rules of arbitration of the International Chamber of Commerce by one arbitrator appointed in accordance with said rules. If ZMD institutes the proceedings, they shall be held in San Francisco, California under the rules of arbitration of the American Arbitration Association by one arbitrator appointed in accordance with said rules. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, (i) the parties may apply to any court of competent jurisdiction for injunctive relief without breach of this arbitration provision, and (ii) collection matters shall specifically be excluded from this arbitration provision. 13.3 Assignment: Neither party may assign or delegate this Agreement or any of its licenses, rights or duties under this Agreement without the prior written consent of the other, except either party may assign this Agreement to a person or entity into which it has merged or which has otherwise succeeded to all or substantially all of its business and assets, and which has assumed in writing or by operation of law its obligations under this Agreement. 13.4 Authority: Each party represents that all corporate action necessary for the authorization, execution and delivery of this Agreement by such party and the performance of its obligations hereunder has been taken. 13.5 Export Controls: The parties agree that no technical information disclosed by one party to the other party under this Agreement or any direct product of such technical information is intended to or will be exported or re-exported, directly or indirectly, to any destination restricted or prohibited by applicable law without necessary authorization by the appropriate government authorities. 13.6 Notices: All notices and other communications required or permitted hereunder shall be in writing and shall be mailed or otherwise delivered by hand, by messenger or by telecommunication, addressed to the addresses first set forth above or at such other address furnished with a notice in the manner set forth herein. Such notices shall be deemed to have been served when delivered or, if delivery is not accomplished by reason of some fault of the addressee, when tendered. 13.7 Partial Invalidity: If any paragraph, provision, or clause thereof in this Agreement shall be found or be held to be invalid or unenforceable in any jurisdiction in which this Agreement is being performed, the remainder of this Agreement shall be valid and enforceable and the parties shall negotiate, in good faith a substitute, valid and enforceable provision which most nearly effects the parties' intent in entering into this Agreement. 13.8 Counterparts: This Agreement may by executed in two (2) or more counterparts, all of which, taken together, shall be regarded as one and the same instrument. 13.9 Waiver: The failure of either party to enforce at any time the provisions of this Agreement shall in no way be constituted to be a present or future waiver of such provisions, nor in any way affect the validity of either party to enforce each and every such provision thereafter. 13.10 Entire Agreement: The terms and conditions herein contained constitute the entire agreement between the parties and supersede all previous agreements and understandings, whether oral or written, between the parties hereto with respect to the subject matter hereof and no agreement or understanding varying or extending the same shall be binding upon either party hereto unless in a written document signed by the party to be bound thereby. 13.11 Section Headings: The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13.12 Force Majeure: Neither party shall be liable or responsible for any defaults or delays in performance due to strikes, riots, acts of God, shortages of lab or materials, war, governmental laws, 9 10 CONFIDENTIAL TREATMENT REQUESTED regulations or restrictions or any other cause of any kind whatsoever that is beyond the reasonable control of the party whose performance has been delayed. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by duly authorized officers or representatives as of the date first above written. XICOR INC. ZMD GMBH By /s/ Bruce Gray By /s/ W. Nolde /s/ Detlef Golla ---------------------------------- --------------- ----------------- Bruce Gray Dr. Wolfgang Nolde Detlef Golla President and Chief Operating Officer Geschaftsfuhrer Geschaftsfuhrer April 8, 1999 April 8, 1999 10 11 CONFIDENTIAL TREATMENT REQUESTED LIST OF EXHIBITS
Number Title 1.3. Milestones for Process Qualification and Production Operation 2.3 Facility Qualification 2.5 Xicor Deliverables 3.1 Prices 3.2 Initial Target Yields 4 Wafer Probe Documentation 5.3 Production Cycle Times 6.1 Process Qualification Criteria and Procedures 6.2 Product and Process Change Control 6.3 Specifications for Wafer Rework 6.4 Life Test and Reliability Monitors 6.6 Critical Processes 7.3 Shipping Documents 7.4 Quality Requirements 10.0 Products for Non-competition clause
11 12 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 1.3 Milestones for Process Qualification and Production Operation See attached project plan. 12 13 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 2.3 Facility Qualification: Verification per ISO 9001 criteria and QS9000 qualification shall be completed prior to the beginning of Risk Production Starts. 13 14 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 2.5 Xicor Deliverables - Process Flow - Lot Traveller - Process Recipes - Critical Monitor Data 14 15 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 3.1 I. Non-recurring Expenses Non-recurring expenses will be a total of $ * to be paid at 3 intervals: A. 1st payment of $ * to be paid 30 days after the signing of the Agreement by both parties . B. 2nd payment of $ * to be paid at the start of the 1st qualification lot as called for in the Process Qualification Milestones shown in EXHIBIT 1.3. C. 3rd and final payment of $ * to be paid at the beginning of RISK production again as called for in the Process Qualification Milestones shown in EXHIBIT 1.3. II. Engineering Wafer cost $ * / Wafer (Minimum Wafer Quantity is 6 wafers / Engineering Lot) III. Payment and Shipping Terms: A. Payment Terms--Payment terms are net 60 days from date of invoice after the delivery of PCM tested wafers or 30 days from date of invoice after the delivery of die sorted wafers. B. Exchange Rate--All wafer/die prices set forth in this Agreement are based on an exchange rate of 1.70DM = $U.S. $1. If the average exchange rate for the previous six months is less than 1.60DM = $U.S. $1 or exceeds 1.80DM = $U.S. $1, the parties will review the wafer/die as soon as practicable to renegotiate prices. The exchange rate is defined as the New York foreign exchange mid-range rates applying to trading among banks in amounts of $1 million and more, as published in the Wall Street Journal. C. Shipping Terms--Shipping, delivery and pricing terms are set FCA Dresden according Incoterms. Xicor will advise ZMD of its choice of freight carrier. D. Taxes and Duties -- The prices and fees do not include sales, use, transfer, property, ad valorem, excise, privilege or value added taxes, import duties, export duties or other custom duties or tariffs or any other taxes, duties or charges not based on ZMD's net income, all of which shall be paid by Xicor. Xicor agrees to promptly pay, or reimburse ZMD for, the amount of such tax or charge and all reasonable attorneys' fees and other costs and expenses incurred by ZMD in connection therewith, and the amount of any fine or penalty assessed against ZMD in connection therewith. Where applicable, Xicor will provide ZMD with exemption certificate(s) in form and substance satisfactory to the relevant taxing or governmental authorities. IV. Wafer Prices (per 5" wafer) A1: Wafer Pricing: (includes raw wafer costs) C5.6 Wafers = Per following table (based on cumulative wafer volume) A.2.: C7 Technology: = to be defined separately * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 15 16 CONFIDENTIAL TREATMENT REQUESTED
CUMULATIVE VOLUME WAFER PRICE (C5.6 @ * layers) up to * wafers $ * /wafer * to * wafers $ * /wafer * to * wafers $ * /wafer
- For wafer volumes in excess of * , lower prices to be negotiated - Wafer prices will be adjusted to the final production layer amount with the following scheme Production Wafer Price = (Wafer price as listed above / * ) * Final production layer amount Example: $ * = $ * x * / * Timing: Once every 6 months. These calculations are inspired by two things: * Calculation: Every 6 months, Xicor will calculate the actual die sort yield percentages and compare them to the actual die sort yield established in the first month following the initial 6 month period. This die sort yield percentage shall become the target die sort yield, but in no case shall target die sort yield be less than the actual established die sort yield at Xicor. * * SCRAP CRITERIA If the individual wafer sort yield falls below the mean-3sigma distribution demonstrated for the 6 month interval, then, that wafer is scrapped and returned back to ZMD for full credit. A3: Device Pricing To be defined separately. A4: Die Test Pricing To be defined separately. V. Volume Expectations The pricing provided for herein is based on an assumed volume of - * wafers per month. If the actual wafer volumes differ significantly from this assumption, the parties agree to meet as soon as practicable to renegotiate pricing. VI. Equipment Xicor shall provide ZMD with the manufacturing equipment for production of the Xicor technologies at ZMD on request by ZMD as follows: . * * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 16 17 CONFIDENTIAL TREATMENT REQUESTED . * Specific details will be mutually determined in a separate MOU. As incremental wafer requirements occur similar arrangements for additional equipment will be agreed upon. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 17 18 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 3.2 Initial Target Yields
Technology 1st 6 months Die Sort Yield ---------- --------------------------- C5.6 * %
This average yield is limited to die sizes not larger than 12mm(squared). For die sizes larger than this size the die sort yield shall be agreed upon before volume production. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18 19 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 4 Wafer Probe Documentation To be provided during technology transfer. 19 20 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 5.3 Production Cycle Times: Production Cycle Times shall be less than or equal to * days per mask layer. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 20 21 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 6.1 Process Qualification Criteria and Procedures - The quality and reliability specifications are defined in detail in the following Xicor specifications: 06020110, 06020101, 06020311, and 06020324. - ZMD shall provide Xicor with the following PQC for the required processes: - Gate Oxide integrity (Bvox and Qbd) - Hot carrier - Electromigration - Stress Migration 21 22 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 6.2 Product and Process Change Control Product and process control changes are defined in the Xicor specification 100213. 22 23 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 6.3 Specifications for Wafer Rework Xicor authorizes ZMD for the following reworks on Xicor products: - Photoresist rework All other rework not listed in this attachment is not authorized and requires written approval by Xicor on either case-by-case base or an amendment to this exhibit. 23 24 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 6.4 Life Test and Reliability Monitors The quality and reliability specifications are defined in detail in the following Xicor specifications: 06020110, 06020101, 06020311, and 06020324. 24 25 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 6.6 Critical Processes Critical Processes defined by Xicor: - * * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 25 26 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 7.3 Shipping Documents To be generated later in conjunction with ZMD's capabilities and United States and/or German Import/Export regulations.. 26 27 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 7.4 Quality Requirements Quality requirements - Monthly reporting of Cp and Cpk values for critical process steps - Process Control Plan - Failure Mode Effects Analysis (FMEA) procedure established in factory for process changes 27 28 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 10 Products from Non-competition clause ZMD explicitly is permitted to sell the following products and product families: ZMD . nvSRAM products U63xxx . SRAM products U62xxx . DRAM products U61xxx . Digitrim ZM534 . Ldreg ZM884 . Scope IC ZM407 . ASIC developments and Foundry Services according ZMD customer specifications even if competitive or similar to those manufactured by ZMD for Xicor ZMD explicitly is NOT permitted to sell the following products and product families: 1. E2 Micro-Peripherals: - System Controller X5114 - Microcontroller Supervisors with EEPROM X25043 X25045 X25163 X25164 X25165 X25166 X25168 X25169 X25323 X25324 X25325 X25326 X25328 X25329 X25383 X25385 X25643 X25644 X25645 X25646 X25648 X25649 1. Parallel EEPROM's: - Universal WordWide x8, x16, x32 XM28C010P XM28C020P XM2064P - Universal ByteWide X2804C X2816C X28C64/HC64 X28VC256 X28C256/HC256 X28C512 X28LC512 X28HT512 X28C010 X28HT010 XM28C010 XM28C020 XM28C040 XM28C080 1. Micro Port Saver (MPS) EEPROM X84041 X84161 X84641 X84129 2. Serial - NOVRAM X24C44 X24C45 X25401 - EEPROM X24C00 X24C01 X24C01A X24C02 X24C04 X24C08 X24C16 X24001 X24012 X24022 X24042 X24128 X24164 X24165 X24320 X24321 X24325 X24640 X24641 X24645 X25C02 X25020 X25040 X25057 X25080 X25097 X25128 X25138 X25160 X25320 X25330 X25383 X25385 X25640 X25642 X25650 - Serial Flash 28 29 CONFIDENTIAL TREATMENT REQUESTED X24F016 X24F032 X24F064 X24F128 X25F008 X25F016 X25F032 X25064 X25F128 X25F047 X25F087 1. Parallel NOVRAMs X20C04 X20C05 X20C16 X20C17 XM20C64 X22C10 X22C12 2. Digitally Controlled Potentiometers - Quad 64 Tap DCP X9241Y X9241W X9241U X9241M X9400W X9408W X9410W X9418W X9448W - 32 Tap DCP X9313Z X9313W X9313U X9313T X9314W X9315Z X9315W X9316Z X9316W - Dual 64 Tap DCP X9221Y X92221W X9221U X9410W X9418W - 100 Tap DCP X9C102 X9C103 X9C503 X9C104 X9312Z X9312W X9312U X9312T - 32 Tap PushPOTs X9511Z X9511W X95514W 1. Smart Card Modules X76F041 X76F100 X76F101 X76F128 X76F640 X24026 X24165 X24325 X24645 X25320 X25650 2. Secure Serial Flash X76F041 X76F100 X76F101 X76F128 X76F640 29 EX-10.14 5 FOUNDRY AGREEMENT XICOR-SANYO 1 CONFIDENTIAL TREATMENT REQUESTED Exhibit 10.14 *Portions denoted with an asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. XICOR - SANYO SEMICONDUCTOR MANUFACTURING FOUNDRY AGREEMENT This Agreement is made and entered into this 1st day of May 1999 by and between Xicor, Inc., a corporation established and existing under the laws of California, USA and having its principal office at 1511 Buckeye Drive, Milpitas, CA 95035 USA (hereinafter called "Xicor"); and Sanyo Corporation, a corporation established and existing under the laws of Japan and having its principal office at 5-2, 2chome, Keighan-Hendori, Moriguchi, Osaka, Japan (hereinafter called "Sanyo"). WHEREAS XICOR, designs and markets integrated circuit products, and desires to obtain an additional manufacturing source for certain of its products, and WHEREAS SANYO, manufactures integrated circuits designed and marketed by other parties and possesses wafer fabrication facilities suitable for manufacturing the Xicor products, and WHEREAS XICOR, desires to entrust Sanyo with the manufacture of certain integrated circuit products; and WHEREAS SANYO, desires to manufacture and supply these products to Xicor and is willing to undertake to manufacture such products with technical assistance and cooperation from Xicor, and to deliver such Product to Xicor. NOW, THEREFORE, in consideration of the above premises and the mutual covenants herein contained, the parties hereto agree as follows: 1.0 DEFINITIONS: 1.1 "Wafer[s]" shall mean 150 mm epitaxial silicon wafers carrying dice designed by Xicor and built by Sanyo according to Xicor's C5 (1.2um process) or C7 (0.6um process) process flows, or a generally similar process flow, through pad mask and parametric test that meet the Specifications as per Appendix C. 1.2 "Device[s]" shall mean individual die of Xicor designed integrated circuits in Wafer form. 1.3 "Specifications" shall mean the parametric, electrical, reliability, quality, yield and endurance specifications for each Wafer and Device type as set forth in Appendix C. 1.4 "Good Device[s]" shall mean individual Devices that meet the Specifications. 2 CONFIDENTIAL TREATMENT REQUESTED 1.5 "Sanyo Process" shall mean the Sanyo process, and/or such other processes or successor processes, qualified by Xicor in accordance with Appendix D, or as modified and approved thereafter in accordance with Paragraph 3.9 of this Agreement, that produce Wafers and Devices that meet the Specifications. 1.6 "Design[s]" shall mean all Xicor integrated circuit designs for systems, circuits and pattern layouts concerning the Wafers and Devices contained thereon. 1.7 "Proprietary Information" shall mean (i) this Agreement, including all appendixes, exhibits, attachments and any technical specifications, prices, schedules, specifications and the like negotiated in implementation of this Agreement, and (ii) any information including, but not limited to, technical information, database tapes, specifications, test tapes, masks and supporting documentation provided either orally, in writing or in machine readable format and masks or reticles generated by or for Sanyo using Xicor's database tapes, provided that all such information is marked "Confidential" or similarly, or, if oral, identified as proprietary within 30 days following the time of disclosure. Notwithstanding the foregoing, Proprietary Information does not include information generally available to the public, information independently developed or known by the receiving Party without reference to information disclosed hereunder, provided that the receiving Party can demonstrate such independent development or knowledge by substantial documentation, information rightfully received from a third party without confidentiality obligations, information authorized in writing for release by the disclosing Party hereunder, or information required to be disclosed pursuant to law or governmental regulation provided that the disclosing Party gives reasonable notice to the other party prior to any such disclosure. 1.8 "Yield" shall mean the number of good Devices to the total Devices on a particular Wafer. 1.9 "Substrates" shall mean 150 mm silicon epitaxial substrates as per the specification in Appendix C. 1.10 "Effective Date" shall mean the date of Japanese governmental approval of this Agreement pursuant to Japanese laws and regulation in effect on the date this Agreement is executed. If such approval is not obtained within 30 days following execution, Xicor shall have the right to terminate this Agreement by notice to Sanyo. Sanyo will make all filings necessary for such approval within ten (10) business days following execution of this Agreement. 1.11 "Forecast" shall mean a six (6) month rolling forecast of Xicor's delivery requirements for Wafers and/or Devices by Device type. 1.12 "Order[s]" shall mean Xicor purchase orders or purchase order releases for specific Wafer and/or Device types, quantities and delivery dates. 2 3 CONFIDENTIAL TREATMENT REQUESTED 1.13 "Risk Starts" shall mean any Wafers and/or Devices ordered by Xicor prior to full and complete qualification of Sanyo's process per Appendix D. 1.14 "Process Change" shall mean any change in process chemicals, gases, chemical or physical structures or impurities embedded in the silicon or in layers above silicon, cross-sections, surface properties, physical or chemical environment which the wafer encounter during processing or storage, photolithographic and electrically charged processes and any other change which could impact the yield, quality, reliability, performance, physical structure and /or appearance of Wafers and/or Devices. 2.0 PRODUCTION: 2.1 Sanyo agrees to manufacture and supply to Xicor Wafers and/or Devices as described in this Agreement and Xicor agrees to purchase from Sanyo, the Wafers and/or Devices under the terms and conditions set forth herein. 2.2 Sanyo hereby assumes responsibility for the manufacture of Wafers and/or Devices based on the Designs, and manufactured to the Specifications, utilizing the Sanyo Process. Sanyo will produce Wafers and/or Devices to fill Xicor's orders, as further outlined below. 2.3 Orders shall be provided by Xicor to Sanyo as follows: 2.3.1 Within thirty (30) days of successful qualification of the Sanyo Process, Wafers and Devices produced therein, and specifically conditioned upon successful agreement by the parties to Lead-Times, Pricing, Specifications, and Monitoring Criteria contained in Appendixes A, B, C and D respectively, Xicor shall provide Orders to Sanyo for Wafers and/or Devices. Orders placed by Xicor will be open purchase orders or releases for fixed quantities of Wafers and/or Devices based upon the Xicor forecast. Sanyo shall use its best efforts to fulfill said Orders within the lead times outlined in Appendix A. 2.3.2 On the twentieth (20th) day of each month Xicor will provide Sanyo a Forecast. The first two months of the Forecast shall be firm and supported by released Orders. All subsequent months shall be for planning purposes only and in no way represent a firm commitment to purchase Wafers and/or Devices by Xicor. 2.4 Defective Wafers and Devices: When a Wafer manufactured by Sanyo fails to meet the Yield Specifications, or a Device manufactured by Sanyo fails meet the Device Specifications, Xicor and Sanyo will work together to investigate and determine the root cause of the defect. The party which is found to be responsible for causing such failures will, at its own cost and responsibility, remove such cause or causes with minimum delay. 3 4 CONFIDENTIAL TREATMENT REQUESTED If the root cause of the defect can not be determined the parties agree to act in good faith to reach an equitable resolution acceptable to both parties. 2.5 Partial Shipments. Xicor will accept deliveries of Wafers or Devices made in timely installments from Sanyo. Any partial shipments will be invoiced as made, and payments therefor are subject to the terms of payment noted below. 2.6 Quantity Variance. If the monthly quantity shipped by Sanyo of each Wafer and/or Device ordered by Xicor is within +/- 5 percent of the quantity ordered, such quantity shall constitute compliance with Xicor's order. Over shipments may be accepted at Xicor's discretion, in which case the respective quantity of such over shipment may be subtracted from the following months' quantity. Any under shipment may, at Xicor's discretion, be added to the following months Order. 2.7 Modifications. If Xicor determines that modifications to the Specifications are required, including modifications to mask tooling, process or testing, Sanyo agrees to investigate to make such modifications within a reasonable period of time after notification in writing by Xicor. The parties will negotiate adjustment to price and delivery schedule as well as charges for retooling costs if warranted by such modifications. 2.8 Substitutions. Xicor may, at Xicor's sole discretion, add or substitute Wafer and/or Device types as long as the Wafer and/or Device type utilizes the same or similar Sanyo Process approved by Xicor and Sanyo for existing production, provided that the agreed upon quantities of Wafers and/or Devices required by Xicor do not exceed those determined pursuant to Paragraph 2.3 and 2.6 except with the consent of Sanyo. Such Wafer and/or Device types are those which can be manufactured using the same process and in accordance with the same qualification plan as Wafers and/or Devices currently manufactured by Sanyo under this Agreement. 2.9 Parametric Failure. If a Devices fails to meet the agreed upon Parametric Specifications, and in Xicor's reasonable opinion such failure appears material, Xicor may request Sanyo to stop production. If Sanyo is unable to correct such failures within a reasonable time, Xicor may cancel such particular Orders at no charge to Xicor. Xicor will notify Sanyo in writing of its intention to suspend or cancel such Orders and will include any substantiating data. 2.10 Reports and Reviews: Sanyo shall provide Xicor with a weekly delivery report. Sanyo will provide a system in 1999 that will be capable of weekly updating of wafer fabrication work in process for each Wafer and/or Device type. The details and format of such Reports shall be as agreed upon by the parties. To enable Xicor to track process control, Sanyo shall also provide weekly status and data summarizing the DC parametric measurements for Sanyo Process. In addition, the parties agree to meet quarterly or as frequently as necessary to discuss and resolve issues that may, from time to time, arise and to review Sanyo performance. Sanyo also agrees to provide Xicor with such data 4 5 CONFIDENTIAL TREATMENT REQUESTED and/or reports required by Xicor to enable Xicor to maintain their qualification to ISO9001 and QS 9000 quality standards. Sanyo shall ensure that the computer system is Y2K compliant. 2.11 Order Cancellation. 2.11.1 If Xicor fails to make any payment hereunder when due or fails to accept any material quantity of Wafers and/or Devices properly furnished hereunder, and such default is not cured within thirty (30) days after Sanyo gives Xicor written notice thereof, Sanyo may decline to make further shipments and/or may terminate Xicor's Orders without affecting any other rights or remedies available to Sanyo. If Sanyo continues to make shipments after such default, Sanyo's actions shall not constitute a waiver nor affect Sanyo's remedies for such default. 2.11.2 If Xicor cancels an Order that is firm pursuant to Section 2.3.2, Xicor shall pay in full and complete satisfaction of any claim arising therefrom, a cancellation charge per Wafer equal to: (number of mask steps completed) ------------------------------------ x (Wafer price) (total number of mask steps) Notwithstanding the above, if the parties mutually agree to reschedule the Order, no claim shall arise unless the Order as rescheduled is canceled. Claims for the canceling of rescheduled Orders shall also be governed as set forth above on the date of cancellation. 2.11.3 Xicor may cancel any Order in whole or in part if Sanyo fails to deliver Wafers and/or Devices as covered by such Order placed hereunder by Xicor, which failure is not corrected within sixty (60) days after written notice thereof. If such failure is not corrected within the above sixty-day period and is not excused pursuant to Paragraph 19.0, Xicor shall have the right to procure substitute goods ("cover") as provided by the California Uniform Commercial Code, Section 2712. The foregoing shall not affect any other right or remedy available to Xicor. If Xicor continues to maintain or place Orders after such default, Xicor's actions shall not constitute a waiver nor affect Xicor's remedies for such default. 3.0 PROCESS TECHNOLOGY: 3.1 Xicor will provide to Sanyo the Xicor C5 and C7 process flows, process parameters, design rules and other relevant information to enable Wafers and Devices to be manufactured by Sanyo. It is understood that the information listed above is the Proprietary Information of Xicor and will remain the sole property of Xicor. Nothing in 5 6 CONFIDENTIAL TREATMENT REQUESTED this Agreement grants or authorizes Sanyo to use this Proprietary Information for any other purpose other than those specifically authorized by this Agreement. 3.2 Sanyo will run the Sanyo Process pursuant to this Agreement, or any process which is based on the Sanyo Process, for the purpose of manufacturing Wafers and/or Devices exclusively for Xicor. All Wafers and Devices produced by Sanyo shall meet the Specifications as per Appendix C. 3.3 Sanyo will either (i) provide Xicor with a list of Sanyo's acceptable mask vendors, to which, Xicor will select and provide one mask vendors, as mutually agreed, with Device database tapes in GDS II format, or (ii) Xicor will provide Sanyo with Device database tapes in GDS II format and Sanyo may procure masks locally All such database tapes, whether or not marked as confidential as per paragraph 1.7, constitute confidential Proprietary Information of the highest level. No such database tapes will be provided to any third party mask vendor or to Sanyo unless and until a written agreement by the mask vendor is executed protecting Xicor Proprietary Information from unauthorized disclosure. Sanyo will provide the mask vendor with mask alignment and test structure database, and oversee merging of device and mask alignment databases by the mask vendor. Xicor will bear the cost of original mask sets, subject to its advance approval of the cost. The cost of subsequent mask layers or sets that are required due to use, abuse or other damage by Sanyo will be the responsibility of Sanyo. The cost of reticle changes required due to process or design changes requested by Xicor will be the responsibility of Xicor. The cost for reticle changes requested by Sanyo for process improvement or yield enhancements shall be the responsibility of Sanyo. Upon termination of this Agreement all mask sets shall be destroyed. 3.4 After Sanyo has provided Xicor with sufficient Wafers and Devices for qualification, but prior to completion of full qualification, Xicor may request that Sanyo provide a mutually agreed quantity of Risk Starts. Sanyo will provide these Risk Starts to Xicor at the prices determined pursuant to Appendix B. 3.5 During the production of Risk Starts per Paragraph 3.4, Xicor may stop production of Wafers and/or Devices by giving notice to Sanyo. Upon receipt of such notice, Sanyo will stop production following completion of the process steps at which Wafers and/or Devices reside at the time of notification. Xicor agrees to pay Sanyo for all Wafers and/or Devices started prior to Sanyo receiving such notice. Prices for such Wafers or Devices will be equitably prorated based on the last stage of production completed as per Paragraph 2.11.2. 3.6 For Sanyo to become qualified, Wafers and/or Devices delivered for qualification must meet all agreed Specifications per Appendix C. When Wafers and/or Devices made by Sanyo successfully complete qualification, then upon written notice from Xicor of successful completion, Sanyo will proceed, as soon as possible after receipt of such notice, to manufacture and deliver Wafers and/or Devices ordered by Xicor in accordance with Paragraph 2.3. 6 7 CONFIDENTIAL TREATMENT REQUESTED 3.7 Prior to qualification, Sanyo and Xicor must agree upon Specifications to be contained in Appendix C. If, in the reasonable opinion of Xicor, such agreement on Specifications can not be reached, Xicor may cancel or terminated this Agreement without any further obligation to Sanyo whatsoever. Sanyo specifically agrees that it will not modify Specifications in any way without the prior written consent of Xicor. 3.8 Xicor shall conduct the qualification as per Appendix D and report the result of such testing to Sanyo. 3.9 Process Change shall be handled in the following manner: 3.9.1 Prior to any Process Change which Sanyo desires to make in the manufacturing process, Sanyo agrees to notify Xicor in writing of each such proposed Process Change, and to get Xicor's approval in advance of the desired implementation of such Process Change. Such notice shall contain the following: 3.9.1.1 intent of the proposed Process Change. 3.9.1.2 detailed description of the proposed Process Change. 3.9.1.3 the reason for the proposed Process Change. 3.9.1.4 the results of controlled experiments done to support the proposed Process Change. 3.9.1.5 detailed and comprehensive analysis of potential failure modes and their effects. 3.9.1.6 monitoring in place to verify the intended improvements and to identify, as early as possible, any unintended consequences of the proposed Process Change. 3.9.1.7 containment plan in case the proposed Process Change produces undesired effects. 3.9.1.8 detailed plan for the implementation of the proposed Process Change and labeling of affected Wafers and/or Devices. 3.9.2 Xicor reserves the right to approve or reject any proposed Process Change that, in Xicor's sole opinion, will materially affect the form, fit, or function of the Device or Wafer or reduce the yield, reliability, or quality thereof. Xicor agrees to provide written notification of approval or disapproval of any proposed Process Change within sixty (60) days of receipt of such proposed Process Change request from Sanyo. In no case will Sanyo implement a Process Change without Xicor's 7 8 CONFIDENTIAL TREATMENT REQUESTED prior written approval. Notwithstanding the foregoing, the process changes in ion implantation dose and energy, oxide, thickness of film except the tunneling oxide less than +/- 5% of default values does not require Xicor's approval, prior to implementing the changes. 3.9.3 Notwithstanding the provisions of Paragraph 3.9.2 above, if an emergency situation warrants a temporary Process Change, Sanyo hereby agrees to notify Xicor within twenty-four (24) hours of identification of the emergency situation. Sanyo shall provide to Xicor, via fax, details relating to the emergency situation including problem identification, proposed emergency Process Change, expected results, expected duration of effectivity and probable ramifications if said emergency Process Change is not approved. Xicor shall provide approval/disapproval, via fax, within forty-eight (48) hours of receipt of Sanyo notification. Unless said emergency Process Change is approved by Xicor as a permanent Process Change, the process will, within the specified time authorization in the emergency process change notification, but in no case greater than one (1) week, revert back to the original process which was in effect prior to the emergency Process Change. 4.0 FORECAST AND COMMITMENT: 4.1 On the twentieth (20th) day of each calendar month, Xicor shall provide to Sanyo a Forecast per Paragraph 2.3.2. The Forecast shall be used by Xicor to advise Sanyo of the Wafer and/or Device volumes required by Xicor. The first two months of the each Forecast will be detailed by week. The remaining months will be detailed by month. Sanyo will provide Xicor with a response in the form of a confirmation in writing to each Forecast by the last working day of each calendar month. The response shall contain a commitment schedule for all Wafers and/or Devices for the first two month periods. 4.2 Upon receipt of the commitment schedule, Xicor shall either accept or reject the response within three (3) working days. If the committed Wafer and/or Device quantities are acceptable to Xicor, Xicor will provide Sanyo with Orders to support the agreed upon Wafers and/or Devices. If the committed Wafer and/or Device quantities are unacceptable to Xicor, both parties agree to negotiate in good faith until an acceptable resolution is reached. The production schedule agreed to by the parties, based on the Forecast and Sanyo's response, shall be dated, in written form, signed by the parties and shall represent a binding commitment for all firm Orders. Signature by facsimile is acceptable as proof of execution. 4.3 Each Order shall obligate Xicor to purchase the Wafers and/or Devices per Order. Xicor also agrees to limit the extent of change to each subsequent Forecast for future months based on the parties previous month's Orders as follows: not more than 30% for the third month, 50% for the fourth month, 75% for the fifth month and 90% for the sixth month. 8 9 CONFIDENTIAL TREATMENT REQUESTED 4.4 Sanyo will provide Xicor with actual weekly Wafer and/or Device completion's and weekly Wafer and/or Device shipment reports to be received at Xicor no later than 12:00 noon on the Monday for the previous weeks Wafer and/or Device activity. 4.5 In case Yields drop below the minimum Yield rate as per Appendix C, Sanyo will use all reasonable efforts to expeditiously make up for the missing Wafer and/or Device deliveries. 5.0 YIELD, RELIABILITY AND QUALITY: 5.1 Xicor shall have the right to test, monitor or sample any and all Wafers and Devices to ensure adherence to the Specifications contained in Appendix C. Any Wafer or Device failing to meet such Specifications may be returned to Sanyo in accordance with the procedure outlined below in Paragraph 5.2. In addition, and in the sole discretion of Xicor, Xicor may stop any or all further shipments of Wafer and/or Devices until such time as Sanyo can successfully demonstrated to Xicor, and in Xicor's sole determination, the root cause creating the non-adherence has been eliminated and all further Wafers and/or Devices shipped will meet the Specifications. 5.2 Xicor shall conduct an analysis of any Wafers and/or Devices that fail to meet the Specifications contained in Appendix C. If the results of the failure analysis indicate to Xicor that the cause of such failure was the responsibility of Sanyo, then Xicor shall provide Sanyo with written notification of the failure and a copy of the failure analysis report. Upon completion of Sanyo's internal investigation, but no later than thirty (30) days after receipt of written notification, Sanyo shall provide Xicor with a Return Material Authorization (RMA) and Xicor may return the failed Wafers and/or Devices to Sanyo. All costs associated with the return of such defective Wafers or Devices, including but not limited to transportation, customs, duties or any other such cost, shall be the sole responsibility of Sanyo. Failure to return or give written notice of rejection of the Wafers or Devices within one (1) year after receipt of the Wafers or Devices by Xicor shall be considered to be an acceptance of the Wafers or Devices by Xicor. If Xicor does not follow the above outlined procedure, then the return period of failed Wafers and/or Devises is limited to three (3) months from the date of receipt of the Wafers and/or Devises by Xicor. 5.3 The parties agree that the prices identified in Appendix B are specifically predicated upon (i) if Wafers are procured, then by the expected average Wafer/Device Yield by Device type contained in Appendix C, and (ii) if Devices are procured, then by the quantity of Good Devices delivered to Xicor. 5.3.1 The price per Wafer (Appendix B) is based on an agreed upon Yield per Device type contained in Appendix C. Should the actual average Yield, as reported for all Wafers of the same Device type and delivered during any 9 10 CONFIDENTIAL TREATMENT REQUESTED particular Xicor accounting period exceed 5% or drop below 5% of the Yield per Appendix C, the price per Wafer will be adjusted upward or downward as per the formula in Appendix B. 5.3.2 The price per Device (Appendix B) are based solely on a per Good Device basis. 6.0 PRICES, PAYMENTS AND TAXES: 6.1 All prices, payments or charges pursuant to this Agreement shall be made in US dollars. Prices will be negotiated annually and will take into consideration any material fluctuations in the currency exchange rate that may have occurred. Agreed upon prices for Wafers and/or Devices, and any other items requiring payment, shall be listed in Appendix B. 6.2 All prices are FCA San Francisco Airport. Sanyo shall be responsible for transportation charge from Sanyo Semiconductor to San Francisco Airport and for Japanese Customs clearance. Title to Wafers and/or Devices shall transfer to Xicor upon release from Japanese Customs to the Xicor designated freight forwarder in Japan. Sanyo shall be responsible for all freight charges prior to transfer of title. Xicor agrees to supply Sanyo with an appropriate tax exemption certificate if appropriate. 6.3 Payment terms shall be net sixty (60) days from receipt of a valid invoice by Xicor. Sanyo shall not send such invoices until Sanyo has shipped to Xicor the associated Wafers and/or Devices. 6.4 Xicor shall have the right to either; (a) offset the cost on any future invoice, or (b) obtain a credit from Sanyo for any Wafer and/or Device returned to Sanyo under Paragraph 5.1 which has previously been invoiced and paid by Xicor. 6.5 Each party shall be solely responsible for any and all taxes, levies or any other type of charges imposed upon them by their respective sovereign governments. 6.6 During the course of this Agreement each party shall bear its own costs and expenses. Expenses shall mean such expenses as engineering materials, Fab costs, transportation and hotel expenses associated with travel and any other expenses required by the parties to meet their obligations under this Agreement. 7.0 ON-SITE INSPECTION: Xicor representatives shall be allowed to visit and tour Sanyo's fabrication and electrical test facilities during normal working hours upon reasonable notice to Sanyo. Sanyo shall keep electrical test records, process run cards, equipment usage 10 11 CONFIDENTIAL TREATMENT REQUESTED status and Q/A results concerning the Wafers and Devices for three (3) years after such data is issued, and Xicor representatives shall be entitled to review such materials during such visits. 8.0 PROPRIETARY INFORMATION: 8.1 Both Sanyo and Xicor agree that Proprietary Information of the other will remain the property of the disclosing party and will be used by them solely for the purpose of manufacturing Wafers and/or Devices hereunder. Such Proprietary Information shall be maintained by each party in confidence and to a degree equal to or higher than the parties maintain their own proprietary information of a similar nature. The parties agree that they will not disclose any Propriety Information to any third party without the prior written permission of the disclosing party and further agree that such Propriety Information will not be maintained on any internal computer network that is unsecured and can be accessed via the internet or any other outside computing system. The parties agree that all of their respective employees and consultants shall be subject to non-disclosure agreements no less protective of Proprietary Information than the provisions of this Agreement prior to such employees and consultants being allowed access to Proprietary Information. 8.2 Upon termination or expiration of this Agreement for whatever reason, the receiving Party must (i) return to the other Party the original and all copies of any Proprietary Information of the disclosing Party, or (ii) destroy the originals and all copies of any Proprietary Information and provide certification of such destruction to the disclosing party, and (iii) at the disclosing Party's request, have one of its officers certify in writing that it will not make any further disclosure or use of such Proprietary Information and specifically will not manufacture or have manufactured for it any product incorporating such Proprietary Information. 8.3 These confidentiality provisions as to any item of Proprietary Information shall survive the termination of this Agreement for a period of five (5) years from the date of termination of this Agreement. 8.4 If Sanyo develops any process modifications or new processes as a result of this relationship with Xicor, and such process modifications or new processes are useable by Xicor, Xicor shall have the right to incorporate such process modifications or new processes in its C5 or C7 processes. The parties further agree that if such process modifications or new processes developed by Sanyo or Xicor are patentable, and both parties wish to pursue such patent, the parties shall equally share the cost of filing such patent, whether in the United States or Japan, and the parties shall become co-owners of such patents. If only one parties wishes to pursue such patent, then the pursuing party shall bear all costs and the non-pursuing party shall be granted a non-exclusive, royalty free license for such patent. 11 12 CONFIDENTIAL TREATMENT REQUESTED 9.0 WARRANTY and ACCEPTANCE: 9.1 Sanyo warrants that Wafers and/or Devices delivered hereunder will meet the mutually agreed Specifications and shall be free from defects in material and workmanship under normal use and service for a period of one (1) year from the date of receipt from Sanyo's facility. If, during such one year period (i) Sanyo is notified with reasonable promptness in writing upon discovery of any defect in the Wafers and/or Devices, including a reasonably detailed description of such defect; (ii) and when physically available such Wafers and/or Devices are returned to Sanyo's facility, transportation prepaid; and (iii) Sanyo's reasonable examination of such Wafers and/or Devices discloses that such Wafers and/or Devices are defective and such defects are not caused by accident, abuse, misuse, neglect, improper installation, repair or alteration not authorized by Xicor, improper testing or use contrary to any reasonable instructions issued by Xicor, then within a reasonable time Sanyo shall, as mutually agreed, either repair, replace, or credit Xicor for such Wafers and/or Devices. Sanyo shall reimburse Xicor for the return transportation charges paid by Xicor for such Wafers and/or Devices. Sanyo shall return any Wafers and/or Devices repaired or replaced under this warranty to Xicor transportation prepaid. If replacement of any Wafer and/or Device is not practical, then Sanyo shall issue a credit to Xicor for the price paid by Xicor for the defective Wafers. The performance of this warranty does not extend the warranty period applicable to the Wafers and/or Devices originally delivered. 9.2 Sanyo shall immediately advise Xicor whenever Sanyo has reason to believe that Wafer and/or Devices may not conform to the applicable Specifications. 9.3 Both parties agree that the foregoing states the entire liability and obligations of Sanyo and the exclusive remedy of Xicor for breach of the provisions of this Article 9. 10.0 NON-COMPETITION: Sanyo agrees that Sanyo will not compete with Xicor with products or semiconductor devices similar in nature to those sold by Xicor with the exception of those products listed in Appendix E. Sanyo specifically agrees that it will not at any time use for its own purposes, or any other purpose other than those specified by this Agreement, any Xicor Proprietary Information, know-how of Xicor's, or the Xicor C5 or C7 process technology unless specifically evidenced by a separate technology licensing agreement properly executed by Xicor. 11.0 INDEMNIFICATION: 11.1 Each party (the "Indemnifying Party") agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding brought against the other party (the "Indemnified Party") or its customers on the issue of infringement of any United States or other country patent, copyright, trade secret, trademark, or other intellectual property right with respect to Xicor, the design of the Wafer, Device or the C5 wafer process technology to the extent contributed by Xicor, or, as to Sanyo, the wafer process to the 12 13 CONFIDENTIAL TREATMENT REQUESTED extent contributed by Sanyo, subject to the limitations hereinafter set forth. The Indemnifying Party shall have sole control of any such action or settlement negotiations, and the Indemnifying Party agrees to pay, subject to the limitations hereinafter set forth, any final judgment or settlement entered against the Indemnified Party or its customer on such issues in any such suit or proceeding defended by the Indemnifying Party. The Indemnified Party agrees that the Indemnifying Party shall be relieved of the foregoing obligations unless the Indemnified Party or its customers notify the Indemnifying Party promptly in writing of such claim, suit or proceeding and give the Indemnifying Party authority to proceed as contemplated herein, and, at the Indemnifying Party's expense (except for the value of the time of the Indemnified Party's employees), gives the Indemnifying Party proper and full information and assistance to settle and/or defend any such claim, suit or proceeding. The Indemnifying Party shall not be liable for any costs or expenses incurred by the Indemnified Party without its prior written authorization. 11.2 The foregoing provisions of this Article state the entire liability and obligations of the Indemnifying Party and the exclusive remedy of the Indemnified Party, with respect to any alleged infringement of patent, copyright, trade secret, trademark or other intellectual property right by the Wafer, process, or any part thereof. 12.0 TERM: 12.1 This Agreement shall come into force on the Effective Date and shall remain in force for a period of five (5) years from the Effective Date, unless terminated earlier in accordance with Paragraph 16 below. 12.2 This Agreement may be renewed for an additional period under terms and conditions agreeable to both parties hereof. 13.0 EXPORT CONTROLS: Sanyo will not export, re-export, transship, or transmit, directly or indirectly, (collectively "Export"), any data, designs, programs, hardware, or technical information of any kind acquired hereunder, or any direct product thereof to any country to which such Export is limited, or prohibited by the United States Government or any law, regulation, agency or executive thereof, including without limitation, the Export Administration Regulations of the US Department of Commerce. This Agreement is subject to compliance with all applicable export and import laws and regulations and the parties agree to cooperate in complying therewith. Sanyo agrees to indemnify Xicor for any fees, fines or penalties imposed on Xicor by the United States Government as a result of Sanyo's breach or violation of this provision. Xicor shall provide Sanyo with information regarding the Export Administration Regulations of the U.S. Department of Commerce. 14.0 PUBLICITY: No public announcement concerning this Agreement shall be made by either party hereto without the prior written consent of the other which shall not be unreasonably 13 14 CONFIDENTIAL TREATMENT REQUESTED withheld. It is understood that Xicor may have obligations under financial and United States Security and Exchange regulations to publicly announce this Agreement. 15.0 NON-DISCLOSURE OF TERMS AND CONDITIONS: Neither party shall, without first obtaining the written consent of the other party, disclose the terms, conditions or subject matter of this Agreement, unless, in the good faith judgment of the disclosing party, such disclosure is; (I) in response to a valid court order, in which case the party making the disclosure pursuant to the valid court order shall first have informed the other party and made reasonable efforts to obtain a protective order requiring that the information or document so disclosed be used only for the purpose for which the order was issued, or (ii) as may be otherwise required by law, rules or government regulations or other governmental body of the United States, Japan or any political subdivisions thereof; provided that the disclosing party requests confidential treatment by the appropriate governmental agency, or (iii) necessary to establish the parties rights under this Agreement. 16.0 TERMINATION: 16.1 Either party may terminate this Agreement for default of any of the terms and conditions of this Agreement by the other party, providing proper notice of default is given and the defaulting party is provided with sixty (60) days after receipt of the notice to correct the defaulting condition. 16.2 The parties agree that each party shall have the right to terminate this Agreement by giving written notice of termination to the other party at any time on or after the filing by the other party of a petition in bankruptcy or insolvency. 17.0. SURVIVAL OF PROVISIONS: The provisions of Paragraphs 8, 9, 10, 11, 13, 14, 15, 17, 23, 24, 25, 26, 27, 28, and 29 shall survive the termination or expiration of this Agreement. 18.0. SEVERABILITY: If any provision of this Agreement, or the application hereof to any situation or circumstance, shall be invalid or unenforceable, the remainder of this Agreement or the application of such provision to situations or circumstances other than those as to which it is invalid or unenforceable, shall be intact; and each remaining provision of this Agreement shall be valid and enforceable to the fullest extent permitted by applicable law. In the event of such partial invalidity the parties shall seek in good faith to agree on replacing any such legally invalid provisions with provisions, which, in effect, will, from an economic viewpoint, most nearly and fairly approach the effect of the invalid provision. 19.0. FORCE MAJEURE:Neither of the parties shall be liable in any manner for failure or delay in the fulfillment of all or any part of this Agreement directly or indirectly owing to Acts of God, governmental orders or restrictions, war, threat of war, war-like conditions, hostilities, sanctions, mobilization, blockade, embargo, detention, revolution, riot, looting, strike, lockout, plague, fire, flood, earthquake or any other cause or other circumstances beyond the affected 14 15 CONFIDENTIAL TREATMENT REQUESTED party's control. Each of the parties shall take all reasonable steps to minimize the effect of force majeure upon it until such effect of force majeure has abated. Notice of any occurrence of force majeure affecting either party shall be given to the other party as soon as possible together with evidence thereof and the expected duration of the period for which performance hereunder shall be delayed. 20.0. ASSIGNMENT OR TRANSFER: This Agreement, and all rights and obligations hereunder, shall not be assigned by a party hereto to any third party or parties without a prior written consent of the others party hereto; provided, however, that no such prior written consent shall be required for any assignment of this Agreement in its entirety by one of the parties to a successor-in-interest of such party as a result of any merger or consolidation involving such party or a sale by such party of substantially all of its assets, provided, that such successor shall promptly agree in writing to be bound by all of the terms and conditions of this Agreement, or any modifications hereof. 21.0. RELATIONSHIP OF THE PARTIES:The parties to this Agreement have the relationship of independent contractors. Nothing herein shall be construed to create any form of agency relationship or to authorize either party to bind the other in any matter. 22.0 NOTICES: Any notices hereunder shall be given in writing by registered or certified mail at the respective addresses listed below or at another address which is specified by written notice. If to Xicor: If to Sanyo: Xicor, Inc. Sanyo Corporation 1511 Buckeye Drive __________________________________ Milpitas, CA 95035, USA __________________________________ Attn: Director of Contracts Attn: ______________________________ 23.0 LANGUAGE: This Agreement is in the English language only, which language shall be controlling for all purposes. All proceedings related to the performance, enforcement, interpretation, termination or breach of this Agreement, and all evidence presented therein, shall be in English. 24.0 GOVERNING LAW:This Agreement shall be governed by the laws of the State of California, except for the resolutions of disputes as provided in Paragraph 25.0 hereof. 25.0 DISPUTE RESOLUTION: In the event of any dispute, claim or question arising out of this Agreement or breach hereof, the parties hereto shall use their best efforts to settle such dispute, claim, question or difference. To this effect they shall mutually consult and negotiate in good faith and understanding to reach a just and equitable solution with sincerity. In the event that the dispute, controversy or difference is not so settled in the above manner within three (3) months, then the matter shall be finally settled by arbitration (i) if Sanyo demands arbitration, it 15 16 CONFIDENTIAL TREATMENT REQUESTED shall be in Santa Clara, California, in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce and under the laws of California, without reference to conflict of laws principles, or (ii) if Xicor demands arbitration, it shall be in Tokyo, Japan, in accordance with the Rules of Conciliation and Arbitration of the Japan Commercial Arbitration Association and under the laws of Japan. In any such arbitration, Xicor will appoint one arbitrator, Sanyo will appoint one arbitrator, and the two arbitrators appointed will select a third arbitrator. Either party hereto may object to any arbitrator who is an employee of or affiliated with any competitor of either party hereto. The decision of the three arbitrators shall be final and binding and may be entered as a judgment by a court of competent jurisdiction. Each side shall bear half the cost of the arbitration. 26.0 TITLES:The titles of all Paragraphs contained in this Agreement are for interpretation convenience and reference only and shall not in any way affect the interpretation hereof. 27.0 ENTIRE AGREEMENT: This Agreement supersedes all documents or arrangements in respect to the subject matter hereof, including any Letter of Intent previously concluded by the parties, and evidences the entire Agreement of the parties hereto. This Agreement cannot be changed, modified or supplemented except in writing signed by the duly authorized officer or representative of each of the parties hereto. 28.0 THIS AGREEMENT CONTROLS: The terms and conditions of this Agreement shall control all sales of Wafers and/or Devices hereunder, and any additional or different terms or conditions in either party's purchase order, Orders, responses to Orders, acknowledgment, or similar document shall be of no effect. 29.0 GOVERNMENT APPROVALS: Sanyo represents and warrants that no consent or approval of any governmental authority is required in connection with the valid execution and performance of this Agreement except as set forth in Paragraph 1.10. Sanyo will be responsible for timely filings of this Agreement with all necessary Japanese government agencies. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, each of which shall be considered as an original, by their respective duly authorized representatives as of the date first above written. XICOR, INC. SANYO CORPORATION BY: /s/ BRUCE GRAY BY: /s/ YUKINORI KUWANO TITLE: PRESIDENT, CHIEF OPERATING TITLE: PRESIDENT, SEMICONDUCTOR OFFICER COMPANY 16 17 CONFIDENTIAL TREATMENT REQUESTED DATE: MAY 1, 1999 DATE: 1 MAY 1999 17 18 CONFIDENTIAL TREATMENT REQUESTED APPENDIX A LEAD-TIMES C5/C7 Cycle Time: Total C5 Cycle Time = * + * Sigma must be less than or equal to * days. Total C7 Cycle Time = * + * Sigma must be less than or equal to * days. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18 19 CONFIDENTIAL TREATMENT REQUESTED APPENDIX B PRICING B1: Wafer Pricing: (including raw wafer costs) C5 TECHNOLOGY: = $ * per unsorted wafer C7 TECHNOLOGY: = (to be defined separately) B2: WAFER PRICE CALCULATIONS: TIMING: Once every 6 months. These calculations are inspired by two things: 1. * 2. * CALCULATION: Every 6 months, Xicor will calculate the actual yield percentage and compare the actual yield percentage to the target as set forth in Table 1. Table 1: Starting "target" wafer sort yield percentages for Xicor products to be used for price calculations. Density Wafer Sort Yield Percentages -------------------------------------------- 64K * % 32K * % 16K * % 256K * % - If the average wafer yield percentage of the total number of wafers shipped in the previous 6 months is on target, the wafer price for the next 6 months stay the same. - If the actual wafer yield percentage is different than the target values, the difference will be shared by Xicor and Sanyo and a new wafer price will be established for the next 6 month period. B3: Device Pricing: (to be defined separately in conjunction with wafer sort costs) * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 19 20 CONFIDENTIAL TREATMENT REQUESTED APPENDIX C SPECIFICATIONS C1: Wafer Specifications: Xicor specification number 00-W-0007 (C5) C2: Device Specifications: Xicor specification number 020512 (C5 E-test limits) C3: Quality and Reliability Specifications: Xicor specification numbers: 06020110, 06020101, 06020311 and 06020324. C4: Wafer Yield: Yield targets are established in Table 1, Appendix B. Any wafer yielding less than minus 3 sigma from the demonstrated six month wafer sort yield average will be scrapped. 20 21 CONFIDENTIAL TREATMENT REQUESTED APPENDIX D PROCESS, WAFER AND DEVICE QUALIFICATION & MONITORING CRITERIA Xicor specification number 06020116. 21 22 CONFIDENTIAL TREATMENT REQUESTED APPENDIX E NON-COMPETITION EXCLUSIONS The following Sanyo Products/Product Families are specifically excluded from the provisions of paragraph 10.0: EEPROM/Flash Memories; #1:LE28C*** series (512k, 1meg), parallel #2:LE28F*** series (512k, 1meg), parallel #3:LexxF*** series (512k, 1meg), serial 22 EX-21 6 LIST OF SUBSIDIARIES 1 EXHIBIT 21 XICOR, INC. LIST OF SUBSIDIARIES(1)
STATE OR OTHER JURISDICTION NAME OF INCORPORATION ---- ---------------- Xicor GmbH Germany Xicor Hong Kong Limited Hong Kong Xicor Japan K.K. Japan Xicor Korea, Ltd. Korea Xicor Limited United Kingdom Xicor, Inc. International Holding Company Delaware
(1) All subsidiaries are wholly-owned. EX-23 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-17806, 33-39627, 33-46687, 33-81986, 33-60947, 333-08597, 333-59509, 333-83563 and 333-95589) of Xicor, Inc. of our report dated January 24, 2000, relating to the financial statements, which appears in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLP San Jose, California March 10, 2000 EX-27 8 FINANCIAL DATA SCHEDULE
5 1 12-MOS JAN-02-2000 JAN-04-1999 JAN-02-2000 22,233,000 0 9,008,000 500,000 13,003,000 44,124,000 47,633,000 38,798,000 54,794,000 40,551,000 0 0 0 129,005,000 (124,556,000) 54,794,000 114,887,000 114,887,000 80,474,000 80,474,000 14,560,000 0 1,407,000 (26,929,000) 0 (26,929,000) 0 0 0 (26,929,000) (1.32) (1.32)
-----END PRIVACY-ENHANCED MESSAGE-----