10-Q 1 f67281e10-q.txt FORM 10-Q QUARTER ENDED OCTOBER 1, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------- FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 1, 2000 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] NUMBER OF SHARES OUTSTANDING AT OCTOBER 1, 2000 21,339,458 2 XICOR, INC. FORM 10-Q QUARTER ENDED OCTOBER 1, 2000 INDEX PART I: FINANCIAL INFORMATION
PAGE ---- ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at October 1, 2000 1 and December 31, 1999 Consolidated Statements of Operations for the three and 2 nine months ended October 1, 2000 and October 3, 1999 Consolidated Statements of Cash Flows for the nine 3 months ended October 1, 2000 and October 3, 1999 Notes to Consolidated Financial Information 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 6 CONDITION AND RESULTS OF OPERATIONS PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 17
-i- 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XICOR, INC. CONSOLIDATED BALANCE SHEETS
October 1, December 31, 2000 1999 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 26,242,000 $ 22,233,000 Accounts receivable 12,080,000 8,508,000 Inventories 16,640,000 13,003,000 Prepaid expenses and other current assets 287,000 380,000 ------------- ------------- Total current assets 55,249,000 44,124,000 Property, plant and equipment, at cost less accumulated depreciation 9,151,000 8,835,000 Other assets 1,785,000 1,835,000 ------------- ------------- $ 66,185,000 $ 54,794,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,443,000 $ 8,018,000 Accrued expenses 14,558,000 14,343,000 Deferred income on shipments to distributors 12,790,000 12,828,000 Current portion of long-term obligations 5,792,000 5,362,000 ------------- ------------- Total current liabilities 46,583,000 40,551,000 Long-term obligations 5,624,000 9,794,000 ------------- ------------- Total liabilities 52,207,000 50,345,000 ------------- ------------- Shareholders' equity: Preferred stock; 5,000,000 shares authorized -- -- Common stock; 75,000,000 shares authorized; 21,339,458 and 20,595,261 shares outstanding 131,064,000 129,005,000 Accumulated deficit (117,086,000) (124,556,000) ------------- ------------- 13,978,000 4,449,000 ------------- ------------- $ 66,185,000 $ 54,794,000 ============= =============
See accompanying notes to consolidated financial information 1 4 XICOR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended --------------------------------- --------------------------------- October 1, October 3, October 1, October 3, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net sales $ 31,060,000 $ 29,542,000 $ 93,326,000 $ 83,949,000 Cost of sales 18,606,000 18,840,000 54,565,000 61,146,000 ------------ ------------ ------------ ------------ Gross profit 12,454,000 10,702,000 38,761,000 22,803,000 ------------ ------------ ------------ ------------ Operating expenses: Research and development 3,966,000 3,581,000 11,993,000 10,823,000 Selling, general and administrative 6,774,000 5,864,000 19,725,000 16,679,000 Restructuring credit (256,000) -- (445,000) -- ------------ ------------ ------------ ------------ 10,484,000 9,445,000 31,273,000 27,502,000 ------------ ------------ ------------ ------------ Income (loss) from operations 1,970,000 1,257,000 7,488,000 (4,699,000) Interest expense (215,000) (354,000) (722,000) (1,105,000) Interest income 384,000 171,000 1,074,000 488,000 ------------ ------------ ------------ ------------ Income (loss) before income taxes 2,139,000 1,074,000 7,840,000 (5,316,000) Provision for income taxes 94,000 -- 370,000 -- ------------ ------------ ------------ ------------ Net income (loss) $ 2,045,000 $ 1,074,000 $ 7,470,000 $ (5,316,000) ============ ============ ============ ============ Net income (loss) per common share: Basic $ 0.10 $ 0.05 $ 0.35 $ (0.26) ============ ============ ============ ============ Diluted $ 0.09 $ 0.05 $ 0.32 $ (0.26) ============ ============ ============ ============ Shares used in per share calculations: Basic 21,280,000 20,364,000 21,115,000 20,265,000 ============ ============ ============ ============ Diluted 23,153,000 22,141,000 23,319,000 20,265,000 ============ ============ ============ ============
See accompanying notes to consolidated financial information 2 5 XICOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended --------------------------------- October 1, October 3, 2000 1999 ------------ ------------ Cash flows from operating activities: Net income (loss) $ 7,470,000 $ (5,316,000) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation 3,020,000 9,949,000 Changes in assets and liabilities: Accounts receivable (3,572,000) (3,026,000) Inventories (3,637,000) 618,000 Prepaid expenses and other current assets 93,000 339,000 Other assets 50,000 (16,000) Accounts payable and accrued expenses 5,640,000 (2,492,000) Deferred income on shipments to distributors (38,000) 2,684,000 ------------ ------------ Net cash provided by operating activities 9,026,000 2,740,000 ------------ ------------ Cash flows from investing activities: Investments in plant and equipment, net (3,336,000) (930,000) ------------ ------------ Net cash used in investing activities (3,336,000) (930,000) ------------ ------------ Cash flows from financing activities: Repayments of long-term obligations (3,740,000) (5,649,000) Net proceeds from sale of common stock 2,059,000 425,000 ------------ ------------ Net cash used in financing activities (1,681,000) (5,224,000) ------------ ------------ Increase (decrease) in cash and cash equivalents 4,009,000 (3,414,000) Cash and cash equivalents at beginning of year 22,233,000 17,881,000 ------------ ------------ Cash and cash equivalents at end of period $ 26,242,000 $ 14,467,000 ============ ============ Supplemental information: Cash paid during the year for: Interest expense $ 717,000 $ 1,174,000 Income taxes 259,000 80,000
See accompanying notes to consolidated financial information 3 6 XICOR, INC. NOTES TO CONSOLIDATED FINANCIAL INFORMATION (Unaudited) NOTE 1 - THE COMPANY: In the opinion of management, all adjustments necessary for a fair statement of the results of the interim periods presented (consisting only of normal recurring adjustments) have been included. These financial statements, notes and analyses should be read in conjunction with Xicor's Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission. NOTE 2 - 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. Dilutive potential common shares consist of employee stock options. Options to purchase 2,891,650 shares of common stock were outstanding at October 3, 1999, but were excluded from the earnings per share (EPS) computation for the nine months ended October 3, 1999 as they were antidilutive. NOTE 3 - COMPREHENSIVE INCOME (LOSS): The net income (loss) for the periods reported also approximated the comprehensive net income (loss) for such periods. NOTE 4 - BALANCE SHEET COMPONENTS:
October 1, December 31, 2000 1999 ------------ ------------ Inventories: Raw materials and supplies $ 1,156,000 $ 1,061,000 Work in process 8,997,000 7,419,000 Finished goods 6,487,000 4,523,000 ------------ ------------ $ 16,640,000 $ 13,003,000 ============ ============ Property, plant and equipment: Leasehold improvements $ 3,924,000 $ 2,582,000 Equipment 42,219,000 42,485,000 Furniture and fixtures 1,343,000 1,343,000 Construction in progress 1,125,000 1,223,000 ------------ ------------ 48,611,000 47,633,000 Accumulated depreciation (39,460,000) (38,798,000) ------------ ------------ $ 9,151,000 $ 8,835,000 ============ ============ Accrued expenses: Accrued wages and employee benefits $ 4,170,000 $ 3,907,000 Accrued restructuring liabilities 5,642,000 6,289,000 Other accrued expenses 4,746,000 4,147,000 ------------ ------------ $ 14,558,000 $ 14,343,000 ============ ============
4 7 Accounts receivable: Accounts receivable at October 1, 2000 and December 31, 1999 are presented net of an allowance for doubtful accounts of $500,000. Accrued restructuring costs: 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. Throughout 1999, products manufactured by an 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 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. Related reductions in workforce of approximately 200 employees, primarily in manufacturing and related support groups, occurred primarily in the fourth quarter of 2000. The following table sets forth activity against the accrual and the remaining restructuring accrual balance at October 1, 2000:
Restructuring Accrual ------------------------------------------------------------------------- Nine Months Ended October 1, 2000 ---------------------------------- December 31, Expense October 1, 1999 (Credit) Utilized 2000 ----------- --------------- ----------- ----------- Fab closure costs $ 3,555,000 $ (119,000)(1) $ -- $ 3,436,000 Employee severance and other 2,365,000 -- 412,000 1,953,000 Equipment lease costs 1,484,000 (256,000)(2) -- 1,228,000 Idle facilities charge 878,000 (70,000)(1) 46,000 762,000 ----------- ----------- ----------- ----------- 8,282,000 $ (445,000) $ 458,000 7,379,000 =========== =========== Less: long-term obligations (1,993,000) (1,737,000) ----------- ----------- $ 6,289,000 $ 5,642,000 =========== ===========
(1) During the quarter ended July 2, 2000, the Company successfully completed certain facility-related restructuring items for costs lower than previously estimated and accrued. The difference between the amount accrued and the actual cost has been recognized as a restructuring credit. (2) During the quarter ended October 1, 2000, a restructuring credit was recorded related to lower than expected equipment lease costs due to a slight movement in the timing of the wafer fab disposition. Subsequent to the end of the third quarter, on November 3, 2000, Xicor completed the sale of its Milpitas wafer fabrication fixed assets and inventory to Standard MEMS, Inc ("Standard MEMS") for a purchase price of approximately $12.5 million. Under a related agreement, Standard MEMS has become Xicor's fourth foundry and for the next two years is committed to supply, and Xicor is committed to purchase, certain minimum quantities of wafers. As a result of the sale, Xicor expects the restructuring costs will be lower than the amount previously estimated. 5 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying Quarterly Financial Information and Notes thereto and Xicor's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations for the three and nine months ended October 1, 2000 are not necessarily indicative of results to be expected in future periods. RESULTS OF OPERATIONS Sales for the three and nine months ended October 1, 2000 increased 5% and 11%, respectively, compared to the same periods last year. Xicor significantly increased programmable mixed signal product sales in 2000. Sales of programmable mixed signal products increased to 41% of sales in the third quarter of 2000 from 36% of sales in the second quarter of 2000 and 29% of sales in the first quarter of 2000. On a sequential basis, sales of programmable mixed signal products increased 17% during the third quarter. For the nine months ended October 1, 2000, programmable mixed signal product sales were 35% of sales compared to 25% of sales for the first nine months of 1999. Sales of memory products decreased in the third quarter of 2000 compared to the third quarter of 1999 primarily due to product mix and, to a lesser extent, pricing. Gross profit as a percentage of sales improved from 36% and 27% in the third quarter and nine months ended October 3, 1999 to 40% and 42% in the comparable periods of 2000. We expect that the gross profit percentage will fluctuate from quarter to quarter as a result of changes in product mix, product costs, and pricing pressures. The gross profit percentage improved each quarter in 1999 primarily due to product mix, more stable 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. Reduced depreciation expense due to the planned closure of the Milpitas in-house wafer fabrication plant was the primary cause of the gross profit percentage improvement during 2000. As anticipated, the third quarter 2000 gross margin of 40% was lower than the second quarter gross margin of 42%. We continue to expect that over the near-term, the gross margin will be similar to the third quarter, reflecting both higher product costs related to inventory produced in the Milpitas wafer fab prior to the fab sale to Standard MEMS, as well as a product mix change within memory products to more price sensitive, low density serial memory products. Research and development expenses were 13% of sales in the three and nine months ended October 1, 2000, compared to 12% and 13% for the comparable prior year periods. We expect a slight increase in the dollar amount of research and development expenses during the fourth quarter of 2000 as we ramp-up new product development. Selling, general and administrative expenses were 22% and 21% of sales for the three and nine months ended October 1, 2000, compared to 20% for both comparable prior year periods. The year-over-year increase in selling, general and administrative expenses includes the hiring of additional sales and marketing personnel, the opening of new regional sales offices in Raleigh, North Carolina and Portland, Oregon and intensified sales and marketing activities with the goal of increasing design wins of proprietary products. Xicor anticipates a slight increase in the dollar 6 9 amount of selling, general and administrative expenses going forward as new sales and marketing programs come on line. During the second quarter of 2000, Xicor successfully completed certain facility-related restructuring items for costs lower than previously estimated and accrued. The $189,000 difference between the amount accrued and the actual cost has been recognized as a restructuring credit. During the third quarter of 2000, a restructuring credit of $256,000 was recorded. This credit related primarily to lower than expected equipment lease costs due to a slight movement in the timing of the wafer fab disposition. After the end of the third quarter, on November 3, 2000, Xicor completed the sale of its Milpitas wafer fabrication fixed assets and inventory to Standard MEMS for a purchase price of approximately $12.5 million. Under a related agreement, Standard MEMS has become Xicor's fourth foundry and for the next two years is committed to supply, and Xicor is committed to purchase, certain minimum quantities of wafers. As a result of the sale, Xicor expects the restructuring costs will be lower than the amount previously estimated. Interest expense decreased in the three and nine months ended October 1, 2000 compared to the comparable 1999 periods due to normal principal payments resulting in a reduction of outstanding lease debt. Interest expense will decrease further in the fourth quarter of 2000 due to the completion of the sale of the Milpitas wafer fabrication assets and payoff of related equipment lease debt in November 2000. Interest income increased in the three and nine months ended October 1, 2000 compared to the comparable prior year periods due to an increase in the average balance invested caused primarily by funds generated from operating activities and employee stock plans and, to a lesser extent, higher interest rates. The provision for income taxes for the three and nine months ended October 1, 2000 consisted primarily of federal and state minimum taxes, which resulted from limitations on the use of net operating loss carryforwards, and foreign taxes. No taxes were provided in 1999 due to the net loss. Net deferred tax assets of $54.5 million at December 31, 1999 remain fully reserved because of the uncertainty regarding the ultimate realization of these assets. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended October 1, 2000, Xicor generated $9.0 million of cash from operating activities and $2.1 million from employee stock plans. Xicor used $3.7 million to repay long-term obligations and $3.3 million for equipment purchases. During the fourth quarter of 2000 Xicor expects to use cash to fund costs associated with exiting the wafer fabrication plant including the payoff of the majority of its outstanding equipment lease obligations, to repay long-term obligations and to purchase equipment, software and leasehold improvements. Capital expenditures for 2000 are currently planned at approximately $5 million and are primarily related to product design, information technology, product testing and leasehold improvements relating to the move of certain operations to a smaller facility. At October 1, 2000, Xicor had entered into commitments for equipment purchases aggregating less than $1 million. 7 10 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 October 1, 2000, 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 October 1, 2000, $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. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This quarterly 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 the expectation of quarter to quarter fluctuations in the gross profit percentage as a result of changes in product mix, product costs and pricing pressures; the expectation that over the near-term the gross margin will be similar to the third quarter, reflecting higher product costs related to inventory produced in the Milpitas wafer fab prior to the sale to Standard MEMS and reflecting the product mix change within memory products to more price sensitive low density serial memory products; the expectation that research and development costs will increase in the fourth quarter of 2000 due to the ramp-up of new product development; the goal of increasing design wins of proprietary products; the expectation of higher selling, general and administrative expenses in 2000; the expectation that the restructuring costs will be lower than the amount previously estimated; and the expectation that sufficient cash, working capital, and credit will be available to support operations for the next twelve months, including costs associated with the planned exit of the wafer fabrication plant, repayment of long-term obligations and the purchase of equipment, software and leasehold improvements. Except for historical information, the matters discussed in this quarterly 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; product mix; 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 Xicor's Annual Report on Form 10-K for the year ended December 31, 1999. 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. 8 11 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. The level of revenues in any one quarter is impacted by orders received during that quarter for same quarter shipments as well as orders previously scheduled to ship in that quarter. In the second quarter of 2000 the percentage of bookings for same quarter shipments was lower than in the first quarter of 2000. In addition, two key customers requested shipment delays that impacted our second quarter 2000 revenues. 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 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 of 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 managing of inventory levels; and - unanticipated research and development expenses associated with new product introductions. 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 THESE CUSTOMERS OR ANY SUBSTANTIAL REDUCTION IN ORDERS FROM THESE CUSTOMERS. 9 12 During the nine months ended October 1, 2000 one distributor accounted for 17% of our sales. Distributors are not themselves end users, but rather serve as a channel of sale to many end users of our products. Also, the composition of our major customer base changes from year to year as the market demand for our customers' products changes. 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. SUBSEQUENT TO THE THIRD QUARTER OF 2000 WE BECAME A FABLESS SEMICONDUCTOR COMPANY AND NOW DEPEND ON A LIMITED NUMBER OF FOUNDRIES TO MANUFACTURE OUR PRODUCTS. THESE FOUNDRIES MAY NOT BE ABLE TO SATISFY OUR MANUFACTURING REQUIREMENTS, WHICH COULD CAUSE OUR SALES TO DECLINE. During 1999, substantially all of our wafers were manufactured at our wafer fabrication plant in Milpitas, California or Yamaha Corporation in Japan. During the fourth quarter of 2000, we sold our wafer fabrication plant in Milpitas to Standard MEMS and entered into a foundry agreement with Standard MEMS. We are also ramping up manufacturing at two additional wafer foundries, Sanyo in Japan and ZMD in Germany. If any of these foundries 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. As Xicor shifts manufacturing of existing products to subcontractors, certain customers will requalify such products prior to accepting delivery. Delays in customer qualification schedules or lack of qualification of such products could result in the loss of sales which could seriously harm our operating results. OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICES OF OUR KEY DESIGN, ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO IDENTIFY, RECRUIT AND RETAIN PERSONNEL. 10 13 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. We are in the midst of the search process for an individual to fill the position of President and Chief Executive Officer. Our future success depends in part on filling this position. 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 a significant portion of 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 AND SHIP OUR PRODUCTS TO CUSTOMERS 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 and ship our products to customers. 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; 11 14 - limited warranties by subcontractors 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. 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 or prices decrease substantially. WE HAVE ENTERED INTO CERTAIN MINIMUM WAFER PURCHASE COMMITMENTS WITH FOUNDRY PARTNERS IN EXCHANGE FOR CAPACITY COMMITMENTS AND PLAN OUR PRODUCTION BASED ON INTERNAL FORECASTS OF CUSTOMER DEMAND. SHOULD DEMAND FOR CERTAIN OF OUR PRODUCTS DECREASE SIGNIFICANTLY, WE MAY BE REQUIRED TO MAKE PAYMENTS FOR UNUSED CAPACITY WHICH WOULD CAUSE OUR COSTS TO INCREASE. We have entered into certain minimum wafer purchase commitments with foundry partners in exchange for wafer capacity commitments. A significant decline in the demand for certain products could result in a reduction in the need for committed capacity. Should we fail to utilize the minimum capacity, we will be required to make payments for the unused capacity and our costs would increase. 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. 12 15 Due to the length of the product design-in cycle we usually require more than nine months to realize volume shipments after a customer first samples our product. 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. 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. 13 16 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 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 intellectual property, 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 certain 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 OR ANY OF OUR FOUNDRIES OR THIRD PARTY SUBCONTRACTORS 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 NEGATIVE 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. OUR BUSINESS MAY SUFFER DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS. 14 17 Our international sales accounted for approximately one-half of sales in the third quarter of 2000. 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 - burden of complying with a wide variety of foreign laws. 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. 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 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. 15 18 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. 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. 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. 16 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended October 1, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XICOR, INC., a California Corporation By /s/ Bruce Gray --------------------------------- Bruce Gray Acting President (Principal Executive Officer) By /s/ Geraldine N. Hench --------------------------------- Geraldine N. Hench Vice President, Finance (Principal Financial Officer) Date: November 14, 2000 17 20 EXHIBIT INDEX
Exhibit # Description --------- ----------- 27 Financial Data Schedule