10-Q 1 f77136e10-q.txt FORM 10-Q 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 September 30, 2001 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 SEPTEMBER 30, 2001 21,983,977 XICOR, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at September 30, 2001 1 and December 31, 2000 Consolidated Statements of Operations for the three 2 and nine months ended September 30, 2001 and October 1, 2000 Consolidated Statements of Cash Flows for the nine 3 months ended September 30, 2001 and October 1, 2000 Notes to Consolidated Financial Information 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 7 CONDITION AND RESULTS OF OPERATIONS PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 18
-i- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. XICOR, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 27,401,000 $ 29,121,000 Accounts receivable 6,222,000 10,812,000 Inventories 7,710,000 14,380,000 Prepaid expenses and other current assets 227,000 639,000 ------------- ------------- Total current assets 41,560,000 54,952,000 Property, plant and equipment, at cost less accumulated depreciation 6,053,000 9,166,000 Other assets 2,702,000 205,000 ------------- ------------- Total assets $ 50,315,000 $ 64,323,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,380,000 $ 11,132,000 Accrued expenses 8,559,000 12,637,000 Deferred income on shipments to distributors 11,530,000 14,258,000 Deferred gain on sale of fab assets 2,711,000 4,600,000 Current portion of long-term obligations 530,000 766,000 ------------- ------------- Total current liabilities 36,710,000 43,393,000 Long-term obligations 1,215,000 715,000 ------------- ------------- Total liabilities 37,925,000 44,108,000 ------------- ------------- Shareholders' equity: Preferred stock; 5,000,000 shares authorized -- -- Common stock; 75,000,000 shares authorized; 21,983,977 and 21,466,270 shares outstanding 132,950,000 131,605,000 Accumulated deficit (120,560,000) (111,390,000) ------------- ------------- Total shareholders' equity 12,390,000 20,215,000 ------------- ------------- Total liabilities and shareholders' equity $ 50,315,000 $ 64,323,000 ============= =============
See accompanying notes to consolidated financial information -1- XICOR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, October 1, September 30, October 1, ------------- ---------- ------------- ---------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 15,167,000 $ 31,060,000 $ 58,321,000 $ 93,326,000 Cost of sales 7,642,000 18,606,000 39,250,000 54,565,000 ------------ ------------ ------------ ------------ Gross profit 7,525,000 12,454,000 19,071,000 38,761,000 ------------ ------------ ------------ ------------ Operating expenses: Research and development 3,184,000 3,966,000 10,845,000 11,993,000 Selling, general and administrative 4,087,000 6,774,000 14,953,000 19,725,000 Restructuring charge (credit) -- (256,000) 3,205,000 (445,000) ------------ ------------ ------------ ------------ 7,271,000 10,484,000 29,003,000 31,273,000 ------------ ------------ ------------ ------------ Income (loss) from operations 254,000 1,970,000 (9,932,000) 7,488,000 Interest expense (45,000) (215,000) (121,000) (722,000) Interest income 246,000 384,000 1,001,000 1,074,000 ------------ ------------ ------------ ------------ Income (loss) before income taxes 455,000 2,139,000 (9,052,000) 7,840,000 Provision for income taxes 23,000 94,000 118,000 370,000 ------------ ------------ ------------ ------------ Net income (loss) $ 432,000 $ 2,045,000 $ (9,170,000) $ 7,470,000 ============ ============ ============ ============ Net income (loss) per common share: Basic $ 0.02 $ 0.10 $ (0.42) $ 0.35 ============ ============ ============ ============ Diluted $ 0.02 $ 0.09 $ (0.42) $ 0.32 ============ ============ ============ ============ Shares used in per share calculations: Basic 21,905,000 21,280,000 21,679,000 21,115,000 ============ ============ ============ ============ Diluted 24,542,000 23,153,000 21,679,000 23,319,000 ============ ============ ============ ============
See accompanying notes to consolidated financial information -2- XICOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended ----------------- September 30, October 1, 2001 2000 ---- ---- Cash flows from operating activities: Net income (loss) $ (9,170,000) $ 7,470,000 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation 3,054,000 3,020,000 Amortization of fab gain (1,889,000) -- Non-cash restructuring charge 1,249,000 -- Changes in assets and liabilities: Accounts receivable 4,590,000 (3,572,000) Inventories 6,670,000 (3,637,000) Prepaid expenses and other current assets 412,000 93,000 Other assets 3,000 50,000 Accounts payable and accrued expenses (1,830,000) 5,640,000 Deferred income on shipments to distributors (2,728,000) (38,000) ------------ ------------ Net cash provided by operating activities 361,000 9,026,000 ------------ ------------ Cash flows from investing activities: Investment in Standard MEMS, Inc. (2,500,000) -- Investments in plant and equipment, net (221,000) (3,336,000) ------------ ------------ Net cash used in investing activities (2,721,000) (3,336,000) ------------ ------------ Cash flows from financing activities: Repayments of long-term obligations (705,000) (3,740,000) Net proceeds from sale of common stock 1,345,000 2,059,000 ------------ ------------ Net cash provided by (used in) financing activities 640,000 (1,681,000) ------------ ------------ Increase (decrease) in cash and cash equivalents (1,720,000) 4,009,000 Cash and cash equivalents at beginning of year 29,121,000 22,233,000 ------------ ------------ Cash and cash equivalents at end of quarter $ 27,401,000 $ 26,242,000 ============ ============ Supplemental information: Cash paid (refunded) during the year for: Interest expense $ 134,000 $ 717,000 Income taxes (63,000) 259,000 Equipment acquired pursuant to long-term obligations 969,000 --
See accompanying notes to consolidated financial information -3- 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, 2000 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. Options to purchase 4,807,808 shares of common stock were outstanding at September 30, 2001, but were excluded from the earnings per share (EPS) computation for the nine months ended September 30, 2001 as they were antidilutive. NOTE 3 - COMPREHENSIVE INCOME (LOSS): The net income (loss) for the periods reported also represented the comprehensive net income (loss) for such periods. NOTE 4 - BALANCE SHEET COMPONENTS:
September 30, December 31, 2001 2000 ---- ---- Inventories: Raw materials and supplies $ 315,000 $ 616,000 Work in process 5,681,000 9,681,000 Finished goods 1,714,000 4,083,000 ------------ ------------ $ 7,710,000 $ 14,380,000 ============ ============ Property, plant and equipment: Leasehold improvements $ 2,722,000 $ 3,846,000 Equipment 37,357,000 41,318,000 Furniture and fixtures 1,098,000 1,228,000 Construction in progress 51,000 615,000 ------------ ------------ 41,228,000 47,007,000 Accumulated depreciation (35,175,000) (37,841,000) ------------ ------------ $ 6,053,000 $ 9,166,000 ============ ============ Accrued expenses: Accrued wages and employee benefits $ 1,418,000 $ 2,842,000 Accrued restructuring liabilities 1,197,000 2,537,000 Other accrued expenses 5,944,000 7,258,000 ------------ ------------ $ 8,559,000 $ 12,637,000 ============ ============
-4- Accounts receivable: Accounts receivable at September 30, 2001 and December 31, 2000 are presented net of an allowance for doubtful accounts of $500,000. Restructuring: In the fourth quarter of 2000, Xicor committed to certain workforce reductions to streamline operations and further implement the Company's outsourced manufacturing strategy. The related restructuring accrual balance of $2.5 million at December 31, 2000 consisted of $2.0 million of severance costs to reduce Xicor's workforce by approximately 50 employees, primarily in administrative, manufacturing and support groups, and $0.5 million of other restructuring related costs. In the first quarter of 2001, Xicor announced its plan to exit from offering stand alone low-density serial EEPROM memory products and complete the move to fully outsourced test and assembly operations. Accordingly, Xicor's first quarter 2001 results included a $3.2 million restructuring charge and an $8.2 million charge to cost of sales to write down inventories to their net realizable value. The restructuring charge included a $2.0 million accrual consisting of $1.5 million of severance-related costs for an additional reduction in Xicor's workforce of approximately 95 employees, primarily in manufacturing, sales and support groups, and $0.5 million of other restructuring related costs. The $1.2 million balance of the restructuring charge recorded in the first quarter of 2001 related principally to the write-off of leasehold improvements in the facility that was vacated as a result of the restructuring plan. In the nine months ended September 30, 2001, Xicor reduced its workforce by approximately 135 employees and utilized $2.8 million of the restructuring reserve for related severance costs and $0.5 million for other restructuring related costs. The remaining reductions in workforce are planned to occur in the fourth quarter of 2001. At September 30, 2001, the restructuring accrual of $1.2 million consisted of $0.7 million of severance costs (including costs to reduce the workforce by approximately 10 employees primarily in manufacturing support and administrative groups) and $0.5 million of other costs associated with vacated facilities, including the building which housed our test operations. Legal Proceedings: On April 17, 2001 Xicor filed suit against Catalyst Semiconductor in Delaware Federal District Court alleging violation of a Xicor Digital Potentiometer patent. Xicor has asked the court to issue a permanent injunction barring Catalyst from using Xicor's patented technology in their recently announced mixed-signal, nonvolatile, Digitally Programmable Potentiometer products. The case is in the discovery stage and while the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's financial position or results of operations, legal costs associated with protecting the Company's Digital Potentiometer patent are expected to increase. -5- Investments During the third quarter of 2001, Xicor invested $2.5 million in one of its third-party foundries, Standard MEMS, Inc., representing a 5% ownership. Headquartered in Burlington, Massachusetts, Standard MEMS is a manufacturer of micro electro mechanical systems for transducer, photonic and fluid applications. The Company is accounting for the investment using the cost method. The investment is included in other assets on the balance sheet. Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be evaluated annually and to determine whether events or circumstances have occurred indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. The Company believes that adopting FAS 141 and FAS 142 will not have a material impact on its financial position and results of operations. In August 2001, FASB Statement No. 143 (FAS 143), "Accounting for Asset Retirement Obligations" was issued. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. FAS 143 is effective for financial statements issued for fiscal years beginning after June 25, 2002. The Company expects that the initial application of FAS 143 will not have an impact on its financial statements. In October 2001, FASB Statement No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-lived Assets" was issued. The objectives of FAS 144 are to address significant issues relating to the implementation of FAS No. 121 (FAS 121), "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of," and to develop a single accounting model, based on the framework established by FAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. FAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company expects that the initial application of FAS 144 will not have a material impact on its financial statements. -6- 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, 2000. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of results to be expected in future periods. RESULTS OF OPERATIONS Xicor's sales are derived from two product groups, mixed-signal products and memory products. Mixed-signal product sales represent our core market. Memory product sales comprise Xicor's legacy businesses of serial EEPROMs, which we are in the process of exiting, and parallel EEPROMs, which business we are retaining. Mixed-signal product sales for the third quarter of 2001 were $8.2 million compared to $10.9 million in the second quarter of 2001 and $12.6 million in the third quarter of 2000. For the nine months ended September 30, 2001 mixed-signal sales were $29.9 million compared to $32.7 million in the comparable prior year period. Overall economic and industry-wide conditions have been weak throughout 2001, and mixed-signal sales declined in the three and nine months ended September 30, 2001 due to lower unit sales. Memory product sales for the third quarter of 2001 were $7.0 million compared to $8.2 million in the second quarter of 2001 and $18.5 million in the third quarter of 2000. For the nine months ended September 30, 2001 memory product sales were $28.4 million compared to $60.6 million in the comparable prior year period. The year over year decline in memory product sales is principally attributable to the serial EEPROM business that Xicor is in the process of exiting and, to a lesser extent, lower unit shipments of parallel EEPROMs. Overall economic and industry wide conditions have been weak throughout 2001. Absent an indication of an industry wide economic recovery, we anticipate continuing weakness in demand in the fourth quarter of 2001. Furthermore, we expect serial EEPROM sales to continue to decline as we exit from that business. Accordingly, we currently expect fourth quarter 2001 sales to decline up to approximately 20% sequentially across both of our product groups. Gross profit as a percentage of sales was 50% in the third quarter of 2001 compared to 47% in the second quarter of 2001 and 40% in the third quarter of 2000. The gross profit percentage for the nine months ended September 30, 2001 was 33%. As discussed below, cost of sales for the first quarter of 2001 included an $8.2 million charge to write down inventories. Excluding the inventory write-down, gross profit as a percentage of sales was 47% in the nine months ended September 30, 2001 compared to 42% in the comparable prior year period. The gross profit percentage in the three and nine months ended September 30, 2001 benefited from a shift in the product mix to a larger percentage of higher margin mixed-signal and parallel EEPROM sales and a smaller percentage of lower margin serial EEPROM sales, the -7- quarterly amortization of $0.6 million of the deferred gain of the sale of the fab assets and lower costs associated with our shift to fully outsourced manufacturing. The gross profit percentage is expected to fluctuate from quarter to quarter as a result of changes in product mix, product costs and average selling prices. Research and development expenses declined 20% from $4.0 million in the third quarter of 2000 to $3.2 million in the third quarter of 2001 primarily due to lower personnel costs and spending controls. For the nine months ended September 30, 2001 research and development expenses declined 10% to $10.8 million from $12.0 million in the comparable period of 2000 principally due to the aforementioned lower expense level in the third quarter of 2001. Selling, general and administrative expenses declined 40% from $6.8 million in the third quarter of 2000 to $4.1 million in the third quarter of 2001. Selling, general and administrative expenses for the nine months ended September 30, 2001 declined 24% to $15.0 million from $19.7 million in the comparable prior year period. The year over year decline in expenses is due primarily to headcount reductions and lower commission expenses resulting from the decreased sales, partially offset by increased legal costs associated with protecting the Company's intellectual property rights. In the first quarter of 2001, Xicor announced its plan to exit from offering stand alone low-density serial EEPROM memory products and complete the move to fully outsourced test and assembly operations. Accordingly, Xicor's first quarter 2001 results included an $8.2 million charge to cost of sales to write down inventories to their net realizable value and a $3.2 million restructuring charge. While Xicor's goal is to sell the serial memory business, the compound effect of the current overall weak economic and industry-wide conditions and uncertain sales in the serial memory business necessitated the inventory write-down. The $3.2 million restructuring charge consisted of $1.5 million of severance-related costs for an additional reduction in Xicor's workforce of approximately 95 employees, $1.2 million of fixed asset write-offs principally related to leasehold improvements in the facility that housed our test operation and $0.5 million of other restructuring-related costs. The restructuring activities are expected to be completed in 2001. Estimated annual cost reductions of $6.0 million associated with the completion of the restructuring plan are expected to mitigate the effect of lower memory product sales. In December 1999 Xicor's Board of Directors decided to close its Milpitas in-house wafer fabrication facility during 2000 and use third-party foundries for all of Xicor's wafer fabrication production. In connection with the planned closure, a restructuring charge was taken in the fourth quarter of 1999. Results for the three and nine months ended October 1, 2000 include restructuring credits of $0.3 million and $0.4 million, respectively. The third quarter 2000 restructuring credit related primarily to lower than expected equipment lease costs due to a slight movement in the timing of the wafer fab disposition. During the nine months ended October 1, 2000, Xicor also 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. -8- Third quarter 2001 operating income was $0.3 million. Although we are continuing our emphasis on spending controls, in light of the anticipated sales decline, we expect to incur an operating loss in the fourth quarter of 2001. Interest expense decreased in the three and nine months ended September 30, 2001 compared to the comparable prior year periods due to lower long-term debt. In November 2000, the Company paid off substantial equipment lease debt related to the wafer fabrication assets in connection with the sale of its Milpitas wafer fabrication assets. Interest income decreased in the three and nine months ended September 30, 2001 primarily as a result of lower interest rates. Interest income is expected to decrease sequentially in the fourth quarter of 2001 as a result of lower interest rates and a decrease in the average balance invested caused by the use of cash in operating activities, including costs associated with restructuring activities, and to repay long-term obligations. The provision for income taxes for the first three quarters of 2001 and 2000 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 $49.9 million at December 31, 2000 remain fully reserved because of the uncertainty regarding the ultimate realization of these assets. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, Xicor had $27.4 million in cash and cash equivalents compared to $29.1 million at the end of 2000. During the nine months ended September 30, 2001, Xicor generated $0.4 million of cash from operating activities and $1.3 million from employee stock plans. Xicor used $2.5 million to invest in Standard MEMS, $0.7 million to repay long-term obligations and $0.2 million for net equipment purchases ($1.2 million of equipment purchases, net of $1.0 million of equipment financing). During the balance of 2001 Xicor expects to use cash in operating activities, including costs associated with restructuring activities, and to repay long-term obligations. Capital expenditures for the fourth quarter of 2001 are currently planned at less than $0.5 million. At September 30, 2001, Xicor had entered into commitments for equipment purchases aggregating less than $0.1 million. Xicor has a line of credit agreement with a financial institution that expires March 31, 2002, 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 September 30, 2001, approximately $6.0 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 September 30, 2001, $1.0 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. -9- "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 continuing weakness in demand in the fourth quarter of 2001; the expectation for serial EEPROM sales to continue to decline as we exit from that business; the expectation for fourth quarter 2001 sales to decline up to approximately 20% sequentially across both of our product groups; the expectation that the gross profit percentage will fluctuate from quarter to quarter as a result of changes in product mix, product costs and average selling prices; the goal to sell the serial memory business; restructuring plans to reduce Xicor's workforce; expected cost reductions from Xicor's restructuring plan; the expectation that we will incur an operating loss in the fourth quarter of 2001; the expectation that interest income will decrease sequentially in the fourth quarter of 2001; and the expectation that sufficient cash and credit will be available to support operations for the next twelve months. These forward-looking statements 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 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, 2000. 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 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 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. You should not use our past financial performance to predict future operating results. We have incurred net losses in three of the last four 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 including the current severe business down cycle; 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 -10- products manufactured on our behalf by third-party suppliers; 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. THE EXIT FROM A PORTION OF OUR MEMORY BUSINESS HAS CHANGED OUR BUSINESS MODEL AND IS CAUSING A REDUCTION IN OUR REVENUES. In the first quarter of 2001, Xicor announced its plan to exit from offering stand-alone low-density serial EEPROM memory products. Xicor's goal is to sell the serial memory business. However, Xicor may be unable to secure a buyer for the business, particularly in light of the current weak economic conditions. The transition out of the serial EEPROM memory business is requiring the Company to devote significant time and expense to transition activities at the same time it is increasing its focus on its mixed-signal products. If Xicor's penetration of the mixed-signal market does not increase, Xicor's operating results could be seriously harmed and its stock price could decline. Further, as a result of the transition, Xicor has become a smaller company with limited resources and a reduced workforce. Xicor may not be able to effectively use its limited resources to increase new product development and build its mixed-signal product business. This could cause a further decline in Xicor's revenues. 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 PRODUCES FLUCTUATIONS IN OUR OPERATING RESULTS. 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 are generally characterized by diminished product demand, production over-capacity and accelerated decline of average selling prices, and in some cases have lasted for more than one year. We are presently experiencing an economic downturn that is harming our business. Our continued success depends on a better supply and demand balance within the industry and the various electronics industries that use semiconductors, including networking, communications and industrial companies, returning to more normal buying patterns. 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. The composition of our major customer base changes as the market demand for our customers' products change. A small number of customers have accounted for a substantial -11- portion of our sales. A reduction, delay, or cancellation of orders from a large customer could harm our business. The loss of, or reduced orders by, any of our key customers could result in a significant decline in our sales. WE DEPEND ON DISTRIBUTORS AND MANUFACTURERS' REPRESENTATIVES TO GENERATE A MAJORITY OF OUR SALES. Distributors serve as a channel of sale to many end users of our products. During the third quarter of 2001, approximately 41% of sales were through distribution, with one distributor accounting for 21% of our sales. Our distributors and manufacturers' representatives could discontinue selling our products at any time. The loss of any significant distributor or manufacturers' representative could seriously harm our operating results by impairing our ability to sell our products. 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. 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 QUALIFIED PERSONNEL. There is significant competition for qualified personnel in the semiconductor industry, in particular for the highly skilled engineers involved in the design and development of our mixed-signal products. At times competition has been especially intense in Silicon Valley, where our design, research and development, and corporate headquarters are located. The failure to recruit and retain key design engineers or other technical and management personnel could harm our business. OUR DEPENDENCE ON THIRD-PARTY FOUNDRIES TO MANUFACTURE OUR PRODUCTS AND ON SUBCONTRACTORS TO SORT, ASSEMBLE AND TEST OUR PRODUCTS AND SHIP OUR PRODUCTS TO CUSTOMERS SUBJECTS US TO A NUMBER OF RISKS. Xicor outsources all manufacturing operations. Our reliance on third-party foundries and subcontractors to manufacture our products and ship our products to customers 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 foundries and subcontractors; - limited warranties by third-party manufacturers on products supplied to us; and - potential increases in product costs due to capacity shortages and other factors. -12- These risks may lead to a possible loss of sales, increased costs, delayed product delivery or loss of competitive advantage, which would harm our profitability and customer relationships. Additionally, as Xicor shifts manufacturing of existing products between foundries and third-party subcontractors, certain customers require requalification of 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 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. Revenue shortfalls can occur for any of the following reasons: economic slowdowns in the markets we serve; significant pricing pressures that occur because of declines in selling prices over the life of a product; the reduction, rescheduling or cancellation of customer orders; and 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. 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 order materials and produce finished products in advance of anticipated customer demand. This advance ordering and production has and may continue to result in excess inventory levels or 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 OUR PRODUCTS DECREASE, WE MAY BE REQUIRED TO MAKE PAYMENTS FOR UNUSED CAPACITY WHICH WOULD CAUSE OUR COSTS TO 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. 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 -13- 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, Maxim, and Analog Devices, all of whom have substantially greater financial, technical, marketing, distribution, and other resources than we do and have their own facilities for the production of semiconductor components. In addition, our foundry partners have the right to develop and fabricate products based on our process technology. 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. 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 COST OF SALES MAY INCREASE IF WE ARE REQUIRED TO PURCHASE ADDITIONAL MANUFACTURING CAPACITY IN THE FUTURE. To obtain additional manufacturing capacity in the future, 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. -14- 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. 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. Our operating results could be seriously harmed by the failure to be able to protect our intellectual property. Policing unauthorized use of our intellectual property, however, is difficult, especially in foreign countries. Litigation may be necessary 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. We recently filed suit against a competitor to protect our intellectual property. Litigation of this type can result in substantial costs and diversion of resources and can harm our business, operating results and financial condition regardless of the outcome of the litigation. IF XICOR OR ANY OF OUR FOUNDRIES OR THIRD PARTY SUBCONTRACTORS IS 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 ROYALTIES AND 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 royalties and 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 in the past, 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. Our international sales accounted for approximately 57% of total sales in the third quarter of 2001. 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 -15- currency fluctuations 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. BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS. Our operations and those of our foundries and other manufacturing subcontractors are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. Our facilities and the facility of one of our foundries in the State of California may be subject to electrical blackouts due to a shortage of available electrical power. If these blackouts continue or increase in severity, they could disrupt Xicor's operations. Business interruption insurance may not provide protection due to the deductible periods or be enough to compensate us for losses that may occur. Additionally, Xicor has been unable to obtain earthquake insurance of reasonable costs and limits. Our business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services, particularly any such delays or stoppages which harm our ability to obtain an adequate supply of wafers and products from our foreign foundries or contractors, could harm our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from customers that have been affected by the terrorist activities and potential activities. The United States economy in general is being adversely affected by terrorist activities and potential terrorist activities. Any economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business. Moreover, we cannot determine whether other attacks may occur in the future and the effects of such attacks on our business. 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 line of credit agreement with Coast Business Credit that provides up to $7.5 million of borrowings 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -16- 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. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On April 17, 2001 Xicor filed suit against Catalyst Semiconductor in Delaware Federal District Court alleging violation of a Xicor Digital Potentiometer patent. Xicor has asked the court to issue a permanent injunction barring Catalyst from using Xicor's patented technology in their recently announced mixed-signal, nonvolatile, Digitally Programmable Potentiometer products. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: None. (b) Reports on Form 8-K: No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 2001. -17- 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/ Louis DiNardo -------------------------- Louis DiNardo Chief Executive Officer (Principal Executive Officer) By /s/ Geraldine N. Hench -------------------------- Geraldine N. Hench Vice President, Finance and Administration (Principal Financial Officer) Date: November 13, 2001 -18-