<PAGE> 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 July 2, 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 July 2, 2000
21,213,908
<PAGE> 2
XICOR, INC.
FORM 10-Q
QUARTER ENDED JULY 2, 2000
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at July 2, 2000
and December 31, 1999 1
Consolidated Statements of Operations for the three
and six months ended July 2, 2000 and July 4, 1999 2
Consolidated Statements of Cash Flows for the six
months ended July 2, 2000 and July 4, 1999 3
Notes to Consolidated Financial Information 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 5
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
i
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XICOR, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
July 2, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,140,000 $ 22,233,000
Accounts receivable 11,275,000 8,508,000
Inventories 13,322,000 13,003,000
Prepaid expenses and other current assets 261,000 380,000
------------- -------------
Total current assets 51,998,000 44,124,000
Property, plant and equipment,
at cost less accumulated depreciation 9,650,000 8,835,000
Other assets 1,784,000 1,835,000
------------- -------------
$ 63,432,000 $ 54,794,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,923,000 $ 8,018,000
Accrued expenses 14,343,000 14,343,000
Deferred income on shipments to distributors 12,841,000 12,828,000
Current portion of long-term obligations 5,695,000 5,362,000
------------- -------------
Total current liabilities 44,802,000 40,551,000
Long-term obligations 7,001,000 9,794,000
------------- -------------
Total liabilities 51,803,000 50,345,000
------------- -------------
Shareholders' equity:
Preferred stock; 5,000,000 shares authorized -- --
Common stock; 75,000,000 shares authorized;
21,213,908 and 20,595,261 shares outstanding 130,760,000 129,005,000
Accumulated deficit (119,131,000) (124,556,000)
------------- -------------
11,629,000 4,449,000
------------- -------------
$ 63,432,000 $ 54,794,000
============= =============
</TABLE>
See accompanying notes to consolidated financial information
1
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XICOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 30,121,000 $ 28,751,000 $ 62,266,000 $ 54,407,000
Cost of sales 17,413,000 21,305,000 35,959,000 42,306,000
------------ ------------ ------------ ------------
Gross profit 12,708,000 7,446,000 26,307,000 12,101,000
------------ ------------ ------------ ------------
Operating expenses:
Research and development 3,953,000 3,683,000 8,027,000 7,242,000
Selling, general and administrative 6,556,000 5,553,000 12,951,000 10,815,000
Restructuring credit (189,000) -- (189,000) --
------------ ------------ ------------ ------------
10,320,000 9,236,000 20,789,000 18,057,000
------------ ------------ ------------ ------------
Income (loss) from operations 2,388,000 (1,790,000) 5,518,000 (5,956,000)
Interest expense (242,000) (359,000) (507,000) (751,000)
Interest income 373,000 156,000 690,000 317,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,519,000 (1,993,000) 5,701,000 (6,390,000)
Provision for income taxes 117,000 -- 276,000 --
------------ ------------ ------------ ------------
Net income (loss) $ 2,402,000 $ (1,993,000) $ 5,425,000 $ (6,390,000)
============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.11 $ (0.10) $ 0.26 $ (0.32)
============ ============ ============ ============
Diluted $ 0.10 $ (0.10) $ 0.23 $ (0.32)
============ ============ ============ ============
Shares used in per share calculations:
Basic 21,172,000 20,257,000 21,033,000 20,215,000
============ ============ ============ ============
Diluted 23,048,000 20,257,000 23,286,000 20,215,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial information
2
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XICOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,425,000 $ (6,390,000)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation 2,006,000 6,663,000
Changes in assets and liabilities:
Accounts receivable (2,767,000) (2,154,000)
Inventories (319,000) 2,261,000
Prepaid expenses and other current assets 119,000 345,000
Other assets 51,000 (2,000)
Accounts payable and accrued expenses 3,905,000 (1,979,000)
Deferred income on shipments to distributors 13,000 1,601,000
------------ ------------
Net cash provided by operating activities 8,433,000 345,000
------------ ------------
Cash flows from investing activities:
Investments in plant and equipment, net (2,821,000) (716,000)
------------ ------------
Net cash used in investing activities (2,821,000) (716,000)
------------ ------------
Cash flows from financing activities:
Repayments of long-term obligations (2,460,000) (3,809,000)
Net proceeds from sale of common stock 1,755,000 238,000
------------ ------------
Net cash used in financing activities (705,000) (3,571,000)
------------ ------------
Increase (decrease) in cash and cash equivalents 4,907,000 (3,942,000)
Cash and cash equivalents at beginning of year 22,233,000 17,881,000
------------ ------------
Cash and cash equivalents at end of period $ 27,140,000 $ 13,939,000
============ ============
Supplemental information:
Cash paid during the year for:
Interest expense $ 262,000 $ 825,000
Income taxes 231,000 24,000
</TABLE>
See accompanying notes to consolidated financial information
3
<PAGE> 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 2,778,525 shares of common stock
were outstanding at July 4, 1999, but were excluded from the earnings per share
(EPS) computation for the three and six months ended July 4, 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:
<TABLE>
<CAPTION>
July 2, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Inventories:
Raw materials and supplies $ 751,000 $ 1,061,000
Work in process 7,467,000 7,419,000
Finished goods 5,104,000 4,523,000
------------ ------------
$ 13,322,000 $ 13,003,000
============ ============
Property, plant and equipment:
Leasehold improvements $ 2,765,000 $ 2,582,000
Equipment 41,986,000 42,485,000
Furniture and fixtures 1,343,000 1,343,000
Construction in progress 2,226,000 1,223,000
------------ ------------
48,320,000 47,633,000
Accumulated depreciation (38,670,000) (38,798,000)
------------ ------------
$ 9,650,000 $ 8,835,000
============ ============
Accrued expenses:
Accrued wages and employee benefits $ 4,289,000 $ 3,907,000
Accrued restructuring liabilities 5,853,000 6,289,000
Other accrued expenses 4,201,000 4,147,000
------------ ------------
$ 14,343,000 $ 14,343,000
============ ============
</TABLE>
4
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Accounts receivable:
Accounts receivable at July 2, 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. In the third quarter of 2000
Xicor entered into a Letter of Intent to sell its Milpitas wafer fabrication
fixed assets and inventory to Teamasia Semiconductor (USA, Inc.) ("Teamasia")
for a purchase price of approximately $10 million. Closing of the sale and
commencement of foundry operations by Teamasia is expected to occur during the
third quarter of 2000, and is subject to the completion of a definitive
agreement and other related agreements, including a foundry agreement to supply
wafers to Xicor. Related reductions in workforce of approximately 200 employees,
primarily in manufacturing and related support groups, are planned to occur
primarily in the second half of 2000. The following table sets forth activities
against the accrual and the remaining restructuring accrual balance at July 2,
2000:
<TABLE>
<CAPTION>
Restructuring Accrual
-------------------------------------------------------------------
Six Months Ended
July 2, 2000
--------------------------------
December 31, Expense July 2,
1999 (Credit) Utilized 2000
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fab closure costs $ 3,555,000 $ (119,000)(1) $ -- $ 3,436,000
Employee severance and other 2,365,000 -- 201,000 2,164,000
Equipment lease costs 1,484,000 -- -- 1,484,000
Idle facilities charge 878,000 (70,000)(1) 46,000 762,000
----------- ----------- ----------- -----------
8,282,000 $ (189,000) $ 247,000 7,846,000
=========== ===========
Less: long-term obligations (1,993,000) (1,993,000)
----------- -----------
$ 6,289,000 $ 5,853,000
=========== ===========
</TABLE>
(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.
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 six months ended July 2, 2000 are not necessarily
indicative of results to be expected in future periods.
5
<PAGE> 8
RESULTS OF OPERATIONS
Sales for the three and six months ended July 2, 2000 increased 5% and
14%, respectively, compared to the comparable prior year periods. Xicor
significantly increased programmable mixed signal product sales in the first
half of 2000. Sales of mixed signal products increased from 24% of sales in the
second quarter and first half of 1999 to approximately 35% and 32% of sales,
respectively, in the second quarter and first half of 2000. Sales of memory
products decreased in the second quarter of 2000 compared to the second quarter
of 1999 primarily due to product mix and, to a lesser extent, pricing.
Gross profit as a percentage of sales improved from 26% and 22% in the
second quarter and first half, respectively, of 1999 to 42% in the second
quarter and first half of 2000. 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 from 38% in the fourth quarter of 1999 to 42% in the second quarter
and first half 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. In the short-term the gross profit percentage will
likely decrease somewhat due to a higher mix of sales of price sensitive
commodity products.
Research and development expenses were 13% of sales in the three and six
months ended July 2, 2000, consistent with the comparable prior year period
percentages. Research and development activities entail a high degree of
complexity of design and manufacturing process technology and consequently we
expect to invest more funds in research and development in 2000 than were
invested in 1999.
Selling, general and administrative expenses were 22% and 21% of sales,
respectively, for the three and six months ended July 2, 2000 compared to 19%
and 20% for the comparable prior year periods. In absolute dollars selling,
general and administrative expenses increased in the first half of 2000 compared
to the first half of 1999 primarily due to higher commission expense resulting
from the significantly increased sales and to intensified sales and marketing
activities. Xicor anticipates a slight increase in selling, general and
administrative expenses going forward as new sales and marketing programs come
on line.
During the quarter ended July 2, 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. In July 2000
Xicor entered into a Letter of Intent to sell its Milpitas wafer fabrication
fixed assets and inventory to Teamasia for a purchase price of approximately $10
million. Closing of the sale and commencement of foundry operations by Teamasia
is expected to occur during the third quarter of 2000, and is subject to the
completion of a definitive agreement and other related agreements, including a
foundry agreement to supply wafers to Xicor. If the sale of the fab is completed
as intended, the restructuring costs will be lower than the amounts previously
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<PAGE> 9
estimated. However, we cannot assure you that the sale to Teamasia will be
consummated as planned.
Interest expense decreased in the three and six months ended July 2,
2000 compared to the comparable 1999 periods due to normal principal payments of
outstanding lease debt.
Interest income increased in the three and six months ended July 2, 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 six months ended July
2, 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 six months ended July 2, 2000, Xicor generated $8.4 million
of cash from operating activities and $1.8 million from employee stock plans.
Xicor used $2.5 million to repay long-term obligations and $2.8 million for
equipment purchases.
During the second half of 2000 Xicor expects to use cash to fund costs
associated with exiting the wafer fabrication plant, to repay long-term
obligations and to purchase equipment, software and leasehold improvements.
Capital expenditures for 2000 are currently planned at approximately $6 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 July 2, 2000, Xicor had entered into commitments for
equipment purchases aggregating less than $1 million.
Xicor has a line of credit agreement with a financial institution that
expires March 31, 2001, provides for borrowings of up to $7.5 million against
eligible accounts receivable and is secured by all of Xicor's assets. Interest
on borrowings is charged at the prime lending rate plus 2% and is payable
monthly. At July 2, 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 July 2, 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 Xicor's plan to
sell its Milpitas wafer fabrication fixed assets and inventory to Teamasia for a
purchase price of approximately $10 million and enter into a foundry
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agreement with Teamasia; the expectation that the sale to Teamasia will close
and Teamasia will commence foundry operations in the third quarter of 2000; the
estimate that approximately 200 employees will be impacted by the planned
reduction in workforce; 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 in the short-term the gross profit
percentage will likely decrease somewhat due to a higher mix of sales of price
sensitive commodity products; the expectation of higher research and development
and selling, general and administrative expenses in 2000; 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.
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.
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<PAGE> 11
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.
During the first half of 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.
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<PAGE> 12
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.
WE ARE IN THE PROCESS OF SHIFTING OUR MANUFACTURING STRATEGY TO A FABLESS
BUSINESS MODEL AND WILL 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.
We plan to outsource all of our manufacturing by the end of the third quarter of
2000 with the exception of limited testing activities. During 1999,
substantially all of our wafers were manufactured at our wafer fabrication plant
in Milpitas, California or Yamaha Corporation in Japan. During 2000 we plan to
sell our wafer fabrication plant in Milpitas to Teamasia and enter into a
foundry agreement with Teamasia. We also plan to ramp 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.
WE COULD EXPERIENCE PROBLEMS IN THE MANUFACTURING PROCESS AT OUR WAFER
FABRICATION PLANT PRIOR TO CLOSURE WHICH WOULD IMPACT THE SUPPLY OF VARIOUS
PRODUCTS, WHICH WE PLAN TO MANUFACTURE AND CAUSE OUR SALES TO DECLINE AND COSTS
TO INCREASE.
We plan to manufacture wafers at our wafer fabrication plant in Milpitas,
California for most of the third quarter of 2000. Manufacturing problems during
the final months of operations of the facility would reduce yields and increase
costs. Due to the complex nature of the manufacturing process, some
manufacturing problems may not be detected until the products are near
completion. Significant yield loss could affect our ability to fulfill orders
and result in reduced sales and gross margins.
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.
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
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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 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;
- limited warranties by subcontractors on products supplied to us; and
- potential increases in prices due to capacity shortages and other factors.
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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.
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 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
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<PAGE> 15
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. 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.
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<PAGE> 16
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 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.
Our international sales accounted for approximately 53% of sales in the first
half 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.
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<PAGE> 17
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.
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
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<PAGE> 18
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.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 9, 2000 the shareholders of Xicor held their annual meeting in Milpitas,
California. The holders of 19,960,570 shares of Common Stock were present or
represented by proxy, and accordingly, a quorum was present and matters were
voted upon as follows:
(a) The following were elected directors:
<TABLE>
<CAPTION>
Votes for Votes withheld
--------- --------------
<S> <C> <C>
Raphael Klein 18,625,067 1,335,503
Julius Blank 18,229,437 1,731,133
Andrew W. Elder 18,649,887 1,310,683
Geoffrey C. Winkler 18,640,597 1,319,973
</TABLE>
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<PAGE> 19
(b) The following resolutions were submitted to a vote of the shareholders
at the meeting:
(1) To approve and ratify the Xicor, Inc. 2000 Director Option Plan
including the reservation of 250,000 shares of Common Stock
issuable thereunder. The resolution was passed, 16,708,169 shares
voting in favor, 3,156,555 shares voting against and 95,846
shares abstaining.
(2) To approve and ratify amendments to the Company's 1990 Incentive
and Non-Incentive Stock Option Plan including an increase of
800,000 shares of Common Stock issuable thereunder. The
resolution was passed, 14,142,606 shares voting in favor,
5,734,047 shares voting against and 83,917 shares abstaining.
(3) To ratify the designation of PricewaterhouseCoopers LLP as
independent accountants for the period ending December 31, 2000.
The resolution was passed, 19,675,917 shares voting in favor,
252,237 shares voting against and 32,416 shares abstaining.
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 July 2, 2000.
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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: August 11, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
