Financial: Xicor 1998 Results New Long Range Plan Announced - Company Financial Information

Edge: Work-Group Computing Report, Feb 1, 1999

Xicor, Inc. (NASDAQ - NMS: XICO) Tuesday reported results for the fourteen-week fourth quarter and year ended December 31, 1998. Sales for fiscal 1998 were $106,147,000 compared to $122,453,000 in 1997. In 1998 Xicor incurred a loss of $29,531,000, or $1.53 per share, which included $7,205,000 or $0.37 per share related to restructuring charges and an inventory write down.

This compares to a net loss of $2,531,000, or $0.13 per share, in 1997, which included an inventory write down of $6,200,000. Sales for the fourteen-week fourth quarter of 1998 were $26,919,000 compared to $31,404,000 in the thirteen-week fourth quarter of 1997. In the fourth quarter of 1998 Xicor incurred a loss of $9,955,000, or $0.51 per share, including a restructuring charge of $3,718,000, or $0.19 per share, compared to a fourth quarter 1997 net loss of $7,527,000, or $0.39 per share, including an inventory write down of $6,200,000. According to Bruce Gray, President, "Worldwide semiconductor sales in 1998 declined sharply from 1997, primarily due to the global slowdown in demand that resulted from the Asian economic crisis. This led to substantial excess capacity in the industry which, in turn, caused severe price erosion of memory products. Xicor's revenues also declined in 1998. These conditions, combined with the under-utilization of our in-house wafer fabrication facility, contributed to Xicor's larger 1998 loss. "While we were immersed in cost reduction activities during 1998, we also developed a new long range plan that addresses the two main causes of our poor financial performance: heavy dependence on commodity memory products, which are increasingly susceptible to global demand and price fluctuations, and the sole use of an in-house wafer fabrication plant which has high fixed costs and continuously requires large capital equipment investments. "After extensive consultations with several major customers and several large, potential customers in the telecommunications and computing industries, we have defined and are currently developing several non-memory system management and analog products. These products expand two of our existing product lines. We expect these product lines to significantly increase the non-memory portion of our business in the coming years. "To reduce the overall cost of our chips and specifically make our memory products more cost competitive, we have decided to follow the successful route taken by many semiconductor companies toward outsourcing. We now expect a substantial portion of our wafer production to be done at an outside wafer foundry and to further outsource product testing to overseas subcontractors. Related to that, we have taken $4,985,000 in restructuring charges during 1998. "To start the outsourcing of wafer fabrication, we tapped Yamaha Ltd. to become our first foundry, and in 1997 we commenced the transfer of our technology to Yamaha's plant in Kagoshima, Japan. In the third quarter of 1998, upon their demonstration of excellent reliability and yield for one of our more complex products, we qualified that factory as an outside foundry for Xicor. Several large customers have subsequently qualified such product, and we are consequently transferring additional products to Yamaha. "Currently about a quarter of our wafer starts are manufactured by Yamaha, and we plan to increase volume there. Assuming continuing successful transfer of products to Yamaha and timely qualification of Yamaha-manufactured products by our customers, late this year we expect to start a sizeable portion of our total wafers at Yamaha. This plan will keep our in-house wafer fabrication facility operating at about a third of its full capacity. The shift of production of many low-margin products to the less expensive outside foundry will allow us to focus our in-house factory on higher-margin products, and help counter the negative financial impact of significant under-utilization. "The burden on the income statement of our underutilized wafer fabrication plant will continue, but to a lesser extent than in 1998 due to the cost reduction measures that were taken late last year, those planned for this year, and the gradually increasing supply of lower cost wafers from the outside foundry. However, since we use the standard "first in, first out" inventory accounting method, the full benefit of a higher percentage of lower cost products made by Yamaha will be realized only after the first half of this year. We expect to stabilize the cash balance late this year after the in-house cost reductions are realized and lower cost production at the outside foundry is in full swing. "We have also recently raised our prices on many memory products. While the year started with improved demand for our products, there is a revenue risk associated with any price increase. Therefore, our current assumption is that 1999 revenues will be level with 1998, but with an improved bottom line. "In 1999, management will continue to focus on reducing losses, improving our cost structure and containing the negative cash flow. We are also committed to develop and market new non- memory products targeted at analog solutions and for system management. We expect to put the recent difficult period behind us, and to symbolize our commitment to this goal, we will introduce a new corporate logo in the near future representing our new product direction and long range plan, as the next millennium approaches," concluded Mr. Gray. As part of the business review conducted in 1998, Xicor recognized the need for a dedicated and focused sales effort in the complex smart card market. Consequently, in November 1998, Xicor and ATMI, Inc. (NASDAQ: ATMI) entered into a strategic alliance focused on IC sales into smart card applications. Under the terms of this agreement, ATMI, through its Emoysn division, has the right to become Xicor's exclusive sales channel for Xicor IC products in chip or module form to customers who focus on smart card applications. While the initial thrust by Emosyn will be in Europe, the agreement provides for expansion into other regions of the world if certain objectives are met. Using its existing distribution channels, Xicor will continue to sell these products worldwide to all customers who focus on applications other than smart cards. Additionally, Xicor and Emosyn will jointly define future IC products suitable for the smart card industry, to be manufactured by Xicor and sold by Emosyn. In addition to the rights listed above, and as part of this agreement, ATMI purchased from Xicor 1,000,000 unregistered shares of Xicor common stock at $4.00 per share. Also, after achieving agreed upon goals, but not before the end of Year 2001, ATMI may purchase the rights to Xicor's Security IC Product line, for use only in smart card applications. The purchase price will be determined by an agreed upon formula. Following the purchase, Xicor will continue to supply such chips to Emosyn, and will also continue to sell its security products using its own distribution channels to all applications other than smart cards. During 1998 Xicor introduced several new products, including a new category of mixed signal products in the electronics industry, using Xicor's "smart analog" technology combining analog, digital and nonvolatile memory circuits in a single chip. These products are expected to be used in many general-purpose applications. In August Xicor launched the industry's first EEPROMs to use chip-scale packaging. The die-sized Xicor Ball Grid Array (XBGA) advanced package is less than half the size of today's smallest EEPROM packages. The small footprint devices provide engineers extra board space to design in additional functions, and shrink the cost of their products such as cellular telephones, pagers, notebook PCs, PDAs, Global Positioning Systems, hearing aids and medical monitors. This new type of package permits significant weight savings as well when compared with standard SOIC or TSSOP package types. The XBGA technology is starting to generate revenues for Xicor from use in cellular telephones. Throughout 1998 Xicor has continued to strengthen its management team by hiring proven executives in sales, marketing, engineering and information technology. These executives have contributed heavily to the new strategic product direction and manufacturing plan that has recently been defined. Xicor designs, develops, manufactures and sells nonvolatile in-the-system programmable products which retain information even when system power is turned off or is lost inadvertently. Xicor's product line includes advanced and standard EEPROMs, digitally controlled potentiometers (XDCPs), security ICs and system management ICs. In-the-system programmability benefits communications, consumer, computer, office automation, industrial, automotive and military products by adding advanced capabilities. Such capabilities include a much reduced design verification cycle, faster introduction to the market, easy adaptability to changing software and operating environments at the point of use, data security, remote maintainability, and personalization by the user. Many of Xicor's products consume little power, operate well from low voltage battery power sources, and come in small packages making them ideal for hand-held and portable applications. Xicor products are sold worldwide and are supported by offices located in Asia, Europe, Japan and North America. Headquartered in Milpitas, California, Xicor holds the Underwriters Laboratories Certification of Compliance with the ISO 9001 quality standard and the joint automotive QS 9000 quality standard certification. Xicor's products, corporate and financial information is readily accessible on the World Wide Web at http://www.xicor.com, or by fax request to 408-432-0640.