UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 27, 1997 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 0-18548 XILINX, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 77-0188631 (I.R.S. Employer Identification No.) 2100 LOGIC DRIVE, SAN JOSE, CA 95124 (Address of principal executive offices) (Zip Code) (408) 559-7778 (Registrant's telephone number, including area code) 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 requirements for the past 90 days. YES [ X ] NO [ ] Class Shares Outstanding at December 27, 1997 ----- --------------------------------------- Common Stock, $.01 par value 74,236,791 Part I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> XILINX, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands except per share amounts) Three Months Ended Nine Months Ended Dec. 27, Dec. 28, Dec. 27, Dec. 28, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net revenues $ 148,735 $ 135,587 $ 459,768 $ 416,366 Costs and expenses: Cost of revenues 55,668 52,156 172,622 156,139 Write-off of discontinued product family - - - 5,000 Research and development 19,536 17,698 59,424 52,283 Marketing, general and administrative 32,460 28,830 96,352 87,087 ---------- ---------- ---------- ---------- Operating costs and expenses 107,664 98,684 328,398 300,509 ---------- ---------- ---------- ---------- Operating income 41,071 36,903 131,370 115,857 Interest income and other 4,425 5,353 15,514 15,121 Interest expense (3,487) (3,407) (10,474) (10,320) ---------- ---------- ---------- ---------- Income before provision for taxes on income and equity in joint venture 42,009 38,849 136,410 120,658 Provision for taxes on income 13,023 12,626 43,030 40,725 ---------- ---------- ---------- ---------- Income before equity in joint venture 28,986 26,223 93,380 79,933 Equity in net income of joint venture 2,614 - 2,614 - ---------- ---------- ---------- ---------- Net income $ 31,600 $ 26,223 $ 95,994 $ 79,933 ========== ========== ========== ========== Net income per share: Basic $ 0.43 $ 0.36 $ 1.30 $ 1.10 ========== ========== ========== ========== Diluted $ 0.40 $ 0.33 $ 1.19 $ 1.01 ========== ========== ========== ========== Common shares used in computing Basic net income per share amounts 74,196 72,931 73,871 72,653 ========== ========== ========== ========== Common and equivalent shares used in computing Diluted net income per share amounts 79,248 79,791 80,663 79,371 ========== ========== ========== ========== <FN> (See accompanying Notes to Consolidated Condensed Financial Statements.) </TABLE>
<TABLE> <CAPTION> XILINX, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands except per share amounts) Dec. 27, March 29, 1997 1997 ---------- ----------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 244,079 $ 215,903 Short-term investments 173,480 209,944 Accounts receivable, net 63,802 72,248 Inventories 54,605 62,367 Advances for wafer purchases 55,000 - Deferred income taxes and other current assets 48,755 41,093 ---------- ----------- Total current assets 639,721 601,555 Property, plant and equipment, at cost 165,518 154,443 Accumulated depreciation and amortization (82,287) (67,863) ---------- ----------- Net property, plant and equipment 83,231 86,580 Restricted investments 36,745 36,257 Investment in joint venture 91,850 35,286 Advances for wafer purchases 65,000 60,000 Developed technology and other assets 50,300 28,015 ---------- ----------- $ 966,847 $ 847,693 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 25,042 $ 16,758 Accrued payroll, other accrued liabilities and interest payable 24,210 33,282 Income taxes payable 22,868 10,858 Deferred income on shipments to distributors 49,244 36,355 ---------- ----------- Total current liabilities 121,364 97,253 Long-term debt 250,000 250,000 Deferred tax liabilities 11,228 9,760 Stockholders' equity: Preferred stock, $.01 par value - - Common stock, $.01 par value 742 733 Additional paid-in capital 129,797 114,530 Retained earnings 473,875 377,881 Treasury stock, at cost (4,054) (1,847) Cumulative translation adjustment (16,105) (617) ---------- ----------- Total stockholders' equity 584,255 490,680 ---------- ----------- $ 966,847 $ 847,693 ========== =========== <FN> (See accompanying Notes to Consolidated Condensed Financial Statements.) </TABLE>
<TABLE> <CAPTION> XILINX, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS Increase (decrease) in cash and cash equivalents (in thousands) Nine Months Ended Dec. 27, Dec. 28, 1997 1996 ---------- ---------- <S> <C> <C> Cash flows from operating activities: Net income $ 95,994 $ 79,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,822 20,195 Undistributed earnings of joint venture (3,642) (938) Changes in assets and liabilities: Accounts receivable 8,446 10,979 Inventories 7,762 (21,908) Deferred income taxes and other 8,114 1,607 Accounts payable, accrued liabilities and income taxes payable 11,222 7,044 Deferred income on shipments to distributors 12,889 (8,221) ---------- ---------- Total adjustments 69,613 8,758 ---------- ---------- Net cash provided by operating activities 165,607 88,691 Cash flows from investing activities: Purchases of short-term available-for-sale investments (281,860) (209,111) Proceeds from sale or maturity of short-term available-for-sale investments 318,241 240,650 Purchases of restricted held-to-maturity investments (36,136) (36,097) Proceeds from sale or maturity of restricted held-to maturity investments 35,648 36,092 Advances for wafer purchases (60,000) (60,000) Property, plant and equipment (17,947) (22,300) Investment in joint venture (67,422) - Deposit on building (28,351) - ---------- ---------- Net cash used in investing activities (137,827) (50,766) Cash flows from financing activities: Acquisition of Treasury stock (22,682) (15,729) Principal payments on capital lease obligations - (779) Proceeds from issuance of common stock 23,078 22,693 ---------- ---------- Net cash provided by financing activities 396 6,185 ---------- ---------- Net increase in cash and cash equivalents 28,176 44,110 Cash and cash equivalents at beginning of period 215,903 110,893 ---------- ---------- Cash and cash equivalents at end of period $ 244,079 $ 155,003 ========== ========== Schedule of non-cash transactions: Tax benefit from stock options $ 12,723 $ 5,484 Issuance of Treasury stock under employee stock plans 20,475 15,511 Receipts against advances for wafer purchases - 9,035 Supplemental disclosures of cash flow information: Interest paid 13,195 12,561 Income taxes paid $ 26,489 $ 26,416 <FN> (See accompanying Notes to Consolidated Condensed Financial Statements.) </TABLE> XILINX, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The accompanying interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles and should be read in conjunction with the Xilinx, Inc. ("Xilinx" or the "Company") consolidated financial statements for the year ended March 29, 1997. The balance sheet at March 29, 1997 is derived from audited financial statements, although certain prior period amounts have been reclassified to conform to the fiscal 1998 presentation. The interim financial statements are unaudited but reflect all adjustments which are in the opinion of management of a normal, recurring nature necessary to present fairly the statements of financial position, results of operations and cash flows for the interim periods presented. The results for the nine-month period ended December 27, 1997 are not necessarily indicative of the results that may be expected for the year ending March 28, 1998. 2. Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Inventories at December 27, 1997 and March 29, 1997 are as follows: <TABLE> <CAPTION> December 27, March 29, 1997 1997 ------------- ---------- <S> <C> <C> Raw materials $ 5,880 $ 4,952 Work-in-process 25,713 30,898 Finished goods 23,012 26,517 ------------- ---------- $ 54,605 $ 62,367 ============= ========== </TABLE> 3. In October 1997, the Company entered into a lease agreement for a facility to be built on property adjacent to the Company's corporate facilities. Building construction and occupancy is expected to be completed in calendar 1998. Upon signing the lease agreement, the Company paid the lessor $31.3 million for prepaid rent and an option to purchase the facility. The rent prepayment covers one year and was discounted to its present value. Additionally, the Company can exercise the lease agreement's purchase option between the sixth and twelfth month following the commencement date of the lease term. If the Company elects to exercise the option, the prepaid purchase option will be considered payment in full. However, if the Company decides not to exercise the purchase option, the prepaid option will be returned without interest at the end of the first year lease. 4. The Company, United Microelectronics Corporation ("UMC") and other parties have entered into a joint venture to construct a wafer fabrication facility in Taiwan, known as United Silicon Inc. ("USIC"). In fiscal 1998, the Company invested additional equity of $67.4 million in USIC in which the Company now holds a 25% equity ownership. UMC has committed to supply and is currently supplying the Company with wafers manufactured in an existing facility until capacity is available in the new facility. The Company records 25% of the net income of USIC as joint venture equity income. To date, USIC's net income has resulted primarily from favorable exchange gains on its foreign currency investments as well as interest earned on its investment portfolio. Net joint venture equity income for the third quarter of fiscal 1998 was $2.6 million. This amount was largely attributable to foreign exchange gains incurred by USIC relating to its US dollar denominated investments. All prior period amounts were immaterial and remain classified as "Interest income and other". 5. In May 1996 the Company entered into an agreement with Seiko Epson. This agreement was amended in December 1997 and now provides for an advance to Seiko Epson of $150.0 million to be used in the construction of a wafer fabrication facility in Japan. Through December 27, 1997, the Company has advanced a total of $120.0 million to Seiko Epson under the agreement. The final installment of $30.0 million was paid on February 2, 1998. 6. During the quarter ended December 27, 1997, the Company adopted the Financial Accounting Standards Board's Statement No. 128, Earnings per Share. The new standard requires the Company to change the method used to compute net income per share and to restate all prior periods. The new requirement includes a calculation of "basic" net income per share, which excludes the dilutive effect of stock options. The calculations of basic and diluted net income per share for the third quarter and first nine months of fiscal 1998 and fiscal 1997 are shown below. <TABLE> <CAPTION> (in thousands except per share amounts) Three Months Ended Nine Months Ended Dec. 27, Dec. 28, Dec. 27, Dec. 28, 1997 1996 1997 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> BASIC Weighted average number of common shares outstanding 74,196 72,931 73,871 72,653 ========= ========= ========= ========= Net income $ 31,600 $ 26,223 $ 95,994 $ 79,933 ========= ========= ========= ========= Net income per share $ 0.43 $ 0.36 $ 1.30 $ 1.10 ========= ========= ========= ========= DILUTED Weighted average number of common shares outstanding 74,196 72,931 73,871 72,653 Incremental common shares attributable to outstanding options 5,052 6,860 6,792 6,718 --------- --------- --------- --------- Total shares 79,248 79,791 80,663 79,371 ========= ========= ========= ========= Net income $ 31,600 $ 26,223 $ 95,994 $ 79,933 ========= ========= ========= ========= Net income per share $ 0.40 $ 0.33 $ 1.19 $ 1.01 ========= ========= ========= ========= </TABLE> The shares issuable upon conversion of long-term debt to equity, approximately 4.9 million shares, are not included in the calculation of diluted net income per share as their inclusion would have had an anti-dilutive effect for all periods presented. In addition, outstanding options to purchase approximately 3.4 million and 1.0 million shares, for the third quarter of fiscal 1998 and 1997, respectively, under the Company's Stock Option Plan were not included in the treasury stock calculation to derive diluted income per share as their inclusion would have had an anti-dilutive effect. 7. The Company is currently involved in patent litigation with Altera Corporation (see Part II, Item 1, Legal Proceedings). Due to the uncertain nature of the litigation with Altera and because the lawsuits are still in the pre-trial stage, the ultimate outcome of these matters cannot be determined at this time. Management believes that it has meritorious defenses to Altera's claims, is defending them vigorously, and has not recorded a provision for the ultimate outcome of these matters in its financial statements. The foregoing is a forward-looking statement subject to risks and uncertainties, and the future outcome could differ materially due to the uncertain nature of the litigation with Altera and because the lawsuits are still in the pre-trial stage.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements, which involve numerous risks and uncertainties. Actual results may differ materially. Certain of these risks and uncertainties are discussed under "Risk Factors". RESULTS OF OPERATIONS - THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 1998 COMPARED TO THE THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 1997 Revenues - -------- Revenues for the third quarter of fiscal 1998 were $148.7 million, which represented a $13.1 million, or 9.7%, increase from the corresponding period of fiscal 1997. In addition, revenues for the first nine months of fiscal 1998 were $459.8 million, up 10.4% from the corresponding period of 1997. The revenue increase during the third quarter of fiscal 1998, as compared to the comparable quarter of fiscal 1997, was primarily attributable to increased demand for the Company's XC4000X product family, which includes revenues from the XC4000EX and XC4000XL devices, as well as the XC5200 and XC9500 product families. The increase was offset primarily by reduced demand for the Company's XC3000 and XC4000 families. The XC4000X and XC9500 devices, which constitute the Company's newest product families, represented 13.0% of revenues during the third quarter of fiscal 1998 as compared to 1.7% in the comparable quarter in the prior year. Revenues relating to first generation products, which include the XC2000, XC3000 and XC3100 product families, represented 26.1% and 26.6% of total revenues during the third quarter and first nine months of fiscal 1998, respectively, as compared to 31.4% and 33.4% of total revenues during the third quarter and first nine months of fiscal 1997, respectively. Revenues relating to second generation products, which include the XC4000, XC4000X, XC5200 and XC6200 product families, represented 56.8% and 57.5% of total revenues during the third quarter and first nine months of fiscal 1998, respectively, as compared to 53.0% and 51.7% of total revenues during the third quarter and first nine months of fiscal 1997, respectively. The increase in revenues relating to second generation products is primarily a function of the decreasing requirements for first generation products and the increasing demand for the functionality and performance provided by devices within the second generation product families. Additionally, within the second generation products, demand is increasing for the newer product family members, including the XC4000X devices, and decreasing for mature devices, including the XC4000 product family. Revenues relating to other products, which include HardWire, serial proms and the XC7000 and XC9500 product families, represented 14.1% and 13.1% of total revenues during the third quarter and first nine months of fiscal 1998, respectively, as compared to 12.2% and 11.7% of total revenues during the third quarter and first nine months of fiscal 1997, respectively. Additionally, software revenues represented approximately 3% of total revenues for both the third quarter and first nine month periods of both fiscal 1998 and fiscal 1997. Software revenues include the sale of approximately 4000 revenue seats for the third quarter of fiscal 1998 as compared to approximately 1300 revenue seats for the comparable period in the prior fiscal year. The increase in revenue seats resulted primarily from increased demand for the Company's lower cost, easier to use Foundation Series software introduced in April 1996, as well as increased demand for the software utilized to design high volume logic devices. The percentage increase in software revenues was less than the proportional increase in software revenue seats due primarily to the change in the sales mix towards lower priced products. International revenues constituted approximately 38% of total revenues in the third quarter of both fiscal 1998 and fiscal 1997. Additionally, international revenues were approximately 38% of total revenues for the first nine months of fiscal 1998 as compared to approximately 37% for the prior year comparable period. International revenues are primarily derived from customers in Europe, Japan and Southeast Asia/Rest of World, which represented approximately 22%, 10% and 6% of the Company's worldwide sales, respectively in the December quarter. Revenue growth in the European and Southeast Asian/Rest of World markets was 13.6% and 38.5%, respectively, in the third quarter of 1998 as compared to the third quarter in 1997. When comparing revenues in Japan over the same periods, yen denominated revenues increased approximately 4% but were adversely impacted by the change in exchange rates relative to the prior year period, resulting in an overall decline of approximately 4% in US dollar equivalent revenues. Gross Margin - ------------- Costs of revenues were $55.7 million, or 37.4% of revenues, and $172.6 million, or 37.5% of revenues, for the third quarter and first nine months of fiscal 1998, respectively. Costs of revenues for the comparable periods of fiscal 1997 were $52.2 million, or 38.5% of revenues, and $156.1 million, or 37.5% of revenues, respectively, excluding the impact of the $5.0 million non-recurring write-off of the XC8100 product family in the second quarter of fiscal 1997. The decrease in the cost of revenues as a percentage of revenues from the prior year third quarter was primarily attributable to ongoing yield improvements and the favorable impact of lower wafer costs, including the impact of favorable movements in the yen exchange rate, partially offset by selling price reductions. Historically, Xilinx has been able to offset much of the erosion in gross margin percentages on more mature integrated circuits with increased volumes of newer, proprietary, higher margin products, although there can be no assurance that this will occur in future periods. The Company recognizes that ongoing manufacturing cost reductions for its integrated circuits, which assist the Company in its efforts to lower selling prices while maintaining historical margins, represent a significant element in expanding the market for its products. Company management believes that future gross margin objectives in the range of 60% to 62% of revenues are consistent with expanding market share while realizing acceptable returns, although there can be no assurance that future gross margins will be in this range. Research and Development - -------------------------- Research and development expenditures were $19.5 million for the third quarter and $59.4 million for the first nine months of fiscal 1998, or 13.1% and 12.9% of revenues, respectively. The expenditures for the comparable periods in the prior year were $17.7 million and $52.3 million, or 13.1% and 12.6% of revenues, respectively. The 10.4% and 13.7% increase in expenditures over the prior year third quarter and nine month periods, respectively, resulted primarily from increased testing of products in development and labor-related expenses partially offset by a decline in engineering wafer purchases. The Company remains committed to a significant level of research and development effort in order to continue to compete aggressively in the programmable logic marketplace. Marketing, General and Administrative - ---------------------------------------- Marketing, general and administrative expenses increased as a percentage of revenue to 21.8% and 21.0% of revenues, or $32.5 million and $96.4 million, respectively, during the third quarter and first nine months of fiscal 1998, up from 21.3% and 20.9% of revenues, or $28.8 million and $87.1 million, respectively, during the third quarter and first nine months of fiscal 1997. These expenses have increased in percentage and amount primarily as a result of increased staffing and labor-related expenses as well as increased legal costs. The Company remains committed to controlling administrative expenses and believes that, over time, most of these expenses should grow at a lower rate than revenue growth, although there can be no assurance that the Company will be successful in achieving these strategies. However, the timing and extent of future legal costs associated with the ongoing enforcement of the Company's intellectual property rights are not readily predictable and may significantly increase the level of general and administrative expenses in the future. Operating Income - ----------------- Operating income of $41.1 million, or 27.6% of revenues, was generated during the third quarter of fiscal 1998, an increase of 11.3% from the $36.9 million or 27.2% of revenues, for the comparable prior year period. In addition, operating income for the first nine months of fiscal 1998 increased 13.4% to $131.4 million, or 28.6% of revenues, from $115.9 million or 27.8% of revenues in the comparable fiscal 1997 period. Excluding the impact of the $5.0 million non-recurring write-off of the discontinued product family, for the first nine months of fiscal 1998 operating income was 8.7% higher than the operating income for the comparable prior year period. This increase in operating income in the third quarter of 1998 compared to the third quarter of 1997 is primarily a result of the 9.7% revenue growth and the level of all other expenses. Operating income as a percentage of revenues could be adversely impacted in future years by the factors noted under "Risk Factors". Interest and Other, net - -------------------------- The Company earns interest income on its cash, cash equivalents, short-term investments and restricted investments. The amount of interest earned is a function of the balance of cash invested as well as prevailing interest rates. The Company incurs interest expense on the $250 million of 5 1/4% convertible subordinated notes issued in November 1995. The Company's investment portfolio contains tax-advantaged municipal securities, which have pretax yields that are less than the interest rate on the convertible subordinated notes. For financial reporting purposes, the Company effectively records the difference between the pretax and tax-equivalent yields as a reduction in provision for taxes on income. Net interest and other income declined in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 primarily due to decreased interest income resulting from lower investment portfolio balances and to separate disclosure of joint venture equity income beginning in the third quarter of fiscal 1998. See additional information under "Joint Venture Equity Income". For the first nine months of fiscal 1998, net interest and other income was consistent with the comparable prior year period. As a result of the difference in interest income and expense yields and future uses of the Company's investment portfolio, levels of net interest and other income could decrease in the future. Provision for Income Taxes - ----------------------------- The Company recorded a tax provision of $13.0 million (31.0% of income before taxes and equity in joint venture) for the third quarter of fiscal 1998 as compared to $12.6 million (32.5% of income before taxes and equity in joint venture) in the comparable prior year period. For the first nine months of fiscal 1998 the Company recorded a provision of $43.0 million (31.5% of income before taxes and equity in joint venture) as compared to $40.7 million (33.8% of income before taxes and equity in joint venture) for the first nine months of fiscal 1997. The lower tax rate for the first nine months of fiscal 1998 is primarily due to legislation extending the R&D tax credit as well as increased profits in foreign operations. Joint Venture Equity Income - ------------------------------ The Company records 25% of the net income of United Silicon Inc. ("USIC"), a wafer fabrication joint venture located in Taiwan, as joint venture equity income. To date, USIC's net income has resulted primarily from favorable exchange gains on its foreign currency investments as well as interest earned on its investment portfolio. Net joint venture equity income for the third quarter of fiscal 1998 was $2.6 million. This amount was largely attributable to foreign exchange gains incurred by USIC relating to its US dollar denominated investments. All prior period amounts were immaterial and remain classified in "Interest income and other". The Company expects to incur joint venture equity losses as the USIC wafer fabrication facility begins to ramp up production, as many of the expenses associated with full foundry operation will be incurred in the early stages of limited production. The Company expects that profitability will occur, if at all, only after a sufficient volume of wafer production is obtained. RISK FACTORS The following risk factors are associated with the Company's business: Factors Affecting Future Operating Results - ---------------------------------------------- The semiconductor industry is characterized by rapid technological change, intense competitive pressure and cyclical market patterns. The Company's results of operations are affected by a wide variety of factors, including general economic conditions, conditions relating to technology companies, conditions specific to the semiconductor industry, decreases in average selling prices over the life of any particular product, the timing of new product introductions (by the Company, its competitors and others), the ability to manufacture sufficient quantities of a given product in a timely manner, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property from competitors, and the impact of new technologies resulting in rapid escalation of demand for some products in the face of equally steep decline in demand for others. Market demand for the Company's products, particularly for those most recently introduced, can be difficult to predict, especially in light of customers' demands to shorten product lead times and minimize inventory levels. Unpredictable market demand could lead to revenue volatility if the Company were unable to provide sufficient quantities of specified products in a given quarter. In addition, any difficulty in achieving targeted wafer production yields could adversely impact the Company's financial condition and results of operations. The Company attempts to identify changes in market conditions as soon as possible; however, the dynamics of the market make prediction of and timely reaction to such events difficult. Due to the foregoing and other factors, past results, including those described in this report, are much less reliable predictors of the future than is the case in many older, more stable and less dynamic industries. Based on the factors noted herein, the Company may experience substantial period-to-period fluctuations in future operating results. The semiconductor industry has historically been cyclical and subject to, at various times, significant economic downturns characterized by diminished product demand, limited visibility to demand for products further out than three to nine months, accelerated erosion of average selling prices and overcapacity. The Company may experience substantial period-to-period fluctuations in future operating results due to general semiconductor industry conditions, overall economic conditions or other factors. The Company's future success depends in large part on the continued service of its key technical, sales, marketing and management personnel and on its ability to continue to attract and retain qualified employees. Particularly important are those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material, adverse effect on the Company's financial condition and results of operations. Sales and operations outside of the United States subject the Company to risks associated with conducting business in foreign economic and regulatory environments. The Company's financial condition and results of operations could be adversely impacted by unfavorable economic conditions in countries in which it does significant business and by changes in foreign currency exchange rates affecting those countries. Specifically, the Company has sales and operations in the Asian markets. The recent instability in the Asian financial markets appears to have adversely impacted sales and may continue to adversely impact sales in those markets in several ways, including reducing access to sources of capital needed by customers to make purchases and creating exchange rate differentials that may adversely effect the customer's ability to purchase or the Company's ability to sell at competitive prices. In addition, the instability may increase credit risks as the recent weakening of certain Asian currencies may impair customers' ability to repay existing obligations. Depending on the situation in Asia in coming quarters, any or all of these factors could adversely impact the Company's financial condition and results of operations in the near future. Additionally, risks include government regulation of exports, tariffs and other potential trade barriers, reduced protection for intellectual property rights in some countries, and generally longer receivable collection periods. The Company's business is also subject to the risks associated with the imposition of legislation and regulations relating specifically to the import or export of semiconductor products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States or other countries upon the importation or exportation of the Company's products in the future or what, if any, effect such actions would have on the Company's financial condition and results of operations. In order to expand international sales and service, the Company will need to maintain and expand existing foreign operations or establish new foreign operations. This entails hiring additional personnel and maintaining or expanding existing relationships with international distributors and sales representatives. This will require significant management attention and financial resources and could adversely affect the Company's financial condition and results of operations. There can be no assurance that the Company will be successful in its maintenance or expansion of existing foreign operations, in its establishment of new foreign operations or in its efforts to maintain or expand its relationships with international distributors or sales representatives. Many of the Company's operations are centered in an area of California that has been seismically active. Should there be a major earthquake in this area, the Company's operations may be disrupted resulting in the inability of the Company to manufacture or ship products in a timely manner, thereby materially adversely affecting the Company's financial condition and results of operations. In addition, the securities of many high technology companies have historically been subject to extreme price and volume fluctuations, which may adversely affect the market price of the Company's common stock. Dependence Upon Independent Manufacturers and Subcontractors - ----------------------------------------------------------------- The Company does not manufacture the wafers used for its products. During the past two years, most of the Company's wafers have been manufactured by Seiko Epson Corporation ("Seiko Epson") and United Microelectronics Corporation ("UMC"). The Company has depended upon these suppliers and others to produce wafers with competitive performance and cost attributes, including transitioning to advanced process technologies, producing wafers at acceptable yields, and delivering them to the Company in a timely manner. While the timeliness, yield and quality of wafer deliveries have met the Company's requirements to date, there can be no assurance that the Company's wafer suppliers will not experience future manufacturing problems, including delays in the realization of advanced process technologies. The Company is also dependent on subcontractors to provide semiconductor assembly services. Any prolonged inability to obtain wafers or assembly services with competitive performance and cost attributes, adequate yields or timely deliveries from these manufacturers/subcontractors, or any other circumstance that would require the Company to seek alternative sources of supply, could delay shipments, and have a material adverse effect on the Company's financial condition and results of operations. The Company's long-term growth will depend in large part on the Company's ability to obtain increased wafer fabrication capacity and assembly services from suppliers. A significant increase in general industry demand or any interruption of supply could reduce the Company's supply of wafers or increase the Company's cost of such wafers, thereby materially adversely affecting the Company's financial condition and results of operations. In order to secure additional wafer capacity, the Company from time to time considers alternatives, including, without limitation, equity investments in, or loans, deposits, or other financial commitments to, independent wafer manufacturers to secure production capacity, or the use of contracts which commit the Company to purchase specified quantities of wafers over extended periods. Although the Company is currently able to obtain wafers from existing suppliers in a timely manner, the Company has at times been unable, and may in the future be unable, to fully satisfy customer demand because of production constraints, including the ability of suppliers and subcontractors to provide materials and services in satisfaction of customer delivery dates, as well as the ability of the Company to process products for shipment. The Company's future growth will depend in part on its ability to locate and qualify additional suppliers and subcontractors and to increase its own capacity to ship products, and there can be no assurance that the Company will be able to do so. Any increase in these constraints on the Company's production could result in a material adverse impact on the Company's financial condition and results of operations. In this regard, the Company has entered into the USIC joint venture with UMC and other parties to obtain wafer capacity from a new wafer fabrication facility. However, there are many risks associated with the construction of a new facility, and there can be no assurance that such facility will become operational and/or cost effective in a timely manner. In addition, the Company has entered into an agreement with Seiko Epson to obtain additional capacity from a facility currently under construction and expected to provide wafers in calendar 1998. If the Company requires additional capacity and such capacity is unavailable, or unavailable on reasonable terms, the Company's financial condition and results of operations could be materially adversely affected. Litigation - ---------- The Company is currently engaged in patent litigation with Altera Corporation ("Altera"). See "Legal Proceedings" in Part II. Dependence on New Products - ----------------------------- The Company's future success depends in large part on its ability to develop and introduce on a timely basis new products which address customer requirements and compete effectively on the basis of price and performance. The success of new product introductions is dependent upon several factors, including timely completion of new product designs, the ability to utilize advanced process technologies, achievement of acceptable yields, availability of supporting design software and market acceptance. No assurance can be given that the Company's product development efforts will be successful or that its new products will achieve market acceptance. Revenues relating to the Company's mature products are expected to continue to decline in the future as a percentage of aggregate revenues, and the Company will be increasingly dependent on revenues derived from newer or future product generation devices. In addition, the average selling price for any particular product tends to decrease rapidly over the product's life. To offset such decreases, the Company relies primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and other price/performance factors such that higher average selling prices and higher margins are achievable relative to mature product lines. To the extent that such cost reductions and new product introductions do not occur in a timely manner, or the Company's products do not achieve market acceptance at prices with higher margins, the Company's financial condition and results of operations could be adversely affected. Competition - ----------- The Company's field programmable gate arrays (FPGAs) and complex programmable logic devices (CPLDs) compete in the programmable logic marketplace, with a substantial majority of the Company's revenues derived from its FPGA product families. The industries in which the Company competes are intensely competitive and are characterized by rapid technological change, rapid product obsolescence and continuous price erosion. The Company expects significantly increased competition both from existing competitors and from a number of companies that may enter its market. Xilinx believes that important competitive factors in the programmable logic market include price, product performance and reliability, adaptability of products to specific applications, ease of use and functionality of design software, and the ability to provide timely customer service and support. The Company's strategy for expansion in the programmable logic market includes continued price reductions commensurate with the ability to lower the cost of manufacture for established products and continued introduction of new product architectures which address high volume, low cost applications as well as high performance, leading edge density applications. However, there can be no assurance that the Company will be successful in achieving these strategies. The Company's major sources of competition are comprised of three elements: the manufacturers of custom CMOS gate arrays, providers of high density programmable logic products characterized by FPGA-type architectures and other providers of programmable logic products. The Company competes with custom gate array manufacturers on the basis of lower design costs, shorter development schedules and reduced inventory risks. The primary attributes of custom gate arrays are high density, high speed and low production costs in high volumes. The Company continues to develop lower cost architectures intended to narrow the gap between current custom gate array production costs (in high volumes) and FPGA production costs. The Company competes with high density programmable logic suppliers on the basis of performance, the ability to deliver complete solutions to customers and customer support, taking advantage of the primary characteristics of flexible, high speed implementation and quick time-to-market capabilities of the Company's PLD product offerings. In addition, the Company competes with manufacturers of other programmable logic products on the basis of price, performance, design and software utility. Some of the Company's current or potential competitors have substantially greater financial, manufacturing, marketing and technical resources than Xilinx. To the extent that such efforts to compete are not successful, the Company's financial condition and results of operations could be materially adversely affected. Intellectual Property - ---------------------- The Company relies upon patent, trademark, trade secret and copyright law to protect its intellectual property. There can be no assurance that such intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. From time to time, third parties, including competitors of the Company, have asserted exclusive patent, copyright and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially, adversely affect the Company's financial condition and results of operations. Year 2000 Compliance - ---------------------- As is the case with most other companies using computers in their operations, the Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems, as well as the vendor and customer date-sensitive computerized information electronically transferred to the Company. The year 2000 issue is the result of computer programs being written using two digits, rather than four, to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize the year "00" as 1900 rather than the year 2000, which could result in miscalculations, classification errors or system failures. Based on preliminary information, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues timely, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition at December 27, 1997 remained strong. Total current assets exceeded total current liabilities by 5.3 times, compared to 6.2 times at March 29, 1997. Since its inception, the Company has used a combination of equity and debt financing and cash flow from operations to support on-going business activities, make acquisitions and investments in complementary technologies, obtain facilities and capital equipment and finance inventory and accounts receivable. The Company continued to generate positive cash flows from operations during the first nine months of fiscal 1998. As of December 27, 1997, the Company had cash, cash equivalents and short-term investments of $417.6 million and working capital of $518.4 million. Cash generated by operations of $165.6 million for the first nine months of fiscal 1998 was $76.9 million higher than the $88.7 million generated for the first nine months of fiscal 1997. The increase in cash generated by operations during the first nine months of fiscal 1998 over the comparable fiscal 1997 period resulted primarily from the favorable cash flow impact of net income, changes in deferred income on shipments to distributors and the impact of reduced cash expenditures for inventories. Cash flows used for investing activities for the nine months ended December 27, 1997, included an additional equity investment of $67.4 million in the USIC joint venture (see Note 4 of Notes to Consolidated Condensed Financial Statements), $60.0 million in advances to Seiko Epson for wafer purchases, and $17.9 million of property, plant and equipment acquisitions along with a building deposit of $28.4 million (see Note 3 of Notes to Consolidated Condensed Financial Statements), which were partially offset by the net investment maturities of $35.9 million in short-term investments. In the first nine months of fiscal 1997, investing activities used funds for advances to Seiko Epson for wafer purchases of $60.0 million (see Note 5 of Notes to Consolidated Condensed Financial Statements) and acquisitions in property, plant and equipment of $22.3 million, partially offset by net investment maturities of $31.5 million in short-term investments. Significant increases in investing activities when comparing the first nine months of 1997 to 1998 are primarily attributable to the additional $67.4 million investment in the USIC joint venture and the $28.4 million building deposit. Net cash flows provided by financing activities were $0.4 million in the first nine months of fiscal 1998, as the proceeds from the issuance of common stock under employee stock plans of $23.1 million were substantially offset by the acquisition of treasury stock during the nine month period of $22.7 million. For the comparable fiscal 1997 period, financing activities included $22.7 million in proceeds from issuance of common stock under corporate stock plans partially offset by the acquisition of treasury stock during the period of $15.7 million. Stockholders' equity increased by $93.6 million at December 27, 1997, principally as a result of the net income for the nine months ended December 27, 1997. In addition, proceeds from the issuance of common stock under employee stock plans and related tax benefits from stock options contributed to the increase in equity, which was partially offset by the acquisition of treasury stock and the cumulative translation adjustment in the period. The increase during the first nine months of fiscal 1998 of $15.5 million in the cumulative translation adjustment resulted primarily from changes in the exchange rate of the New Taiwan dollar relative to the U.S. dollars. The Company has available credit line facilities for up to $47.0 million of which $7.0 million is intended to meet occasional working capital requirements for the Company's wholly owned Irish subsidiary. At December 27, 1997, no borrowings were outstanding under the lines of credit. Subsequent to December 27, 1997, the Company purchased a 59-acre business park located in Longmont, Colorado, near the Company's current Boulder, Colorado facility. The land was purchased for approximately $7.0 million. Plans for infrastructure and the future development of the new property have not been finalized. In July 1997, the Company invested additional equity of $67.4 million towards the construction of the USIC wafer fabrication facility in Taiwan. UMC has committed to supply the Company with wafers manufactured in an existing facility until capacity is available in the new facility. In October 1997, a fire occurred at a UMC related facility. The Company currently does not anticipate that this event will have an adverse effect on its ability to obtain wafers from UMC in the near future, or adversely impact the USIC joint venture, although there can be no assurance of this. In May 1996 the Company entered into an agreement with Seiko Epson. This agreement was amended in December 1997 and now provides for an advance to Seiko Epson of $150.0 million to be used in the construction of a wafer fabrication facility in Japan. Through December 27, 1997, the Company has advanced a total of $120.0 million to Seiko Epson under the agreement. The final installment of $30.0 million was paid on February 2, 1998. The Company anticipates that existing sources of liquidity and cash flow from operations will be sufficient to satisfy the Company's cash needs for the foreseeable future. The Company will continue to evaluate opportunities to obtain additional wafer capacity, procure additional capital equipment and facilities, develop new products, and acquire businesses, products or technologies that would complement the Company's businesses and may use available cash or other sources of funding for such purposes. Part II. OTHER INFORMATION Item 1. Legal Proceedings On June 7, 1993, the Company filed suit against Altera Corporation ("Altera") in the United States District Court for the Northern District of California for infringement of certain of the Company's patents. Subsequently, Altera filed suit against the Company, alleging that certain of the Company's products infringe certain Altera patents. Fact and expert discovery has been completed in both cases, which have been consolidated. On April 20, 1995, Altera filed an additional suit against the Company in the Federal District Court in Delaware, alleging that the Company's XC5200 family infringes an Altera patent. The Company answered the Delaware suit denying that the XC5200 family infringes the patent in suit, asserting certain affirmative defenses and counterclaiming that the Altera Max 9000 family infringes certain of the Company's patents. The Delaware suit was transferred to the United States District Court for the Northern District of California and is also before the same judge. In October 1997, the Court held a hearing with respect to construction of the claims of the various patents in suit. The ultimate outcome of these matters cannot be determined at this time. Management believes that it has meritorious defenses to such claims and is defending them vigorously. The foregoing is a forward-looking statement subject to risks and uncertainties, and the future outcome could differ materially due to the uncertain nature of the litigation with Altera and because the lawsuits are still in the pre-trial stage. There are no other pending legal proceedings of a material nature to which the Company is a party or of which any of its property is the subject. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 10.1: Amended Services and Compensation Exhibit to the Consulting Agreement dated as of June 1, 1996 between the Company and Bernard Vonderschmitt Exhibit 10.2: Second Amendment to the Consulting Agreement dated as of June 1, 1996 between the Company and Bernard Vonderschmitt Exhibit 10.3: Agreement of Purchase and Sale of Land in Longmont Colorado, dated November 24, 1997 Exhibit 10.4: First Amendment to Agreement of Purchase and Sale of Land in Longmont Colorado, dated January 15, 1998 Exhibit 10.5: Amended and Restated Advance Payment Agreement with Seiko Epson dated December 12, 1997 Exhibit 12: Statement of Computation of Ratio of Earning to Fixed Charges (b) Reports on Form 8-K - None
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. Date February 4, 1998 XILINX, INC. - ----------------------- ------------------------------------------------- /s/ Gordon M. Steel ------------------------------------------------- Gordon M. Steel Senior Vice President of Finance and Chief Financial Officer (as principal accounting and financial officer and on behalf of Registrant)