Xilinx - 10-Q quarterly report FY

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 filed on Form 10-K for the year ended March 31, 2001. 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 29, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending March 30, 2002 or any future period.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” (SFAS 141) and Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS 142 eliminates the systematic amortization of goodwill and requires that goodwill be reviewed for impairment annually, or more frequently if impairment indicators arise. The Company will adopt SFAS 142, which is effective for fiscal years beginning after December 15, 2001, on March 31, 2002. Amortization of goodwill attributable to acquisitions occurring prior to July 1, 2001 is approximately $7 million per quarter. At December 29, 2001, the unamortized balance of goodwill was $107.9 million.            

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which is effective January 1, 2002. SFAS 144 supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No.30. The Company does not expect that the adoption of SFAS 144 will have a significant impact on its financial statements.

We attempt to mitigate the concentration of credit risk in our trade receivables with respect to the high-technology industry with our credit evaluation process, relatively short collection terms, distributor agreements, sales among various end-user applications throughout the high-technology market and the geographical dispersion of sales. We generally do not require collateral. Bad debt write-offs have been insignificant for all periods presented.

On a consolidated basis, at December 29, 2001, two distributors accounted for 60.5% and 15.1% of total accounts receivable.

Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Inventories at December 29, 2001 and March 31, 2001 are as follows:

Given the volatility of the market and the obsolescence in technology and shorter product life cycles, we write down inventories to net realizable value based on backlog and forecasted demand. However, backlog is subject to revisions, cancellations, and rescheduling. Actual demand may differ from forecasted demand and such difference may have a material effect on our financial position and results of operations. Our standard cost reserve policy is to continuously review and monitor our standard costs based on current wafer costs. Once standard costs are created, gross inventories are re-evaluated based on the new standard costs. Our excess and obsolescence reserve policy is to reserve inventory in excess of nine months of forecasted demand. Our research and development reserve policy is to reserve new devices until the following criteria are met: Devices must be production released and we must have sufficient product in the hands of customers and distributors.

The computation of basic net income (loss) per share for all periods presented is derived from the information on the face of the statement of operations, and there are no reconciling items to net income (loss). The total shares used in the denominator of the diluted net income per share calculation includes incremental common shares attributable to outstanding options of 16.3 million and 26.1 million for the quarter ended December 29, 2001 and the nine months ended December 30, 2000, respectively. For the nine months ended December 29, 2001 and the quarter ended December 30, 2000, 18.2 million and 23.8 million common stock equivalents attributable to the Company’s stock option plans were excluded from the calculation of diluted net loss per share, as they would be antidilutive.

The changes in components of comprehensive income (loss) for the periods presented are as follows:

The components of accumulated other comprehensive income (loss) at December 29, 2001 and March 31, 2001 are as follows:

The Board of Directors has approved stock repurchase programs enabling the Company to repurchase its common stock. During the quarter ended December 29, 2001, 0.4 million shares of common stock were repurchased for $27.9 million, and 1.8 million shares were issued during the period for Stock Option exercises and Stock Purchase Plan requirements. During the nine months ended December 29, 2001, 1.6 million shares of common stock were repurchased for $100.6 million and 5.3 million shares were issued during the period for Stock Option exercises and Stock Purchase Plan requirements. In conjunction with the stock repurchase program, during the nine months ended December 29, 2001 and December 30, 2000, respectively, we sold .3 million and 1.6 million put options that entitle the holder of each option to sell to us, by physical delivery, one share of common stock at specified prices. The cash proceeds from the sale of put options of $3.0 million and $19.8 million for the nine months ended December 29, 2001 and December 30, 2000, respectively, have been included in additional paid-in capital following the provisions of Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. As of December 29, 2001, 0.5 million shares of common stock were subject to future issuance under outstanding put options with expiration dates through August 2002, with strike prices ranging from $40 to $53 per share.

We lease some of our facilities and office buildings under operating leases that expire at various dates through December 2014. Lease agreements for certain corporate facilities contain payment provisions, which allow for changes in rental amounts based upon interest rate changes. The approximate future minimum lease payments under operating leases are as follows:

Rent expense was approximately $.6 million and $1.8 million for the three and nine months ended December 29, 2001, respectively. Rent expense for the three and nine months ended December 30, 2000 was approximately $.2 million and $2.2 million, respectively.

On April 1, 2001 we adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify, or are not effective as hedges must be recognized currently in earnings. Upon adoption, we reflected all derivatives at fair value on the balance sheet but did not recognize a cumulative transition adjustment to earnings under the new standard.

We are expanding our Ireland facility and have entered into firm commitments with respect to specific project costs to be incurred over the next year. We enter into forward foreign exchange contracts to eliminate, reduce, or transfer selected foreign currency risks that have been identified. Designated and documented at inception as fair value hedges, the project development forward contracts are evaluated for effectiveness monthly. The critical terms of the forward contract and the firm commitments are matched at inception and subsequent forward contract effectiveness is calculated by comparing the fair value of the forward contract or cash balance to the cumulative change in value of the specified firm commitment. The derivative fair values are recognized currently in income and offset by the gains and losses on the contract commitments, which are also reflected on

The value of our unrestricted United Microelectronics Corporation (UMC) shares increased in value by $122.8 million during the third quarter of fiscal 2002 to $361.8 million at December 29, 2001. The increase in value of $122.8 million was recorded within stockholders’ equity as a component of accumulated other comprehensive income. The value of our UMC shares had declined to $239.0 million as of September 29, 2001. Because of the continued downturn in the economy, we believed that the decline in the market value of our investment in UMC as of September 29, 2001 was other than temporary. During the second quarter of fiscal 2002 we recognized a pre-tax loss of $191.9 million to reflect this other-than-temporary decline in market value. We will continue to re-evaluate the UMC investment quarterly to determine whether there are incremental other-than-temporary impairments or increases in valuation in future periods.

We account for the unrestricted portion (approximately 76% at December 29, 2001) of our investment in UMC as available-for-sale marketable securities in accordance with SFAS 115. The portion of the investment in UMC that is restricted beyond twelve months (approximately 24% of the Company’s holdings at December 29, 2001) is accounted for as a cost method investment.

We evaluate the carrying value of certain long-lived assets and acquired intangibles, consisting primarily of testing equipment, goodwill, acquired technology, patents, and assembled workforce, recorded on the balance sheet, in accordance with SFAS 121 on a quarterly basis. SFAS 121 requires recognition of impairment losses on long-lived assets in the event that the carrying value of such assets exceeds the fair values. When we have indicators of impairment, we review our long-lived assets and acquired intangible assets for impairment based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.

Remaining goodwill and acquired intangibles will continue to be amortized through fiscal year 2002 using an estimated useful life of four to seven years. In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” effective for business combinations initiated after June 30, 2001, and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Beginning in fiscal 2003, goodwill will no longer be amortized, but will be subject to annual impairment tests.

The Company filed a petition with the Tax Court on March 26, 2001. (See Note 12). Other than this petition, we know of no legal proceedings contemplated by any governmental authority or agency against the Company.

On January 15, 2002, the Company served process against Bausch & Lomb claiming trademark infringement. At this point in time, it is premature to comment on the likely outcome of this case.

Except as stated above, there are no pending legal proceedings of a material nature to which we are a party or of which any of our property is the subject.

In July 2000, we purchased office buildings in San Jose due to the rapid growth of the Company at that time. Currently, the buildings are still being remodeled and are expected to be ready for occupancy in fiscal 2003. Additionally, groundbreaking to develop a new 130,000 square foot facility in Longmont, Colorado was started in March 2000 and we are planning on moving into this facility within the next six months.

We recorded a tax provision of $8.8 million and a tax benefit of $90.1 million for the third quarter and first nine months of fiscal 2002, respectively, representing effective tax rates of 47.7% and 37.9%, respectively. We recorded a provision of $62.1 million and $142.9 million for the third quarter and first nine months of fiscal 2001, respectively, representing effective tax rates of 120.4% and 42.0%, respectively. The fiscal 2002 effective tax rate is primarily due to the tax benefit of operating losses and U.S. tax credits. The prior year rates were significantly impacted by the acquisition of RocketChips in November 2000.

On December 28, 2000, the Internal Revenue Service issued a statutory notice of deficiency reflecting their proposed audit adjustments for the fiscal years of 1996, 1997, and 1998. We filed a petition with the Tax Court on March 26, 2001 contesting this notice of deficiency. We believe the Company has meritorious defenses to the proposed adjustments and sufficient taxes have been provided.

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 “Factors Affecting Future Operating Results”.

Net revenues of $228.1 million in the third quarter of fiscal 2002 represented a 49.3% decrease from the comparable prior year quarter of $450.1 million, as industry wide business conditions declined. Net revenues for the first nine months of fiscal 2002 were $742.1 million, a 40.7% decrease from the prior year comparable period of $1,252.3 million, also due to an industry wide business recession.

Advanced products represented 36.0% and 34.8% of total net revenues in the third quarter and first nine months of fiscal 2002, respectively, as compared to 20.5% and 14.3% in the prior year periods. The percentage increases in revenues of Advanced products were due to the introduction and strong market acceptance of Virtex-II and Spartan-II products. Mainstream and Base products represented 56.0% and 57.6% of total net revenues in the third quarter and first nine months of fiscal 2002, respectively, as compared to 72.0% and 78.3% in the prior year periods. Mainstream and Base products saw the largest revenue decline in the Virtex, 4000XL and 4000XLA product families due to the combination of the weak demand, excess inventories at end customers, and customer migration to newer product offerings. Support products represented 8.0% and 7.6% of total net revenues in the third quarter and first nine months of fiscal 2002, respectively, as compared to 7.5% and 7.4% in the prior year periods. Net

International revenues represented approximately 47.2% and 48.8% of total net revenues in the third quarter and first nine months of fiscal 2002, respectively, as compared to 37.9% and 36.0% in the prior year periods. Net revenues by geography for the three and nine-month periods ended December 29, 2001 and December 30, 2000 are as follows:

Gross margin was $126.2 million and $299.5 million for the third quarter and first nine months of fiscal 2002, or 55.3% and 40.4% of net revenues, respectively. Gross margin for the comparable periods of fiscal 2001 was $270.9 million and $767.9 million, or 60.2% and 61.3% of net revenues, respectively. The significant decrease in gross margin percentages compared to last year resulted from a write-down of inventories during the second quarter of fiscal 2002 and from product mix shifts away from Mainstream and Base products that generate higher margins. The inventory write-down related primarily to the Virtex and Virtex-E product families and was based on a significant decrease in backlog and forecasted demand for those products relative to the inventory levels. Advanced products represented 36.0% and 34.8% of total net revenues in the third quarter and first nine months of fiscal 2002, respectively, while they were only 20.5% and 14.3% in the comparable prior year periods. As the demand for our products shifts away from the older, more profitable product families, gross margin could come under further pressure. Margins for the Advanced products (Virtex-E, Virtex-II product families as well as Spartan-II products) are below our more mature Base and Mainstream product families, as the products have not yet achieved optimal manufacturing cost and yields.

Research and development expenses were $49.1 million for the third quarter and $152.5 million for the first nine months of fiscal 2002, or 21.5% and 20.5% of net revenues, respectively. Research and development expenses for the third quarter and the first nine months of fiscal 2002 include non-cash deferred stock compensation of $2.1 and $6.4 million, respectively, associated with the November 2000 acquisition of RocketChips, Inc. Excluding RocketChips’ deferred stock compensation, research and development expenses were $47.0 million for the third quarter and $146.1 million for the first nine months of fiscal 2002, or 20.6% and 19.7% of net revenues, respectively. Research and development expenses for the comparable periods in the prior year were $59.1 million and $153.8 million, or 13.1% and 12.3% of net revenues, respectively. Research and development expenses for the

Sales, general and administrative expenses were $52.4 million, or 23.0% of net revenues and $173.1 million or 23.3% of net revenues for the third quarter and first nine months of fiscal 2002, respectively. They were $71.1 million, or 15.8% of net revenues and $205.0 million or 16.4% of net revenues for the comparable prior year periods. The decreases in sales, general and administrative expenses were primarily attributable to lower commissions and marketing expenses as well as a reduction in legal expenses as a result of the settlement of the Altera litigation.

We evaluate the carrying value of certain long-lived assets and acquired intangibles, consisting primarily of testing equipment, goodwill, acquired technology, patents, and assembled workforce, recorded on the balance sheet, in accordance with SFAS 121 on a quarterly basis. SFAS 121 requires recognition of impairment losses on long-lived assets in the event that the carrying value of such assets exceeds the fair values. When we have indicators of impairment, we review our long-lived assets and acquired intangible assets for impairment based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.

Remaining goodwill and acquired intangibles will continue to be amortized through fiscal year 2002 using an estimated useful life of four to seven years. In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” effective for business combinations initiated after June 30, 2001, and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Beginning in fiscal 2003, goodwill will no longer be amortized, but will be subject to annual impairment tests.

The value of our unrestricted United Microelectronics Corporation (UMC) shares increased in value by $122.8 million during the third quarter of fiscal 2002 to $361.8 million at December 29, 2001. The increase in value of $122.8 million was recorded within stockholders’ equity as a component of accumulated other comprehensive income. The value of our UMC shares had declined to $239.0 million as of September 29, 2001. Because of the continued downturn in the economy, we believed that the decline in the market value of our investment in UMC as of September 29, 2001 was other than temporary. During the second quarter of fiscal 2002 we recognized a pre-tax loss of $191.9 million to reflect this other-than-temporary decline in market value. We will continue to re-evaluate the UMC investment quarterly to determine whether there are incremental other-than-temporary impairments or increases in valuation in future periods.

Interest income and other, net decreased to $4.5 million in the third quarter of fiscal 2002 from $8.4 million in the prior year quarter, and decreased to $18.2 million in the first nine months of fiscal 2002 from $28.7 million in the

We recorded a tax provision of $8.8 million and a tax benefit of $90.1 million for the third quarter and first nine months of fiscal 2002, respectively, representing effective tax rates of 47.7% and 37.9%, respectively. We recorded a provision of $62.1 million and $142.9 million for the third quarter and first nine months of fiscal 2001, respectively, representing effective tax rates of 120.4% and 42.0%, respectively. The fiscal 2002 effective tax rate is primarily due to the tax benefit of operating losses and U.S. tax credits. The prior year rates were significantly impacted by the acquisition of RocketChips in November 2000.

On December 28, 2000, the Internal Revenue Service issued a statutory notice of deficiency reflecting their proposed audit adjustments for the fiscal years of 1996, 1997, and 1998. We believe the Company has meritorious defenses to the proposed adjustments and will contest this deficiency. We believe that sufficient taxes have been provided and that the ultimate resolution will not have a material adverse impact on the Company’s financial position or results of operations.

On April 1, 2001 we adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify, or are not effective as hedges must be recognized currently in earnings. Upon adoption, we reflected all derivatives at fair value on the balance sheet but did not recognize a cumulative transition adjustment to earnings under the new standard.

We use forward currency exchange contracts to reduce financial market risks. Our sales to Japanese customers had been denominated in yen while our purchases of processed silicon wafers from Japanese foundries are primarily denominated in U.S. dollars. Effective July 1, 2001, our sales to all Japanese customers were converted to U.S. dollars. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of firm commitments are deferred and included in the basis of the transaction in the same period that the underlying transaction is recognized. Gains and losses on any instruments not meeting the above criteria are recognized in income (loss) in the current period.

To date, the effects of inflation upon our financial results have not been significant.

Our financial condition at December 29, 2001 remained healthy. Total current assets were 4.4 times larger than total current liabilities, compared to 3.1 times at March 31, 2001. We have used a combination of equity and cash flow from operations to support ongoing business activities, secure manufacturing capacity from foundries, make acquisitions and investments in complementary technologies, obtain facilities and capital equipment and finance inventories and accounts receivable.

We continued to generate positive cash flows from operations during the first nine months of fiscal 2002. As of December 29, 2001, we had cash, cash equivalents and short-term investments of $417.4 million and working capital of $666.2 million. Cash flows generated by operations of $178.8 million for the first nine months of fiscal 2002 were $197.8 million lower than the $376.6 million generated during the first nine months of fiscal 2001. Decreases in cash generated by operations resulted primarily from the net loss during the period and decreases in accounts payable, income taxes payable, and deferred income on shipments to distributors which were partially offset by decreases in accounts receivable and inventories.

Net cash used in investing activities of $141.0 million during the first nine months of fiscal 2002 included net purchases of investments of $74.1 million and $66.9 million for purchases of property, plant and equipment. During the first nine months of fiscal 2001, net cash used in investing activities of $53.9 million included $177.4 million for property, plant and equipment purchases, partially offset by $119.3 million of net proceeds from sales and purchases of investments and cash obtained from our acquisition of RocketChips of $4.2 million.

Net cash used in financing activities was $42.1 million in the first nine months of fiscal 2002 and consisted of $100.9 million for the acquisition of treasury stock, partially offset by $55.8 million of proceeds from the issuance of common stock under employee stock plans and $3.0 million in proceeds from sales of put options. For the comparable fiscal 2001 period, net cash used in financing activities of $310.3 million included $382.9 million for the acquisition of treasury stock, partially offset by $52.8 million of proceeds from the issuance of common stock under employee stock plans and $19.8 million in proceeds from sales of put options.

Stockholders’ equity decreased $57.6 million during the first nine months of fiscal 2002, principally as a result of the $147.9 million net loss for the nine months ended December 29, 2001. In addition, the acquisition of treasury stock of $100.6 million and $0.3 million of cumulative translation adjustments contributed to the decrease, which was partially offset by proceeds from the issuance of common stock under employee stock plans of $55.4 million, $70.2 million in unrealized gains on available-for-sale securities, related tax benefits associated with stock option exercises and the employee stock purchase plan of $53.7 million, $8.9 million in deferred compensation related to the RocketChips acquisition and $3.0 million in proceeds from sales of put options.

We anticipate that existing sources of liquidity and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future. However, the risk factors discussed below could affect our cash positions adversely. We will continue to evaluate opportunities for investments to secure advanced process technology and capacity, procurement of additional capital equipment and facilities, development of new products, and potential acquisitions of and investments in technologies or businesses that could complement our business. We may use available cash or other sources of funding for such purposes.

The semiconductor industry is characterized by rapid technological change, intense competition and cyclical market patterns. Cyclical market patterns are characterized by several factors, including:

Our results of operations are affected by several factors. These factors include general economic conditions, those conditions specific to technology companies and to the semiconductor industry in particular, decreases in average selling prices over the life of particular products and the timing of new product introductions (by us, our competitors

Sales and operations outside of the United States subject us to the risks associated with conducting business in foreign economic and regulatory environments. Our financial condition and results of operations could be adversely affected by unfavorable economic conditions in countries in which we do significant business and by changes in foreign currency exchange rates affecting those countries. For example, we have sales and operations in Asia Pacific and Japan. Past economic weakness in these markets adversely affected revenues, and such conditions may occur in the future. Currently all of our customers are invoiced in U.S. dollars. While the recent weakness of the Euro and Yen against the Dollar had no material impact to our business, continued weakness could lead to adverse conditions from our European and Japanese customers. Customers may face reduced access to capital and exchange rate fluctuations may adversely affect their ability to purchase our products. In addition, our ability to sell at competitive prices may be diminished. Currency instability may increase credit risks as the weak currencies may impair our customers' ability to repay existing obligations. Any or all of these factors could adversely affect our financial condition and results of operations in the near future.

Our financial condition and results of operations are becoming increasingly dependent on the global economy. Any instability in worldwide economic environments, such as the terrorist attacks on September 11, 2001 and their aftermath, could lead to a contraction of capital spending by our customers. Additional risks to us include government regulation of exports, imposition of tariffs and other potential trade barriers, reduced protection for intellectual property rights in some countries and generally longer receivable collection periods. Moreover, our financial condition and results of operations could be affected in the event of political conflicts in Taiwan where our main wafer provider, UMC, as well as a significant number of suppliers to the semiconductor industry, end-customers and contract manufacturers who provide manufacturing services worldwide, are located.

Our 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. We cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States or other countries upon the import or export of our products in the future or what effect, if any, such actions would have on our financial condition and results of operations.

We do not manufacture our own silicon wafers. Presently, all of our wafers are manufactured in Taiwan by UMC, in Japan by Seiko Epson Corp (Seiko) and in the U.S by International Business Machines Corporation (IBM). Terms with respect to the volume and timing of wafer production and the pricing of wafers produced by the semiconductor foundries are determined by periodic negotiations between Xilinx and these wafer foundries. We are dependent on these foundries and others to produce wafers with competitive performance and cost attributes which include transitioning to advanced manufacturing process technologies, producing wafers at acceptable yields and delivering them in a timely manner. While the timeliness, yield and quality of wafer deliveries have met our requirements to

UMC’s foundries in Taiwan and Seiko’s foundries in Japan as well as many of our operations in California are centered in areas that have been seismically active in the recent past. Should there be a major earthquake in our operating locations in the future, our operations, including our manufacturing activities, may be disrupted. This type of disruption could result in our inability to ship products in a timely manner, thereby materially adversely affecting our financial condition and results of operations. Additionally, disruption of operations at these foundries for any reason, including other natural disasters such as fires or floods, as well as disruptions in access to adequate supplies of electricity, natural gas or water could cause delays in shipments of our products, and could have a material adverse effect on our results of operations. We are also dependent on subcontractors located in Asia to provide semiconductor assembly services. The more complex product design requires more advanced assembling and packaging technology developed by our subcontractors. Any prolonged inability to obtain wafers or assembly services with competitive performance and cost attributes, adequate yields or timely delivery, or any other circumstance that would require us to seek alternative sources of supply, could delay shipments and have a material adverse effect on our financial condition and results of operations.

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 our common stock.

Our success depends in large part on our ability to develop and introduce new products that address customer requirements and compete effectively on the basis of price, density, functionality, and performance. The success of new product introductions is dependent upon several factors, including:

We cannot assure that our product development efforts will be successful, that our new products will achieve industry acceptance or that we will achieve the necessary volume of production that would lead to further per unit cost reductions. Revenues relating to our mature products are expected to decline in the future. As a result, we will be increasingly dependent on revenues derived from newer products along with cost reductions on current products. We rely 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 that enable us to increase revenues while maintaining consistent margins. To the extent that such cost reductions and new product introductions do not occur in a timely manner, or to the extent that our products do not achieve market acceptance at prices with higher margins, our financial condition and results of operations could be materially adversely affected.

Our programmable logic devices (PLDs) compete in the logic industry. The industries in which we compete are intensely competitive and are characterized by rapid technological change, product obsolescence, and continuous price erosion. We expect increased competition, both from our primary competitors, Altera and Lattice Semiconductor Corporation (Lattice) and from new companies that may enter the market. We believe that important competitive factors in the programmable logic industry include:

Our strategy for expansion in the logic market includes continued introduction of new product architectures that address high volume, low cost applications as well as high performance, leading-edge density applications. In addition, we anticipate continued price reductions proportionate with our ability to lower the manufacturing cost for established products. However, we cannot assure that we will be successful in achieving these strategies.

Our major sources of competition are comprised of several elements:

We compete with high density programmable logic suppliers on the basis of device performance, the ability to deliver complete solutions to customers, device power consumption, and customer support by taking advantage of the primary characteristics of our PLD product offerings which include: flexibility, high speed implementation, quick time-to-market, and system level capabilities. We compete with ASIC manufacturers on the basis of lower design costs, shorter development schedules, and reduced inventory risk and field upgradability. The primary attributes of ASICs are high density, high speed, and low production costs in high volumes. We continue to develop lower cost architectures intended to narrow the gap between current ASIC production costs (in high volumes) and PLD production costs. As PLDs have increased in density and performance and decreased in cost due to the advanced manufacturing processes, they have become more directly competitive with ASICs. With our Spartan family, which is Xilinx’s low cost programmable replacement for ASICs, we seek to grow by directly competing with other companies in the ASIC segment. Many of the companies in the ASIC segment have substantially greater financial, technical, and marketing resources than Xilinx. Consequently, there can be no assurance that we will be successful in competing in the ASIC segment. Competition among PLD suppliers and manufacturers of new or emerging programmable logic products is based primarily on price, performance, design, customer support, software utility, and the ability to deliver complete solutions to customers. Some of our current or potential competitors have substantially greater financial, manufacturing, marketing, distribution, and technical resources than we do. Several companies, both large and small, have introduced products that compete with ours or have announced their intention to enter the PLD segment. To the extent that our efforts to compete are not successful, our financial condition and results of operations could be materially adversely affected.

The benefits of programmable logic have attracted a number of companies to the logic market. We recognize that different applications require different programmable technologies, and we are developing architectures, processes, and products to meet these varying customer needs. Recognizing the increasing importance of standard software solutions, we have developed common software design tools that support the full range of integrated circuit products. We believe that automation and ease of design are significant competitive factors in the PLD segment.

We could also face competition from our licensees. Under a license from us, Lucent Technologies (Lucent) had rights to manufacture and market our XC3000 FPGA products and also to employ that technology to provide additional high density FPGA products. In 2001, Lucent assigned its rights to Agere Systems, Inc. (Agere). Agere has subsequently sold a portion of its programmable logic business to Lattice. Under the terms of the Xilinx license grant, no rights of Agere are transferable to Lattice. Seiko has rights to manufacture some of our older products and market them in Japan and Europe, but is not currently doing so. We granted a license to use certain of our patents

We rely upon patent, copyright, trade secret, mask work and trademark law to protect our intellectual property. We cannot assure 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 our competitors, have asserted patent, copyright, and other intellectual property rights to technologies that are important to us. We cannot assure that third parties will not assert infringement claims against us in the future, that assertions by third parties will not result in costly litigation or that we 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 costs and diversion of our resources. Any infringement claim or other litigation against us or by us could materially adversely affect our financial condition and results of operations.

Beginning in 1999, 11 member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the Euro as their common legal currency. During the three-year transition, the Euro was available for non-cash transactions and legacy currencies remained legal tender. We are continuing to assess the Euro’s impact on our business. We have reviewed the ability of our accounting and information systems to handle the conversion, the ability of foreign banks to report on dual currencies, the legal and contractual implications of agreements, as well as reviewed our pricing strategies. We have made the modifications to do business in the Euro should our customers desire. We expect that any additional modifications to our operations and systems will be completed on a timely basis and do not believe the conversion will have a material adverse impact on our operations. However, we cannot assure that we will be able to successfully modify all systems and contracts to comply with Euro requirements.

Our exposure to interest rate risk relates primarily to our investment portfolio. Our primary aim with our investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. The portfolio includes tax-advantaged municipal bonds, tax-advantaged auction rate preferred municipal bonds, commercial paper, and U.S. Treasury securities. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 10% increase or decrease in interest rates would not materially affect the fair value of our available-for-sale securities.

We enter into forward currency exchange contracts to reduce financial market risks. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and included in the basis of the transaction in the same period that the underlying transactions are settled. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. Effective July 1, 2001, we converted all Japanese customers to U.S. dollar invoicing and will have minimal yen currency exposure.

We are expanding our Ireland facility and we have seven outstanding forward currency exchange contracts against the Irish punt. The total value of these contracts is approximately U.S. $8.3 million. The seven contracts expire at

Our investments in several subsidiaries and in the UMC securities are recorded in currencies other than the U.S. dollar. As these foreign currency denominated investments are translated at each quarter end during consolidation, fluctuations of exchange rates between the foreign currency and the U.S. dollar increase or decrease the value of those investments. If permanent changes, other than a temporary impairment, occur in exchange rates after an investment is made, the investment’s value will increase or decrease accordingly. These fluctuations are recorded within stockholders’ equity as a component of accumulated other comprehensive income. Also, as our subsidiaries maintain investments denominated in other than local currencies, exchange rate fluctuations will occur.

The Company filed a petition with the Tax Court on March 26, 2001. Other than this petition, we know of no legal proceedings contemplated by any governmental authority or agency against the Company.

On January 15, 2002, the Company served process against Bausch & Lomb claiming trademark infringement. At this point in time, it is premature to comment on the likely outcome of this case.

Except as stated above, there are no pending legal proceedings of a material nature to which we are a party or of which any of our property is the subject.

Items 2, 3, 4 and 5 are not applicable and have been omitted.

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.