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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO______
Commission File No. 0-14225
EXAR CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware 94-1741481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
48720 Kato Road, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 668-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 31, 2000 was $1,284,230,475 based on the last sales price
reported for such date.
The number of shares outstanding of the Registrant's Common Stock was 18,679,716
as of May 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement filed not later than 120
days after the close of the fiscal year are incorporated in Part III of this
report.
1
PART I
Except for the historical information contained herein, the following discussion
contains forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section under the heading entitled "Risk
Factors," as well as in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 1 BUSINESS
OVERVIEW
Exar Corporation ("Exar" or the "Company") designs, develops and markets
high-performance, high-bandwidth mixed-signal (analog and digital) silicon
solutions for the worldwide communications infrastructure. The Company uses
its high-speed, analog and mixed-signal design expertise, system-level
knowledge and standard CMOS process technologies to offer integrated
circuits, or ICs, for the communications markets that address asynchronous
transmission standards, such as T/E carrier and ATM. The Company is
leveraging this expertise to develop products based on optical transmission
standards, such as SONET/SDH. Additionally, Exar provides solutions for the
serial communications market as well as the video and imaging markets. Exar's
major customers include Alcatel, Cisco, Hewlett-Packard, Lucent, Nokia and
Tellabs.
INDUSTRY BACKGROUND
Communications technology has evolved from simple analog voice
signals transmitted over networks of copper telephone lines to complex analog
and digital voice and data signals transmitted over hybrid networks of media,
such as copper, coaxial and fiber optic cables. This evolution has been
driven by large increases in the number of users and the complexity and
variety of the data transmitted over networks, resulting from:
- the substantial growth in the Internet and its transformation from
a text-based medium to a multimedia platform containing pictures,
video and sound;
- the growth of wireless communications; and
- the increased demand for remote network access and higher speed,
higher bandwidth communication between local area networks, or
LANs, and wide area networks, or WANs.
The majority of installed communications systems were designed to
transmit only voice communications, and are therefore inadequate for the
high-bandwidth transmission of both voice and data. As a result, new
equipment is being deployed to augment existing transmission media and
increase their bandwidth. Access to the public network is typically based on
asynchronous technologies, such as T/E carrier over copper wire. The demand
for greater bandwidth is driving a migration from lower-speed T1/E1 to
higher-speed T3/E3 transmission rates. The T1/E1 standard permits the
transmission of data at 1.5 Mbps/2.0 Mbps, and the T3/E3 standard permits the
transmission of data at 45 Mbps/34 Mbps. The backbone of the public network
is built on an optical fiber transmission medium that employs synchronous
technologies such as SONET/SDH. Similar to the utilization of faster
transmission rates over copper wire, SONET/SDH protocols such as OC-3 (155
Mbps) and OC-12 (622 Mbps) are being upgraded to OC-48 (2.5 Gbps) and OC-192
(10 Gbps) to increase the bandwidth over a single optical fiber.
To address the evolving requirements of communications networks,
OEMs must develop and introduce increasingly sophisticated systems at a rapid
rate. To achieve the performance and functionality required of these systems,
communications OEMs utilize increasingly complex communications ICs, which
now account for a significant portion of the value-added proprietary content
of these systems. As a result of the rapid pace of new equipment
introductions, the proliferation of transmission standards, and the
difficulty of designing and producing these ICs, equipment suppliers are
increasingly outsourcing the design and production of the ICs incorporated
into their systems.
2
These trends have created a significant opportunity for IC suppliers
that can design cost-effective solutions for high-speed communications. The
worldwide T/E carrier IC market has experienced steady growth, and Dataquest
estimates that it will reach $616 million by 2003. The ATM IC market is
expected to grow at a compound annual growth rate of 28%, from $309 million
in 1998 to nearly $1.1 billion in 2003, according to Dataquest. The SONET/SDH
IC market reached $510 million in 1998, and Dataquest expects that it will
grow at a compound annual growth rate of 22% to $922 million by 2002.
The key ICs contained in a typical communications system include
physical interface, access control, channel processor, bus interface and
switch fabric devices. The physical interface device consists of a
transmitter and receiver that, when integrated, is called a transceiver.
Transceivers interface with the physical transmission media, such as copper
wire or optical fiber. Most of these high-speed, mixed-signal ICs convert
parallel digital inputs into a single analog bit stream that is up to 32
times faster than the original signal. Transceivers therefore serve as a
bridge between analog transmission media and the digital devices that process
data. Access control circuits are digital ICs that format, or frame, the data
and perform error checking. The bus interface manages the transfer of data
along numerous channels between elements, such as the channel processor and
the switch fabric, which work together to shape, route and control the data.
Because physical interface and access control ICs interface with the
transmission media and are critical to increasing bandwidth, these ICs must
offer high-speed and robust performance. Therefore, communications equipment
OEMs seek IC suppliers that possess extensive analog and digital expertise to
provide high-speed, mixed-signal solutions to bridge the analog physical
world and the digital computing environment. This must be coupled with
system-level expertise so that a supplier can quickly bring to market
high-performance, highly-reliable ICs with optimal feature sets.
THE EXAR SOLUTION
Exar designs, develops and markets high-performance, high-bandwidth
mixed-signal ICs for use in the worldwide communications infrastructure. The
Company's analog and mixed-signal design expertise, combined with its systems
understanding, enables the Company to provide physical interface and access
control solutions for WAN communications equipment. Exar currently offers ICs
based upon the T/E carrier and ATM transmission standards and is leveraging
its expertise to develop products based upon the SONET/SDH transmission
standards. In addition, the Company provides solutions for the serial
communications market and the video and imaging markets. Exar believes its
products offer its customers the following benefits:
- increased bandwidth through the integration of multiple channels
on a single device;
- reduced system noise/jitter to improve data integrity;
- reduced overall system cost through the integration of multiple
functions on a single device; and
- accelerated time to market by allowing them to focus on core
competencies and outsource standards-based solutions.
Key elements of the Company's solution include:
LEADING ANALOG AND MIXED-SIGNAL DESIGN EXPERTISE. Exar has over 28 years of
experience in developing analog and mixed-signal ICs. As a result, the
Company has developed a significant base of knowledge in these areas and a
library of design elements. For example, the Company believes that it has
particularly strong expertise in the design of high-speed, low-jitter phase
lock loops, which are key elements in Exar's mixed-signal transceiver
products. As a result, Exar can provide its customers with products that
typically exceed standard specifications and allow them flexibility in
designing other parts of their systems.
BROAD PRODUCT OFFERINGS. Exar offers a variety of physical interface and
access control products based upon the T1/E1, T3/E3 and ATM transmission
standards. Exar is currently developing multiple channel products for each
transmission standard enabling its customers to minimize board space and
overall cost in multi-port applications. The Company is also developing
products based upon SONET/SDH standards.
3
COMPREHENSIVE SOLUTIONS TO ENHANCE SYSTEM INTEGRATION. The combination of
Exar's design and system level expertise allows it to provide a solution that
encompasses hardware, software and applications support. Using its solutions,
Exar believes that OEMs can efficiently integrate the Company's devices into
their systems, better leverage their development resources and reduce their
time to market.
COMPELLING PRICE/PERFORMANCE SOLUTIONS. The Company uses its systems
expertise and its analog, digital and mixed-signal design techniques to
architect high-performance products based on standard CMOS process
technologies. Exar believes that these CMOS processes are proven, stable,
predictable and able to meet the application speed and power/performance
requirements at a lower price point than other semiconductor manufacturing
processes.
STRATEGY
Exar's objective is to be the leading provider of high-performance,
high-bandwidth IC solutions for the worldwide communications infrastructure.
To achieve this objective, Exar employs the following strategies:
FOCUS ON HIGH-GROWTH COMMUNICATIONS MARKETS. Exar targets high-growth
communications markets, including T/E carrier, ATM and SONET/SDH. The Company
has built substantial expertise in the areas of analog and mixed-signal
design, systems architecture and applications support. Exar believes that the
integration of these capabilities enables the Company to develop solutions
addressing the high-bandwidth requirements of communications systems OEMs.
LEVERAGE ANALOG AND MIXED-SIGNAL DESIGN EXPERTISE TO PROVIDE INTEGRATED
SYSTEM LEVEL SOLUTIONS. Utilizing Exar's strong analog and mixed-signal
design expertise, the Company can integrate mixed-signal physical interface
devices with digital access control devices. The Company is currently
developing products that integrate transceivers with framers on a single IC
and are exploring opportunities to integrate other functions. These
configurations would enable OEMs to use less board space and reduce their
overall system cost.
EXPAND THE COMPANY'S REVENUE CONTENT PER SYSTEM. Exar's analog and mixed
signal design expertise has enabled the Company to build what it believes to
be a technological lead and a strong market position in T3/E3 transceivers.
The Company is leveraging this lead and its established customer
relationships to capture design wins for its access control products, thereby
increasing the Company's overall revenue content per system.
STRENGTHEN AND EXPAND STRATEGIC OEM RELATIONSHIPS. Exar's customer base
includes Alcatel, Cisco, Lucent, Nokia and Tellabs. To promote the early
adoption of its solutions, the Company actively seeks collaborative
relationships with strategic OEMs during product development. The Company
believes that OEMs recognize the value of its early involvement because
designing their system products in parallel with the Company's development
can accelerate their time to market. In addition, Exar believes that
collaborative relationships help the Company to obtain early design wins and
to reduce the risk of market acceptance of its new products.
LEVERAGE BROAD PRODUCT PORTFOLIO TO ACCELERATE COMMUNICATIONS PRODUCT
DEVELOPMENT. Exar believes it has developed a strong presence in the serial
communications market as well as the video and imaging markets, where the
Company has leading industry customers, proven technological capabilities and
a strong product portfolio. The Company's design expertise has enabled it to
offer a diverse portfolio of both industry standard and proprietary universal
asynchronous receiver transmitters, or UARTs. The Company also has
established important customer relationships in Taiwan for its
high-performance, low-power video products and continues to work closely with
key customers such as Hewlett-Packard for its imaging products. Exar's sales
to these markets provide the Company with resources to invest in and
accelerate its communications product development.
USE STANDARD CMOS PROCESS TECHNOLOGIES TO PROVIDE COMPELLING
PRICE/PERFORMANCE SOLUTIONS. Exar primarily designs its products to be
manufactured using standard CMOS processes. The Company believes that these
processes are proven, stable and predictable and benefit from the extensive
semiconductor manufacturing infrastructure devoted to CMOS processes.
Therefore, the Company believes that it can achieve a given level of
performance at a lower cost than others employing alternative processes.
4
LEVERAGE FABLESS SEMICONDUCTOR MODEL. Exar has longstanding relationships
with world-class third-party assembly, test and wafer foundries to
manufacture the Company's ICs. The Company's fabless approach allows it to
avoid substantial capital spending, obtain competitive pricing, reduce time
to market, reduce technology and product risks, and facilitate the migration
of the Company's products to new process technologies, which reduce costs and
optimize performance. By leveraging the fabless model, Exar can focus on its
core competencies of IC design and development.
PRODUCTS
Exar designs, develops and markets high-performance, high-bandwidth
physical interface and access control solutions for the worldwide
communications infrastructure. The Company's current IC products for the
communications market are designed to respond to the growing demand for
high-speed networking equipment based on transmission standards such as T/E
carrier, ATM and SONET/SDH. The Company also designs, develops and markets IC
products that address the needs of the serial communications market and the
video and imaging markets. Exar uses its design methodologies to develop
products ranging from application specific standard products, or ASSPs,
designed for industry-wide applications, to semi-custom solutions for
specific customer applications. These complementary products enable the
Company to offer a range of solutions for its customers' applications.
COMMUNICATIONS
Exar's products for T/E carrier, ATM and SONET/SDH applications
include high-speed analog, digital and mixed-signal physical interface and
access control ICs. The physical interface ICs consist of a transmitter and
receiver that, when integrated, is called a transceiver chip. Transceivers
interface with the physical transmission media. Most of these high-speed,
mixed-signal ICs convert parallel digital inputs into a single analog bit
stream that is up to 32 times faster than the original signal. Access control
circuits are digital circuits that format, or frame, the data and perform
error checking. The figure below illustrates where the Company products are
employed within WAN equipment.
TYPES OF COMMUNICATIONS ICs USED IN WAN EQUIPMENT
[GRAPHIC]
Exar's communications products include transmitters and receivers,
transceivers, framers, ATM user network interfaces, or ATM UNIs, a jitter
attenuator and an M13 multiplexer. These products are used in SONET/SDH
multiplexers, private branch exchanges (PBX), central office switches and
digital cross connects. The Company introduced in early 1999 and began volume
production in October 1999 its second generation physical interface solution,
an integrated single chip transceiver. Subsequently, the Company announced a
dual channel and triple channel version of this transceiver that meets the
same performance levels while requiring less board space and lower overall
power in multi-port applications. The Company recently introduced its
integrated, single IC jitter attenuator, a proprietary solution that allows
OEMs to meet difficult jitter tolerance specifications while reducing overall
system costs. Exar's access control products include framers, ATM UNIs and an
M13 multiplexer. These newer products are achieving greater market acceptance
as Exar's strong transceiver products have allowed it to compete for adjacent
component opportunities. The Company also supplies a family
5
of V.35 transceiver and multiprotocol products used for high-speed data
transmission, primarily in networking equipment such as routers and bridges.
The following table describes some of the Company's key
communications products:
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION APPLICATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
T3/E3/STS-1 1-channel/2-channel transceiver and
T3/E3/STS-1 1-channel receiver and transmitter SONET/SDH multiplexers and digital cross connects
- ------------------------------------------------------------------------------------------------------------------------------------
T3/E3 jitter attenuator Multiplexers, switches and digital cross connects
- ------------------------------------------------------------------------------------------------------------------------------------
T3/E3 M13 multiplexer Multiplexers, frame relay and Internet access switches
- ------------------------------------------------------------------------------------------------------------------------------------
T3/E3 framer Multiplexers and digital cross connects
- ------------------------------------------------------------------------------------------------------------------------------------
T3/E3 ATM UNIs ATM switches/routers/hubs
- ------------------------------------------------------------------------------------------------------------------------------------
4-channel E1 transceiver and framer Routers, Internet access equipment, frame relay and ATM
switches/routers/hubs
- ------------------------------------------------------------------------------------------------------------------------------------
Multi-channel E1 transceivers Multiplexers, frame relay and ATM switches/routers/hubs
- ------------------------------------------------------------------------------------------------------------------------------------
T1/E1 clock adaptors Frame relay access devices and remote access servers
- ------------------------------------------------------------------------------------------------------------------------------------
Multiprotocol serial interface Multiplexers, access equipment and routers
- ------------------------------------------------------------------------------------------------------------------------------------
V.35 serial interface Multiplexers, access equipment and routers
- ------------------------------------------------------------------------------------------------------------------------------------
The Company expects to introduce a number of new communications ICs
in the current fiscal year to provide an expanded line of T/E carrier
products as well as SONET/SDH products. The T/E carrier products are expected
to include multi-channel transceivers, framers and ATM UNIs. SONET/SDH
product introductions are expected to start at the OC-48 (2.5 Gbps) rate, and
subsequently introduce OC-3 (155 Mbps) and OC-12 (622 Mbps) products.
SERIAL COMMUNICATIONS
UARTs convert data streams from parallel to serial, enabling a
serial data stream to communicate with a central processing unit, or CPU.
Exar sells its UART products to the remote access, data collection,
industrial automation and handheld/mobile markets. Many of these products
include high performance features, such as automated flow control and large
First-In First-Out, or FIFO, buffers. The Company has designed a highly
integrated quad, or four channel, UART with FIFO circuitry, which the Company
believes is the de facto industry standard for quad FIFO UARTs used in
multi-channel networking applications.
The following table describes the Company's key serial
communications products:
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION APPLICATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
8-channel PCI UART with 64 byte FIFO PCI interface for network control management
- ------------------------------------------------------------------------------------------------------------------------------------
8-channel UART with 64 byte FIFO Network management, remote access servers and point of
sale systems
- ------------------------------------------------------------------------------------------------------------------------------------
Single/Dual/Quad channel UART with 128 byte FIFO Process control systems
- ------------------------------------------------------------------------------------------------------------------------------------
Single/Quad channel UART with 64 byte FIFO Personal digital assistants and GPS
- ------------------------------------------------------------------------------------------------------------------------------------
Single/Dual/Quad channel UART with 16 byte FIFO Hub management, high-speed modems and PC I/O cards
- ------------------------------------------------------------------------------------------------------------------------------------
6
Dual channel UART with 8 byte FIFO Process control systems, switches and serial port equipment
- ------------------------------------------------------------------------------------------------------------------------------------
Dual channel UART with 16 byte FIFO Process control systems, switches and serial port equipment
- ------------------------------------------------------------------------------------------------------------------------------------
Dual channel UART Serial port equipment
- ------------------------------------------------------------------------------------------------------------------------------------
During the current fiscal year, the Company expects to expand its
family of PCI multi-channel UARTs to include quad channel as well as dual
channel devices.
VIDEO AND IMAGING
The video market is composed of several segments, including digital
still cameras, or DSCs, PC video cameras, security cameras, camcorders and
digital camcorders. Among these applications, one of the fastest growing
segments is DSCs, which Dataquest forecasts will grow from 6.2 million units
in 1999 to 13.0 million units in 2003. To create images that are more
comparable to film cameras and include features such as steady-shot and
digital zoom, DSCs and digital camcorders are requiring higher resolution and
higher speed data acquisition subsystems, also known as analog front ends, or
AFEs, and analog-to-digital converters, or ADCs.
Exar supplies high-performance ADCs and integrated AFEs for products
such as DSCs, digital copiers, scanners and multifunctional peripherals, or
MFPs, which incorporate scanning, faxing and copying functions in a single
integrated system. The Company uses advanced design techniques and process
technologies to integrate low-power converter architectures with surrounding
analog functions, reducing total system cost.
The following table describes some of the Company's key video and
imaging products:
- ----------------------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION APPLICATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
10bit/18 or 27 Msps AFEs DSCs, camcorders and video conferencing
- ----------------------------------------------------------------------------------------------------------------------------------
3-channel 12, 14 or 16bit/6 or 12 Msps AFEs Scanners, MFPs and digital color copiers
- ----------------------------------------------------------------------------------------------------------------------------------
10bit/20 or 40 Msps ADC High-end DSCs and broadcast video
- ----------------------------------------------------------------------------------------------------------------------------------
8bit/6 Msps ADC Video boards, scanners and battery powered devices
- ----------------------------------------------------------------------------------------------------------------------------------
8, 10 or 12 bit serial input DAC (digital-to-analog converter) Voltage control and power control for wireless equipment
- ----------------------------------------------------------------------------------------------------------------------------------
During the current fiscal year, the Company plans to focus its
product development efforts on video applications, specifically for DSCs and
digital camcorders. These applications require higher resolution and speed.
Key planned product introductions include 12bit/24 Msps and 10bit/45 Msps
AFEs in single and dual channel configurations.
SALES AND CUSTOMERS
Exar markets its products in the United States through 25
independent sales representatives and four independent, non-exclusive
distributors, as well as through the Company's own direct sales force. The
Company currently has sales support offices in or near Atlanta, Boston,
Chicago, Dallas, Los Angeles and Fremont. The Company is represented
internationally by 26 sales representatives and distributors. In addition,
the Company is represented in Europe by its wholly-owned subsidiaries, Exar
Ltd. and Exar SARL, and in the Asia/Pacific Region by its wholly-owned
subsidiaries, Exar Japan and Exar Taiwan.
7
Some of the Company's larger customers include the following:
- ------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS SERIAL COMMUNICATIONS VIDEO AND IMAGING
- ------------------------------------------------------------------------------------------------------------------
- - Alcatel Alsthom S.A. - Cisco Systems, Inc. - Eastman Kodak Company
- - Cisco Systems, Inc. - Digi International, Inc. - Hewlett-Packard Company
- - Lucent Technologies, Inc. - LM Ericsson Telephone Co. - Hitachi, Ltd.
- - Marconi Communications Plc. - Pitney Bowes, Inc. - Logitech International S.A.
- - Nokia Corporation - Symbol Technologies, Inc. - Microtek International, Inc.
- - Tellabs, Inc. - NEC Corporation
- Pretek Electronics Corp.
- ------------------------------------------------------------------------------------------------------------------
Through the fiscal year ended March 31, 2000, no single customer
accounted for more than 10% of the Company's sales.
MANUFACTURING
Exar outsources all of its fabrication and assembly, as well as the
majority of its testing operations. This fabless manufacturing model allows the
Company to focus on its core competencies of product design and development.
The Company uses world-class independent wafer foundries, such as
Chartered Semiconductor Manufacturing, or Chartered, and Taiwan Semiconductor
Manufacturing Company, or TSMC. Chartered and TSMC manufacture all of the
Company's CMOS products. Rohm Co. Ltd. manufactures all of the Company's
Bipolar products and Chartered manufactures most of the Company's BiCMOS
products. The Company does not have long term supply agreements with Chartered
or TSMC. The Company's supply agreement with Rohm expires in 2006. The majority
of the Company's current products are implemented in standard CMOS. The Company
uses CMOS manufacturing processes to take advantage of that technology's lower
power consumption, cost-effectiveness, foundry availability and ever-increasing
speed. Currently, most of the Company's new product development is being
implemented in CMOS.
Wafers are usually shipped to the Company's subcontractors in Asia for
wafer test and assembly, where they are cut into individual die and packaged.
Most of the Company's assembly work is performed by independent contractors in
Hong Kong, Indonesia, the Philippines and Japan. Following assembly, final test
and quality assurance is performed either at the Company's Fremont, California
facility or at its subcontractors' facilities in Asia. The Company conducts
electrical testing of both wafers and packaged ICs. The combination of various
functions makes the test process for analog and mixed-signal devices
particularly difficult. Test operations require the programming, maintenance
and use of sophisticated computer-based test systems and complex automatic
handling systems.
RESEARCH AND DEVELOPMENT
Exar believes that the continued introduction of new products in its
target markets is essential to its growth. As of March 31, 2000, the Company's
research and development staff consisted of 110 employees, 60 of whom hold
advanced engineering degrees. The Company has successfully recruited 24
engineers during the fiscal year ended March 31, 2000, while experiencing
minimal attrition. Over the next year, EXAR will seek to significantly increase
the Company's engineering headcount to add more design and application
personnel. In the fiscal year ended March 31, 2000, the Company's
communications research and development spending increased 59.4% over the
previous fiscal year. To support its growth, Exar intends to continue spending
approximately 20% of revenue on research and development activities.
COMPETITION
The semiconductor industry is intensely competitive and is
characterized by rapid technological change and a history of price reduction as
production efficiencies are achieved in successive generations of products.
Although the market for analog
8
and mixed-signal integrated circuits is generally characterized by longer
product life cycles and less dramatic price reductions than the market for
digital integrated circuits, the Company faces substantial competition in
each market in which the Company participates. Competition in the Company's
markets is based principally on technical innovation, product features,
timely introduction of new products, quality and reliability, performance,
price, technical support and service. The Company believes that it competes
favorably in all of these areas.
Because the IC markets are highly fragmented, the Company generally
encounters different competitors in its various market areas. Competitors with
respect to the Company's communications products include Conexant, PMC-Sierra
and TranSwitch. In addition, the expansion of the Company's communications
product portfolio may in the future bring it into competition with other
established communications IC companies, such as Applied Micro Circuits Corp.
and Vitesse. Competitors in the Company's other markets include Analog Devices,
Philips and Texas Instruments.
BACKLOG
Exar defines backlog to include OEM orders and distributor orders for
which a delivery schedule has been specified for product shipment occurring
primarily during the succeeding six months.
At March 31, 2000, Exar's backlog was approximately $20.6 million, compared
with $12.4 million at March 31, 1999. The increase in the Company's backlog was
primarily due to the growth in orders for communication devices.
Sales are made pursuant to purchase orders for current delivery of standard
items or agreements covering purchases over a period of time, which are
frequently subject to revision and cancellation. Lead times for the release of
purchase orders depend upon the scheduling practices of the individual
customer, and the rate of bookings varies from month to month. In addition,
Exar's distributor agreements generally permit the return of up to 10% of the
purchases annually for purposes of stock rotation and also provide for credits
to distributors in the event Exar reduces the price of any product. Because of
the possibility of changes in delivery schedules, quantity actually purchased,
cancellations of orders, distributor returns or price reductions, Exar's
backlog as of any particular date may not be representative of actual sales for
any succeeding period. Customers can cancel a significant portion of their
backlog at their discretion without substantial penalty.
INTELLECTUAL PROPERTY RIGHTS
The Company has 71 patents issued and 17 patent applications pending
in the U.S. The Company has 10 patents issued and 24 patent applications
pending in various foreign countries. None of the Company's domestic and
foreign patents that have been issued will expire in the near future unless the
Company chooses not to pay renewal fees. To protect the Company's intellectual
property, the Company also relies on a combination of mask work registrations,
trademarks, copyrights, trade secrets, employee and third-party nondisclosure
agreements and licensing arrangements. The Company has also entered into
license agreements from time to time to gain access to externally developed
products or technologies.
There can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such intellectual
property or trade secrets, or that the Company can meaningfully protect its
intellectual property. Furthermore, there can be no assurance that the
Company's pending patent applications or any future applications will be
approved, or that any issued patents will provide the Company with competitive
advantages, or will not be challenged by third parties, or that if challenged,
will be found to be valid or enforceable, or that the patents of others will
not have an adverse effect on the Company's ability to do business.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate the Company's products, or design around
any patents that may be issued to the Company.
The Company cannot be sure that its products or technologies do not
infringe patents that may be granted in the future pursuant to pending patent
applications or that the Company's products do not infringe any patents or
proprietary rights of third parties. From time to time, the Company receives
communications from third parties alleging patent infringement. In the event
that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from selling the Company's
products or could be required to obtain licenses from the owners of these
patents or be required to redesign the Company's products to avoid
infringement. The Company cannot assure you that licenses would be available
to the Company on acceptable terms, or at all, or that the Company would be
successful in any attempts to redesign its
9
products or processes to avoid infringement. The Company's failure to obtain
these licenses or to redesign the Company's products could harm its business.
EMPLOYEES
As of March 31, 2000, the Company employed 276 full-time employees,
with 46 in administration, 110 in engineering and product development, 45 in
operations and 75 in marketing and sales. Of the 110 engineering and product
development employees, 60 hold advanced degrees. The Company's ability to
attract, motivate and retain qualified personnel is essential to its continued
success. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company ever experienced any work stoppage.
The Company believes its employee relations are good.
FACILITIES
Exar's executive offices, marketing and sales, research and
development and engineering operations are located in Fremont, California in
two buildings that the Company owns consisting of approximately 151,000 square
feet. The Company also owns approximately 5.3 acres of undeveloped property
adjacent to its headquarters, which is presently being held for future office
expansion. The Company leases additional space for sales offices in Foxboro,
Massachusetts; Atlanta, Georgia; Plano, Texas; Palatine, Illinois; Irvine,
California; Kawasaki, Japan; Velizy, France; East Sussex, England; Remseck and
Munich, Germany; and Taipei, Taiwan.
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MANAGEMENT
The names of the Company's executive officers and directors, and their
ages as of March 31, 2000, are as follows:
NAME AGE POSITION
- ---- --- --------
Donald L. Ciffone, Jr................... 44 Chief Executive Officer, President and Director
Michael Class........................... 42 Vice President, Worldwide Sales
Roubik Gregorian........................ 50 Chief Technology Officer, Senior Vice President/General Manager,
Communications Division
Ronald W. Guire......................... 51 Executive Vice President, Chief Financial Officer, Secretary and Director
Susan J. Hardman........................ 38 Vice President, Corporate Marketing
Thomas W. Jones......................... 52 Vice President, Reliability and Quality Assurance
Thomas R. Melendrez..................... 46 Corporate Vice President, General Counsel
Stephen W. Michael...................... 53 Vice President, Operations Division
John Sramek............................. 49 Vice President and General Manager, Video and Imaging Division
Raimon L. Conlisk....................... 77 Chairman of the Board of Directors
Frank P. Carrubba....................... 62 Director
James E. Dykes.......................... 62 Director
Richard Previte......................... 65 Director
DONALD L. CIFFONE, JR. joined Exar as Chief Executive Officer and
President in October 1996 and was appointed director at that time. From August
1996 to October 1996, Mr. Ciffone was Executive Vice President of Toshiba
America, the U.S. semiconductor subsidiary of Toshiba Semiconductor. Prior to
joining Toshiba, he served from 1991 to 1996 in a variety of senior management
positions at VLSI Technology, Inc. From 1978 to 1991, Mr. Ciffone held a
variety of marketing and operations positions at National Semiconductor, Inc.
Mr. Ciffone holds an M.B.A. from the University of Santa Clara.
MICHAEL CLASS joined Exar as Director of Western Area Sales in 1996.
In January 1998, he was promoted to the position of Vice President, North
American/European Sales and was promoted to Vice President, Worldwide Sales in
July, 1999. Mr. Class has over 20 years of experience in the semiconductor
industry, most recently with IC Works, Inc. as Area Sales Manager for Western
U.S. and Canada. Prior to joining IC Works, Mr. Class held various sales
management positions with Intel Corporation and VLSI from 1979 to 1995. He
holds a B.S. in Electrical Engineering from Lehigh University and an M.B.A.
from LaSalle University.
ROUBIK GREGORIAN joined Exar in March 1995 as Vice President, Startech
Division, when the Company acquired Startech Semiconductor, Inc., where he
served as President. He was appointed Chief Technology Officer and Vice
President of the Communications Division in June 1996, and to his current
position as Chief Technology Officer, Senior Vice President/General Manager,
Communications Division, in June 1998. Prior to joining Startech in 1994, Dr.
Gregorian was Vice President of Research and Development and Chief Technology
Officer for Sierra Semiconductor, Inc. Dr. Gregorian has been issued 16 patents
and received his M.S.E.E. and Ph.D. in Electrical Engineering from the
University of California at Los Angeles, as well as an M.S.E.E. from Tehran
University.
RONALD W. GUIRE joined Exar in July 1984 and has been a director since
June 1985. He has served as Chief Financial Officer since May 1985 and
Executive Vice President since July 1995. Mr. Guire is also Chairman of the
Board of Xetel Corporation, an electronics contract manufacturer. Mr. Guire was
a partner in the certified public accounting firm of Graubart & Co. from 1979
until he joined Exar in July 1984. Mr. Guire holds a B.S. in Accounting from
California College of Commerce.
SUSAN J. HARDMAN joined Exar in February 1997 and became Vice
President, Corporate Marketing in February 2000. Prior to this position, she
served as Senior Director of Business Development as well as Director of
Marketing for the Company's communication products. Ms. Hardman has over 16
years experience in the semiconductor industry. From 1989 to 1997, Ms.
Hardman was with VLSI in a variety of management positions, most recently as
Director of Product Marketing for
11
VLSI's networking products division. From 1983 to 1989, she was with Motorola
holding a variety of engineering roles. Ms. Hardman holds a B.S. in Chemical
Engineering from Purdue University and an M.B.A. from the University of
Phoenix.
THOMAS W. JONES joined Exar as Director of Total Quality Management in
October 1992 and became Director of Reliability and Quality Assurance in
November 1992. He was promoted to his current position of Vice President,
Reliability and Quality Assurance in July 1995. Mr. Jones has over 30 years of
industry experience, most recently with LSI Logic, Inc., as Director of Quality
Assurance. Mr. Jones joined LSI in September 1990. In December 1989, Mr. Jones
joined Elcon Products International as Director of Manufacturing. From 1970 to
December 1989, he was with Siliconix, where he held various management
positions including Director of Operations and Director of Quality and
Reliability. Mr. Jones holds a B.S.E.E. equivalent degree from Port Talbot
College of Technology.
THOMAS R. MELENDREZ joined Exar in April 1986 as Corporate Attorney.
He was promoted to Director, Legal Affairs in July 1991, and again to Corporate
Vice President, Legal Affairs in March 1993. In March 1996, Mr. Melendrez was
promoted to his current position of Corporate Vice President, General Counsel.
Mr. Melendrez has over 20 years legal experience in the semiconductor and
related industries. He received a B.A. from the University of Notre Dame and a
J.D. from the University of San Francisco.
STEPHEN W. MICHAEL joined Exar as Vice President New Market
Development in September 1992. In July 1995, he was appointed to his current
position of Vice President, Operations Division. Mr. Michael has over 20 years
of semiconductor industry experience, most recently as Vice President and
General Manager, Analog and Custom Products with Catalyst Semiconductor. He
joined Catalyst in 1987 and served in various senior positions.
JOHN SRAMEK joined Exar as Group Manager for the Micro Power Business
Unit in June of 1994 and served in a variety of senior marketing positions
until his promotion to his current position as Vice President, Video and
Imaging Division, in February 1998. Mr. Sramek has over 20 years of experience
in sales and product marketing in the semiconductor industry with a variety of
companies including Micro Power Systems, Inc., Harris Semiconductor and Genrad
Inc. Mr. Sramek holds a B.A. in English Literature and a B.S. in Electrical
Engineering from Bucknell University and an M.B.A. from the University of Santa
Clara.
RAIMON L. CONLISK joined Exar as a director in August 1985, was
appointed Vice Chairman of the Board in August 1990, and was appointed Chairman
of the Board in April 1995. Mr. Conlisk has also served as a director since
1991 and was appointed Chairman of the Board in December 1997 of SBE, Inc., a
manufacturer of communications and computer products. From 1977 to 1999, Mr.
Conlisk was President of Conlisk Associates, a management consulting firm
serving high-technology companies in the United States and foreign countries.
From 1991 to 1998, Mr. Conlisk served as a director of Xetel Corporation, a
contract manufacturer of electronic equipment. Mr. Conlisk was also President
from 1984 to 1989, a director from 1970 and Chairman from 1989 until retirement
in June 1990, of Quantic Industries, Inc., a privately held manufacturer of
electronic systems. From 1970 to 1973 and from 1987 to 1990, Mr. Conlisk served
as a director of the American Electronics Association.
FRANK P. CARRUBBA joined Exar as a director in August 1998. Dr.
Carrubba served as Executive Vice President and Chief Technical Officer of
Royal Philips Electronics, headquartered in Eindhoven, the Netherlands, from
1991 to 1997. From 1982 to 1991, Dr. Carrubba was with the Hewlett-Packard
Company, where he was a member of the Group Management Committee and was
Director of H-P Laboratories. Prior to joining Hewlett-Packard, he spent 22
years as a member of the technical staff at IBM Corporation's Thomas J. Watson
Research Laboratory in Yorktown Heights, New York. Dr. Carrubba was one of the
original designers of RISC Architecture, for which he was named Inventor of the
Year in 1992. Dr. Carrubba is also a Director of Coherent, Inc., a developer
and manufacturer of lasers, laser systems and precision optics.
JAMES E. DYKES joined Exar as a director in May 1994. Mr. Dykes served
as President and CEO of the Signetics division of North American Philips
Corporation, a manufacturer of industrial and consumer electronics, from 1989 to
1993 and, from 1987 to 1988, as President and CEO of TSMC, a semiconductor
foundry in Taiwan. Prior to joining TSMC, Mr. Dykes held various management
positions with other semiconductor and related companies, including General
Electric Company, a diversified international manufacturer of defense,
electrical and other products, and Harris Semiconductor, Inc., a manufacturer
of integrated circuits. From August 1994 to June 1997, Mr. Dykes served as
President and Chief Operating Officer of Intellon Corp., a wireless network
communications company. From July 1997 to July 1998, Mr. Dykes served as
12
Executive Vice President, Corporate Development of the Thomas Group, Inc., a
management services company. Mr. Dykes is also a director of the Thomas Group
Inc., Cree Research, Inc., a developer of blue light-emitting diodes, and
Thesus Logic, Inc., a privately held semiconductor company.
RICHARD PREVITE joined Exar as a director in October 1999. Mr.
Previte is Chief Executive Officer and Chairman of the Board of Directors of
marketFusion. He was a director from 1990 to April 2000 and Vice Chairman
from 1999 to April 2000 of the Board of Directors of Advanced Micro Devices,
or AMD. Additionally, Mr. Previte served as Chairman of the Board from 1997
to June 1999, and acted as Chief Executive Officer from February 1999 to June
1999 of Vantis Corporation, a subsidiary of AMD. Mr. Previte served as
President of AMD from 1990 to 1999, Executive Vice President and Chief
Operating Officer from 1989 to 1990 and Chief Financial Officer and Treasurer
from 1969 to 1989.
RISK FACTORS
In addition to the other information contained in this Annual Report on Form
10-K and other reports filed by the Company with the Securities and Exchange
Commission, you should consider the following factors in evaluating the Company
and its business. If any of the following risks actually occur, the Company's
business could be harmed. This could cause the price of EXAR's stock to
decline. This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties, including statements about future plans,
objectives, intentions and expectations. Many factors, including those
described below, could cause actual results to differ materially from those
discussed in any forward-looking statement.
THE COMPANY'S OPERATING RESULTS FLUCTUATE SIGNIFICANTLY BECAUSE OF A NUMBER OF
FACTORS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL.
The Company's operating results fluctuate significantly. Some of the
factors that affect the Company's quarterly and annual results, many of which
are difficult to control or predict, are:
- the reduction, rescheduling or cancellation of orders by customers;
- fluctuations in the timing and amount of customer requests for
product shipments;
- fluctuations in the manufacturing output, yields and inventory levels
of the Company's suppliers;
- changes in the mix of products that the Company's customers purchase;
- the Company's ability to introduce new products on a timely basis;
- the announcement or introduction of products by the Company's
competitors;
- the availability of third-party foundry capacity and raw materials;
- competitive pressures on selling prices;
- the amounts and timing of costs associated with product warranties
and returns;
- the amounts and timing of investments in research and development;
- market acceptance of the Company's products;
- costs associated with acquisitions and the integration of acquired
operations;
- the ability of the Company's customers to obtain components from
their other suppliers;
- general conditions in the communications and semiconductor
industries;
- fluctuations in interest rates; and
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- general economic conditions.
THE COMPANY'S MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE; THEREFORE, THE
COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The markets for the Company's products are characterized by:
- rapidly changing technologies;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.
To develop new products for the Company's target markets, the Company
must develop, gain access to and use leading technologies in a cost-effective
and timely manner and continue to expand its technical and design expertise. In
addition, the Company must have its products designed into its customers'
future products and maintain close working relationships with key customers in
order to develop new products that meet their changing needs.
In addition, products for communications applications are based on
continually evolving industry standards. The Company's ability to compete will
depend on its ability to identify and ensure compliance with these industry
standards. As a result, the Company could be required to invest significant
time and effort and to incur significant expense to redesign its products to
ensure compliance with relevant standards.
The Company cannot assure you that it will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by its competitors. In addition, the Company may not be
successful in developing or using new technologies or in developing new
products or product enhancements that achieve market acceptance. The Company's
pursuit of necessary technological advances may require substantial time and
expense. Failure in any of these areas could harm its operating results.
THE COMPANY'S FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF ITS
KEY ENGINEERING AND MANAGEMENT PERSONNEL AND ITS ABILITY TO IDENTIFY, HIRE AND
RETAIN ADDITIONAL PERSONNEL.
There is intense competition for qualified personnel in the
semiconductor industry, in particular the highly skilled design, applications
and test engineers involved in the development of new communications ICs.
Competition is especially intense in the Silicon Valley, where the Company's
corporate headquarters is located. The Company may not be able to continue to
attract and retain engineers or other qualified personnel necessary for the
development of its business or to replace engineers or other qualified
personnel who may leave it's employ in the future. The Company's anticipated
growth is expected to place increased demands on its resources and will likely
require the addition of new management and engineering personnel and the
development of additional expertise by existing management personnel. Loss of
the services of, or failure to recruit, key engineers or other technical and
management personnel could harm its business.
THE COMPANY DEPENDS ON THIRD PARTY FOUNDRIES TO MANUFACTURE ITS ICS.
The Company does not own or operate a semiconductor fabrication facility. Most
of its products are based on CMOS processes. Although two foundries manufacture
its products based on CMOS processes, most are manufactured at a single
foundry. In addition, one foundry manufactures most of the Company's BiCMOS
products. The Company does not have long-term wafer supply agreements with its
CMOS foundries that guarantee wafer or product quantities, prices, delivery or
lead times, as its CMOS foundries manufacture its products on a purchase order
basis. The Company provides these foundries with rolling forecasts of its
production requirements; however, the ability of each foundry to provide wafers
to the Company is limited by the foundry's available capacity. Therefore, the
Company's CMOS foundries could choose to
14
prioritize capacity for other customers or reduce or eliminate deliveries to
it on short notice. Accordingly, the Company cannot be certain that these
foundries will allocate sufficient capacity to satisfy its requirements. In
addition, the Company cannot be certain that it will continue to do business
with its foundries on terms as favorable as its current terms. Other
significant risks associated with the Company's reliance on third-party
foundries include:
- the lack of control over delivery schedules;
- the unavailability of, or delays in obtaining access to, key process
technologies;
- limited control over quality assurance, manufacturing yields and
production costs; and
- potential misappropriation of the Company's intellectual property.
The Company could experience a substantial delay or interruption in
the shipment of its products or an increase in its costs due to the following:
- a sudden demand for semiconductor devices;
- a manufacturing disruption experienced by one or more of the
Company's foundries or sudden reduction or elimination of any
existing source or sources of semiconductor devices;
- time required to identify or qualify alternative manufacturing
sources for existing or new products; or
- failure of the Company's suppliers to obtain the raw materials and
equipment used in the production of its ICs.
TO SECURE FOUNDRY CAPACITY, THE COMPANY MAY BE REQUIRED TO ENTER INTO FINANCIAL
AND OTHER ARRANGEMENTS WITH FOUNDRIES, AND SUCH AGREEMENTS MAY RESULT IN THE
DILUTION OF ITS EARNINGS OR THE OWNERSHIP OF ITS STOCKHOLDERS OR OTHERWISE HARM
ITS OPERATING RESULTS.
Allocation of a foundry's manufacturing capacity may be influenced by
a customer's size or the existence of a long-term agreement with the foundry.
To address foundry capacity constraints, the Company and other semiconductor
companies that rely on third-party foundries have utilized various
arrangements, including equity investments in or loans to foundries in exchange
for guaranteed production capacity, joint ventures to own and operate
foundries, or "take or pay" contracts that commit a company to purchase
specified quantities of wafers over extended periods. While the Company is not
currently a party to any of these arrangements, it may decide to enter into
these arrangements in the future. The Company cannot be sure, however, that
these arrangements will be available to it on acceptable terms, if at all. Any
of these arrangements could require the Company to commit substantial capital
and, accordingly, could require it to obtain additional debt or equity
financing. This could result in the dilution of its earnings or the ownership
of its stockholders or otherwise harm its operating results.
IF THE COMPANY'S FOUNDRIES DISCONTINUE THE MANUFACTURING PROCESSES NEEDED TO
MEET ITS DEMANDS, OR FAIL TO UPGRADE THE TECHNOLOGIES NEEDED TO MANUFACTURE ITS
PRODUCTS, THE COMPANY MAY FACE PRODUCTION DELAYS.
The Company's wafer and product requirements typically represent a small
portion of the total production of the foundries that manufacture its products.
As a result, the Company is subject to the risk that a foundry will cease
production on an older or lower-volume process that it uses to produce its
parts. Additionally, the Company cannot be certain its foundries will continue
to devote resources to the production of its products or continue to advance
the process design technologies on which the manufacturing of its products is
based. Each of these events could increase the Company's costs and harm its
ability to deliver its products on time.
THE MARKETS IN WHICH THE COMPANY PARTICIPATES ARE INTENSELY COMPETITIVE.
The Company's target markets are intensely competitive. The Company's ability
to compete successfully in its target markets depends on the following factors:
15
- designing new products that implement new technologies;
- subcontracting the manufacture of new products and delivering them in
a timely manner;
- product quality and reliability;
- technical support and service;
- timely product introduction;
- product performance;
- product features;
- price;
- end-user acceptance of the Company's customers' products;
- compliance with evolving standards; and
- market acceptance of competitors' products.
In addition, the Company's competitors or customers may offer new
products based on new technologies, industry standards or end-user or customer
requirements, including products that have the potential to replace or provide
lower-cost or higher-performance alternatives to its products. The introduction
of new products by the Company's competitors or customers could render the
Company's existing and future products obsolete or unmarketable. In addition,
the Company's competitors and customers may introduce products that integrate
the functions performed by its ICs on a single IC, thus eliminating the need
for the Company's products.
Because the IC markets are highly fragmented, the Company generally
encounters different competitors in its various market areas. Competitors with
respect to the Company's communications products include Conexant Systems Inc.,
PMC-Sierra, Inc. and TranSwitch Corporation. In addition, the expansion of the
Company's communications product portfolio may in the future bring it into
competition with other established communications IC companies, such as Applied
Micro Circuits Corp. and Vitesse Semiconductor Corporation. Competitors in the
Company's other markets include Analog Devices Incorporated, Philips
Electronics and Texas Instruments Incorporated. Many of the Company's
competitors have greater financial, technical and management resources than the
Company does. Some of these competitors may be able to sell their products at
prices below which it would be profitable for the Company to sell its products.
IF THE COMPANY IS UNABLE TO FURTHER PENETRATE THE MARKETS FOR COMMUNICATIONS
ICS, OR IF THESE MARKETS FAIL TO GROW AS EXPECTED, ITS REVENUES COULD STOP
GROWING AND MAY DECLINE.
A significant portion of the Company's revenues in recent periods has
been, and is expected to continue to be, derived from sales of communications
ICs, particularly products based on the T/E carrier and ATM transmission
standards. In order for the Company to be successful, it must continue to
penetrate these markets. Furthermore, if these markets fail to grow as
expected, the Company's business could be harmed.
THE COMPANY EXPECTS THAT REVENUES CURRENTLY DERIVED FROM NON-COMMUNICATIONS
PRODUCTS WILL DECLINE IN FUTURE PERIODS, AND ITS BUSINESS WILL BE HARMED IF ITS
COMMUNICATIONS PRODUCTS FAIL TO COMPENSATE FOR THIS DECLINE.
The Company does not intend to increase its funding of development efforts
relating to its video and imaging and other non-communications products, and as
a result revenues from these products may decline in future periods. In
addition, the markets for these products are subject to extreme price
competition, and the Company may not be able to reduce its costs in response to
declining average selling prices. Even if the Company reduces its costs, its
customers in these markets may not
16
purchase these products. Moreover, these markets may decrease in size in the
future. If the Company's communications products fail to compensate for any
revenue shortfall, its business could be harmed.
THE COMPANY'S DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST ITS
PRODUCTS SUBJECTS IT TO A NUMBER OF RISKS, INCLUDING AN INADEQUATE SUPPLY OF
PRODUCTS AND HIGHER MATERIALS COSTS.
The Company depends on independent subcontractors for the assembly and testing
of its products. The Company's reliance on these subcontractors involves the
following significant risks:
- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of excess
demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to the Company;
- potential increases in prices due to capacity shortages and other
factors; and
- potential misappropriation of the Company's intellectual property.
These risks may lead to delayed product delivery or increased costs,
which would harm the Company's profitability and customer relationships.
THE COMPANY'S RELIANCE UPON FOREIGN SUPPLIERS EXPOSES IT TO RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS.
The Company uses semiconductor wafer foundries and assembly and test
subcontractors throughout Asia for most of its products. The Company intends to
continue transferring its testing and shipping operations to foreign
subcontractors. The Company's dependence on these subcontractors involves the
following substantial risks:
- political and economic instability;
- disruption to air transportation from Asia;
- changes in tax laws, tariffs and freight rates; and
- compliance with local or foreign regulatory reguirements.
These risks may lead to delayed product delivery or increased costs,
which would harm the Company's profitability and customer relationships.
THE COMPANY'S RELIANCE ON FOREIGN CUSTOMERS COULD CAUSE FLUCTUATIONS IN ITS
OPERATING RESULTS.
International sales accounted for 32.8% and 36.5% of net sales for
fiscal years 2000 and 1999, respectively. International sales may account for an
increasing portion of the Company's revenues, which would subject it to the
following risks:
- changes in regulatory requirements;
- tariffs and other barriers;
- timing and availability of export licenses;
- political and economic instability;
17
- difficulties in accounts receivable collections;
- difficulties in staffing and managing foreign subsidiary and branch
operations;
- difficulties in managing distributors;
- difficulties in obtaining governmental approvals for communications
and other products;
- limited intellectual property protection;
- foreign currency exchange fluctuations;
- the burden of complying with and the risk of violating a wide variety
of complex foreign laws and treaties; and
- potentially adverse tax consequences.
In addition, because sales of the Company's products have been
denominated to date primarily in United States Dollars (except in Japan, where
the Company transacts a portion of its business in Japanese Yen), increases in
the value of the United States Dollar could increase the relative price of the
Company's products so that they become more expensive to customers in the local
currency of a particular country. Future international activity may result in
increased foreign currency denominated sales. Furthermore, because some of the
Company's customer purchase orders and agreements are governed by foreign laws,
the Company may be limited in its ability to enforce its rights under these
agreements and to collect damages, if awarded.
THE COMPANY RELIES ON ITS DISTRIBUTORS AND SALES REPRESENTATIVES TO SELL MANY
OF ITS PRODUCTS.
The Company sells many of its products through distributors and sales
representatives. The Company's distributors and sales representatives could
reduce or discontinue sales of its products. They may not devote the resources
necessary to sell the Company's products in the volumes and within the time
frames that it expects. In addition, the Company depends upon the continued
viability and financial resources of these distributors and sales
representatives, some of which are small organizations with limited working
capital. These distributors and sales representatives, in turn, depend
substantially on general economic conditions and conditions within the
semiconductor industry. The Company believes that its success will continue to
depend upon these distributors and sales representatives. If some or all of the
Company's distributors and sales representatives experience financial
difficulties, or otherwise become unable or unwilling to promote and sell its
products, the Company's business could be harmed.
BECAUSE THE COMPANY'S COMMUNICATIONS ICS TYPICALLY HAVE LENGTHY SALES CYCLES,
THE COMPANY MAY EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES
RELATED TO RESEARCH AND DEVELOPMENT AND THE GENERATION OF SALES REVENUE.
Due to the communications IC product cycle, it usually takes the
Company more than 12 months to realize volume shipments after it first contacts
a customer. The Company first works with customers to achieve a design win,
which may take nine months or longer. The Company's customers then complete the
design, testing and evaluation process and begin to ramp up production, a
period which typically lasts an additional three months or longer. As a result,
a significant period of time may elapse between the Company's research and
development efforts and its realization of revenue, if any, from volume
purchasing of the Company's communications products by its customers.
THE COMPANY'S BACKLOG MAY NOT RESULT IN FUTURE REVENUE.
Due to possible customer changes in delivery schedules and
cancellations of orders, the Company's backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period. A reduction
of backlog during any particular period, or the failure of the Company's
backlog to result in future revenue, could harm the Company's business.
18
THE COMPANY'S OPERATING EXPENSES ARE RELATIVELY FIXED, AND IT MAY ORDER
MATERIALS IN ADVANCE OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, THE COMPANY HAS
LIMITED ABILITY TO REDUCE EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE
SHORTFALLS.
The Company's operating expenses are relatively fixed, and, therefore,
it has limited ability to reduce expenses quickly in response to any revenue
shortfalls. Consequently, the Company's operating results will be harmed if its
revenues do not meet its revenue projections. The Company may experience
revenue shortfalls for the following reasons:
- significant pricing pressures that occur because of declines in
average selling prices over the life of a product;
- sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead the Company's suppliers to allocate
available supplies or capacity to other customers and, in turn, harm
the Company's ability to meet its sales obligations; and
- the reduction, rescheduling or cancellation of customer orders.
In addition, the Company typically plans its production and inventory
levels based on internal forecasts of customer demand, which is highly
unpredictable and can fluctuate substantially. From time to time, in response
to anticipated long lead times to obtain inventory and materials from the
Company's outside suppliers and foundries, it may order materials in advance of
anticipated customer demand. This advance ordering may result in excess
inventory levels or unanticipated inventory write-downs if expected orders fail
to materialize.
PERIODS OF RAPID GROWTH AND EXPANSION COULD CONTINUE TO PLACE A SIGNIFICANT
STRAIN ON THE COMPANY'S LIMITED PERSONNEL AND OTHER RESOURCES.
To manage the Company's possible future growth effectively, the
Company will be required to continue to improve its operational, financial and
management systems and to successfully hire, train, motivate and manage its
employees. In addition, the integration of past and future potential
acquisitions and the evolution of the Company's business plan will require
significant additional management, technical and administrative resources. The
Company cannot be certain that it will be able to manage the growth and
evolution of its current business effectively.
EXAR HAS IN THE PAST AND MAY IN THE FUTURE MAKE ACQUISITIONS, WHICH WILL
INVOLVE NUMEROUS RISKS. EXAR CANNOT ASSURE THAT IT WILL BE ABLE TO ADDRESS
THESE RISKS SUCCESSFULLY WITHOUT SUBSTANTIAL EXPENSE, DELAY OR OTHER
OPERATIONAL OR FINANCIAL PROBLEMS.
The risks involved with acquisitions include:
- diversion of management's attention;
- failure to retain key personnel;
- amortization of acquired intangible assets;
- customer dissatisfaction or performance problems with an acquired
company;
- the cost associated with acquisitions and the integration of acquired
operations; and
- assumption of known or unknown liabilities or other unanticipated
events or circumstances.
The Company cannot assure that it will be able to address these risks
successfully without substantial expense, delay or other operational or
financial problems.
19
THE COMPANY MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS
ADEQUATELY.
The Company's ability to compete is affected by its ability to protect its
intellectual property rights. The Company relies on a combination of patents,
trademarks, copyrights, mask work registrations, trade secrets, confidentiality
procedures and non-disclosure and licensing arrangements to protect its
intellectual property rights. Despite these efforts, the Company cannot be
certain that the steps it takes to protect its proprietary information will be
adequate to prevent misappropriation of the Company's technology, or that its
competitors will not independently develop technology that is substantially
similar or superior to the Company's technology.
More specifically, the Company cannot be sure that its pending patent
applications or any future applications will be approved, or that any issued
patents will provide it with competitive advantages or will not be challenged by
third parties. Nor can the Company be sure that, if challenged, the Company's
patents will be found to be valid or enforceable, or that the patents of others
will not have an adverse effect on the Company's ability to do business.
Furthermore, others may independently develop similar products or processes,
duplicate the Company's products or processes or design around any patents that
may be issued to it.
THE COMPANY COULD BE HARMED BY LITIGATION INVOLVING PATENTS AND OTHER
INTELLECTUAL PROPERTY RIGHTS.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company may be accused of infringing the intellectual property rights of
third parties. Furthermore, the Company has certain indemnification obligations
to customers with respect to the infringement of third-party intellectual
property rights by its products. The Company cannot be certain that infringement
claims by third parties or claims for indemnification by customers or end users
of its products resulting from infringement claims will not be asserted in the
future or that such assertions, if proven to be true, will not harm its
business.
Any litigation relating to the intellectual property rights of third
parties, whether or not determined in the Company's favor or settled by the
Company, would at a minimum be costly and could divert the efforts and attention
of its management and technical personnel. In the event of any adverse ruling in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacturing, use and sale of infringing products, discontinue the
use of certain processes or obtain a license under the intellectual property
rights of the third party claiming infringement. A license might not be
available on reasonable terms, or at all.
EARTHQUAKES AND OTHER NATURAL DISASTERS MAY DAMAGE THE COMPANY'S FACILITIES OR
THOSE OF ITS SUPPLIERS.
The Company's corporate headquarters in Fremont, California is located near
major earthquake faults that have experienced earthquakes in the past. In
addition, some of its suppliers are located near fault lines. In the event of a
major earthquake or other natural disaster near its headquarters, the Company's
operations could be harmed. Similarly, a major earthquake or other natural
disaster near one or more of the Company's major suppliers, like the one that
occurred in Taiwan in September 1999, could disrupt the operations of those
suppliers, which could limit the supply of the Company's products and harm its
business.
THE COMPANY'S STOCK PRICE IS VOLATILE.
The market price of the Company's common stock has fluctuated
significantly to date. In the future, the market price of its common stock could
be subject to significant fluctuations due to:
- quarter-to-quarter variations in the Company's anticipated or
actual operating results;
- announcements or introductions of new products;
- technological innovations or setbacks by the Company or its
competitors;
- conditions in the communications and semiconductor markets;
20
- the commencement of litigation;
- changes in estimates of the Company's performance by securities
analysts;
- announcements of merger or acquisition transactions; and
- general economic and market conditions.
In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that have affected the market prices of many high
technology companies, including semiconductor companies, and that have often
been unrelated or disproportionate to the operating performance of companies.
These fluctuations may harm the market price of the Company's common stock.
THE ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
OF THE DELAWARE GENERAL CORPORATION LAW MAY DELAY, DEFER OR PREVENT A CHANGE OF
CONTROL.
The Company's board of directors has the authority to issue up to 2,250,000
shares of preferred stock and to determine the price, rights, preferences and
privileges and restrictions, including voting rights, of those shares without
any further vote or action by its stockholders. The rights of the holders of
common stock will be subject to, and may be harmed by, the rights of the holders
of any shares of preferred stock that may be issued in the future. The issuance
of preferred stock may delay, defer or prevent a change in control, as the terms
of the preferred stock that might be issued could potentially prohibit the
Company's consummation of any merger, reorganization, sale of substantially all
of its assets, liquidation or other extraordinary corporate transaction without
the approval of the holders of the outstanding shares of preferred stock. In
addition, the issuance of preferred stock could have a dilutive effect on the
Company's stockholders. The Company's stockholders must give 120 days advance
notice prior to the relevant meeting to nominate a candidate for director or
present a proposal to the Company's stockholders at a meeting. These notice
requirements could inhibit a takeover by delaying stockholder action. The
Company may trigger its stockholder rights plan in the event its board of
directors does not agree to an acquisition proposal. The rights plan may make it
more difficult and costly to acquire the Company. The Delaware anti-takeover law
restricts business combinations with some stockholders once the stockholder
acquires 15% or more of the Company's common stock. The Delaware statute makes
it more difficult for the Company to be acquired without the consent of its
board of directors and management.
IF THE COMPANY HAS NOT ADEQUATELY PREPARED FOR THE TRANSITION TO YEAR 2000, ITS
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD SUFFER.
The Company has executed a plan designed to make its computer systems,
applications, computer and manufacturing equipment and facilities Year 2000
ready. To date, none of the Company's systems, applications, equipment or
facilities have experienced material difficulties from the transition to Year
2000, nor has the Company been notified that any of its suppliers have had any
such difficulties. However, due to the breadth of potential issues related to
the Year 2000, the Company cannot guarantee that it will not experience any
problems in the future and the final determination may take several months.
Where practicable, the Company has attempted to mitigate its risks with respect
to any failures of its critical external suppliers related to the Year 2000. The
effect on the Company's results of operations from any failure of its systems,
applications, equipment or facilities, or its critical external suppliers,
related to the Year 2000 issue cannot yet be determined.
ITEM 2 PROPERTIES
The Company's corporate headquarters are located in Fremont, California and
consist of approximately 151,000 square feet. The land and building are owned by
the Company and house Exar's principal administrative, test, engineering,
marketing, customer service and sales departments.
ITEM 3 LEGAL PROCEEDINGS
There are no material legal actions pending or contemplated.
21
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
March 31, 2000.
22
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of Exar is traded on the Nasdaq National Market under the
symbol "EXAR." The following table sets forth the range of high and low sales
prices for the Company's Common Stock for the periods indicated, as reported by
Nasdaq, as adjusted for a three-for-two stock split effected on February 15,
2000. The listed quotations represent inter-dealer prices without retail markup,
markdown or commissions.
- -------------------------------------------------------------------------------
COMMON STOCK PRICES
HIGH LOW
---- ---
FISCAL 2000
Quarter ended March 31, 2000 $99.63 $38.00
Quarter ended December 31, 1999 $43.08 $21.00
Quarter ended September 30, 1999 $26.00 $17.00
Quarter ended June 30, 1999 $16.92 $10.58
FISCAL 1999
Quarter ended March 31, 1999 $11.25 $ 8.75
Quarter ended December 31, 1998 $12.50 $ 8.00
Quarter ended September 30, 1998 $14.42 $ 9.25
Quarter ended June 30, 1998 $17.13 $12.08
- -------------------------------------------------------------------------------
The Company has never paid dividends on its Common Stock and presently intends
to continue this policy in order to retain earnings for use in its business. The
Company had approximately 206 stockholders of record as of May 31, 2000. The
Company believes it has in excess of 3,900 beneficial stockholders. The last
sales price for Exar's Common Stock, as reported by Nasdaq on May 31, 1999, was
$68.75 per share.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Consolidated Statements of
Operations Data:
Net Sales $ 78,544 $ 71,868 $ 102,015 $ 92,343 $ 125,766
Gross Profit 44,402 38,482 50,078 36,883 63,549
Income (Loss) From Operations 3,946 4,051 8,986 (15,238) 18,759
Net Income (Loss) 15,115 5,424 7,518 (9,197) 13,582
Net Income (Loss) Per Share:
Basic $ 1.04 $ 0.39 $ 0.54 $ (0.68) $ 0.95
Diluted $ 0.93 $ 0.38 $ 0.52 $ (0.68) $ 0.91
Shares Used in Computation of Net Income
(Loss) Per Share:
Basic 14,480 14,088 13,989 13,606 14,243
Diluted 16,197 14,400 14,595 13,606 14,888
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
(IN THOUSANDS)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Consolidated Balance Sheet
Data:
Working Capital $ 393,570 $ 91,885 $ 90,395 $ 68,822 $ 77,550
Total Assets 438,433 138,296 143,669 125,537 139,074
Long-term Obligations 574 664 745 880 979
Retained Earnings 72,239 57,124 51,700 44,182 53,379
Stockholders' Equity 425,041 125,757 123,729 109,817 117,847
- ------------------------------------------------------------------------------------------------------------------------------------
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN
THE SECTION ENTITLED "RISK FACTORS."
OVERVIEW
The Company designs, develops and markets analog and mixed-signal ICs
for the communications markets and the video and imaging markets. The Company's
primary customers are large communications OEMs.
Over the past several years, the Company has actively refocused its
business on products for the communications markets. In the 1970's, the Company
designed, manufactured and marketed custom and general purpose analog circuits
supporting many different applications. In the 1980's, the Company transitioned
its products to analog and mixed-signal application specific standard products,
or ASSPs, focusing on telecommunications, data communications, computer
peripherals and consumer electronics. Through the mid-1990's, the Company
continued this product transition through internal development and strategic
acquisitions and moved to a fabless semiconductor business model. In 1997, the
Company chose to focus its product strategy and development efforts on the
communications markets. For that year, the Company's communications products
represented 43.2% of its net sales. For the year ended March 31, 2000, the
Company's communications product sales increased to 74.2% of its net sales.
The Company's international sales represented 32.8%, 36.5% and 41.2% of
the Company's net sales for the years ended March 31, 2000, 1999 and 1998. These
international sales consist of sales from the United States to overseas
customers and sales by its wholly-owned subsidiary in Japan. Sales by the
Company's Japanese subsidiary are denominated in Yen, while all other
international sales are denominated in United States Dollars. The Company's
international operations give rise to exposures from changes in currency
exchange rates. The Company has adopted a set of practices to minimize its
foreign currency risk which include the occasional use of foreign currency
exchange contracts to hedge amounts receivable from its foreign subsidiaries. In
addition, foreign sales may be subject to tariffs in certain countries or with
regard to certain products; however, the Company's profit margin on
international sales of ICs, adjusted for differences in product mix, is not
significantly different from that realized on its sales to domestic customers.
The Company recognizes revenue from the sale of products when shipped. The
Company's distributor agreements generally permit the return of up to 10% of
their purchases annually for purposes of stock rotation and also provide for
credits to distributors in the event the Company reduces the price of any
product. The Company records an allowance based on future authorized and
historical patterns of returns, price protection and other concessions at the
time revenue is recognized.
The Company's gross margins vary depending on product mix, competition, the
volume of products sold, its suppliers' ability to achieve certain manufacturing
efficiencies and the cost of materials procured from its suppliers. The
Company's newer analog and mixed-signal products, especially its communications
products, generally have higher gross margins than its more mature products, and
margins of any particular product may erode over time.
25
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain cost, expense and income items. The table
and subsequent discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------
2000 1999 1998
--------- -------- -------
Net sales.................................................... 100.0% 100.0% 100.0%
Cost of sales................................................ 43.5 46.5 50.9
---------- --------- --------
Gross profit................................................. 56.5 53.5 49.1
Research and development..................................... 21.3 18.9 15.3
Selling, general and administrative.......................... 29.6 27.1 22.8
Goodwill amortization........................................ 0.6 0.9 1.0
Restructuring and other charges.............................. 1.0
Acquisition and related expenses............................. 1.2
---------- --------- --------
Operating income............................................. 5.0 5.6 8.8
Other income, net............................................ 23.2 6.6 3.2
---------- --------- --------
Income before income taxes................................... 28.2 12.2 12.0
Income taxes................................................. 9.0 4.6 4.7
---------- --------- --------
Net income .................................................. 19.2% 7.6% 7.3%
========== ========= ========
PRODUCT LINE SALES AS A PERCENTAGE OF NET SALES
The following table sets forth product line revenue information as a
percentage of net sales. The table and subsequent discussion should be read
in conjunction with the Consolidated Financial Statements and Notes thereto.
FISCAL YEARS ENDED MARCH 31,
---------------------------------------
2000 1999 1998
-------- -------- --------
Communications............................................... 74.2% 57.1% 47.8%
Video and Imaging............................................ 18.1 21.4 25.0
Other........................................................ 7.7 21.5 27.2
--------- --------- ---------
100.0% 100.0% 100.0%
========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
NET SALES. Net sales for the fiscal year ended March 31, 2000
increased by 9.3% to $78.6 million, compared to $71.9 million for the fiscal
year ended March 31, 1999. This increase was primarily due to a 42.0% or $17.2
million increase in sales of the Company's communications products. This
increase in communications product sales was fueled by increased sales of the
Company's serial communications products and increased sales of its data
transmission products as both of these product lines gained market acceptance
and design wins. This increase was offset by decreases in sales of discontinued
consumer and custom products in the Company's legacy product lines (due in part
to the fiscal 1999 closure of one of the Company's third-party wafer fabrication
facilities), as well as the sale of the Company's silicon microstructures
business unit and related product lines in November 1998.
26
In the fiscal year ended March 31, 2000, sales to domestic customers
increased by 15.7% to $52.8 million. International sales decreased by 1.7% to
$25.8 million.
COST OF SALES. Cost of sales as a percentage of net sales for the fiscal year
ended March 31, 2000 decreased to approximately 43.5%, compared to 46.5% for
the fiscal year ended March 31, 1999. The resulting increase in gross margins
is due primarily to a greater mix of communications products, which generally
have higher gross margins than many of the Company's more mature products.
Gross margins from sales of ICs vary depending on product mix, competition
from other manufacturers, the volume of products manufactured and sold, the
ability of the Company's suppliers to achieve manufacturing efficiencies and
the cost of materials procured from the Company's suppliers. Margins on any
particular product generally erode over time.
RESEARCH AND DEVELOPMENT. Research and development expenses for the fiscal year
ended March 31, 2000 represented 21.3% of net sales, compared to 18.9% of net
sales for the fiscal year ended March 31, 1999. Research and development
spending for the fiscal year ended March 31, 2000 increased by 23.4% as the
Company continued to invest in the development of its communications products.
These spending increases resulted from additional staffing in the communications
products areas, increases in expenditures for supplies and equipment for the
development of communications products, and an increase in employee compensation
and benefits expenses associated with a pre-tax gain recognized in Other Income
in the first quarter of fiscal 2000. In the future, the Company expects to
increase spending on research and development activities, particularly for
communications products. The Company expects research and development expenses
to continue to fluctuate as a percentage of net sales as a result of the timing
of expenditures and changes in the level of net sales. However, the Company
intends to continue spending approximately 20% of net sales on research and
development activities to support its growth.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the fiscal year ended March 31, 2000 represented 29.6% of net
sales, compared to 27.1% for the fiscal year ended March 31, 1999. Selling,
general and administrative expenses for the fiscal year ended March 31, 2000
increased by 19.1%. The increase was due to growth in communications product
sales and an increase in employee compensation and benefits expenses associated
with a pre-tax gain recognized in Other Income in the first quarter of fiscal
2000. In the short term, many of the selling, general and administrative
expenses are fixed, causing a decline as a percentage of net sales in periods of
rapidly rising sales and an increase as a percentage of net sales when sales
growth is slower or declining.
OTHER INCOME. Other income in the fiscal year ended March 31, 2000 includes a
pre-tax $12.0 million gain on the sale of an investment related to a minority
equity investment in IC Works, Inc. In April 1999, the Company received
approximately 1.1 million shares of common stock in Cypress Semiconductor, Inc.
in exchange for its investment in IC Works due to the merger of Cypress
Semiconductor and IC Works. The Company sold this stock during the first and
fourth quarters of fiscal 2000, resulting in a pre-tax gain of $12.0 million in
other income and a related employee compensation and benefits expense of $3.0
million in costs and expenses.
PROVISION FOR INCOME TAXES. The provision for income taxes is based on income
from operations. The effective tax rate for fiscal 2000 was approximately 31.7%
compared with the federal statutory rate of 35%. The difference is due to
utilization of capital loss carryforwards that offset the gain on sale of the IC
Works investment and tax savings generated from utilization of the Company's
foreign sales corporation partially offset by non-deductible expenses, state
income taxes and foreign income, which is taxed at rates different from U.S.
income tax.
To date, inflation has not had a significant impact on the Company's
operating results.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
NET SALES. Net sales during fiscal 1999 were $71.9 million compared to
$102.0 million in fiscal 1998, a decrease of 29.6%. This decrease was primarily
due to decreases in net sales of discontinued consumer and custom products in
the Company's legacy product lines, as well as the sale of the Company's silicon
microstructures business unit and related product lines. The abrupt closure of
one of the Company's third-party wafer fabrication facilities during the third
quarter of fiscal 1999 had a further negative impact of $2.0 million on its
fiscal 1999 net sales from legacy products.
27
In fiscal 1999, sales to domestic customers decreased by 24.0% to $45.6
million. International sales decreased by 37.5% to $26.3 million.
COST OF SALES. Cost of sales as a percentage of net sales decreased from 50.9%
in fiscal 1998 to 46.5% in fiscal 1999. The resulting increase in gross margins
is due primarily to a greater mix of the Company's newer analog and mixed-signal
products which generally have higher gross margins than its more mature
products.
RESEARCH AND DEVELOPMENT. Research and development expenses, as a percentage of
net sales, increased from 15.3% in fiscal 1998 to 18.9% in fiscal 1999. Research
and development expenses decreased by $2.0 million or 13.0% compared to fiscal
1998. The decrease in research and development expenses is attributable to the
Company's control of operating expenses in response to decreased sales, to lower
employee benefits costs and to the restructuring activities associated with the
sale of the Company's silicon microstructures business unit and related product
lines.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, as a percentage of net sales, increased from 22.8% in fiscal 1998 to
27.1% in fiscal 1999. Selling, general and administrative expenses for fiscal
1999 decreased by $3.8 million or 16.2% compared to fiscal 1998. The decrease in
selling, general and administrative expenses is attributable to decreased
commissions expense, to lower employee benefits costs and to the Company's
control of operating expenses in response to decreased sales.
RESTRUCTURING AND OTHER CHARGES. Restructuring and other charges in fiscal 1999
of $731,000 relate to the sale of the Company's silicon microstructures business
unit and related product lines to OSI Systems, Inc. in the third quarter and
represent the loss on the sale of assets, severance costs related to the
termination of 38 employees and other disposition related expenses. The
restructuring action was completed during the fourth quarter of fiscal 1999 and
was financed with cash. In addition to the $2.6 million in proceeds from the
sale of the silicon microstructures business unit and related product lines, the
Company may receive additional contingent performance-based payments from this
sale of up to $2.5 million over the next year.
During the third quarter of fiscal 1998, the Company sold the capital
assets that it had written down in fiscal 1997 in connection with the
termination of a foundry arrangement. The sales proceeds exceeded the carrying
value and, as a result, the Company reversed $1.2 million of the related reserve
during the quarter. Offsetting this reversal, the Company decided during the
quarter to replace its information system under development with a system
determined to better meet its needs and wrote off $1.2 million of capitalized
costs associated with system modules which the Company did not intend to use.
OTHER INCOME. Other income during fiscal 1999 increased to $4.1 million from
$3.1 million in fiscal 1998 due to increased balances of cash and short-term
investments.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for fiscal 1999
was 38% compared with the federal statutory rate of 35%. The discrepancy is due
to non-deductible expenses, state income taxes and foreign losses, which are
taxed at rates different from U.S. income tax rates, partially offset by tax
advantaged investment income and tax savings generated from utilization of the
Company's foreign sales corporation.
28
QUARTERLY RESULTS
The following tables contain selected unaudited quarterly financial
data for the eight quarters ended March 31, 2000 and this data as a percentage
of net sales. In the opinion of management, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein. Results for a particular
quarter are not necessarily indicative of the results for any subsequent
quarter. The data gives effect to the three-for-two stock split effected on
February 15, 2000.
QUARTER ENDED
------------------------------------------------------
MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999
------------ ------------ ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 23,045 $ 20,708 $ 18,550 $ 16,251
Cost of sales 9,743 8,947 8,160 7,302
------------ ------------ ----------- ----------
Gross profit 13,302 11,761 10,390 8,949
Research and development 4,360 3,950 3,669 4,759
Selling, general and administrative 5,946 5,609 5,253 6,406
Goodwill amortization 126 126 126 126
Restructuring and other charges
------------ ------------ ----------- ----------
Operating income (loss) 2,870 2,076 1,342 (2,342)
Other income, net 7,423 1,423 1,296 8,044
------------ ------------ ----------- ----------
Income before income taxes 10,293 3,499 2,638 5,702
Income taxes 3,229 1,124 857 1,807
------------ ------------ ----------- ----------
Net income $ 7,064 $ 2,375 $ 1,781 $ 3,895
============ ============ =========== ==========
Net income per share:
Basic $ 0.45 $ 0.17 $ 0.13 $ 0.28
============ ============ =========== ==========
Diluted $ 0.39 $ 0.14 $ 0.11 $ 0.27
============ ============ =========== ==========
Shares used in the computation of
Net income per share:
Basic 15,538 14,313 14,074 13,998
============ ============ =========== ==========
Diluted 18,122 16,402 15,652 14,614
============ ============ =========== ==========
---------------------------------------------------
MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1999 1998 1998 1998
------------ ---------- ------------ ------------
Net sales $ 15,098 $ 15,808 $ 19,198 $ 21,764
Cost of sales 6,882 7,292 9,145 10,067
------------ ---------- ------------ ------------
Gross profit 8,216 8,516 10,053 11,697
Research and development 3,212 3,360 3,576 3,412
Selling, general and administrative 4,709 4,475 4,893 5,422
Goodwill amortization 126 146 185 184
Restructuring and other charges 731
------------ ---------- ------------ ------------
Operating income (loss) 169 (196) 1,399 2,679
Other income, net 1,016 1,182 1,424 1,091
------------ ---------- ------------ ------------
Income before income taxes 1,185 986 2,823 3,770
Income taxes 466 402 1,068 1,404
------------ ---------- ------------ ------------
Net income $ 719 $ 584 $ 1,755 $ 2,366
============ ========== ============ ============
Net income per share:
Basic $ 0.05 $ 0.04 $ 0.12 $ 0.17
============ ========== ============ ============
Diluted $ 0.05 $ 0.04 $ 0.12 $ 0.16
============ ========== ============ ============
Shares used in the computation of
Net income per share:
Basic 13,966 13,954 14,119 14,308
============ ========== ============ ============
Diluted 14,065 14,154 14,427 14,955
============ ========== ============ ============
MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999
------------- ------------- ------------ -----------
(AS A PERCENTAGE OF NET SALES)
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 42.3 43.2 44.0 44.9
------------- ------------- ------------ -----------
Gross profit 57.7 56.8 56.0 55.1
Research and development 18.9 19.1 19.8 29.3
Selling, general and administrative 25.8 27.1 28.3 39.4
Goodwill amortization 0.5 0.6 0.7 0.8
Restructuring and other charges
------------- ------------- ------------ -----------
Operating income (loss) 12.5 10.0 7.2 (14.4)
Other income, net 32.2 6.9 7.0 49.5
------------- ------------- ------------ -----------
Income before income taxes 44.7 16.9 14.2 35.1
Income taxes 14.0 5.4 4.6 11.1
------------- ------------- ------------ -----------
Net income 30.7% 11.5% 9.6% 24.0%
============= ============= ============ ===========
MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1999 1998 1998 1998
------------- ----------- ----------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 45.6 46.1 47.6 46.3
------------- ----------- ----------- --------------
Gross profit 54.4 53.9 52.4 53.7
Research and development 21.3 21.3 18.6 15.7
Selling, general and administrative 31.2 28.3 25.5 24.9
Goodwill amortization 0.8 0.9 1.0 0.8
Restructuring and other charges 4.6
------------- ----------- ----------- --------------
Operating income (loss) 1.1 (1.2) 7.3 12.3
Other income, net 6.7 7.4 7.4 5.0
------------- ----------- ----------- --------------
Income before income taxes 7.8 6.2 14.7 17.3
Income taxes 3.0 2.5 5.6 6.4
------------- ----------- ----------- --------------
Net income 4.8% 3.7% 9.1% 10.9%
============= =========== =========== ==============
Since September 30, 1998, gross margins have increased each quarter primarily
due to manufacturing efficiencies from higher production volumes, efficiencies
gained as a result of the Company's decision, in the fourth quarter of fiscal
1997, to transfer its test and shipping operations to foreign subcontractors to
reduce manufacturing expenses, and a greater mix of communications products
which generally have higher gross margins than the Company's more mature
products. The
29
sequential quarter decrease in net sales for the three quarters ended March
31, 1999 was primarily due to decreases in sales of discontinued consumer and
custom products in the Company's legacy product lines (due in part to the
fiscal 1999 closure of one of its third-party wafer fabrication facilities),
as well as the sale of the Company's silicon microstructures business unit
and related product lines in November 1998.
Research and development and selling, general and administrative
expenses increased in the quarter ended June 30, 1999 primarily due to $3.0
million in employee compensation and benefits expenses resulting from a $7.0
million first quarter pre-tax gain on the sale of an investment related to a
minority equity investment in IC Works included in other income. In April 1999,
the Company received in excess of 1.1 million shares of common stock in Cypress
Semiconductor in exchange for its investment in IC Works due to the merger of
Cypress Semiconductor and IC Works. The Company sold this stock during the first
and fourth quarters of fiscal 2000, resulting in a pre-tax gain of $12.0
million.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, the Company financed its operations primarily from
cash flows from operations and existing cash and short-term investments. At
March 31, 2000, the Company had $380.2 million of cash and short-term
investments. The Company has a short term, unsecured line of credit available
under which it may borrow up to $10.0 million, none of which was being utilized
at March 31, 2000. In addition, the Company has a credit facility with certain
domestic and foreign banks under which it may execute up to $25.0 million in
foreign currency transactions. At March 31, 2000, the Company had no foreign
currency contracts outstanding.
For the fiscal year ended March 31, 2000, the Company generated $9.6
million of cash from its operating activities, the result of net income of $15.1
million and a net increase in working capital of $7.3 million, partially offset
by $12.6 million of gains on sales of an investment and equipment and non-cash
items of $200,000.
Net capital and other asset expenditures during the fiscal year ended
March 31, 2000 totaled $2.9 million including purchases of computer equipment
and software used for product development. Other investing activities during the
fiscal year ended March 31, 2000 included the net purchases of $1.0 million of
short term investments, which was offset by $18.1 million of proceeds from the
sale of the Company's minority equity investment in IC Works, and $658,000 of
proceeds from the sale of equipment.
During the fiscal year ended March 31, 2000, the Company issued
3,450,000 shares of common stock through a follow-on offering for net proceeds
of $260.8 million, repurchased 177,450 shares of the Company's common stock for
$3.4 million and received $16.0 million from the issuance of 1,337,036 common
stock shares upon the exercise of stock options under the Company's stock option
plans.
The Company has no material firm capital commitments.
The Company anticipates that it will continue to finance its
operations with cash flows from operations, existing cash and short-term
investment balances, borrowings under existing bank credit lines, and some
combination of long-term debt and/or lease financing and additional sales of
equity securities. The combination and sources of capital will be determined
by management based on the Company's needs and prevailing market conditions.
The Company believes that cash, cash equivalents, short-term investments,
borrowings from the line of credit and cash flows from operations will be
sufficient to satisfy working capital requirements and capital equipment
needs for at least the next twelve months. From time to time, the Company
evaluates potential acquisitions and equity investments complementary to its
design expertise and market strategy, including investments in, or other
arrangements with, wafer fabrication foundries. To the extent the Company
pursues these transactions, it could be required to seek additional equity or
debt financing. There can be no assurance that the Company would be able to
obtain additional financing on acceptable terms, or at all. The sale of
additional equity or convertible debt could result in dilution to the
Company's stockholders.
YEAR 2000
Many computer systems may experience problems interpreting dates around
the Year 2000. The Company has completed the process of identifying the programs
and infrastructure in all areas that could be affected by the Year 2000 issue
and has
30
developed an implementation plan to resolve any issues. As of the date of
this filing, the Company has experienced no significant problems related to
Year 2000 issues.
In 1999, the Company implemented a new business system that is Year
2000 compliant at a cost of $5.3 million. In addition, the replacement of the
Company's remaining legacy systems is estimated to cost $300,000. The amount
capitalized for the acquisition and implementation of the new business system
and the replacement of the remaining legacy systems was $5.3 million. The
Company has expensed approximately $300,000 of project costs in prior periods.
The new business system implementation was substantially complete as of March
31, 1999, and the capitalized portion is being depreciated over an average of
six years.
The Company believes that it will continue to be able to operate its time
sensitive business-application software programs and infrastructure. However,
due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on its results of
operations, liquidity or financial condition. The Company continues to work with
key suppliers and customers to assess their Year 2000 readiness. The failure by
a third party to adequately address the Year 2000 issue could harm the party's
ability to furnish products and services to the Company and, therefore, could
harm its business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY FLUCTUATIONS. The Company is exposed to foreign currency
fluctuations primarily through its operations in Japan. This exposure is the
result of timing differences between incoming and outgoing cashflows denominated
in foreign currency. Operational currency requirements are typically forecast
for a three-month period. If there is a need to hedge this risk, the Company
will enter into transactions to purchase or sell currency in the open market or
enter into forward currency exchange contracts which are currently available
under its bank lines of credit. While it is expected that this method of hedging
foreign currency risk will be utilized in the future, the hedging methodology
and/or usage may be changed to manage exposure to foreign currency fluctuations.
If the Company's foreign operations forecasts are overstated or
understated during periods of currency volatility, the Company could experience
unanticipated currency gains or losses. At the end of fiscal 2000, the Company
did not have significant foreign currency denominated net assets or net
liabilities positions and had no foreign currency contracts outstanding.
INTEREST RATE SENSITIVITY. The Company maintains investment portfolio holdings
of various issuers, types and maturity dates with various banks and investment
banking institutions. The Company does not regularly hold investments with
maturity dates beyond 90 days. The market value of these investments on any day
during the investment term may vary as a result of market interest rate
fluctuations. This exposure is not hedged because a hypothetical 10% movement in
interest rates during the investment term would not likely have a material
impact on investment income. The actual impact on investment income in the
future may differ materially from this analysis, depending on actual balances
and changes in the timing and the amount of interest rate movements. The
short-term investments are classified as "available-for-sale" securities and the
cost of securities sold is based on the specific identification method. This
designation is reevaluated as of each balance sheet date. At March 31, 2000,
short-term investments consisted of auction rate securities of $3.0 million. As
of March 31, 2000, there were no significant differences between the fair market
value and the underlying cost of such investments.
31
ITEM 8.
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Exar Corporation:
We have audited the accompanying consolidated balance sheets of Exar Corporation
and subsidiaries as of March 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for each of the years in the three year period ended March 31, 2000.
Our audits also included the consolidated financial statement schedule listed in
Item 14.(a)2. These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Exar Corporation and its
subsidiaries as of March 31, 2000 and 1999 and the results of their operations
and their cash flows, for each of the years in the three year period ended March
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
April 24, 2000
32
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 377,158 $ 79,410
Short-term investments 3,000 2,000
Accounts receivable, net of allowances of $1,869 and $2,047 11,550 10,734
Inventories 8,299 5,873
Prepaid expenses and other 3,012 1,399
Deferred income taxes 3,369 4,047
--------------- -------------
Total current assets 406,388 103,463
PROPERTY, PLANT, AND EQUIPMENT, Net 26,653 27,684
GOODWILL, net of accumulated amortization of $4,922 - 504
OTHER ASSETS 5,392 6,645
--------------- -------------
TOTAL ASSETS $ 438,433 $ 138,296
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,497 $ 4,265
Accrued compensation and related benefits 7,060 3,560
Accrued sales commissions 1,096 1,053
Other accrued expenses 1,165 1,775
Income taxes payable - 925
--------------- -------------
Total current liabilities 12,818 11,578
COMMITMENTS AND CONTINGENCIES (see Note 10)
DEFERRED INCOME TAXES - 297
LONG-TERM OBLIGATIONS 574 664
STOCKHOLDERS' EQUITY:
Preferred stock; $.0001 par value; 2,250,000 shares authorized;
no shares outstanding - -
Common stock; $.0001 par value; 25,000,000 shares authorized;
18,582,975 and 15,980,788 shares issued 352,614 88,908
Accumulated other comprehensive income 188 204
Retained earnings 72,239 57,124
Treasury stock; none and 2,007,399 shares of common stock at cost - (20,479)
--------------- -------------
Total stockholders' equity 425,041 125,757
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 438,433 $ 138,296
=============== =============
See notes to consolidated financial statements.
33
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
NET SALES $ 78,554 $ 71,868 $ 102,015
COST AND EXPENSES:
Cost of sales 34,152 33,386 51,937
Research and development 16,738 13,560 15,581
Selling, general and administrative 23,214 19,499 23,273
Goodwill amortization 504 641 1,062
Restructuring and other charges - 731 -
Acquisition and related expenses - - 1,176
------------- ------------- --------------
Total costs and expenses 74,608 67,817 93,029
------------- ------------- --------------
INCOME FROM OPERATIONS 3,946 4,051 8,986
OTHER INCOME (EXPENSE):
Interest income 6,152 4,156 3,165
Interest expense - (65) (76)
Gain on sale of investment 12,018 - -
Other, net 16 622 224
------------- ------------- --------------
Total other income, net 18,186 4,713 3,313
------------- ------------- --------------
INCOME BEFORE INCOME TAXES 22,132 8,764 12,299
PROVISION FOR INCOME TAXES 7,017 3,340 4,781
------------- ------------- --------------
NET INCOME $ 15,115 $ 5,424 $ 7,518
============= ============= ==============
NET INCOME PER SHARE:
BASIC $ 1.04 $ 0.39 $ 0.54
============= ============= ==============
DILUTED $ 0.93 $ 0.38 $ 0.52
============= ============= ==============
SHARES USED IN COMPUTATION OF
NET INCOME PER SHARE:
BASIC 14,480 14,088 13,989
============= ============= ==============
DILUTED 16,197 14,400 14,595
============= ============= ==============
See notes to consolidated financial statements
34
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Accumulated
Common Stock Treasury Stock Other Total
---------------------- ----------------------- Retained Comprehensive Stockholder's
Shares Amount Shares Amount Earnings Income (Loss) Equity
----------- ---------- ----------- ----------- ---------- ------------- ------------
BALANCES, March 31, 1997 15,184,407 $ 80,072 (1,466,649) $ (14,145) $ 44,182 $ (292) $ 109,817
Comprehensive income:
Net income 7,518 7,518
Other comprehensive income:
Foreign currency translation
adjustments 375 375
Comprehensive income
Exercise of stock options 410,700 3,987 3,987
Income tax benefit from stock option
transactions 867 867
Stock issued under Employee Stock
Participation Plan 117,750 1,165 1,165
----------- ---------- ----------- ----------- ---------- ------------- -----------
BALANCES, March 31, 1998 15,712,857 86,091 (1,466,649) (14,145) 51,700 83 123,729
Comprehensive income:
Net income 5,424 5,424
Other comprehensive income:
Foreign currency translation
adjustments 121 121
Comprehensive income
Exercise of stock options 140,476 1,330 1,330
Income tax benefit from stock option
transactions 312 312
Stock issued under Employee Stock
Participation Plan 127,455 1,175 1,175
Acquisition of treasury stock (540,750) (6,334) (6,334)
----------- ---------- ----------- ----------- ---------- ------------- -----------
BALANCES, March 31, 1999 15,980,788 88,908 (2,007,399) (20,479) 57,124 204 125,757
Comprehensive income:
Net income 15,115 15,115
Other comprehensive income:
Foreign currency translation
adjustments (16) (16)
Comprehensive income
Exercise of stock options 1,259,777 14,718 14,718
Income tax benefit from stock option
transactions 10,838 10,838
Stock issued under Employee Stock
Participation Plan 77,259 1,264 1,264
Acquisition of treasury stock (177,450) (3,392) (3,392)
Stock issued in connection with
follow-on offering, net of related
costs 1,265,151 236,886 2,184,849 23,871 260,757
----------- ---------- ----------- ----------- ---------- ------------- -----------
BALANCES, March 31, 2000 18,582,975 $352,614 - $ - $ 72,239 $ 188 $ 425,041
=========== ========== =========== =========== ========== ============= ===========
Comprehensive
Income
-------------
BALANCES, March 31, 1997
Comprehensive income:
Net income $ 7,518
Other comprehensive income:
Foreign currency translation
adjustments 375
-------------
Comprehensive income $ 7,893
=============
Exercise of stock options
Income tax benefit from stock option
transactions
Stock issued under Employee Stock
Participation Plan
BALANCES, March 31, 1998
Comprehensive income:
Net income $ 5,424
Other comprehensive income:
Foreign currency translation
adjustments 121
-------------
Comprehensive income $ 5,545
=============
Exercise of stock options
Income tax benefit from stock option
transactions
Stock issued under Employee Stock
Participation Plan
Acquisition of treasury stock
BALANCES, March 31, 1999
Comprehensive income:
Net income $ 15,115
Other comprehensive income:
Foreign currency translation
adjustments (16)
-------------
Comprehensive income $ 15,099
=============
Exercise of stock options
Income tax benefit from stock option
transactions
Stock issued under Employee Stock
Participation Plan
Acquisition of treasury stock
Stock issued in connection with
follow-on offering, net of related
costs
BALANCES, March 31, 2000
See notes to consolidated financial statements.
35
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,115 $ 5,424 $ 7,518
Reconciliation of net income to net cash provided by operating activities::
Depreciation and amortization 4,038 4,762 6,190
Provision for doubtful accounts and sales returns (178) (1,364) 254
Deferred income taxes (4,071) 1,510 3,607
Gain on sale of investment (12,018) -
Gain on sale of equipment (584) (289) (387)
Changes in operating assets and liabilities:
Accounts receivable (638) 6,678 (3,374)
Inventories (2,426) 908 495
Prepaid expenses and other (937) 319 (246)
Accounts payable (768) (3,269) 15
Accrued compensation and related benefits 3,500 (5,004) 3,900
Accrued sales commissions 43 (54) 494
Other accrued expenses (684) (238) (615)
Income taxes payable 9,237 1,500 2,817
---------- ---------- ----------
Net cash provided by operating activities 9,629 10,883 20,668
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (2,503) (5,335) (4,837)
Proceeds from disposition of equipment and leasehold improvements 658 977 7,968
Purchases of short-term investments (24,340) (137) (4,087)
Proceeds from maturities of short-term investments 23,340 1,277 6,000
Purchases of long-term investments - - (3,000)
Proceeds from sale of investment 18,095 - -
Other assets (372) (889) (416)
---------- ---------- ----------
Net cash provided by (used in) investing activities 14,878 (4,107) 1,628
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 276,739 2,505 5,152
Long-term obligations (90) (81) (135)
Acquisition of treasury stock (3,392) (6,334) -
---------- ---------- ----------
Net cash provided by (used in) financing activities 273,257 (3,910) 5,017
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16) 121 375
---------- ---------- ----------
NET INCREASE IN CASH AND EQUIVALENTS 297,748 2,987 27,688
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 79,410 76,423 48,735
---------- ---------- ----------
CASH AND EQUIVALENTS AT END OF YEAR $377,158 $79,410 $76,423
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 1,051 $ 633 $ 391
========== ========== ==========
Cash paid for interest $ 725 $ - $ -
========== ========== ==========
See notes to consolidated financial statements.
36
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
- -------------------------------------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Exar Corporation ("Exar" or the "Company")
designs, develops and markets high-performance, high-bandwidth
mixed-signal (analog and digital) silicon solutions for the worldwide
communications infrastructure. The Company uses its high-speed, analog
and mixed-signal design expertise, system-level knowledge and standard
CMOS process technologies to offer integrated circuits, or ICs, for the
communications markets that address asynchronous transmission
standards, such as T/E carrier and ATM. The Company is leveraging this
expertise to develop products based on optical transmission standards,
such as SONET/SDH. Additionally, Exar provides solutions for the serial
communications market as well as the video and imaging markets. Exar's
largest customers include Alcatel, Cisco, Hewlett-Packard, Lucent,
Nokia and Tellabs.
USE OF MANAGEMENT ESTIMATES - The preparation of the Company's
consolidated financial statements in conformity with generally accepted
accounting principles requires the use of management estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported results of operations during the reporting period. Actual
results could differ from estimates.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Exar and its wholly owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
BASIS OF PRESENTATION - All share amounts and per share calculations in
the accompanying consolidated financial statements give effect to the
three-for-two stock split effected on February 15, 2000.
CASH AND EQUIVALENTS - The Company considers all highly liquid
investments with original maturities of three months or less, when
purchased, to be cash equivalents.
SHORT-TERM INVESTMENTS - The Company's policy is to invest in various
short-term instruments with investment grade credit ratings. Generally,
such investments have contractual maturities of less than one year. The
Company classifies its short-term investments as "available-for-sale"
securities and the cost of securities sold is based on the specific
identification method. At March 31, 2000, short term investments
consisted of auction rate securities of $3,000,000. At March 31, 1999,
short-term investments consisted of auction rate securities of
$2,000,000. As of March 31, 2000 and 1999, there were no significant
differences between the fair market value and the underlying cost of
such investments.
INVENTORIES - Inventories are stated at the lower of cost
(first-in, first-out method) or market.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and
equipment are stated at cost. Depreciation of plant and equipment are
computed using the straight-line method over the estimated useful lives
of the assets. Estimated useful lives are as follows:
Computer software and computer equipment 3-6 years
Machinery and equipment 5-7 years
Buildings and fixtures 5-30 years
GOODWILL - Goodwill is amortized on a straight-line basis
over a period of five years.
37
LONG LIVED ASSETS - Long lived assets are evaluated for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company's
policy is to review the recoverability of all long lived assets based
upon undiscounted cash flows on an annual basis at a minimum, and in
addition, whenever events or changes indicate that the carrying amount
of the asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual
disposition is less than its carrying amount.
INCOME TAXES - The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes," which
requires the asset and liability approach for financial accounting and
reporting of income taxes. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
REVENUE RECOGNITION - The Company recognizes revenue from the
sale of products when shipped. The Company's distributor agreements
generally permit the return of up to 10% of their purchases annually
for purposes of stock rotation and also provide for credits to
distributors in the event the Company reduces the price of any product.
The Company records an allowance based on future authorized and
historical patterns of returns, price protection and other concessions
at the time revenue is recognized.
COMPREHENSIVE INCOME - In 1999, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net assets during the
period from nonowner sources. Comprehensive income for the years ended
March 31, 2000, 1999, and 1998 has been disclosed within the
consolidated statements of stockholders' equity and comprehensive
income.
FOREIGN CURRENCY - The functional currency of each of the
Company's foreign subsidiaries is the local currency of that country.
Accordingly, gains and losses from the translation of the financial
statements of the foreign subsidiaries are included in stockholders'
equity. Gains and losses resulting from foreign currency transactions
are included in other income. Net foreign currency transaction gains
(losses) were $(157,000), $59,000 and $19,000 in 2000, 1999 and 1998,
respectively.
The Company enters into foreign currency exchange contracts from
time-to-time to hedge certain currency exposures. These contracts are
executed with credit-worthy financial institutions and are denominated
in currencies of major industrial nations. Gains and losses on these
contracts serve as hedges in that they offset fluctuations that might
otherwise impact the Company's financial results. The Company is
exposed to credit-related losses in the event of nonperformance by the
parties to its foreign currency exchange contracts. At March 31, 2000,
and 1999, there were no such foreign currency exchange contracts
outstanding.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - Financial
instruments potentially subjecting the Company to concentrations of
credit risk consist primarily of accounts receivable and cash and
short-term investments. The majority of the Company's sales are derived
from manufacturers in the computer, communications and electronic
imaging industries. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral for sales on
credit. The Company maintains reserves for potential credit losses and
such losses have been within management's expectations. The Company's
policy is to place its cash and short-term investments with high credit
quality financial institutions and limit the amounts invested with any
one financial institution or in any type of financial instrument. The
Company does not hold or issue financial instruments for trading
purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of
financial instruments have been determined by the Company, using
available market information and valuation methodology considered to be
appropriate. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. The use of
different market assumptions and/or estimation methodologies could have
a material effect on estimated fair value amounts. The estimated fair
value of the Company's financial instruments at March 31, 2000
and 1999 was not materially different from the values presented in the
consolidated balance sheets.
38
RECLASSIFICATIONS - Certain amounts in the 1999 financial statements
have been reclassified to conform to the 2000 presentation.
2. INVENTORIES
Inventories at March 31 consisted of the following:
2000 1999
---- ----
(In thousands)
Work in process $ 5,064 $ 3,262
Finished goods 3,235 2,611
-------- --------
Total $ 8,299 $ 5,873
======== ========
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31 consisted of the following:
2000 1999
---- ----
(In thousands)
Land $ 6,584 $ 6,584
Building 13,433 13,433
Machinery and equipment 35,254 28,660
Leasehold improvements 68 50
Construction in progress 5,023
--------- ---------
55,339 53,750
Accumulated depreciation and
amortization (28,686) (26,066)
--------- ---------
Total $ 26,653 $ 27,684
========= =========
4. BORROWING ARRANGEMENTS
The Company has available a short-term, unsecured, bank line of credit
under which it may borrow up to $10,000,000, none of which was being
utilized at March 31, 2000. In addition, the Company has a credit
facility with certain domestic and foreign banks under which it may
execute up to $25,000,000 in foreign currency transactions. At March
31, 2000, the Company had no outstanding foreign currency forward
contracts.
39
5. INCOME TAXES
The provision for income taxes for the years ended March 31 consisted
of the following:
2000 1999 1998
---- ---- ----
(In thousands)
Current:
Federal $ 91 $ 882 $ 293
State 159 636 14
Foreign - - -
--------- -------- ---------
250 1,518 307
--------- -------- ---------
Deferred:
Federal (3,624) 1,489 3,047
State (447) 21 560
Foreign - - -
--------- -------- ---------
(4,071) 1,510 3,607
--------- -------- ---------
Charge in lieu of taxes attributable
to employee stock plans 10,838 312 867
--------- -------- ---------
Total $ 7,017 $ 3,340 $ 4,781
========= ======== =========
Consolidated pretax income includes foreign losses of approximately
$(28,000), $(622,000), and $(780,000), in 2000, 1999, and 1998,
respectively. Undistributed earnings of the Company's foreign
subsidiaries are considered to be indefinitely reinvested and,
accordingly no provision for federal and state income taxes have been
provided thereon. Upon distribution of those earnings in the form of a
dividend or otherwise, the Company would be subject to both US income
taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. It is not
practical to estimate the income tax liability that might be incurred
on the remittance of such earnings.
Current net deferred tax assets at March 31, 2000 and 1999 were
$3,369,000 and $4,047,000, respectively. Non-current net deferred tax
assets (liabilities) at March 31, 2000 and 1999 of $4,480,000 and
$(269,000), respectively, are included in deferred income taxes and
other assets, respectively, within the accompanying balance sheet.
Significant components of the Company's net deferred tax asset at March
31, 2000 and 1999 are as follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Reserves and accruals not currently deductible $ 3,903 $ 4,550
Net operating loss and tax credit carryforwards 8,477 8,393
General business credits 2,024 1,161
State income taxes 8 219
Other 169 207
-------- ---------
Total deferred tax assets 14,581 14,530
-------- ---------
Deferred tax liabilities:
Depreciation (922) (1,005)
Other (480) (323)
-------- ----------
Total deferred tax liabilities (1,402) (1,328)
-------- ----------
Valuation allowance (5,330) (9,424)
-------- ----------
Net deferred tax assets $ 7,849 $ 3,778
======== ==========
40
The valuation allowance for deferred tax assets relates to (i) the tax
benefits of certain acquired net operating losses for which the
utilization is limited to the taxable income of the acquired subsidiary
and (ii) state tax credits. The valuation allowance relates to the
amount of such benefits for which realization is not assured. During
fiscal year 2000, the Company reversed valuation allowances of
$4,094,000, primarily due to a change in the assessment of the
realization of the tax benefits of certain net operating loss
carryforwards.
The Company has net operating loss carryforwards of approximately
$15,307,000 for federal income tax purposes, which are available to
offset future taxable income through fiscal year 2012. The federal tax
law includes provisions limiting the use of net operating loss
carryforwards in the event of certain changes in ownership, as defined.
Consequently, the Company's ability to utilize certain of its acquired
net operating loss carryforwards is subject to an annual limitation.
The following summarizes differences between the amount computed by
applying the statutory federal income tax rate to income before income
taxes and the provision for income taxes for each of the years ended
March 31:
2000 1999 1998
---- ---- ----
(In thousands)
Income tax provision at statutory rate $ 7,746 $ 3,067 4,305
State income taxes, net of federal income
tax benefit 1,071 762 457
Change in valuation allowance (1,818) (657) -
Amortization of goodwill 176 224 371
Tax-exempt interest income (7) (38) (114)
Benefit of foreign sales corporation - (175) (175)
Foreign losses providing no benefit 48 261 (18)
Tax credits (200) (200) (424)
Other, net 1 96 379
--------- --------- ---------
Total $ 7,017 $ 3,340 $ 4,781
========== ========= ==========
41
6. NET INCOME PER SHARE
SFAS 128 requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income by the
weighted average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock.
A summary of the Company's EPS for each of the years ended March 31 is
as follows (In thousands, except per share amounts):
2000 1999 1998
---------- ---------- -----------
NET INCOME $ 15,115 $ 5,424 $ 7,518
========== ========== ===========
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding used in
computation of basic net income per share 14,480 14,088 13,989
Dilutive effect of stock options 1,717 312 606
---------- ---------- -----------
Shares used in computation of diluted net income per share 16,197 14,400 14,595
========== ========== ===========
BASIC NET INCOME PER SHARE $ 1.04 $ 0.39 $ 0.54
========== ========== ===========
DILUTED NET INCOME PER SHARE $ 0.93 $ 0.38 $ 0.52
========== ========== ===========
Options to purchase 27,000, 2,367,771 and 992,100 shares of common
stock at prices ranging from $95.31, $10.37 to $24.83 and $14.33 to
$24.83 were outstanding as of March 31, 2000, 1999 and 1998,
respectively, but not included in the computation of diluted net income
per share because the options' exercise prices were greater than the
average market price of the common shares as of such dates and,
therefore, would be anti-dilutive under the treasury stock method.
7. EMPLOYEE BENEFIT PLANS
EXAR SAVINGS PROGRAMS - The Exar Savings Plan covers substantially all
employees of the Company. The Savings Plan provides for voluntary
salary reduction contributions in accordance with Section 401(k) of the
Internal Revenue Code as well as contributions from the Company based
on the achievement of specified operating results. Exar made
contributions of $452,000, $86,000 and $379,000 during 2000, 1999 and
1998, respectively.
INCENTIVE COMPENSATION PROGRAMS - The Company's incentive
compensation programs provide for incentive awards for substantially
all employees of the Company based upon the achievement of specified
operating and performance results. Incentive awards totaled $4,964,000,
$681,000, and $3,616,000 in fiscal years 2000, 1999 and 1998,
respectively. The Company's incentive programs may be amended or
discontinued at the discretion of the Board of Directors.
42
8. STOCKHOLDERS' EQUITY
PREFERRED SHARE PURCHASE RIGHTS PLAN - In December 1995, the
Company's Board of Directors (the Board) adopted a Preferred Share
Purchase Rights Plan under which the Board declared a dividend of one
purchase right for each outstanding share of common stock of Exar held
as of January 10, 1996. Each right entitles the registered holder to
purchase one one-hundredth of a share of Exar's Series A Junior
Participating Preferred Stock. Subsequent to March 31, 2000, the
original price of the dividend of rights was increased from $118.50
($79.00 after giving effect to the 3 for 2 stock split effected on
February 15, 2000) to $375.00. The rights become exercisable ten days
after the announcement that an entity or person has commenced a tender
offer to acquire or has acquired 15% or more of the outstanding Exar
Common Stock ("the Distribution Date").
After the Distribution Date, the Board may exchange the rights at an
exchange ratio of one common share or one one-hundredth of a preferred
share per right. Otherwise, each holder of a right, other than rights
beneficially owned by the acquiring entity or person (which will
thereafter be void), will have the right to receive upon exercise that
number of common shares having a market value of two times the exercise
price of the right. The rights will expire on December 15, 2005.
EMPLOYEE STOCK PARTICIPATION PLAN - Exar is authorized to
issue 2,250,000 shares of common stock under its Employee Stock
Participation Plan (the Plan). The Plan permits employees to purchase
common stock through payroll deductions. The purchase price is the
lower of 85% of the fair market value of the common stock at the
beginning or end of each three month offering period. Shares purchased
by and distributed to participating employees were 77,259 in 2000,
117,750 in 1999, and 130,096 in 1998 at weighted average prices of
$16.34, $9.21 and $9.87, respectively. The weighted average fair value
of the fiscal 2000, 1999 and 1998 awards was $14.54, $2.77 and $4.10
per share, respectively.
The Company has reserved 1,217,963 shares of common stock for
future issuance under its Employee Stock Participation Plan.
STOCK OPTION PLANS - Exar has a Stock Option Plan and a
Non-Employee Directors' Stock Option Plan. Under these
plans, the Company may grant options to purchase up to
3,594,052 and 375,000 shares of common stock, respectively.
Options are granted at fair market value on the date of
grant. Options are generally exercisable in four equal
annual installments commencing one year after the date of
grant and generally expire seven years from the grant date.
During fiscal year 2000, shareholders approved 675,000 additional
shares of the Company's Common Stock to be reserved under the 1997
Equity Incentive Plan, as amended (the "1997 Plan"). The 1997 Plan
differs from prior plans in that, the 1997 Plan allows for selected
employees and employee directors to irrevocably elect to defer $5,000
to $50,000 of their yearly salaries in return for options to purchase
Common Stock at an aggregate discount from current fair market value
equal to the salary reduction amount.
43
Option activity for both plans is summarized as follows:
Outstanding Options
---------------------------
Weighted
Average Exercise
Number of Price per
Shares Share
--------- -------
Outstanding, March 31, 1997 (968,383 exercisable at a weighted
average price of $10.80) 2,882,078 $ 10.81
Options granted (weighted average fair value of $8.41) 1,194,253 14.83
Options exercised (410,700) 9.71
Options canceled (375,648) 12.01
--------- -------
Outstanding, March 31, 1998 (1,146,460 exercisable at a weighted
average price of $11.21) 3,289,983 12.26
Options granted (weighted average fair value of $6.04) 1,192,370 10.57
Options exercised (140,476) 9.49
Options canceled (452,289) 12.72
--------- -------
Outstanding, March 31, 1999 (1,542,018 exercisable at a weighted
average price of $11.77) 3,889,588 11.81
Options granted (weighted average fair value of $15.77) 1,108,055 27.42
Options exercised (1,259,777) 11.66
Options canceled (174,798) 14.96
--------- -------
Outstanding, March 31, 2000 3,563,068 $ 16.54
========= =======
At March 31, 2000, 1,035,608 options were available for future grant
under both plans.
Options Outstanding Options Exercisable
---------------------------------- ------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (years) Price Exercisable Exercise Price
- ----------------------- ----------- --------------------- -------- ----------- --------------
$ 3.50 - $ 9.96 817,079 4.87 $ 9.60 233,348 $ 9.02
10.00 - 11.46 823,011 3.79 10.81 471,474 10.93
11.63 - 15.46 355,091 3.98 13.17 163,085 13.02
15.75 - 24.83 714,653 4.82 17.48 230,298 16.89
24.89 - 95.31 853,234 6.51 29.31 16,875 24.89
------------------ --------- ---- ----- --------- ------
$ 3.50 - $ 95.31 3,563,068 4.91 $ 16.54 1,115,080 $ 12.28
========= =========
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro
forma net income and earnings per share had the Company adopted the
fair value method as of the beginning of fiscal 1996. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
44
significantly differ from the Company's stock option awards. These
models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 5.3 to 7.8 years; stock volatility, 58%,
43% and 44% in 2000, 1999 and 1998 respectively; risk free interest
rates, 6.1%, 5.4% and 6.0% in 2000, 1999 and 1998; respectively; and no
dividends during the expected term. The Company's calculations are
based on a single option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 2000, 1999
and 1998 awards had been amortized to expense over the vesting period
of the awards, pro forma net income would have been as follows: (In
thousands, except per share amounts):
2000 1999 1998
---- ---- ----
Pro Forma Net Income $ 11,039 $ 2,412 $ 4,696
======== ======== =======
Pro Forma Net Income Per Share:
BASIC $ 0.76 $ 0.17 $ 0.34
======== ======== =======
DILUTED $ 0.68 $ 0.17 $ 0.32
======== ======== =======
The impact of outstanding non-vested stock options granted prior to
1996 has been excluded from the pro forma calculation; accordingly, the
2000, 1999 and 1998 pro forma amounts are not indicative of future
period pro forma amounts, when the calculation will apply to all
applicable stock options.
9. RESTRUCTURING AND OTHER CHARGES
RESTRUCTURING
In the third quarter of fiscal 1999, the Company sold its Silicon
Microstructures business unit to OSI Systems, Inc. ("OSI") for
$2,600,000, with additional contingent performance-based payments of up
to $2,500,000 over the next year. The resulting restructuring charge of
$731,000 represents the loss on the sale of the assets sold, severance
costs related to the termination of 38 employees and other disposition
related expenses. The restructuring action was completed during the
fourth quarter of fiscal 1999 and was financed through the use of cash.
OTHER CHARGES
During the fourth quarter of fiscal 1997, the Company incurred a charge
of $9,000,000 relating to the write-down of capital assets and
investments made under the terms of a wafer production agreement and
equity investment agreements with IC Works, Inc. ("IC Works"). The
charge was estimated in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" and reflects management's estimate of the net realizable
value of the equipment and investment in IC Works. The Company
terminated its 1995 wafer production agreement with the foundry due to
dramatically changed market conditions for wafer pricing and
availability, as well as the recent business redirection of the Company
and delays in the commencement of anticipated production by the
foundry.
During the quarter ended December 31, 1997, the Company sold the
capital assets written down in connection with this prior year charge.
The sales proceeds exceeded the carrying value and, as a result, the
Company reversed $1.2 million of the related reserve during the
quarter. Offsetting this reversal, the Company decided during the
quarter to replace its current information system under development
with a system determined to
45
better meet the Company's needs and wrote off $1,200,000 of capitalized
costs associated with system modules which the Company does not intend
to use.
As a result of a merger completed on April 1, 1999 of IC Works, Inc.
and Cypress Semiconductor, the Company received in excess of 1.1
million shares of Cypress Semiconductor (CY: NYSE) common stock in
exchange for the Company's minority equity investment in IC Works, Inc.
The Company sold this stock during the first and fourth quarters of
fiscal 2000 resulting in a pre-tax gain of $12,000,000 in other income
and a related employee compensation and benefits expense of $3,000,000
in costs and expenses.
10. COMMITMENTS AND CONTINGENCIES
In 1987, one of the Company's subsidiaries identified low-level
groundwater contamination at its principal manufacturing site. Although
the area of contamination appears to have been defined, the source of
the contamination has not been identified. The Company has reached an
agreement with another entity to participate in the cost of ongoing
site investigations and the operation of remedial systems to remove
subsurface chemicals which is expected to continue for 10 to 15 years.
The accompanying consolidated financial statements include the
Company's share of estimated remaining remediation costs of
approximately $647,000 as of March 31, 2000.
The Company is involved in various claims, legal actions and complaints
arising in the normal course of business. Although the ultimate outcome
of these matters is not presently determinable, management believes
that the resolution of all such pending matters will not have a
material adverse effect on the Company's consolidated financial
position, results of operations, liquidity or cash flows.
11. INDUSTRY AND SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for reporting information about operating
segments in annual financial statements and requires that certain
selected information about operating segments be reported in interim
financial reports. It also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which
separate financial information is evaluated regularly by the chief
operating decision maker, or decision making group in deciding how to
allocate resources and in assessing performance. SFAS No. 131 differs
from accounting standard SFAS No. 14, which required companies to
disclose certain financial information about an industry segment in
which they operate. Under both SFAS No. 14 and SFAS No. 131, the
Company operates in one reportable segment and is engaged in the
design, development and marketing of a variety of analog and
mixed-signal application-specific integrated circuits for use in
communications, and in the video and imaging products. The nature of
the Company's products and production processes as well as type of
customers and distribution methods are consistent among all of the
Company's devices. The Company's foreign operations consist primarily
of its wholly-owned subsidiaries in Japan, the United Kingdom, France
and Taiwan. The Company's principle markets include North America,
Asia, Europe and other countries. Total sales by geographic area
represent sales to unaffiliated customers (inventory movements to Japan
for sale by the Japan region directly to end customers in Japan are not
significant and eliminated in consolidation and not included below).
The following table sets forth product line revenue for years ended
March 31:
2000 1999 1998
---- ---- ----
(In thousands)
Communications $ 58,262 $ 41,029 $48,787
Video and Imaging 14,204 15,375 25,549
Other 6,088 15,464 27,679
---------- ---------- ----------
$ 78,554 $ 71,868 $102,015
========== ========== ==========
46
Identifiable assets represent assets used in the Company's operations
in each geographic area.
Geographic financial information for each year is as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Net sales:
United States $ 52,775 $ 45,631 $ 60,020
Export sales to Japan and Asia 12,007 8,658 16,852
Export sales to Western Europe 12,363 15,731 21,001
Export sales to rest of world 823 975 1,110
Japan 586 873 3,032
---------- ---------- ----------
$ 78,554 $ 71,868 $ 102,015
========== ========== ==========
Income (loss) from operations:
United States $ 4,000 4,572 $ 9,350
Japan (89) (512) (467)
Western Europe 35 (9) 103
--------- ---------- ----------
$ 3,946 $ 4,051 $ 8,986
========== ========== ==========
Long-lived assets:
United States $437,505 $ 137,078 $ 141,422
Japan 526 1,121 2,102
Western Europe 402 97 145
---------- ---------- ----------
$438,433 $ 138,296 $ 143,669
========== ========== ==========
12. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No.133,
"Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair
value, and provides for hedging accounting when certain conditions are
met. This is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. On a forward looking basis, although the
Company has not fully assessed the implications of this new statement,
the Company does not believe adoption of this statement will have a
material impact on the Company's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin (SAB) No. 101. Revenue Recognition
in Financial Statements. This bulletin summarizes certain
interpretations and practices followed by the Division of Corporation
Finance and the Office of the Chief Accountant of the SEC
in administering the disclosure requirements of the Federal securities
laws in applying generally accepted accounting principles to revenue
recognition in financial statements. Applications of the accounting and
disclosures desired in the bulletin is required by the first quarter of
fiscal 2001. Although the Company has not fully assessed the
implications of SAB No. 101. management does not believe adoption of
this bulletin will have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For a listing of executive officers and directors of the Company and certain
information about them, see Part I "Management."
Certain information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Proposal 1: Election of
Directors" contained in the Company's Definitive Proxy Statement to be filed not
later than 120 days following the close of the fiscal year ("Definitive Proxy
Statement").
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Market. Officers, directors and greater than ten-percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge and based solely on its review of the copies of such
forms received by it, and written representations from certain reporting persons
that no other forms were required during the fiscal year ended March 31, 2000,
its officers, directors, and greater than ten percent beneficial owners complied
with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement under the caption "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement under the captions "Certain
Transactions" and "Executive Compensation."
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Index to Consolidated Financial Statements. The following Consolidated
Financial Statements of Exar Corporation and its subsidiaries are filed as part
of this Form 10-K:
Form 10K
Page No.
Independent Auditors' Report 32
Consolidated Balance Sheets
March 31, 2000 and 1999 33
Consolidated Statements of Operations
for the years ended
March 31, 2000, 1999 and 1998 34
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
for the years ended
March 31, 2000, 1999, and 1998 35
Consolidated Statements of Cash Flows
for the years ended
March 31, 2000, 1999 and 1998 36
Notes to Consolidated Financial
Statements 37-47
(2) Index to Financial Statement Schedules. The following Consolidated Financial
Statement Schedule of Exar Corporation and its subsidiaries for each of the
years ended March 31, 2000, 1999 and 1998 are filed as part of this Form 10-K:
Form 10K
Page No.
II Valuation and Qualifying Accounts 53
and Reserves
Schedules not listed above have been omitted because they are not applicable or
required, or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
49
Exhibit Exhibit
Footnote Number Description
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Exar Corporation, as amended June 8, 2000.
(a) 3.2 Bylaws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
(c) 4.2 Rights Agreement dated as of December 15, 1995, between the
Registrant and the First National Bank of Boston, as amended
May 1, 2000.
* 10.1 1989 Employee Stock Participation Plan of the Company and related
Offering, as amended June 24, 1999.
(a)* 10.2 1991 Stock Option Plan of the Company and related forms of stock
option grant and exercise.
(a)* 10.3 1991 Non-Employee Directors' Stock Option Plan of the Company and
related forms of stock option grant and exercise.
* 10.4 Fiscal 2000 Key Employee Incentive Compensation Program.
* 10.5 Fiscal 2000 Executive Incentive Compensation Program.
* 10.6 1996 Non-Employee Directors' Stock Option Plan, as amended
April 13, 2000.
(b)* 10.7 1997 Equity Incentive Plan, as amended September 9, 1999.
* 10.8 Executive Officers' Change of Control Severence Benefit Plans
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule.
(a) Filed as an exhibit to the Company's Annual report on
Form 10-K for the fiscal year ended March 31, 1992
and incorporated herein by reference.
(b) Filed as an exhibit to the Company's registration
statement on Form S-8 (Registration statement No.
333-31120) filed with the Commission on February 25,
2000 and incorporated herein by reference.
(c) The Right's Agreement was filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated
December 15, 1995.
50
* Indicates management contracts or compensatory plans
and arrangements filed pursuant to Item 601(b)(10) of
Regulation S-K.
- ---------------------
(b) There were no reports filed on Form 8-K during the fourth quarter of
fiscal year 2000.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EXAR CORPORATION
By: /s/ Donald L. Ciffone Jr.
-----------------------------------------------
Donald L. Ciffone Jr.
Chief Executive Officer, President and Director
Date: June 22, 2000
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald W. Guire and Donald L. Ciffone, Jr., and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Donald L. Ciffone Jr. Chief Executive Officer, President and Director June 22, 2000
- --------------------------
(Donald L. Ciffone Jr.)
/s/ Ronald W. Guire Executive Vice President, Chief Financial Officer, June 22, 2000
- -------------------- Secretary and Director
(Ronald W. Guire) (Principal Financial and Accounting Officer)
/s/ Raimon L. Conlisk Director and Chairman of the Board June 22, 2000
- ----------------------
(Raimon L. Conlisk)
/s/ James E. Dykes Director June 22, 2000
- ------------------
(James E. Dykes)
/s/ Frank P. Carrubba Director June 22, 2000
- ---------------------
(Frank P. Carrubba)
/s/ Richard Previte Director June 22, 2000
- -------------------
(Richard Previte)
52
SCHEDULE II
- ---------------------------------------------------------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance
Balance at Write-offs and at end
Classification Beginning of Year Additions Recoveries of Year
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
Year ended March 31, 2000:
Allowance for doubtful
accounts and sales returns $ 2,047 $4,192 $ 4,370 $ 1,869
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
Year ended March 31, 1999:
Allowance for doubtful
accounts and sales returns $ 3,411 $ 1,360 $ 2,724 $ 2,047
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
Year ended March 31, 1998:
Allowance for doubtful
accounts and sales returns $ 3,158 $ 716 $463 $ 3,411
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
- ------------------------------------------ ------------------- ----------------------- ------------------- ----------------------
53