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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, 1999
[ ] 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, 1999 was $194,807,295 based on the last sales price
reported for such date.
The number of shares outstanding of the Registrant's Common Stock was 9,332,086
as of May 31, 1999, net of 1,349,766 shares of treasury stock.
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.
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
GENERAL
Exar Corporation ("Exar" or the "Company") designs, develops and markets analog
and mixed-signal integrated circuits for use in communications and video and
imaging products. The Company's target markets are ones in which the Company
believes its design and process expertise, combined with its knowledge of
particular system application requirements, enables the Company to deliver
products that provide effective solutions to customer needs. Exar is emphasizing
the development and sale of analog and mixed-signal application-specific
standard products ("ASSPs"). The Company also produces digital integrated
circuits used in communications products, as well as general purpose analog
integrated circuits.
INDUSTRY BACKGROUND
Integrated circuits may be divided into three general categories -- analog (or
linear), digital and mixed-signal. Analog circuits typically are used to
condition, process, measure or control physical properties such as temperature,
pressure, sound or speed. They include devices such as amplifiers, filters,
switches and power circuits. Digital circuits perform logic and memory
functions, and include devices such as memories and microprocessors.
Mixed-signal circuits combine analog circuitry with digital logic or memory in a
single integrated circuit or chip set to provide an interface between the analog
and digital worlds.
The Company believes that the market for analog and mixed-signal integrated
circuits, as compared to the market for digital integrated circuits, is
characterized by longer product life cycles, smaller unit volumes and generally
lower capital requirements. The analog market is a highly fragmented group of
niche markets, serving numerous and widely differing applications. For each
application, different users may have unique requirements for circuits with
specific characteristics.
Integrated circuits are either standard products or custom products (including
both full custom and semi-custom). Standard products are available to customers
"off-the-shelf." Standard application-specific products that are tailored to
address specific applications and to meet the needs of multiple customers are
often referred to as ASSPs. Custom products are designed to an individual
customer's specifications. Compared to standard products, custom products
typically involve greater design costs for the customer, but enable the customer
to save space, improve performance, reduce manufacturing costs, or maintain
greater confidentiality with respect to the customer's ultimate product design.
2
PRODUCTS AND MARKETS
The Company divides its integrated circuit products into three major market
groups: communications, video and imaging, and other products.
The following chart shows selected applications and representative products in
each of the Company's major market groups:
- --------------------------------------------- ---------------------------------------- ------------------------------------
MARKET APPLICATION PRODUCT
- --------------------------------------------- ---------------------------------------- ------------------------------------
Communications High speed communication transmission T/E-Carrier circuits:
equipment, central office equipment, -repeaters
private branch exchanges -line interface circuits
and wirelink communication test -framers
systems -buffers
-ATM UNI's
Computer serial asynchronous -UARTS/DUARTS/QUARTS
interfaces, serial communications -V.35, Multiprotocol
Telephone sets, headsets Speakerphone and other telephony
oriented components
Caller ID Systems, pagers, cellular Phase-locked loops, function
telephones, two-way radios generators and tone decoders
- --------------------------------------------- ---------------------------------------- ------------------------------------
Video and Imaging Scanners Analog-to-digital converters
Digital cameras (ADCs)
Digital copiers Digital-to-analog converters
(DACs)
Video systems Analog front ends (integrated
mixed signal subsystems) for
digital still camera, PC video
cameras and document scanners
- --------------------------------------------- ---------------------------------------- ------------------------------------
Other Audio systems Switched capacitor filters
Audio enhancement circuits
Personal computers Frequency timing generators
Input/Output
Automotive Timing circuits
Hearing aids RF transmitters/receivers
Amplifiers
- --------------------------------------------- ---------------------------------------- ------------------------------------
3
COMMUNICATIONS
Exar markets integrated circuits for a variety of applications in both the
telecommunications and data communication markets.
Exar's transmission telecommunications circuits are used in SONET/SDH/PDH
multiplexers, private branch exchanges (PBX), central office switches and
digital cross connects. Exar's principal products in this market are targeted
toward T-carrier and E-carrier equipment. These circuits include line interface
units, repeater circuits, framers, buffers, ATM UNI's for pulse code modulation
(PCM) systems. The majority of these circuits require bipolar, mixed-signal and
CMOS process technologies optimized for telecommunications applications and have
specialized test and performance criteria. Certain of these products are based
upon ANSI, Bellcore and ITU standards. The Company also provides general purpose
integrated circuits for telephony applications including, telephone handsets,
speakerphones, telephone circuitry and caller identification systems.
The Company's data communications products include a broad line of Universal
Asynchronous Receiver and Transmitter ("UART") circuits and related products
known as DUART (Dual UART) and QUART (Quad UART) circuits for use in computer
serial interfaces. Exar created a highly integrated Quad UART with FIFO (first
in, first out) circuitry which has been established as the de facto industry
standard for Quad FIFO UARTs used in multi-channel networking applications
designed to work with Intel and Motorola Corporation's microprocessors. Exar
also supplies a family of V.35 transceiver and multiprotocol products used for
high speed data transmission, primarily in networking equipment such as routers
and bridges.
The Company's customers in the communications market include Cisco Systems,
Lucent, Nokia, Digi International, Alcatel and 3Com, Tellabs.
VIDEO AND IMAGING
The Company supplies high-performance data converters, data acquisition
subsystems and other sophisticated electronic components to the document
imaging, video and other markets. The Company offers analog-to-digital
converters (ADCs), digital-to-analog converters (DACs) and integrated mixed
signal subsystems to the document imaging industry for products such as
scanners, digital cameras and digital copiers. The Company was first to market a
monolithic triple 10-bit ADC, with pixel-to-pixel correction for color scanners.
Advanced design techniques and process technologies are used to integrate
low-power converter architectures with surrounding analog functions to minimize
total system cost. The Company offers both standard and custom solutions.
The family of ADCs includes full flash, half flash, pipeline and successive
approximation register converter architectures. Current products offer from 6 to
16 bits of resolution and operate in ranges from 1 kHz to 100 mHz. Several
devices are currently specified for 3.3V operation for battery-operated and
hand-held equipment.
Innovative circuit topologies and efficient design techniques have allowed the
creation of multichannel ADC, DAC and combination architectures.
Application-specific products that integrate data conversion and other functions
include a family of multiple output DACs for use in high frequency signal
conditioning and gain control in CCD and video applications.
In the video and imaging market, the Company's products provide signal
conditioning and digitization of CCD signals. Products incorporating the
Company's integrated circuits include digital still cameras, camcorders and
industrial cameras for machine vision, surveillance, flatbed and sheetfed
scanners, film scanners, and multifunctional peripherals.
The Company's customers in the video and imaging market include NEC, Hewlett
Packard, Kodak and Logitech.
4
OTHER PRODUCTS AND MARKETS
The Company has historically developed custom, semi-custom and ASSP products in
certain niche areas. The Company has discontinued the development of products in
the following areas and has offered last time buys on certain product
categories. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Restructuring and Other Charges").
HEARING AIDS The Company's BiCMOS processes and advanced filtering
technology allow the Company to provide a low-noise, low-power single
chip solution for hearing aid manufacturers.
INDUSTRIAL CONTROL The Company's products in this area include
integrated circuits for use in security systems, magnetic card readers
and process control.
AUTOMOTIVE Exar sells custom and semi-custom integrated circuits for
use in automotive applications, including body control systems, such as
keyless entry systems.
CONSUMER ELECTRONICS Exar-designed products being sold to the consumer
products market include integrated circuits for use in graphic
equalizer systems, telephone answering devices, base band circuits for
cellular telephones, filter circuits for use in audio systems, BBE-TM-
audio chips for sound enhancement and timer circuits for various
products.
GENERAL PURPOSE ANALOG STANDARD PRODUCTS The Company also markets a
line of general purpose analog standard products such as timers,
switching regulators, operational amplifiers and filters.
5
MARKETING AND CUSTOMERS
Exar sells its products principally to Original Equipment Manufacturers (OEM's)
for use in a broad range of electronic systems and equipment. The following
table provides a geographic breakdown of the Company's domestic and
international sales. For additional geographic financial information, see Note
11 in Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------
YEARS ENDED MARCH 31
(IN THOUSANDS)
1999 1998 1997
---- ---- ----
U.S. Sales $ 45,631 $ 60,020 $ 53,374
International Sales:
Sales by Exar Japan 873 3,032 9,465
Other Sales 25,364 38,963 29,504
----------- ----------- -----------
TOTAL $ 71,868 $ 102,015 $ 92,343
=========== =========== ===========
- -------------------------------------------------------------------------------
Exar markets its products in the United States principally through 23
independent sales representatives and four independent non-exclusive
distributors, as well as through the Company's direct sales force. Exar
currently has sales support offices in or near Atlanta, Boston, Chicago, Dallas,
Los Angeles, and San Jose.
Exar is represented internationally by approximately 34 sales representatives
and distributors. In addition, Exar 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. Exar's international
operations are subject to certain risks common to foreign operations in general,
such as governmental regulations and import restrictions. While Exar has acted
to minimize its exposure to exchange rate fluctuations, there can be no
assurance that the Company will not, from time to time, experience exchange rate
losses on products sold overseas by Exar Ltd., Exar SARL, Exar Japan and Exar
Taiwan.
During the fiscal year ended March 31, 1999, no single customer accounted for
more than 10% of Exar's sales.
Exar typically provides a limited warranty against defects in materials and
workmanship for a period of ninety days from the date its products are
delivered.
PROCESS TECHNOLOGIES
Exar uses a variety of process technologies in the fabrication of its products,
including CMOS, bipolar, and BiCMOS (which utilizes both bipolar and CMOS
technologies). These processes allow Exar to take advantage of different types
and characteristics of integrated circuit components with different performance
and cost characteristics. The Company believes that its ability to design and
deliver integrated circuits using a wide variety of processes enables it to be
responsive to customer requirements and optimize the performance of its products
for particular applications.
Historically, bipolar processes have been used for analog circuits where speed,
high voltage, low noise or effective component matching is necessary. CMOS
circuitry was originally used for digital applications where lower voltage and
greater chip density are necessary. CMOS manufacturing processes have
subsequently been adopted and are used for an increasing portion of analog and
mixed-signal devices in order to take advantage of that technology's lower power
consumption, cost-effectiveness, foundry availability and ever-increasing speed.
BiCMOS processes permit the combination of bipolar and CMOS on a single device,
resulting in the ability to combine selectively the performance characteristics
of bipolar circuitry with the advantages of CMOS.
In addition, the Company can provide accurately matched thin-film resistors
and/or laser trim when needed to meet performance requirements.
6
MANUFACTURING
The Company uses outside sources for the supply of its integrated circuits. The
Company obtains CMOS and BiCMOS products from world class independent
manufacturers, including Chartered and TSMC. The Company has qualified second
sources for certain of its foundry requirements. However, a disruption in supply
from one or more of the Company's outside suppliers could have a material
adverse effect on operations due to lead times and initially lower yields
associated with the volume production ramps of such sources.
Exar conducts electrical testing of integrated circuits in both wafer and
packaged form. The combination of various functionalities 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. Exar has special screening
and qualification programs when high reliability quality grades are required by
customer specifications.
After testing, wafers are usually shipped to the Far East for assembly, where
they are cut into individual circuits and packaged. Following assembly, a
portion of the Company's products are returned to Exar for final testing and
quality assurance. Most of Exar's assembly work is performed by independent
contractors in Hong Kong, Indonesia, the Philippines, Korea and Japan.
In the fourth quarter of fiscal 1997, the Company began to implement a plan to
reduce manufacturing expenses by transferring its test and shipping operations
to off shore sub-contractors. By the end of fiscal 1999, the Company had
completed the transfer of approximately 75% of its test operations off-shore.
The Company plans to maintain a minimal level of test operations at its
California facilities to support its research and development activities. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring and Other Charges").
The raw materials and equipment used in the production of the Company's
integrated circuits are available from several suppliers. Although the Company
has not recently experienced significant difficulty in obtaining raw materials
or equipment, shortages have occurred and on occasion lead times have been
extended.
ENGINEERING, RESEARCH AND DEVELOPMENT
Exar's ability to compete successfully depends in part on its ability to
introduce technologically advanced products on a cost-effective and timely
basis. Exar is committed to improving its manufacturing and design capabilities
and developing new process technologies and product. During the fiscal years
ended March 31, 1999, 1998 and 1997, Exar's research and development expenses
were $13.6 million, $15.6 million, and $13.9 million, respectively.
Exar develops and utilizes an advanced sub-micron CMOS library of analog and
digital standard cells which incorporate analog, digital and memory
functions. Standard cells are pre-designed and characterized mini-circuits
that adhere to certain design constraints, and that have been prepared for
efficient insertion into custom integrated circuits.
These mini-circuits include widely used functional blocks, plus primitive
circuit elements from which more specialized functions can be built. The
technique of designing with standard cells enables the designer to focus on
functional aspects of the circuit design, rather than physical aspects.
Exar anticipates that market demand for higher performance and more complex
circuits will require increasing levels of precision, simulation and testing
made available with design automation tools, such as computer-aided engineering
("CAE") and computer-aided design ("CAD") systems. In addition, such design
automation systems significantly accelerate the product development cycle,
particularly when used with semi-custom products, such as analog and
mixed-signal arrays and standard cells. The vast majority of the CAE systems
available have been developed for digital design and, consequently, must be
adapted for analog design implementation. Exar considers its CAE/CAD
capabilities to be important to its future success in all areas of new product
development and intends to continue to enhance its CAE/CAD systems.
7
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 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, Exar faces substantial
competition in each market in which it participates. Competition in Exar's
markets is based principally on technical innovation, product features, timely
introduction of new products, reliability, price, technical support and service.
Exar believes that it competes favorably in all of these areas.
Because the analog and mixed-signal integrated circuit markets are highly
fragmented, the Company generally encounters different competitors in its
various market areas. Competitors with respect to some of the Company's
products include, among others, National Semiconductor, Analog Devices, Inc.,
PMC, Transwitch, Dallas Semiconductor, Level One Communications (which has
recently announced that it will be acquired by Intel Corporation) and
Conexant. There can be no assurance that competitive factors will not
adversely affect the Company's future business.
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 twelve months. Backlog includes oral orders which are
generally subsequently confirmed by written purchase orders.
At March 31, 1999, Exar's backlog was approximately $13.8 million, compared with
$20.6 million at March 31, 1998. The decrease in the company's backlog was
primarily due to the decrease in bookings 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.
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, 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.
Customer orders for standard products can be canceled 30 days prior to shipment
without substantial penalty.
EMPLOYEES
As of April 1, 1999, Exar had 269 employees, including 76 in marketing and
sales, 105 in research, development and engineering-related functions, 44 in
manufacturing and production and 44 in administration. Many of Exar's employees
are highly skilled, and competition in recruiting and retaining such personnel
is particularly intense in the labor market in which Exar operates. Exar
believes that its continued success depends in part on its ability to continue
to attract and retain highly qualified management, marketing and technical
personnel. The loss of key employees, none of whom is subject to an employment
agreement, could have a material and adverse effect on Exar. None of Exar's
employees are covered by collective bargaining agreements, and Exar has not
experienced any work stoppages. Exar believes that its employee relations are
good.
8
EXECUTIVE OFFICERS OF THE COMPANY
The names of the Company's executive officers and certain information about them
is set forth below.
NAME AGE POSITION
---- --- --------
Donald L. Ciffone, Jr. 44 Chief Executive Officer, President and Director
Michael Class 42 Vice President, North American/European Sales
Roubik Gregorian 48 Chief Technology Officer, Senior Vice President/General Manager Communications
Division
Ronald W. Guire 50 Executive Vice President, Chief Financial Officer, Secretary and Director
Thomas W. Jones 51 Vice President, Reliability and Quality Assurance
Thomas R. Melendrez 45 Corporate Vice President, General Counsel
Stephen W. Michael 52 Vice President, Operations Division
Linda Prosser 43 Vice President, Marketing Communications
John Sramek 48 Vice President, Video and Imaging Division
Mr. Ciffone joined Exar as CEO and President in October 1996 and was appointed
as 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. ("VLSI").
From 1978 to 1991, Mr. Ciffone held a variety of marketing and operations
positions at National Semiconductor, Inc. Mr. Ciffone holds an MBA from the
University of Santa Clara.
Mr. Class joined the Company as Director of North America Sales in 1996. In
January 1998 he was promoted to his current position as Vice President, North
American/European Sales. Mr. Class has over 15 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, Inc., Mr. Class held
various sales management positions with Intel Corporation and VLSI from 1979 to
1995.
Dr. 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 in June,
1998. Prior to joining Startech in 1994, Dr. Gregorian was Vice President of
Research and Development and CTO for Sierra Semiconductor, Inc. Dr. Gregorian
holds 16 patents and received his MSEE and Ph.D. in Electrical Engineering from
the University of California at Los Angeles, as well as an MSEE from Tehran
University.
Mr. Guire joined the Company in July 1984 and has been a director of the Company
since June 1985. He has served in a variety of officer positions, and has been
Chief Financial Officer of the Company 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
the Company in July 1984.
Mr. Jones joined the Company as Director of Total Quality Management in October
1992 and was promoted to Director of Reliability and Quality Assurance in
November 1992. He was promoted to his current position in July 1995. Mr. Jones
has over thirty 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, in Fremont
California 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.
9
Mr. Melendrez joined Exar in April of 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. Mr. Melendrez has over 15 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.
Mr. Michael joined the Company as Vice President of New Market Development in
September 1992. In July 1995 he was appointed to his current position as Vice
President, Operations Division. Mr. Michael has over 20 years of semiconductor
industry experience, most recently as Vice President, and General Manager,
Analog & Custom Products with Catalyst Semiconductor ("Catalyst"). He joined
Catalyst in 1987 and served in various senior positions.
Ms. Prosser joined Exar as Vice President, Marketing Communications in March
1997. Ms. Prosser has over 18 years experience in marketing communications, in
both corporate and consulting roles. From June 1997 to February 1998, she
provided consulting services to technology companies, and formerly she held
corporate positions including Vice President, Corporate Communications at VLSI
Technology, from June 1994 to May 1996; and Director of Corporate Communications
at Adobe Systems, from March 1990 to May 1994. Prior to joining Adobe Systems,
she held management positions at technology communications consulting firms
including Ketchum Communications, from 1985 to 1990; and Burson-Marsteller,
Inc., from 1982 to 1985. Ms. Prosser holds a Bachelor of Journalism degree from
the University of Missouri.
Mr. 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 in February 1998. Mr. Sramek has over twenty
years of experience in sales and product marketing in the semiconductor industry
with a variety of companies including, Micro Power Systems, Harris Semiconductor
and Genrad Inc. Mr. Sramek holds a M.B.A. from the University of Santa Clara, a
B.A. in English Literature from Bucknell University and a B.S. in Electrical
Engineering also from Bucknell University.
TRADEMARKS, PATENTS AND LICENSES
The Company seeks to protect its proprietary products through a combination of
patent rights, copyrights, mask work registrations and trade secrets. Exar
believes that these intellectual property rights are substantially less
significant to its business than such factors as technical expertise, marketing
ability and customer support.
Because of rapid technological developments in the semiconductor industry and
the broad and rapidly developing patent, mask-work rights and copyright
coverage, certain of Exar's products or processes may, from time to time, give
rise to alleged infringement of existing patents, mask-work rights or
copyrights. Exar has, on occasion, received notifications of alleged
infringements and some allegations remain unresolved. There can be no assurance
regarding the outcome of any particular alleged infringements. The Company
attempts to protect its trade secrets, mask-work rights and other proprietary
information through agreements with customers and suppliers, proprietary
information agreements with employees and other security measures. Although the
Company intends to protect its rights vigorously, there can be no assurance that
these measures will be successful.
ENVIRONMENTAL LAWS
Governmental regulations impose various controls on the discharge to the
environment of hazardous materials used in semiconductor processing. Failure to
comply with present or future regulations could result in the suspension or
cessation of the Company's operations. In addition, such regulations could
restrict Exar's ability to expand at its present location and incur other
substantial expense. Moreover, there can be no assurance that changes in
governmental regulations will not result in the imposition of other requirements
which could impede operating performance. Any failure by Exar to adequately
control hazardous substances could also subject it to future liabilities.
10
During 1987, Micro Power Systems, Inc. ("Micro Power"), acquired Exar in June
1994, became aware of low-level groundwater contamination on its principal
manufacturing property. Although the area of contamination appears to have been
defined, the source has not been determined. Micro Power has reached an
agreement with another company to participate in the cost of the remedial
investigations and the final clean up, which is expected to continue for
approximately 10 to 15 years. Micro Power has recorded its share of the
estimated liability, approximately $764,000 at March 31, 1999.
The California Regional Water Quality Control Board for the San Francisco Bay
Area (the "Board") conducted an investigation of contaminants detected in
subsurface groundwater at approximately 50 different sites in Santa Clara
County, California, including a location formerly leased by Exar in Sunnyvale,
California. The Board notified the Company in March 1996 that the Board does not
intend to name Exar as a discharger, and the Company considers the matter
closed.
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, prospective investors should consider the following factors in
evaluating the Company and its business.
DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL CHANGE. The markets for the
Company's products are characterized by evolving industry standards and rapid
technological change and product obsolescence. The Company's future success
will be highly dependent upon the timely completion and introduction of new
products at competitive price and performance levels. The success of new
products depends on a number of factors, including successful and timely
completion of product development and introduction to market, correct
judgment with respect to product demand, market acceptance of the Company's
and its customers' new products, sufficient foundry capacity for volume
manufacturing of wafers, achievement of acceptable wafer fabrication yields
by the Company's independent foundries and the continued ability of the
Company to offer new products at competitive prices. Some of these factors
are outside the control of the Company. There can be no assurance that the
Company will be able to identify new product opportunities successfully,
develop and bring to market new products, achieve design wins or be able to
respond effectively to new technological changes or product announcements by
others. A failure in any of these areas could materially and adversely affect
the Company's operating results.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. Redesigns or design delays often are required
for both the customer's products and the Company's chipsets as industry and
customer standards, protocols or design specifications are determined. Any
resulting delay in the production of the Company's products could have a
material adverse effect on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL; INTENSE COMPETITION FOR EMPLOYEES. Exar's future
success depends in large part on the continued service of certain of Exar's key
technical and management personnel and on Exar's ability to continue to attract
and retain qualified employees, particularly those highly skilled design,
process and test engineers involved in the manufacture of existing products and
the development of new products and processes. The competition for such
personnel is intense, and the loss of key employees, most of whom are not
subject to an employment agreement for a specified term or a post-employment
non-competition agreement, could have a material and adverse effect on Exar.
INTENSE COMPETITION. The semiconductor industry is intensely competitive and
is characterized by price erosion, rapid technological change and heightened
international competition in many markets. In this regard, Exar intends to
discontinue its consumer electronics product line which is targeted at the
Japanese market in part due to increased competition in this market. Exar
competes with major domestic and international semiconductor companies, many
of which have substantially greater financial and other resources than Exar
with which to pursue engineering, manufacturing, marketing and distribution
of their products. New entrants may also increase competition in the
semiconductor market. The ability of Exar to compete successfully in the
rapidly evolving area of integrated circuit technology depends on factors
both within and outside of its control, including success in designing and
subcontracting the manufacture of new products that implement new
technologies, adequate sources of raw materials such as wafers and plastics,
protection of Company products by effective
11
utilization of intellectual property laws and other security measures,
product quality, reliability, price, efficiency of production, the pace at
which customers incorporate Exar's integrated circuits into their products,
success of competitors' products and general economic conditions. There can
be no assurance that Exar will be able to compete successfully in the future.
FACTORS AFFECTING OPERATING RESULTS. Exar believes its future operating
results will be subject to quarterly and annual variations based on a wide
variety of factors, including customer demand for Exar's products, changes in
product mix, competitive pressures on prices and prices charged by Exar's
suppliers. The semiconductor industry has historically been characterized by
business cycles, with economic downturns resulting in diminished product
demand and erosion of average selling prices. Exar's future operating results
could be adversely affected by a downturn in this market or by a general
economic downturn or by the failure of one or more of its customers to
compete successfully in such market.
DEPENDENCE ON OUTSIDE FABRICATION FACILITIES. All of the semiconductor wafers
used in the manufacture of Exar's products are processed to Exar's
specifications by outside suppliers. In particular, Rohm is Exar's sole
source of bipolar wafers. Rohm is contractually obligated to supply Exar with
bipolar wafers pursuant to a long-term agreement and has committed to provide
Exar with wafers at a price that is commercially favorable. Exar has
generally received adequate deliveries of wafers and adequate yield and
quality of product. However, if for any reason wafer shipments were delayed
or its suppliers encountered yield or quality problems in the future, Exar's
operating results would be adversely affected. In addition, Exar could
encounter lengthy delays if for any reason it was forced to establish
alternative manufacturing arrangements.
While Exar believes that it has an adequate wafer supply to meet its currently
anticipated needs, there can be no assurance that in the future Exar will
receive sufficient quantities of wafers at favorable prices on a timely basis.
If the wafer manufacturers which Exar currently uses to manufacture its products
suffer a material curtailment of their manufacturing operations, Exar could
incur manufacturing delays of between three and six months. Although Exar
believes that there is an adequate level of high quality wafer manufacturing
capacity available world-wide which could perform manufacturing for Exar in
those circumstances, there can be no assurance that Exar would be able to
arrange sufficient alternative manufacturing capacity on comparable terms or
within that time period if its current suppliers curtailed or halted
manufacturing. Should wafer capacity limitations occur because of increased
demand for Exar's products or otherwise, Exar may be unable to meet demand for
its products in a timely fashion, which could result in customer dissatisfaction
and decreased revenues.
DEPENDENCE ON ASSEMBLY AND TEST SUBCONTRACTORS. Exar's products are currently
assembled to Exar's specifications by independent subcontractors. Exar's
reliance on subcontractors to assemble its products involves significant
risks, including reduced control over delivery schedules, quality assurance
and costs, the potential lack of adequate capacity and potential
misappropriation of proprietary intellectual property. Failure to obtain
products on a timely basis could delay product delivery to Exar's customers,
thereby materially adversely affecting Exar's businesses. In addition, Exar
presently utilizes semiconductor assembly contractors located throughout Asia
and intends to continue to transfer testing and shipping operations to
offshore subcontractors in fiscal 2000. Offshore assembly and testing
operations entail certain political and economic risks, including political
instability and expropriation, currency controls and changes in tax laws,
tariffs and freight rates. Exar's operations could be materially adversely
affected if the operations of any major subcontractor are interrupted, or if
air transportation from Asia is disrupted, for a substantial period of time.
PATENTS AND LITIGATION. The Company's ability to compete is affected by its
ability to protect its proprietary information. The Company relies on a
combination of patents, trademarks, copyrights, mask work registrations,
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that
patents will issue from any of the Company's pending applications or that any
claims allowed will be of sufficient scope or strength, or be issued in all
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. In addition,
competitors of the Company may be able to design around the Company's
patents. The laws of certain foreign countries in which the Company's
products are or may be developed, manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of piracy of the Company's technology and products
more likely. There can be no assurance that the steps taken by the Company to
protect its
12
proprietary information will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
As is typical in the semiconductor industry, Exar has from time to time
received, and may in the future receive, communications from third parties
asserting patent rights, copyrights or other intellectual property rights
covering Exar's products or processes. There can be no assurance that other
intellectual property claims will not be made against Exar, or that any such
claims or litigation proceedings will not be decided against Exar. Furthermore,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation by or against the Company could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation
results in a favorable determination for the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, spend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology. There can
be no assurance that the Company would be successful in such development or that
such licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Any successful third party claim against the Company
or its customers for patent or intellectual property infringement would have a
material adverse effect on the Company's operating results.
ENVIRONMENTAL REGULATIONS. Exar is subject to a variety of federal, state and
local governmental regulations relating to the purchase, storage, use,
release and disposal of toxic, volatile or otherwise hazardous chemicals.
Although Exar believes that it has all permits necessary to conduct its
business, the failure to comply with present or future regulations could
result in the imposition of fines on Exar. In this regard, Exar has been
involved in a groundwater contamination and clean-up matter relating to a
Santa Clara site since its acquisition of Micro Power in July 1994. Although
Exar does not believe that this matter will have a material adverse effect on
Exar's business, there can be no assurance that there will not be such an
adverse effect.
VARIATION IN PRODUCTION YIELDS. The manufacture and assembly of semiconductor
products is highly complex and sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment,
impurities in the materials used and the performance of manufacturing
personnel and production equipment. No assurance can be given that Exar or
its suppliers will not experience yield problems in the future, which could
result in a material adverse effect on Exar's results of operations. See
"Dependence on Outside Fabrication Facilities".
FOREIGN TRADE AND CURRENCY EXCHANGE. Approximately 41% of Exar's revenues in
fiscal 1998 and approximately 37% in fiscal 1999 were derived from sales to
foreign customers. In addition, Exar purchases its assembly services from
foreign subcontractors and intends to have the majority of its testing and
shipping operations transferred to offshore subcontractors by the end of
fiscal 2000. Both the manufacture and sale of Exar's products may be
adversely affected by political or economic conditions abroad. Risks include
unexpected changes in, or impositions of, legislative or regulatory
requirements, delays resulting from difficulty in obtaining export licenses
for certain technology, tariffs, quotas and other trade barriers and
restrictions, longer payment cycles, greater difficulty in accounts
receivable collection, potentially adverse taxes, the burdens of complying
with a variety of foreign laws and other factors beyond the Company's
control. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and
trade relationships. Even though Exar primarily transacts business
internationally in United States currency (except for Japan, where Exar
transacts business in Japanese Yen), currency exchange fluctuations in
countries in which Exar does business (other than Japan) could materially
adversely affect Exar by resulting in pricing that is not competitive with
prices denominated in local currencies. The Company enters into foreign
currency contracts from time to time to hedge currency exposure in Japan. See
Item 7A "Quantitative and Qualitative Disclosure about Market Risk."
13
POSSIBLE VOLATILITY OF STOCK PRICE. In recent years, the market value of Exar
Common Stock has been subject to significant fluctuation. The market price of
Exar Common Stock may continue to be subject to significant fluctuations in
response to operating results and other factors. In addition, the stock
market in recent years has experienced price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of Exar Common Stock.
RISKS RELATED TO RESTRUCTURING. In the fourth quarter of fiscal 1997, the
Company announced and began to implement a restructuring plan to i) reduce
manufacturing expenses by transferring its test and shipping operations to
offshore subcontractors, ii) focus the Company's product strategy to provide
analog and mixed signal products for the video, imaging, communications and
silicon microstructure markets and iii) narrow the Company's distribution
channels to create more leverage. The Company's restructuring actions
consisted primarily of writing down certain equipment as a result of the
transfer of operations and change in product focus; terminating 54 full-time
employees; writing down inventory associated with product lines which are
being discontinued; canceling certain facility leases and cancellation of
contracts as a result of a change in distribution channels; and writing down
goodwill associated with discontinued products.
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 $3,900,000 over the
next two years. 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.
There is no assurance that these actions will be successful or have a positive
impact on results of operations. Furthermore, should such actions have a
negative impact on the Company's ability to design and develop new products,
market new or existing products, or produce and/or purchase products at
competitive prices, these actions could have an adverse impact on the Company's
results of operations.
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.
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, 1999.
14
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. The listed quotations represent inter-dealer prices without retail
markup, markdown or commissions.
- --------------------------------------------------------------------------------
COMMON STOCK PRICES
HIGH LOW
---- ---
FISCAL 1999
Quarter ended March 31, 1999 $16 7/8 $13 1/8
Quarter ended December 31, 1998 $18 3/4 $12
Quarter ended September 30, 1998 $21 5/8 $13 7/8
Quarter ended June 30, 1998 $25 11/16 $18 1/8
FISCAL 1998
Quarter ended March 31, 1998 $24 $16
Quarter ended December 31, 1997 $27 1/4 $16 1/8
Quarter ended September 30, 1997 $26 7/8 $19 1/4
Quarter ended June 30, 1997 $21 3/4 $14 1/2
- --------------------------------------------------------------------------------
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 238 stockholders of record as of May 31, 1999. The
Company believes it has in excess of 2,800 beneficial stockholders. The last
sales price for Exar's Common Stock, as reported by Nasdaq on May 31, 1999, was
$20 7/8 per share.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Consolidated Statements of
Operations Data:
Net Sales $ 71,868 $ 102,015 $ 92,343 $ 125,766 $ 159,472
Income (Loss) From Operations 4,051 8,986 (15,238) 18,759 (4,989)
Net Income (Loss) 5,424 7,518 (9,197) 13,582 (11,084)
Net Income (Loss) Per Share:
Basic $ 0.58 $ 0.81 $ (1.01) $ 1.43 $ (1.25)
Diluted $ 0.57 $ 0.77 $ (1.01) $ 1.37 $ (1.25)
Shares Used Computation of Net Income
(Loss) Per Share:
Basic 9,392 9,326 9,071 9,495 8,835
Diluted 9,600 9,730 9,071 9,925 8,835
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
---------------------
(IN THOUSANDS)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Consolidated Balance Sheet
Data:
Working Capital $ 91,885 $ 90,395 $ 68,822 $ 77,550 $ 81,286
Total Assets 138,296 143,669 125,537 139,074 150,080
Long-term Obligations 664 745 880 979 2,557
Retained Earnings 57,124 51,700 44,182 53,379 39,797
Stockholders' Equity 125,757 123,729 109,817 117,847 107,696
- -----------------------------------------------------------------------------------------------------------
16
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
"Business - Risk Factors".
GENERAL
The Company derives revenue principally from the sale of integrated circuits for
use in communications and video and imaging product areas. The Company's gross
margins from sales of integrated circuits vary depending on competition from
other manufacturers, the volume of products manufactured and sold, the Company's
ability to achieve certain manufacturing efficiencies and the cost of material
procured from the Company's suppliers. The Company's newer analog and
mixed-signal products tend to have higher gross margins than many of the
Company's more mature products and margins of any particular product may erode
over time.
The Company has wholly-owned subsidiaries in Japan, Taiwan, and Europe to
support its sales operations in each of those areas. The Company's business in
Japan includes the sale of integrated circuits primarily for use in consumer
electronics.
The Company has made a number of changes in its underlying business over the
past several years in an effort to reduce its low-margin businesses and focus
its product strategy. At the same time, to increase its share of revenues from
the sale of proprietary products and to acquire additional technology, the
Company made significant investments through direct acquisition of companies
with related product lines.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 1997, the Company announced and began to
implement a restructuring plan to i) reduce manufacturing expenses by
transferring its test and shipping operations to offshore subcontractors, ii)
focus the Company's product strategy to provide analog and mixed signal products
for the video, imaging, communications and silicon sensor markets and iii)
narrow the Company's distribution channels to create more leverage. The
Company's restructuring actions consisted primarily of writing down certain
equipment as a result of the transfer of operations and change in product focus;
terminating 54 full-time employees; writing down inventory associated with
product lines which are being discontinued; canceling certain facility leases
and cancellation of contracts as a result of a change in distribution channels;
and writing down goodwill associated with discontinued products. These actions
resulted in a charge of $5.3 million to operating expenses and $4.6 million to
cost of goods sold. The charges include a non-cash charge of $8,454,000 and cash
expenditures of $1,522,000. As of March 31, 1999 an accrual of approximately
$190,000 remains related to cancellation of lease obligations.
In the third quarter of fiscal 1999, the Company sold its Silicon
Microstructures business unit to OSI Systems, Inc. ("OSI") for $2.6 million,
with additional contingent performance-based payments of up to $3.9 million over
the next two years. 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.
In October 1995, the Company entered into a wafer production agreement with IC
Works, Inc. ("IC Works"). Under the terms of the agreement, Exar invested
approximately $13 million for the purchase and installation of equipment at IC
Works, in exchange for a predetermined supply of wafers over the next five
years. Under separate but related agreements, Exar has made a minority equity
investment in IC Works of approximately $7.5 million. The dramatically changed
market conditions for wafer pricing and availability, as well as the recent
business redirection of Exar, have led to a reassessment of Exar's foundry
relationships and process requirements. These factors combined with delays in
the commencement of anticipated production by the foundry, resulted in the
termination of the wafer production agreement. The Company incurred a fourth
quarter fiscal 1997 charge to operating expenses of $9 million as a result of
negotiations to terminate the
17
Company's 1995 wafer production agreement with IC Works. 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 better meet the Company's needs and
wrote off $1.2 million 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 anticipates a pre-tax gain of
approximately $6.9 million and this transaction will be accounted for in the
Company's fiscal year ended March 31, 2000.
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.
- -----------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
---------------------
1999 1998 1997
---- ---- ----
Net sales 100.0 % 100.0% 100.0%
Cost of sales 46.5 50.9 55.0
Cost of sales-inventory write-off - - 5.0
Research and development 18.9 15.3 15.1
Selling, general and administrative 27.1 22.8 23.1
Write-off of in-process R&D and
other charges 1.0 1.2 16.8
Goodwill amortization .9 1.0 1.5
----- ----- -----
Operating income (loss) 5.6 8.8 (16.5)
Other income, net 6.6 3.2 2.9
----- ----- -----
Income (loss) before income taxes 12.2 12.0 (13.6)
Income taxes (benefit) 4.6 4.7 (3.6)
----- ----- -----
Net income (loss) 7.6% 7.3% (10.0)%
===== ===== =====
- -----------------------------------------------------------------------------------------
FISCAL 1999 VS FISCAL 1998
Net sales during fiscal 1999 were approximately $71.9 million compared to $102.0
million in fiscal 1998, a decrease of approximately 29.6%. These decreases were
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 fab suppliers during the
third quarter of fiscal 1999 had a further negative impact of approximately $2
million on the Company's fiscal 1999 revenue from legacy products. This closure
is expected to result in a further decline in revenue from legacy products of
approximately $1 million per quarter through fiscal 2000.
In fiscal 1999, sales to domestic customers decreased by 24.0% to $45.6 million.
International sales decreased by 37.5% to approximately $26.3 million. The
Company's international sales consist of sales from the United States to
overseas customers and sales by the Company's wholly-owned subsidiary in Japan.
Sales by the Company's Japanese subsidiary are denominated in yen, while all
other international sales are denominated in U.S. dollars. The fact that the
Company operates internationally gives rise to exposures from changes in
currency exchange rates. The Company has adopted a set of practices intended to
minimize its foreign currency risk which includes the use, from time to time, of
foreign currency
18
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 integrated circuits, adjusted for differences in
product mix, is not significantly different from that realized on its sales
to domestic customers.
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 tend to have higher gross margins than many of the Company's more
mature products. The Company's gross margins from sales of integrated circuits
vary depending on competition from other manufacturers, the volume of products
manufactured and sold, the Company's ability to achieve certain manufacturing
efficiencies and the cost of material procured from the Company's suppliers.
Margins of any particular product may erode over time.
Expenditures for research and development, as a percentage of net sales,
increased from approximately 15.3% in fiscal 1998 to 18.9 % in fiscal 1999.
Expenditures for research and development decreased approximately $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 revenues, lower employee benefits costs and to the
restructuring activities associated with the sale of the Company's silicon
microstructures business unit. See Note 9 to Notes to Consolidated Financial
Statements.
Selling, general and administrative expenses, as a percentage of net sales,
increased from approximately 22.8% in fiscal 1998 to 27.1% of net sales 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, lower employee benefits costs and to the Company's control
of operating expenses in response to decreased revenues.
Net interest income during fiscal 1999 increased to $4.1 million from the $3.1
million reported in fiscal 1998 due to increased balances of cash and short-term
investments in fiscal 1999.
The Company's provision for income taxes is based on income from operations. The
Company's effective tax rate for fiscal 1999 was approximately 38% compared with
the federal statutory rate of 35%. The discrepancy is due to non-deductible
expenses, state income taxes and foreign losses, which is 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.
Net income for the fiscal year 1999 was $5.4 million, or $0.57 per diluted
share, a 27.9% decrease from net income for the fiscal year 1998 of $7.5
million, or $.77 per diluted share.
To date, inflation has not had a significant impact on the Company's operating
results.
FISCAL 1998 VS FISCAL 1997
Net sales during fiscal 1998 were approximately $102.0 million compared to $92.3
million in fiscal 1997, an increase of approximately 10.5%. This increase was
primarily due to significant increases in net sales in the Company's
communications and silicon microstructure product lines as well as last time buy
activity pertaining to some of the company's discontinued custom legacy
products. These increases were partially offset by a significant decrease in net
sales of discontinued consumer products.
In fiscal 1998, sales to domestic U.S. customers increased by 12.5% to $60.0
million. International sales, increased by 7.8% to approximately $42.0 million.
The Company's international sales consist of sales from the United States to
overseas customers and sales by the Company's wholly-owned subsidiaries in
Japan. Sales by the Company's Japanese subsidiary are denominated in yen, while
all other international sales are denominated in U.S. dollars. The fact that the
Company operates internationally gives rise to exposures from changes in
currency exchange rates. The Company has adopted a set of practices to minimize
its foreign currency risk which includes the use, from time to time, of foreign
19
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 integrated circuits, adjusted for differences
in product mix, is not significantly different from that realized on its sales
to domestic customers.
Cost of sales as a percentage of net sales decreased from 55.0% in fiscal 1997
(excluding the one-time inventory write-off) to 50.9% in fiscal 1998. The
resulting increase in gross margins is due primarily to manufacturing
efficiencies due to higher production volumes, changes in product mix and
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 offshore
sub-contractors to reduce manufacturing expenses.
Expenditures for research and development increased approximately $1.7 million
or 12.0% compared to fiscal 1997 due primarily to increased spending on mask
sets and other related costs for new product development. Expenditures for
research and development, as a percentage of net sales, increased from
approximately 15.1% in fiscal 1997 to 15.3 % in fiscal 1998.
Selling, general and administrative expenses for fiscal 1998 increased by $2.0
million or 9.3 % compared to fiscal 1997 due primarily to increased spending on
marketing efforts. As a percentage of net sales, selling, general and
administrative expenses decreased from approximately 23.1% of net sales in
fiscal 1997 to 22.8% of net sales in fiscal 1998. The decrease as a percentage
of sales is due primarily to the increase in net sales.
The Company incurred $1.2 million in compensation expenses during fiscal 1998
(and $1.2 million in fiscal 1997) for the final payment related to the
acquisition of Startech, Semiconductor, Inc. in fiscal 1995. There are no
further deferred compensation obligations under this arrangement.
Net interest income during fiscal 1998 increased to $3.1 million from the $2.3
million reported in fiscal 1997 due to increased balances of cash and short-term
investments in fiscal 1998.
The Company's provision for income taxes is based on income from operations. The
Company's effective tax rate for fiscal 1998 was approximately 39% compared with
the federal statutory rate of 35%. The discrepancy is due to non-deductible
expenses, state income taxes and foreign losses, which is 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.
Including one-time charges, actual net income for the fiscal year 1998 was $7.5
million, or $0.77 per diluted share versus a loss for the fiscal year 1997 of
$9.2 million, or a loss of $1.01 per diluted share. Pro forma net income
excluding one-time charges for fiscal year 1998 was $8.2 million, or $0.85 per
diluted share, a 79% increase over pro forma net income of $4.6 million, or
$0.50 per diluted share, for the fiscal year 1997.
To date, inflation has not had a significant impact on the Company's operating
results.
20
QUARTERLY RESULTS
The following table contains selected unaudited quarterly financial data for
the fiscal years ended March 31, 1999 and 1998. 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.
- -----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY RESULTS
(THREE MONTHS ENDED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1999 1998 1998 1998 1998 1997 1997 1997
- ---------------------- ------------- ------------ ------------- ------------ -------------- ------------ ------------ -------------
STATEMENT OF
INCOME DATA
Net sales $ 15,098 $ 15,808 $ 19,198 $ 21,764 $ 25,105 $ 26,577 $ 25,935 $ 24,398
Cost of sales 6,882 7,292 9,145 10,067 12,201 13,455 13,335 12,946
-------- -------- -------- -------- -------- -------- -------- ---------
Gross profit 8,216 8,516 10,053 11,697 12,904 13,122 12,600 11,452
Research and
development 3,212 3,360 3,576 3,412 3,906 3,953 3,948 3,774
Selling, general,
and
administrative 4,709 4,475 4,893 5,422 5,880 5,982 5,873 5,538
Goodwill
amortization 126 146 185 184 184 293 293 292
Restructuring and
other charges -- 731 -- -- -- -- -- --
Acquisition related
expenses -- -- -- -- 1,176 -- -- --
-------- -------- -------- -------- -------- -------- -------- ---------
Operating
income (loss) 169 (196) 1,399 2,679 1,758 2,894 2,486 1,848
Other income, net 1,016 1,182 1,424 1,091 1,175 844 683 611
-------- -------- -------- -------- -------- -------- -------- ---------
Income
before income
taxes 1,185 986 2,823 3,770 2,933 3,738 3,169 2,459
Income taxes 466 402 1,068 1,404 1,145 1,431 1,229 976
-------- -------- -------- -------- -------- -------- -------- ---------
Net income $ 719 $ 584 $ 1,755 $ 2,366 $ 1,788 $ 2,307 $ 1,940 $ 1,483
-------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- ---------
Net income
per share:
Basic $ .08 $ .06 $ 0.19 $ 0.25 $ 0.19 $ 0.25 $ 0.21 $ 0.16
-------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- ---------
Diluted $ .08 $ .06 $ 0.18 $ 0.24 $ 0.18 $ 0.23 $ 0.20 $ 0.16
-------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- ---------
Shares used in
Computation of
Net Income
Per Share:
Basic 9,311 9,303 9,413 9,539 9,437 9,365 9,304 9,199
-------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- ---------
Diluted 9,377 9,436 9,618 9,970 9,749 9,933 9,812 9,458
-------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- ---------
- ---------------------- ------------- ------------ ------------- ------------ -------------- ------------ ------------ -------------
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company is continuing to transfer its remaining test and shipping operations
to offshore sub-contractors to reduce manufacturing costs. In addition, the
Company has refocused its product strategy to provide analog and mixed-signal
products for the video, imaging and communications applications and, therefore,
has discontinued certain product offerings. Furthermore, the semiconductor
industry is characterized by economic downturns resulting in diminished product
demand, erosion of average selling prices, intense competition, rapid
technological change, occasional shortages of materials, dependence upon highly
skilled engineering and other personnel and significant expenditures for product
development. In addition, the cyclical market patterns of the semiconductor
industry periodically result in shortages of wafer fabrication capacity. The
Company's availability to meet future demand for its products is dependent upon
obtaining sufficient supply
21
of raw materials and components. The Company's operations have reflected, and
may in the future reflect, substantial fluctuation from period-to-period as a
result of the above factors, as well as general economic conditions, the
timing of orders from major customers, variations in manufacturing
efficiencies, exchange rate fluctuations, the availability and cost of
products from the Company's suppliers, management decisions to commence or
discontinue certain product lines, the Company's ability to design, introduce
and manufacture new products on a cost-effective and timely basis and other
factors. Exar's future operating results could continue to be adversely
affected by a downturn in the semiconductor market, the Asian financial
crisis or by the failure of one or more of its customers to compete
successfully in their markets. The markets for components used in video,
imaging and communications products are extremely price competitive.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal years ended March 31, 1999, 1998 and 1997, the Company
financed its operations primarily from cash flows from operations and
existing cash and short-term investments.
At March 31, 1999, the Company had $81.2 million in cash and short-term
investments. 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, 1999. 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, 1999, the Company
had no outstanding foreign currency forward contracts.
The Company made a $4.5 million minority equity investment in IC Works, Inc.,
a semiconductor manufacturer ("IC Works"), in February 1996. In April 1997,
the Company made an additional equity investment in IC Works of $3 million.
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
anticipates a pre-tax gain of approximately $6.9 million and this transaction
will be accounted for in the Company's fiscal year ended March 31, 2000.
The Company anticipates that it will finance its operations with cash flows
from operations, existing cash and a 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 needs of the Company and prevailing market conditions.
YEAR 2000 AND PROXIMATE DATES
Many computer systems are expected to experience problems interpreting dates
around the year 2000. Following is a summary of our activities to address the
ability of our business to operate around these dates:
STATE OF READINESS AND CONTINGENCY PLANS-- The Company has completed the
process of identifying the programs and infrastructure in all areas of the
Company (including manufacturing, engineering and facilities) that could be
affected by the Year 2000 issue and has developed an implementation plan to
resolve the issue. In 1997, in order to improve access to business
information through common, integrated computing systems across the Company,
the Company began a worldwide business systems replacement project with
systems that use programs primarily from Oracle Corporation (Oracle). The new
systems implementation, which is expected to make the Company's core business
computer systems are Year 2000 compliant, was substantially completed in the
quarter ending March 31, 1999.
A plan has been developed to make any remaining legacy computer systems are
Year 2000 compliant. These remaining legacy systems include, PC based
computer applications, stock option tracking software, and time and
attendance hardware and software. The plan for replacing these remaining
legacy systems is approximately 50% complete and on schedule for completion
in the quarter ended September 30, 1999. In the event that the company is
unable to successfully complete the replacement of these legacy systems, the
Company believes that a contingency plan using manual reporting and tracking
systems can easily be implemented without a disruption in the Company's
critical business functions.
22
COSTS -- The cost of the Oracle implementation was approximately $5.3 million
dollars and the replacement of the remaining legacy systems is estimated to
cost $.3 million. Approximately $5.3 million dollars will be capitalized and
is for the development of the Oracle related software and hardware, and the
replacement of the remaining legacy systems. The Company has expensed
approximately $.3 million of project costs in prior periods. The Oracle
implementation was substantially complete as of March 31, 1999 and the
capitalized portion will be depreciated over an average of six years
commencing in FY00.
RISKS -- The Company believes that with the implementation of the above
mentioned hardware and software, it will be able to operate its time
sensitive business-application software programs and infrastructure into and
beyond the year 2000. 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 the Company's results of operations, liquidity or
financial condition. Furthermore, the Company is in the process of working
with certain key suppliers and customers to assess their year 2000 readiness.
The failure by a third party to adequately address the year 2000 issue could
have a material adverse impact on such third party's ability to furnish
products and services to the Company and, therefore, could have a material
adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion regarding the Company's risk management activities
contains "forward-looking statements" that involve risks and uncertainties.
Actual results may differ materially from those projected in the
forward-looking statements.
FOREIGN CURRENCY FLUCTUATIONS. The Company is exposed to foreign currency
fluctuations 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 the Company's 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, unanticipated currency gains or losses
could be experienced. At the end of fiscal years 1999 and 1998, the Company
did not have significant foreign currency denominated net assets or net
liabilities positions, and has no outstanding foreign currency contracts.
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. Actual gains or
losses 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 re-evaluated as of each balance
sheet date. At March 31, 1999, short-term investments consisted of auction
rate securities of $2,000,000. At March 31, 1998, short-term investments
consisted of government agency securities of $2,000,000 and auction rate
securities of $1,140,000. As of March 31, 1999 and 1998, there were no
significant differences between the fair market value and the underlying cost
of such investments.
23
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three year period
ended March 31, 1999. 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 generally accepted auditing
standards. 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 provide 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, 1999 and 1998 and the results of their
operations and their cash flows, for each of the years in the three year
period ended March 31, 1999, in conformity with generally accepted accounting
principles. 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 20, 1999
24
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 79,154 $ 76,167
Short-term investments 2,000 3,140
Accounts receivable, net of allowances of $2,047 and $3,411 11,450 16,764
Inventories 5,873 6,781
Prepaid expenses and other 939 1,521
Deferred income taxes 4,047 5,217
--------------- -------------
Total current assets 103,463 109,590
PROPERTY, PLANT, AND EQUIPMENT, Net 27,684 26,746
GOODWILL, net of accumulated amortization of $4,922 and $5,061 504 1,534
OTHER ASSETS 6,645 5,799
--------------- -------------
TOTAL ASSETS $ 138,296 $ 143,669
--------------- -------------
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,265 $ 7,534
Accrued compensation and related benefits 3,560 8,564
Accrued sales commissions 1,053 1,107
Other accrued expenses 1,775 1,990
Income taxes payable 925 -
--------------- -------------
Total current liabilities 11,578 19,195
COMMITMENTS AND CONTINGENCIES (see Note 10)
DEFERRED INCOME TAXES 297 -
LONG-TERM OBLIGATIONS 664 745
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;
10,654,244 and 10,475,503 shares issued 88,908 86,091
Accumulated other comprehensive income 204 83
Retained earnings 57,124 51,700
Treasury stock; 1,338,266 and 977,766 shares of common stock at cost (20,479) (14,145)
--------------- -------------
Total stockholders' equity 125,757 123,729
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 138,296 $ 143,669
--------------- -------------
--------------- -------------
See notes to consolidated financial statements.
25
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997 (IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
NET SALES $ 71,868 $ 102,015 $ 92,343
COST AND EXPENSES:
Cost of sales 33,386 51,937 50,829
Cost of sales - inventory write-off - - 4,631
Research and development 13,560 15,581 13,907
Selling, general and administrative 19,499 23,273 21,296
Goodwill amortization 641 1,062 1,374
Restructuring and other charges 731 - 14,344
Acquisition related expenses - 1,176 1,200
------------- ------------- --------------
Total costs and expenses 67,817 93,029 107,581
------------- ------------- --------------
INCOME (LOSS) FROM OPERATIONS 4,051 8,986 (15,238)
OTHER INCOME (EXPENSE):
Interest income 4,156 3,165 2,382
Interest expense (65) (76) (85)
Other, net 622 224 412
------------- ------------- --------------
Total other income, net 4,713 3,313 2,709
------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 8,764 12,299 (12,529)
PROVISION (BENEFIT) FOR INCOME TAXES 3,340 4,781 (3,332)
------------- ------------- --------------
NET INCOME (LOSS) $ 5,424 $ 7,518 $ (9,197)
------------- ------------- --------------
------------- ------------- --------------
NET INCOME (LOSS) PER SHARE:
BASIC
$ 0.58 $ 0.81 $ (1.01)
------------- ------------- --------------
------------- ------------- --------------
DILUTED
$ 0.57 $ 0.77 $ (1.01)
------------- ------------- --------------
------------- ------------- --------------
SHARES USED IN COMPUTATION OF
NET INCOME (LOSS) PER SHARE:
BASIC
9,392 9,326 9,071
------------- ------------- --------------
------------- ------------- --------------
DILUTED
9,600 9,730 9,071
------------- ------------- --------------
------------- ------------- --------------
See notes to consolidated financial statements
26
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
--------------------- ----------------------- Retained
Shares Amount Shares Amount Earnings
BALANCES, March 31, 1996 9,918,371 $ 77,688 (927,766) $(13,420) $53,379
Comprehensive loss:
Net loss (9,197)
Other comprehensive income,
Foreign currency translation
adjustments
Comprehensive loss
Exercise of stock options 117,837 1,240
Income tax benefit from stock option transactions 110
Stock issued under Employee Stock Participation Plan 86,868 1,034
Acquisition of treasury stock (50,000) (725)
---------- -------- --------- ---------- -------
BALANCES, March 31, 1997 10,123,076 80,072 (977,766) (14,145) 44,182
Comprehensive income:
Net income 7,518
Other comprehensive income,
Foreign currency translation
adjustments
Comprehensive income
Exercise of stock options 273,800 3,987
Income tax benefit from stock option transactions 867
Stock issued under Employee Stock Participation Plan 78,627 1,165
---------- -------- --------- ---------- -------
BALANCES, March 31, 1998 10,475,503 86,091 (977,766) (14,145) 51,700
Comprehensive income:
Net income 5,424
Other comprehensive income,
Foreign currency translation
adjustments
Comprehensive income
Exercise of stock options 93,651 1,330
Income tax benefit from stock option transactions 312
Stock issued under Employee Stock Participation Plan 85,090 1,175
Acquisition of treasury stock (360,500) (6,334)
---------- -------- --------- ---------- -------
BALANCES, March 31, 1999 10,654,244 $ 88,908 (1,338,266) $(20,479) $57,124
---------- -------- --------- ---------- -------
---------- -------- --------- ---------- -------
- -----------------------------------------------------------------------------------------------------------------
Accumulated
Other Total Compre-
Comprehensive Stockholders' hensive
Income (loss) Equity Income (loss)
BALANCES, March 31, 1996 $ 200 $ 117,847
Comprehensive loss:
Net loss (9,197) $ (9,197)
Other comprehensive income,
Foreign currency translation
adjustments (492) (492) (492)
------------
Comprehensive loss $ (9,689)
------------
------------
Exercise of stock options 1,240
Income tax benefit from stock option transactions 110
Stock issued under Employee Stock Participation Plan 1,034
Acquisition of treasury stock (725)
--------- ----------
BALANCES, March 31, 1997 (292) 109,817
Comprehensive income:
Net income 7,518 $ 7,518
Other comprehensive income,
Foreign currency translation
adjustments 375 375 375
------------
Comprehensive income $ 7,893
------------
------------
Exercise of stock options 3,987
Income tax benefit from stock option transactions 867
Stock issued under Employee Stock Participation Plan 1,165
--------- ----------
BALANCES, March 31, 1998 83 123,729
Comprehensive income:
Net income 5,424 $ 5,424
Other comprehensive income,
Foreign currency translation
adjustments 121 121 121
------------
Comprehensive income $ 5,545
------------
------------
Exercise of stock options 1,330
Income tax benefit from stock option transactions 312
Stock issued under Employee Stock Participation Plan 1,175
Acquisition of treasury stock (6,334)
--------- ----------
BALANCES, March 31, 1999 $ 204 $ 125,757
--------- ----------
--------- ----------
See notes to consolidated financial statements
27
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,424 $ 7,518 $ (9,197)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,762 6,190 6,491
Write-down of equipment - - 11,382
Provision for doubtful accounts and sales returns (1,364) 254 464
Deferred income taxes 1,510 3,607 (5,050)
Changes in operating assets and liabilities:
Accounts receivable 6,678 (3,374) 5,211
Inventories 908 495 10,789
Prepaid expenses and other 319 (246) (2,643)
Accounts payable (3,269) 15 (3,862)
Accrued compensation and related benefits (5,004) 3,900 1,030
Accrued sales commissions (54) 494 105
Other accrued expenses (215) (615) (829)
Income taxes payable 1,500 2,817 110
---------- ---------- ---------
Net cash provided by operating activities 11,195 21,055 14,001
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (5,335) (4,837) (14,696)
Proceeds from disposition of equipment and leasehold improvements 665 7,581 -
Purchases of short-term investments (137) (4,087) (11,072)
Proceeds from maturities of short-term investments 1,277 6,000 9,000
Purchases of long-term investments - (3,000) -
Other assets (889) (416) 986
---------- ---------- ---------
Net cash provided by (used in) investing activities (4,419) 1,241 (15,782)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,505 5,152 2,274
Long-term obligations (81) (135) (99)
Acquisition of treasury stock (6,334) - (725)
---------- ---------- ---------
Net cash provided by (used in) financing activities (3,910) 5,017 1,450
---------- ---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 121 375 (492)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,987 27,688 (823)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 76,167 48,479 49,302
---------- ---------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 79,154 $ 76,167 $ 48,479
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 633 $ 391 $ 2,750
---------- ---------- ---------
---------- ---------- ---------
See notes to consolidated financial statements.
28
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Exar Corporation (Exar or the Company)
designs, develops, and markets analog and mixed-signal
application-specific integrated circuits for use in communications and
video and imaging products. Principal markets include North America,
Asia and Europe.
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.
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, 1999, short term investments
consisted of auction rate securities of $2,000,000. At March 31, 1998,
short-term investments consisted of government agency securities of
$2,000,000 and auction rate securities of $1,140,000. As of March 31,
1999 and 1998, 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.
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.
29
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 - Revenue is recognized when title transfers (which
is usually at the time of shipment) including sales made to
distributors under agreements allowing limited right of return and
price protection on merchandise unsold by the distributors. For sales
made to distributors, reserves are provided for returns and price
allowances at the time of shipment.
COMPREHENSIVE INCOME (LOSS) - 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 (loss) for the years
ended March 31, 1999, 1998, and 1997 has been disclosed within the
consolidated statements of shareholders' equity and comprehensive
income (loss).
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
were $59,000, $19,000 and $153,000, in 1999, 1998 and 1997,
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, 1999,
and 1998, 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. Approximately
5% of net accounts receivable at March 31, 1999 relates to sales to
customers in Japan. 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, 1999 and 1998
was not materially different from the values presented in the
consolidated balance sheets.
RECLASSIFICATIONS - Certain amounts in the 1998 financial statements
have been reclassified to conform to the 1999 presentation.
30
2. INVENTORIES
Inventories at March 31 consisted of the following:
1999 1998
---- ----
(In thousands)
Work in process $ 3,262 $ 4,579
Finished goods 2,611 2,202
--------- ---------
Total $ 5,873 $ 6,781
========= =========
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31 consisted of the following:
1999 1998
---- ----
(In thousands)
Land $ 6,584 $ 6,584
Building 13,433 13,433
Machinery and equipment 28,660 40,817
Leasehold improvements 50 44
Construction in progress 5,023 1,607
--------- ---------
53,750 62,485
Accumulated depreciation and
amortization (26,066) (35,739)
--------- ---------
Total $ 27,684 $ 26,746
========= =========
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, 1999. 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, 1999, the Company had no outstanding foreign currency forward
contracts.
31
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31
consisted of the following:
1999 1998 1997
---- ---- ----
(In thousands)
Current:
Federal $ 882 $ 293 $ 1,112
State 636 14 278
Foreign - - 218
--------- -------- ---------
1,518 307 1,608
--------- -------- ---------
Deferred:
Federal 1,489 3,047 (4,090)
State 21 560 (960)
Foreign - - -
--------- -------- ---------
1,510 3,607 (5,050)
---------- -------- ---------
Charge in lieu of taxes attributable
to employee stock plans 312 867 110
---------- -------- ---------
Total $ 3,340 $ 4,781 $ (3,332)
========== ======== =========
Consolidated pretax income (loss) includes foreign losses of
approximately $(622,000), $(780,000), and $(52,000), in 1999, 1998,
and 1997, respectively.
Current net deferred tax assets at March 31, 1999 and 1998 were
$4,047,000 and $5,217,000, respectively. Non-current net deferred tax
assets (liabilities) at March 31, 1999 and 1998 of $(269,000) and
$71,000, 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, 1999 and 1998 are as follows:
1999 1998
---- ----
(In thousands)
Deferred tax assets:
Reserves and accruals not currently deductible $ 4,550 $ 6,212
Net operating loss and tax credit carryforwards 8,393 8,981
General business credits 1,161 1,365
State income taxes 219 43
Other 207 168
--------- --------
Total deferred tax assets 14,530 16,769
--------- --------
Deferred tax liabilities:
Depreciation (1,005) (1,070)
Other (323) (330)
--------- --------
Total deferred tax liabilities (1,328) (1,400)
--------- --------
Valuation allowance (9,424) (10,081)
--------- ---------
Net deferred tax assets $ 3,778 $ 5,288
========= =========
32
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, (ii) capital loss carryforwards and (iii) state tax
credits. The valuation allowance relates to the amount of such benefits
for which realization is not assured. During 1999, the Company reversed
valuation allowances of $657,000, 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
$19,700,000 for federal income tax purposes, which are available to
offset future taxable income through 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 (loss) before
income taxes and the provision (benefit) for income taxes for each of
the years ended March 31:
1999 1998 1997
---- ---- ----
(In thousands)
Income tax (benefit) provision at statutory rate $ 3,067 $ 4,305 $ (4,385)
State income taxes, net of federal income
tax benefit 762 457 606
Change in valuation allowance (657) - -
Amortization and write-off of goodwill 224 371 770
Tax-exempt interest income (38) (114) (60)
Benefit of acquired net operating losses
not previously recognized - - (70)
Benefit of foreign sales corporation (175) (175) (490)
Foreign losses providing no benefit 261 (18) -
Tax credits (200) (424) -
Other, net 96 379 297
--------- --------- ---------
Total $ 3,340 $ 4,781 $ (3,332)
========= ========= =========
The California income tax authorities may propose to assess income
taxes using the unitary taxation method for some or all of the fiscal
years 1986 to 1990, which remain open to examination under the statute
of limitations. This taxation method has the effect of apportioning
taxable income of a former foreign majority stockholder of the Company
to Exar and could possibly result in additional state income tax
liability if successfully asserted. The California income tax
authorities have assessed Exar for income taxes under the unitary
taxation method for the years 1980 through 1985. Such assessments have
been paid or accrued as of March 31, 1999. However, management believes
the unitary taxation method is inappropriate for the Company and has
filed refund claims or protests with respect to such amounts.
33
6. NET INCOME (LOSS) 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 is as follows (In thousands, except per
share amounts):
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------- -------- --------
NET INCOME (LOSS) $ 5,424 $ 7,518 $ (9,197)
======== ======== ========
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding used in
computation of basic net income (loss) per share 9,392 9,326 9,071
Dilutive effect of stock options 208 404 -
-------- -------- -------
Shares used in computation of diluted net income (loss) per share 9,600 9,730 9,071
======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ 0.58 $ 0.81 $ (1.01)
======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.57 $ 0.77 $ (1.01)
======== ======== ========
Options to purchase 1,578,514 and 661,400 shares of common stock at
prices ranging from $15.56 to $37.25 and $21.50 to $37.25 were
outstanding as of March 31, 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. Diluted net loss per
share for the year ended March 31, 1997 excludes common equivalent
shares of 882,925 as their effect is anti-dilutive.
7. EMPLOYEE BENEFIT PLANS
EXAR SAVINGS PLAN - 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 $86,000, $379,000 and $373,000 during 1999, 1998 and
1997, respectively.
INCENTIVE COMPENSATION PLANS - The Company's incentive compensation
plans provide for incentive awards for substantially all employees of
the Company based upon the achievement of specified operating and
performance results. Incentive awards totaled $681,000, $3,616,000, and
$547,000, 1999, 1998 and 1997, respectively. The Company's incentive
plans may be amended or discontinued at the discretion of the Board of
Directors.
34
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 at a price of $118.50. 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
1,401,093 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 85,090 in 1999, 78,627 in 1998, and
86,868 in 1997 at weighted average prices of $13.81, $14.81 and $11.90,
respectively. The weighted average fair value of the fiscal 1999, 1998
and 1997 awards was $4.16, $6.15 and $3.67 per share, respectively.
The Company has reserved 845,023 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 3,351,056 and 250,000 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 1999, shareholders approved 450,000 additional
shares of the Company's Common Stock to be reserved under the 1997
Equity Incentive Plan (the "1997 Plan"), and 100,000 additional shares
of the Company's 1996 Non-Employee Directors, Stock Option Plan
(the "1996 Directors Plan"). The 1997 plan differs from prior plans in
that, the 1997 plan allows for selected employees and directors to
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.
35
Option activity for both plans is summarized as follows:
Outstanding Options
-------------------
Weighted Average
Exercise
Number of Price per
Shares Share
------ -----
Outstanding, March 31, 1996 (427,783 exercisable at a weighted
average price of $15.63) 1,611,078 $ 17.52
Options granted (weighted average fair value of $7.92) 874,000 15.25
Options exercised (82,050) 9.92
Options canceled (481,643) 19.81
--------- -----
Outstanding, March 31, 1997 (645,589 exercisable at a weighted
average price of $16.20) 1,921,385 16.22
Options granted (weighted average fair value of $12.62) 796,169 22.24
Options exercised (273,800) 14.56
Options canceled (250,432) 18.01
--------- -----
Outstanding, March 31, 1998 (764,307 exercisable at a weighted
average price of $16.81) 2,193,322 18.39
Options granted (weighted average fair value of $9.06) 794,924 15.85
Options exercised (93,651) 14.24
Options canceled (301,526) 19.08
--------- -----
Outstanding, March 31, 1999 2,593,069 $ 17.71
========= =====
At March 31, 1999 589,871 options were available for future grant under
both plans.
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Price Exercisable Exercise Price
--------------------------- ----------- ------------ -------------- ----------- --------------
$ 5.25 - $ 14.09 141,618 5.61 $ 12.16 108,269 $ 12.20
14.25 - 14.94 819,387 6.95 14.64 186,585 14.34
15.00 - 16.50 515,701 6.83 15.95 177,354 16.07
17.00 - 17.92 362,488 4.07 17.29 318,363 17.31
18.17 - 37.25 753,875 7.09 23.51 237,441 24.39
$ 5.25 - $ 37.25 2,593,069 6.49 $ 17.71 1,028,012 $ 17.66
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro
forma net income (loss) and earnings (loss) 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
significantly
36
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, 6.7 to 7.8 years; stock
volatility, 43%, 44% and 35% in 1999, 1998 and 1997 respectively;
risk free interest rates, 5.4%, 6.0% and 6.1% in 1999, 1998 and
1997; 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 1999, 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro
forma net income (loss) would have been as follows: (In thousands,
except per share amounts):
1999 1998 1997
---- ---- ----
Pro Forma Net Income (Loss) $ 2,412 $ 4,696 $ (10,544)
========= ======== ===========
Pro Forma Net Income (Loss) Per Share:
BASIC $ 0.26 $ 0.50 $ (1.16)
========= ======== ===========
DILUTED $ 0.25 $ 0.48 $ (1.16)
========= ======== ===========
The impact of outstanding non-vested stock options granted prior to
1996 has been excluded from the pro forma calculation; accordingly, the
1999, 1998 and 1997 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 fourth quarter of fiscal 1997, the Company announced and began
to implement a restructuring plan to i) reduce manufacturing expenses
by transferring its test and shipping operations to off shore
subcontractors, ii) focus the Company's product strategy to provide
analog and mixed signal products for the video, imaging, communications
and silicon sensor markets and iii) narrow the Company's distribution
channels to create more leverage. The Company's restructuring actions
consisted primarily of writing down certain equipment as a result of
the transfer of operations and change in product focus; terminating 54
full-time employees; writing down inventory associated with product
lines which are being discontinued; canceling certain facility leases
and cancellation of contracts as a result of a change in distribution
channels; and writing down goodwill associated with discontinued
products. These actions resulted in a charge of $5,345,000 to operating
expenses and $4,631,000 to cost of goods sold. The charges include a
non-cash charge of $8,454,000 and cash expenditures of $1,522,000. As
of March 31, 1999 an accrual of approximately $190,000 remained related
to cancellation of lease obligations.
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 $3,900,000 over the next two years. 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.
37
OTHER CHARGES
During the fourth quarter of fiscal 1997, the Company incurred a charge
of $9 million 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 Exar 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 better meet the Company's needs and wrote
off $1.2 million 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 anticipates a pre-tax gain of approximately $6.9 million
and this transaction will be accounted for in the Company's fiscal year
ended March 31, 2000.
10. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities were leased under lease agreements
expiring through August 2001. Rent expense was $300,000 for 1997. The
Company expensed all future lease obligations in 1997 as a part of the
restructuring and other charges (see Note 9).
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 $764,000 as of March 31, 1999.
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
38
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 and the United Kingdom. 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).
Identifiable assets represent assets used in the Company's operations
in each geographic area. Geographic financial information for each year
is as follows:
1999 1998 1997
---- ---- ----
(In thousands)
Net sales:
United States $ 45,631 $ 60,020 $ 53,374
Export sales to Japan and Asia 8,658 16,852 13,160
Export sales to western Europe 15,731 21,001 15,144
Export sales to rest of world 975 1,110 1,200
Japan 873 3,032 9,465
Western Europe - - -
-------- ---------- ----------
$ 71,868 $ 102,015 $ 92,343
======== ========== ==========
Income (loss) from operations:
United States $ 4,572 9,350 $ (15,153)
Japan (512) (467) (143)
Western Europe (9) 103 58
-------- ---------- ----------
$ 4,051 $ 8,986 $ (15,238)
======== ========== ==========
Identifiable assets:
United States $137,078 $ 141,422 $ 119,623
Japan 1,121 2,102 5,739
Western Europe 97 145 175
-------- ---------- ----------
$138,296 $ 143,669 $ 125,537
======== ========== ==========
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, 1999. 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.
39
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 certain key employees of the Company and
certain information about them, see Part I "Executive Officers of the Company."
The 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 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, 1999,
all Section 16(a) filing requirements applicable to its officers, directors, and
greater than ten percent beneficial owners were complied with; except that 1
report covering 1 transaction was filed late by Mr. Thomas R. Melendrez and 1
report covering 1 transaction was filed late by Mr. George D. Wells.
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."
40
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 24
Consolidated Balance Sheets
March 31, 1999 and 1998 25
Consolidated Statements of Operations
for the years ended
March 31, 1999, 1998 and 1997 26
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)
for the years ended
March 31, 1999, 1998, and 1997 27
Consolidated Statements of Cash Flows
for the years ended
March 31, 19998, 1998 and 1997 28
Notes to Consolidated Financial
Statements 29-39
(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, 1999, 1998 and 1997 are filed as part of this Form 10-K:
Form 10K
Page No.
II Valuation and Qualifying Accounts 45
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.
41
Exhibit Exhibit
Footnote Number Description
(d) 2.1 Agreement and Plan of Reorganization
Dated June 3, 1994
(d) 2.2 First Amendment to Agreement and Plan of
Reorganization Dated March 31, 1995
(c) 3.1 Restated Certificate of Incorporation of the Company.
(c) 3.2 Bylaws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
(a)* 10.1 1986 Directors' Stock Option Plan of the Company, as amended,
and related forms of stock option grant and exercise.
(b)* 10.2 1989 Employee Stock Participation Plan of the Company and related
Offering.
(c)* 10.3 1991 Stock Option Plan of the Company and related forms of stock
option grant and exercise.
(c)* 10.4 1991 Non-Employee Directors' Stock Option Plan of the Company
and related forms of stock option grant and exercise.
* 10.5 Fiscal 1999 Key Employee Incentive Compensation Program.
* 10.6 Fiscal 1999 Executive Incentive Compensation Program.
(e)* 10.7 1996 Non-Employee Directors' Stock Option Plan, as amended
September 10, 1998.
(e)* 10.8 1997 Equity Incentive Plan, as amended September 10, 1998.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors' - Deloitte & Touche LLP
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, 1991 and incorporated herein by reference.
(b) Filed as an exhibit to the Company's report on Form
8-K, filed with the Commission on January 19, 1990
and incorporated herein by reference.
42
(c) 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.
(d) Filed as an exhibit to the Company's Annual report on
Form 10-K for the fiscal year ended March
31, 1994 and incorporated herein by reference.
(e) Filed as an exhibit to the Company's registration
statements on Form S-8 (Registration statements No.
333-37369 and N0.333-69381) filed with the Commission
On October 7, 1997 and December 21, 1998 and
incorporated herein by reference.
* 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 1999.
43
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 24, 1999
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 24, 1999
- -------------------------
(Donald L. Ciffone Jr.)
/s/ Ronald W. Guire Executive Vice President, Chief Financial Officer June 24, 1999
- ------------------------- Secretary and Director
(Ronald W. Guire) (Principal Financial and Accounting Officer)
/s/ Raimon L. Conlisk Director and Chairman of the Board June 24, 1999
- -------------------------
(Raimon L. Conlisk)
/S/ James E. Dykes Director June 24, 1999
- -------------------------
(James E. Dykes)
/s/ Frank P. Carrubba Director June 24, 1999
- -------------------------
(Frank P. Carrubba)
44
SCHEDULE II
- ----------------------------------------------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
Balance at Balance
Beginning of Write-offs and at end
Classification Year Additions Recoveries of Year
- ----------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997:
Allowance for doubtful
accounts and sales returns $ 2,692 $ 348 $ (118) $ 3,158
- ----------------------------------------------------------------------------------------------------------------------
45