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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, 1996
/ / 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
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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, 1996 was $146,253,120 based on the last sales price
reported for such date.
The number of shares outstanding of the Registrant's Common Stock was 9,000,192
as of May 31, 1996, net of 927,766 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.
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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, as well as in the section entitled
"Managements' 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 telecommunications, data
communications, document imaging, consumer electronics and automotive products
and in other selected product areas. 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, enable 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 telecommunications and data communications products,
as well as general purpose analog integrated circuits. In May 1994, the Company
acquired Origin Technology, Inc. ("Origin") and in June 1994 the Company
acquired Micro Power Systems, Inc. ("Micro Power"). In March 1995 the Company
acquired Startech Semiconductor, Inc. ("Startech") and in June 1995 the Company
acquired Silicon Microstructures, Inc. ("SMI"). (See "Recent Acquisitions".)
In May 1995, the Company announced the discontinuance of its mass storage
product line. (See "Mass Storage".)
Rohm Co., Ltd., a manufacturer of semiconductor devices and other electronic
components in Japan, was the majority stockholder of Exar from 1971 until 1990.
Working in cooperation with the Company, Rohm reduced its ownership interest in
Exar beginning in 1984 and in May 1990, Rohm engaged in a share exchange that
reduced its ownership of Exar's common stock to less than 50%. As of January
1994, Rohm was no longer an affiliate of the Company. Exar has in the past and
continues to have various significant business relationships with Rohm Co., Ltd.
and its subsidiaries ("Rohm"), including the sale of epitaxial and bipolar
wafers to Rohm. The arrangement for the sale of epitaxial and bipolar wafers to
Rohm was terminated as of April 1, 1994. Rohm continues to be a major foundry
supplier of the Company.
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.
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The Company believes that the market for analog and mixed-signal integrated
circuits, in contrast 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. Custom products typically involve greater design
costs for the customer, compared to standard products, 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.
PRODUCTS AND MARKETS
The Company divides its integrated circuit sales into five major market groups:
communications, document imaging, consumer electronics, personal computers and
other products. These market groups account for most of the Company's sales of
integrated circuits, with a small portion being accounted for by the sale of
general purpose integrated circuits.
In recent years, the Company entered the Japanese market for integrated circuits
used in consumer electronics products. These integrated circuits are sold to
several of the major Japanese electronics companies through Exar Japan
Corporation, a wholly-owned subsidiary of Exar ("Exar Japan"). The Company
sells both proprietary products and standard Rohm products in Japan. As of April
1, 1995, the Company no longer recognizes revenue from its sale of standard Rohm
products in Japan, but records its net margin from such sales as commission
revenue. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".)
Exar's operating results will depend to a significant extent on its ability to
continue to introduce new products. The success of Exar's new products will
depend on several factors, including the ability to anticipate customer
requirements, timely introduction of new products to the market and market
acceptance. There can be no assurance that Exar's new products will be
successfully developed, or will receive or maintain substantial market
acceptance.
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<TABLE>
<CAPTION>
The following chart shows selected applications and representative products
in each of the Company's major market areas:
- - ----------------------------------------------------------------------------------------------------------------
MARKET APPLICATION PRODUCT
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Communications high speed communication T/E-Carrier circuits:
transmission equipment, central office -repeaters
equipment and private branch exchanges -line interface circuits
-framers
-buffers
-transcorders
Telephone sets, headsets Speakerphone and other
telephonyorieinted componenets
Speech Recognition
Caller ID Sytems, pagers, cellular Phase-Locked loops, function
telephones, two-way radios generators and tone decoders
Computer-to-computer links through Modem chips and chip sets
telephones
Computer serial asynchronous UARTS/DUARTS/QUARTS
interfaces Analog-to-digital converter/dual
Wireline communication test systems digital-to-analog converter
- - ---------------------------------------------------------------------------------------------------------------
Document Imaging Scanners Analog-to-digital converters
Digital Camera (ADC's)
Digital Copiers Digital-to-analog converts
(DAC's)
- - ---------------------------------------------------------------------------------------------------------------
Consumer Electronics(1) Graphic Equalizers Switched capacitor filters
Audio Systems Audio enhancement circuits
Video Systems Automatic track finding (ATF)
circuits; ADC's; DAC's
- - ----------------------------------------------------------------------------------------------------------------
Personal Computers(2) Clocks Frequency timing generators
Input/Output Super I/O
- - ----------------------------------------------------------------------------------------------------------------
Automotive Engine controls Silicon sensors(3)
Timing circuits
Automatice remote lock controls RF transmitters/receivers
- - ----------------------------------------------------------------------------------------------------------------
Other Hearing aids Amplifiers
Multi media Audio mixer circutis
Proximity sensors Sensor interface circuits
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
1 Only Exar designed products are described here. Exar also sells in Japan
integrated circuits designed by Rohm for use in consumer electronic products.
(See "Consumer Electronics".)
2 This market and applications are a result of the Startech Semiconductor, Inc.
acquisition. (See "Recent Acquisitions".)
3 This product is a result of the Silicon Microstructures, Inc. acquisition.
(See "Recent Acquisitions".)
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COMMUNICATIONS
Exar markets integrated circuits for a variety of applications in both the
telecommunications as well as data communication markets.
Exar's transmission telecommunications circuits are used in SONET/SDM
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, transcoders for pulse code
modulation (PCM) systems and T1/E1 and T3/E3/STS/SONET interfaces. The majority
of these circuits require bipolar, mixed-signal and CMOS process technology
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 integrated circuits for telephone
handsets, including speakerphones, telephone circuitry and caller identification
systems.
The Company's data communications products include 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 supplies a family of V.35 circuits used for high speed data
transmission, primarily in networking equipment such as routers and bridges. In
addition, the Company manufactures high performance fax/data/voice ("modem")
chip sets. These chip sets incorporate proprietary firmware that facilitates
integration of the Company's fax/data/voice products into OEM customers'
systems. The Company has no additional versions of its modem chip sets
currently in development.
The Company offers proprietary automatic speech recognition ("ASR") products
through its wholly-owned subsidiary Origin. Origin integrates its proprietary
ASR technology into a family of voice dialing telephone products which are
distributed worldwide.
Users of the Company's integrated circuits in the communications market include
Cisco Systems, Nokia, Alcatel S.A., British Telecom, Digital Switch Corporation,
Northern Telecom, Inc. and Siemens A.G.
DOCUMENT IMAGING
The Company supplies high-performance data converters, data acquisition
subsystems and other sophisticated electronic components to the document
imaging, communications, industrial and other markets through its wholly-owned
subsidiary, Micro Power. The Company offers analog to digital converters (ADCs)
as well as digital to analog converters (DACs), to the document imaging industry
for products such as scanners, digital cameras and digital copiers. Using CMOS
and BiCMOS process technologies, the Company creates standard and custom
products that integrate data conversion and other functions. The Company was
first to market a monolithic triple 10-bit ADC, a digitally-controlled gain and
offset adjustment device 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.
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The family of ADCs includes full flash, half flash, pipeline and successive
approximation register converter architectures. Current products offer from
6 to 12 bits of resolution and operating ranges from LESS THAN 1 kHz to 30
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 and a family of 16 to 32 channel data
acquisition subsystem products with over voltage protection circuitry for
control systems.
Users of the Company's integrated circuits in the document imaging market
include Sony Corporation, Canon, Epson and Logitech.
CONSUMER ELECTRONICS
With the establishment of Exar Japan in 1989 and related sales assistance from
Rohm, Exar began to market integrated circuits to Japanese manufacturers of
consumer electronics products. Exar-designed products being sold to or
developed for 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 and video systems,
BBETM audio chips for sound enhancement, automatic track finding circuits for
video systems and timer circuits for various products.
A majority of the integrated circuits sold by Exar Japan for use in consumer
electronics products are designed by Rohm and, until April 1995, purchased by
Exar Japan from Rohm. Effecitve April 1, 1995, the Company no longer purchases
and resells the products designed by Rohm, but, as a representative, receives a
commission on the sales of these products.
Customers of the Company in the consumer products area include Sony Corporation,
Zenith, AIWA Co., Ltd. and Matsushita.
PERSONAL COMPUTERS
Through the acquisition of Startech, the Company supplies frequency timing
generators chips to the personal computer and workstation markets.)
In a computer system, in order to perform an operation accurately, the computer
requires a precise timing of signals that coordinate transfer, storage and
execution activities. There are many different timing signals (sometimes called
"clocks") needed to make a computer run. Previous generations of computer
designs used individual oscillator circuits and their additional crystal
components in every system. By using modern phased-locked-loop and voltage
controlled oscillator design methods, Startech engineers have developed a family
of single chips which can synthesize most of the required timing signals into a
single oscillator source, or "frequency timing generator".
The output timing signal from Startech's frequency timing generators has low
"noise" levels and is within the industry requirements for low frequency
"jitter" that computer systems demand. The timing
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signals generated by Startech's frequency generators are virtually identical to
those of individual oscillator circuits and the reduction in the number of
required circuits is significant. Most Startech frequency generator
applications result in a ten-fold reduction in circuit count, which translates
into significant reduction in cost for the customer.
The Company is currently designing a super I/O (Input/Output) chip. Super I/O
chips integrate certain selected features of standard integrated circuits. By
blending functions, a super I/O chip can hold all or most of the common
input/output, control and interface functions of more than one dedicated
circuit. Startech is developing a line of super I/O chips that integrate
selected features found in various standard integrated circuits.
Personal computer and workstation manufacturers among Startech's customers
include Compaq Computer Corp., Sun Microsystems, Inc. IBM and Matsushita
Electric Corporation of America.
OTHER PRODUCTS AND MARKETS
The Company also serves a variety of other markets, such as hearing aids,
industrial controls and automotive controls. At present, most of the Company's
integrated circuits sold to these markets are custom and semi-custom products.
However, the Company continues to develop ASSP products in certain niche areas
where there are opportunities.
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. The Company's design experience
with EEPROM memory also enables the Company to add programmability features
so that in the future the electronic characteristics of hearing aids may be
tailored to fit both an individual user and ambient noise conditions.
INDUSTRIAL CONTROL The Company's products in this area include integrated
circuits for use in security systems, magnetic card readers and process
control. One of the Company's products in this area is an integrated
circuit for industrial robotics applications incorporating EEPROM
technology.
AUTOMOTIVE Exar sells custom and semi-custom integrated circuits for use
in automotive applications, including air bags and body control systems,
such as keyless entry systems.
MULTI MEDIA Multi media combines voice, data, and video on the same
medium. The Company's mixed-signal and audio expertise are integrated for
custom products in this market.
SENSORS The Company's analog to digital techniques and amplifier expertise
are incorporated in Exar's offering of sensor interface circuits. The
acquisition of SMI expands Exar's product offerings to the motion, pressure
and accelerometer markets. (See "Recent Acquisitions".)
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. The Company offers current
and voltage output DACs which include products ranging from 8 to 16 bits of
resolution. Recent product introductions offer unique digital control
capabilities and wide bandwidth for the direct control of video and CCD
imaging signals.
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MASS STORAGE
In July 1995, the Company discontinued its family of devices for use in the mass
storage industry. The termination of this product line was the result of supply
disruptions and accompanying low margins. The Company has filed claims against
its former supplier of these products, alleging breach of contract and this
dispute is currently in arbitration. (See "Legal Proceedings".)
WAFER SERVICES Through March 31, 1994, the Company sold epitaxial and bipolar
wafers to Rohm. The Company entered into a sale and leaseback of these
manufacturing facilities with Rohm in April 1992 in order to shift to Rohm (as
the largest customer of the facilities) the benefits and risks associated with
capacity utilization. Effective April 1, 1994, Exar no longer operates the
manufacturing facilities for Rohm. Accordingly, the revenues associated with
the operation of such facilities are no longer included in the financial results
of the Company.
RECENT ACQUISITIONS
STARTECH On March 31, 1995, the Company acquired Startech Semiconductor, Inc.
(Startech). Startech designs, develops and markets ASSPs for a variety of
markets including the data communications, telecommunications, personal
computer, workstation and peripherals markets. ASSPs meet the requirement for
fast, error-free, inexpensive data communications essential to today's computer
system and software products. Startech designs its ASSPs to meet evolving
industry standards and protocols, enabling its customers to react rapidly to the
technological changes they face.
Startech's principal product offerings include a broad line of UARTs. Startech
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
Corporation's microprocessors. Startech is using its megacell design library,
created in connection with its UART operations, to develop a line of super I/O
(input/output) chips that integrate selected features found in various standard
integrated circuits. In addition to its UART-related activities, Startech
offers a range of programmable frequency generators used in computer system
graphics applications, hard disk drives and telecommunications.
Startech has over 200 customers worldwide including Boca Research, Digiboard and
U.S. Robotics, as well as Exar, in the communications and connectivity industry
together with the personal computer manufacturers previously discussed.
SMI In February 1993, Exar acquired a minority interest in Silicon
Microstructures, Inc. (SMI) and in June 1995, the Company acquired all of the
remaining outstanding stock of SMI. SMI designs, develops and markets silicon
sensors for a variety of markets including medical, automotive and consumer.
SMI's current products include precision piezoresistive pressure sensors and
accelerometers.
The pressure devices are fabricated in silicon using processing similar to that
needed for bipolar or MOS transistors coupled with additional silicon etching
technologies to allow the formation of thin membranes and force concentrators.
SMI produces both moderate and very-low pressure sensors.
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SMI has achieved a precision capacitive accelerometer structure using "bulk"
micromachining of the silicon merged with fusion bonding of several silicon
wafers to provide a self-contained sensor. Coupled with an application specific
integrated circuit, the accelerometer provides high performance, wide-dynamic
range, good stability, good over-shock protection and low cost. Micron sized
mechanical parts etched in silicon can incorporate sophisticated intelligence
on-board the sensor itself.
Other structures possible with the technology include, for instance, precision
flow channels, ultra small valve structures, as well as co-integrated devices
where mechanical structures and circuitry are fabricated on a common wafer
silicon.
MICRO POWER AND ORIGIN In fiscal 1995 the Company acquired all of the
outstanding stock of Micro Power and Origin. (See Note 9 to Consolidated
Financial Statements.)
MARKETING AND CUSTOMERS
Exar sells its products principally to OEMs for use in a broad range of
electronic systems and equipment. The following table provides a geographic
breakdown of the Company's sales with sales of wafer services to Rohm set forth
separately. For additional geographic financial information, see Note 8 in
Notes to Consolidated Financial Statements.
YEARS ENDED MARCH 31
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(IN THOUSANDS)
1996 1995 1994
---- ---- ----
U.S. Sales $ 56,030 $ 62,344 $ 42,040
International Sales:
Sales by Exar Japan 19,061 55,851 64,833
Other Sales 50,675 41,277 32,732
Rohm Wafer Services -- -- 22,054
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TOTAL $ 125,766 $ 159,472 $ 161,659
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Exar markets its products in the United States principally through 26
independent sales representatives and nine independent non-exclusive
distributors, as well as through the Company's direct sales force. Exar
currently has sales support offices in or near Boston, Chicago, Dallas, Los
Angeles, Philadelphia and Fremont.
Exar is represented internationally by approximately 43 sales representatives
and distributors. In addition, Exar is represented in Europe by its wholly-
owned subsidiary, Exar Ltd. and in Japan by its wholly-owned subsidiary, Exar
Japan. The products marketed by Exar Japan are generally not in competition
with those marketed in Japan by Exar's independent distributors. 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
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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. and
Exar Japan.
During the fiscal year ended March 31, 1996, 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 bipolar, silicon gate and moly gate CMOS, 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, its cost-effectiveness and 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.
MANUFACTURING
The Company uses outside sources for the supply of its integrated circuits.
Rohm is the Company's largest supplier of wafer services. During fiscal 1996,
approximately 51% of the Company's sales of integrated circuits were of products
made from wafers manufactured for the Company by Rohm. Rohm supplies the
Company with bipolar, BiCMOS and CMOS products. These services are provided to
the Company pursuant to two separate foundry service agreements which expire in
April 1997 and April 2006. The agreement expiring in April 1997 is
automatically extended for successive two year terms unless and until it is
terminated by either party upon at least six months notice prior to the end of
the extension term. The Company is not under any obligation to continue
obtaining manufacturing services from Rohm.
The Company also obtains CMOS and BiCMOS products from independent
manufacturers. Although the Company has qualified second sources for certain of
its foundry requirements, there would be significant lead times and initially
lower yields associated with the use of such sources. Accordingly, a disruption
in supply from one or more of the Company's outside suppliers could have a
material adverse effect on operations.
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The Company experienced long lead times and delays from outside sources of
certain products during the first half of fiscal 1996. These delays negatively
affected the Company's ability to respond to customers of such products. Due to
supply disruptions, the Company decided to terminate its product line of
semiconductors used in hard disk drive products. (See "Mass Storage".) In
October 1995, the Company entered into an agreement with IC Works Inc. to expand
its available manufacturing capacity for sub-micron products. (See "Liquidity
and Capital Resources".)
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. The Company
has purchased and intends to continue to acquire advanced equipment to test its
products. 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
significant 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 Taiwan, Indonesia, the Philippines, Korea and Japan.
The raw materials and equipment used in the production of the Company's
integrated circuits are available from several suppliers. Although shortages
have occurred and on occasion lead times have been extended, the Company has not
recently experienced significant difficulty in obtaining raw materials or
equipment.
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 products. During the fiscal years
ended March 31, 1996, 1995 and 1994, Exar's research and development expenses
were $16.1 million, $14.4 million, and $11.5 million, respectively.
Exar was one of the first companies to offer its customers the ability to create
semi-custom analog integrated circuits, and the Company remains a leading vendor
in this area. Exar's analog arrays utilize silicon wafers containing a series
of uncommitted components. The wafers are completely fabricated except for the
final metalization layer, allowing an engineer to customize the circuit by
connecting the uncommitted components to conform to the customer's requirements.
Semi-custom design techniques reduce the total time required for new custom
designs to reach production, with development costs substantially lower than
those associated with full custom design. Exar makes available to its customers
its FLEXARTM family of flexible linear arrays, together with its proprietary
Flexible Integrated Design System (FIDSTM) software tools to assist customers
with the design and layout of array products.
Exar utilizes an "N"-well CMOS library of analog, digital and EEPROM 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
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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.
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, Crystal Semiconductor, Dallas Semiconductor,
Hitachi, Level One Communications and Rockwell Communications. As the Company
has marketed its products more aggressively in Japan, it has encountered greater
competition from Japanese manufacturers. Many of the Company's competitors have
substantially greater financial, manufacturing and marketing resources, and some
of them have greater technical resources. 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 over the succeeding
twelve months. Backlog includes oral orders which are generally subsequently
confirmed by written purchase orders. Exar's backlog does not include Rohm
designed products sold by Exar Japan which has been a material source of revenue
for Exar.
At March 31, 1996, Exar's backlog was approximately $32.9 million, compared with
$41.9 million at March 31, 1995.
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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 prior to shipment without
substantial penalty.
EMPLOYEES
As of April 1, 1996, Exar had 447 employees, including 111 in marketing and
sales, 163 in research, development and engineering-related functions, 122 in
manufacturing and production and 51 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 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.
13
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY The name of the Company's executive officers
and certain information about them is set forth below.
NAME AGE POSITION
---- --- --------
George D. Wells 60 Chief Executive Officer, President and Director
Ronald W. Guire 47 Executive Vice President, Chief Financial Officer,
Secretary and Director
Eric J. Ochiltree 49 Vice President, Exar Products Division
Jean-Claude Zambelli 52 Vice President, Worldwide Sales
Stephen W. Michael 49 Vice President, Operations Division
Thomas R. Melendrez 42 Corporate Vice President, General Counsel
Thomas W. Jones 48 Vice President, Reliability and Quality Assurance
Suhas "Sid" Bagwe 56 Vice President, Strategic Planning and Long-Range
Business Development
Mr. Wells joined Exar as CEO and President of the Company in June 1992 and has
served as a director since September 1992. Mr. Wells has more than 35 years of
semiconductor experience, most recently with LSI Logic Corporation, a
manufacturer of HCMOS and BiCMOS application-specific integrated circuits (LSI)
where he was President and Chief Operating Officer from 1985 to 1992. From 1983
to 1985, Mr. Wells was President of Intersil and General Manager of
Semiconductor, divisions of General Electric. Mr. Wells is also a director of Q
Logic, a supplier of adapter cards and disk controller chips. Mr. Wells holds a
BS in Physics (cum laude) and completed two years of post-graduate work in
Nuclear Physics at the University of Glasgow, Scotland. Mr. Wells has informed
the Company of his intention to resign as an officer and employee of the
Company. The Board of Directors is currently conducting a search for a
successor.
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 a director 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. Ochiltree joined Exar in September 1995 as Vice President, Exar Products
Division. A 25-year veteran of the semiconductor industry, prior to joining
Exar, Mr. Ochiltree was Vice President, Santa Clara Site General Manager,
Standard Linear Products Division of Analog Devices, Inc. Mr. Ochiltree joined
Analog Devices with the acquisition of Precision Monolithics, Inc. (PMI) in
1991, where he was Vice President and General Manager of the
Industrial/Commercial Division. Mr. Ochiltree has an MBA from the University of
Santa Clara, an MSEE from Arizona State University and a BSEE from the Georgia
Institute of Technology.
Mr. Jean-Claude Zambelli joined the Exar as Group Manager, New Market
Development in April 1994. In July 1995 he was promoted to Director, Product
groups and in April 1996 he assumed his current position as Vice President,
Worldwide Sales. Prior to joining Exar, Mr. Zambelli was President and CEO of
MetaDesign Semiconductor from 1986 to 1994. Mr. Zambelli joined Fairchild
Semiconductor in 1982 as Marketing/Strategic Planning Manager and was promoted
to General Manager of the Power Systems and Discrete Division in 1984. Mr.
Zambelli has a Diploma from the Institut Controle de Gestion, Paris, France
(U.S. equivalent M.B.A. Finance), a Diploma from the Institut Administration des
Enterprises, Paris, France (U.S. equivalent M.B.A. Marketing), and a Diploma,
Ecole Nationale Ingenieurs, Belfort, France (U.S. equivalent M.S.E.E.).
14
<PAGE>
Mr. Michael joined the Company as Vice President of New Market Development in
September 1992 In July 1995 he was promoted 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.
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. 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 as Director
of Quality Assurance. Mr. Jones joined LSI in September 1990. In December 1989
Mr. Jones joined Elcon Products International, 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.
Mr. Bagwe joined Exar as Director of Data Communications Product Group in March
1993, a position he held until April 1994 when he was promoted to Director of
Strategic Planning and Long Range Business Development. In July 1995 he was
promoted to his current position. From January 1990 until March 1993, Mr. Bagwe
was Vice President of Marketing and Sales at Phylon Communications. From 1987
to December 1990 he served as Director of Business Development for Headland
Technology. Mr. Bagwe has also served in a variety of executive management
positions with various companies in the electronics industry. Mr. Bagwe holds
an MBA with honors from Loyola University in Chicago, a BSEE from the University
of Illinois and a BS in physics from the University of Poone, India.
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
15
<PAGE>
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.
The California Regional Water Quality Control Board for the San Francisco Bay
Region (the "Regional 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 administrative proceeding before the Regional Board
was resolved by letter dated March 7, 1996, from the Regional Board to the
Company stating that the Regional Board staff had concluded that "pollution in
groundwater beneath the subject site... is the result of migration of pollutants
in groundwater from upgradient sources [and that] Board staff does not intend to
name [the Company] as a discharger nor require further action by [the Company]
in defining the migration of pollutants."
During 1987, Micro Power 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 informal 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 10-15 years. Micro Power has recorded its share of
the estimated liability, approximately $1.1 million.
ITEM 2 PROPERTIES
The Company's corporate headquarters are located in Fremont, California
consisting 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. In addition,
the Company leases approximately 60,000 square feet of office space in Santa
Clara, California. This lease expires in August 1996 and the space is currently
being used for storage of documents.
ITEM 3 LEGAL PROCEEDINGS
In June 1995 the Company filed a $9 million arbitration claim against SGS-
Thompson Microelectronics, Inc. ("SGS-Thompson"), its foundry supplier of wafers
used in its mass storage products, alleging inter alia breach of an Agreement
between the parties, arising out of SGS-Thompson's refusal to provide Exar with
various products called for under the Agreement. In September 1995 SGS-Thompson
filed a counter claim for $8 million alleging breach of the Agreement by the
Company. The Company believes the counter claim is without merit. This dispute
is currently in arbitration.
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, 1996.
16
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock of Exar is traded on the 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.
Such prices have been adjusted for the stock dividend effected in the form of a
stock split in October 1994. The listed quotations represent inter-dealer
prices without retail markup, markdown or commissions.
- - --------------------------------------------------------------------------------
COMMON STOCK PRICES
HIGH LOW
FISCAL 1996 ---- ---
- - -------------
Quarter ended March 31, 1996 $18 3/4 $12
Quarter ended December 31, 1995 $35 3/4 $13 3/4
Quarter ended September 30, 1995 $40 1/4 $28 3/4
Quarter ended June 30, 1995 $31 1/4 $21
FISCAL 1995
Quarter ended March 31, 1995 $24 3/4 $19 1/2
Quarter ended December 31, 1994 $24 1/2 $19 1/2
Quarter ended September 30, 1994 $35 $25 1/2
Quarter ended June 30, 1994 $28 1/4 $21 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 367 stockholders of record as of May 31, 1996.
The Company believes it has in excess of 2,500 beneficial stockholders. The
last sales price for Exar's Common Stock, as reported by NASDAQ on May 31, 1996,
was $16.25 per share.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net Sales $125,766 $159,472 $161,659 $146,096 $139,775
Income (Loss) From Operations 18,759 (4,989) 20,999 18,858 13,250
Net Income (Loss) 13,582 (11,084) 15,665 13,687 10,819
Net Income (Loss) Per Share (a) 1.37 (1.25) 1.52 1.33 1.16
Weighted Average Shares
Outstanding(a) 9,925 8,835 10,287 10,260 9,354
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
MARCH 31,
---------
(IN THOUSANDS)
1996 1995 1994 1993 1992
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Working Capital $ 77,550 $ 81,286 $ 85,842 $ 90,827 $ 73,426
Total Assets 139,074 150,080 132,219 138,898 138,235
Redeemable Preferred Stock -- -- -- -- 13,135
Retained Earnings 53,379 39,797 50,881 35,216 21,529
Stockholders' Equity 117,847 107,696 105,378 108,773 91,623
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) All share and per share amounts for 1991 through 1994 have been restated to
give effect to the 3 for 2 stock dividend effected in the form of a stock split
in October 1994.
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 statement 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".
GENERAL
The Company derives revenue principally from the sale of integrated circuits for
use in communications, consumer electronics, document imaging, automotive,
personal computers and other selected areas. In addition, until June 1995, the
Company also generated revenues from sales of mass storage 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, and the Company's ability to achieve certain manufacturing efficiencies.
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.
18
<PAGE>
The Company has wholly-owned subsidiaries in Japan and the United Kingdom to
support its sales operations in each of those areas. The Company's business in
Japan includes the sale of integrated circuits which are primarily for use in
consumer electronics products and such sales are made with sales assistance from
Rohm. The sale of integrated circuits for use in consumer electronics products
is a high volume business, but generally such products have lower gross margins
than the Company's other products.
The Company has made a number of changes in its underlying business in an effort
to reduce its low-margin businesses. 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. These actions are summarized below:
REDUCTION OF LOW MARGIN BUSINESSES
Effective April 1, 1994, the Company transferred its wafer manufacturing
operations to Rohm and thereby eliminated sales derived from wafer processing
services. In fiscal 1995, the Company continued to provide certain services to
Rohm in exchange for an administrative fee, which was not significant, but this
activity and the related fees have ceased. However, Rohm continues to be a
major supplier of wafers to the Company.
Effective April 1, 1995, the Company no longer recognized revenue from the sale
of Rohm-designed integrated circuits for the consumer products industry in
Japan. However, as of April 1995, the Company recognizes commission revenue
from this business. In fiscal 1995 sales of Rohm designed products were
approximately $36 million as compared to commission revenue of $1.6 million
reported in fiscal 1996.
DISCONTINUATION OF MASS STORAGE PRODUCTS
In May 1995, the Company was notified by its foundry supplier of wafers used in
its mass storage products that no wafers would be delivered in the second and
third quarters of fiscal 1996. The Company has made a claim against its foundry
supplier for recovery of write-offs and other losses it incurred related to the
termination of this product line, and this matter is currently in arbitration.
Accordingly, the Company discontinued its mass storage product line, in the
second quarter of fiscal 1996. In the year ended March 31, 1995, sales of mass
storage products were approximately $20 million and the product line generated a
small operating loss. In the year ended March 31, 1996, sales of mass storage
products were approximately $3.7 million.
RECENT ACQUISITIONS
In May 1994, the Company acquired Origin Technology, Inc. (Origin) for $1.4
million in cash and invested an additional $1.0 million in newly issued common
stock of Origin. Origin designs, develops and markets proprietary automatic
speech recognition (ASR) products for the consumer market.
In June 1994, the Company acquired Micro Power Systems, Inc. (Micro Power) for
$21.7 million in cash. Micro Power designs, develops, manufactures and markets
high-performance data converters, data acquisition subsystems and other
sophisticated electronic components for the document imaging, communications,
microperipherals, industrial and other markets.
19
<PAGE>
On March 31, 1995, the Company acquired Startech Semiconductor, Inc. (Startech)
in exchange for a combination of cash and common stock valued at $13.2 million.
Startech designs, develops and markets application-specific standard products
for a variety of markets, including the data , communications,
telecommunications and personal computer workstation and peripheral markets.
In June 1995, the Company acquired Silicon Microstructures, Inc. (SMI), in
exchange for the conversion to equity of $1.25 million of loans previously
granted to SMI and 43,334 shares of common stock. SMI designs, develops and
markets silicon sensors for a variety of markets, including medical, automotive
and consumer.
All of the acquisitions have been accounted for as purchases and the results of
operations for fiscal 1995 and 1996 include the operations of the acquired
companies subsequent to the dates of acquisition. Accordingly, the operations
of these companies, prior to acquisition, are not reflected in the Company's
historical operating results. As a result of the acquisitions completed in
fiscal 1995 and 1996, the Company recorded approximately $7.1 million of
goodwill, which is being amortized over a period of five years. The remaining
portion of the excess purchase price (approximately $27.8 million in fiscal 1995
and $.9 million in fiscal 1996) was allocated to acquired research and
development and was expensed. (See note 9 to Consolidated Financial
Statements.)
20
<PAGE>
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,
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 49.5 61.1 67.6
Research and development 12.8 9.0 7.1
Selling, general and administrative 19.8 15.0 12.4
Goodwill amortization 1.1 .5 --
Write-off of in-process R&D and
other one-time charges 1.9 17.5 --
----- ----- ----
Operating income (loss) 14.9 (3.1) 12.9
Other income, net 2.8 1.8 1.9
----- ----- ----
Income (loss) before income taxes 17.7 (1.3) 14.8
Income taxes 6.9 5.7 5.1
----- ----- ----
Net income (loss) 10.8% (7.0)% 9.7%
----- ----- ----
----- ----- ----
- - --------------------------------------------------------------------------------
FISCAL 1996 VS FISCAL 1995
Net sales during fiscal 1996 were approximately $125.8 million compared to
$159.5 million in fiscal 1995, a decrease of approximately 21%. The decrease
reflects the elimination of sales of second source consumer products revenues
and discontinued hard disk drive products totaling approximately $51.8 million.
Such decrease was offset, in part by increased sales of integrated circuits for
use in data acquisition products. In addition, the Company benefited from the
sale of personal computer and pressure sensor products as a result of the
Startech and SMI acquisitions.
Overall, sales of continuing proprietary products increased by approximately
20%. In fiscal 1996, sales to domestic customers decreased by 10% to $56
million. International sales, excluding second source consumer products,
increased by 12% to approximately $68.2 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 and the United Kingdom. Sales
by the Company's foreign subsidiaries are denominated in the currency of the
local country, 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 strictly minimize its foreign currency risk which includes
the use of foreign currency exchange contracts to hedge amounts receivable from
its foreign subsidiaries. In addition, foreign sales may be subject to tariffs
in certain countries or with regard to certain products; however, the Company's
profit margin on international sales of integrated circuits, adjusted for
differences in product mix, is not significantly different from that realized on
its sales to domestic customers.
21
<PAGE>
Cost of sales as a percentage of net sales decreased from 61% in fiscal 1995 to
50% in fiscal 1996. The corresponding increase in gross margins is due
primarily to changes in product mix, including i) the elimination of sales of
second source consumer products in Japan, ii) discontinued sales of hard disk
drive products, and iii) the addition of higher margin product lines as a result
of the acquisitions discussed above.
Expenditures for research and development during fiscal 1996 increased by $1.7
million or 12% compared to fiscal 1995. As a percentage of net sales,
expenditures for research and development increased from approximately 9% in
fiscal 1995 to 13% in fiscal 1996. The increase in research and development
expenses as a percentage of net sales is primarily attributable to the decrease
in net sales discussed above as well as additional headcount and additional
research and development expenditures of acquired companies.
Selling, general and administrative expenses were $24.9 million in fiscal 1996
compared to $24 million in fiscal 1995. As a percentage of net sales, selling
general and administrative expenses increased from approximately 15% of net
sales in fiscal 1995 to 20% of net sales in fiscal 1996. The increases are due
primarily to the decrease in net sales.
As a result of the discontinuation of the mass storage product line discussed
above, the Company incurred a one-time charge to operations of approximately
$1.2 million.
Net interest income during fiscal 1996 increased to $3.1 from the $2.4 million
reported in fiscal 1995 as higher average investment rates in fiscal 1996 more
than offset lower levels of cash and short-term investments.
The Company's provision for income taxes is based on income from operations,
excluding the write-off of in-process research and development, as there was no
tax benefit associated with such write-off. The effective income tax rate for
fiscal 1996, before the write-off of in-process research and development, was
37.5% compared to the federal statutory rate of 35%, due primarily to state
income taxes and foreign income which is taxed at rates different from U.S.
income tax rates offset, in part, by tax advantaged investment income and tax
savings generated by use of the Company's foreign sales corporation.
Excluding the effects of the write-off of in-process research and development
and other acquisition related expenses, the Company reported net income of $15.5
million ($1.56 per share) compared to $16.7 million ($1.82 per share) in fiscal
1995.
To date inflation has not had a significant impact on the Company's operating
results.
FISCAL 1995 VS FISCAL 1994
Net sales during fiscal 1995 were approximately $159.5 million compared to
$161.7 million in fiscal 1994 as the addition of the revenues of Origin and
Micro Power, offset in part, the revenues previously provided under the wafer
processing arrangement with Rohm and a decrease in sales of second source
consumer products in Japan.
The Company experienced increases in sales of integrated circuits for use in new
markets, communications and microperipheral products which were partially offset
by decreases in sales
22
<PAGE>
of integrated circuits for use in the communications product line. These
decreases were due, in part, to increased competition and no new product
introductions within the modem market.
Overall, sales of proprietary products increased by approximately 29%, while
sales of second source consumer products decreased by approximately 21%. In
fiscal 1995, sales to domestic customers increased by 48% to $62.3 million.
International sales, excluding wafer sales to Rohm, remained relatively constant
at approximately $97 million.
Cost of sales as a percentage of net sales decreased from 68% in fiscal 1994 to
61% in fiscal 1995. The corresponding increase in gross margins is due
primarily to changes in product mix, including i) the termination of the
arrangement under which the Company provided wafer processing services to Rohm,
ii) the decrease in sales of second source consumer products in Japan, and iii)
the addition of higher margin product lines as a result of the acquisitions
discussed above.
Expenditures for research and development during fiscal 1995 increased by $2.9
million or 25% compared to fiscal 1994. As a percentage of net sales,
expenditures for research and development increased from approximately 7% in
fiscal 1994 to 9% in fiscal 1995. The increase in research and development
expenses is primarily attributable to additional headcount and additional
research and development expenditures of acquired companies, as well as changes
in product mix as the products of acquired companies displaced the wafer foundry
services previously provided to Rohm.
Selling, general and administrative expenses were $24 million in fiscal 1995
compared to $20 million in fiscal 1994. As a percentage of net sales, selling
general and administrative expenses increased from approximately 12% of net
sales in fiscal 1994 to 15% of net sales in fiscal 1995. The increases are
primarily due to the additional selling, general and administrative expenses of
acquired companies and changes in product mix.
Net interest income during fiscal 1995 was consistent with the amounts reported
in fiscal 1994 as higher average investment rates in fiscal 1995 were partially
offset by lower levels of cash and short-term investments.
The Company's provision for income taxes is based on income from operations,
excluding the write-off of in-process research and development, as there was no
tax benefit associated with such write-off. The effective income tax rate for
fiscal 1995, before the write-off of in-process research and development, was
consistent with the federal statutory rate of 35% as state income taxes and
foreign income which is taxed at rates different from U.S. income tax rates was
offset by tax advantaged investment income and tax savings generated from
utilization of net operating losses and the Company's foreign sales corporation.
Although the Company reported a net loss for fiscal 1995, excluding the effects
of the write-off of in-process research and development, the Company reported
net income of $16.7 million ($1.82 per share) compared to $15.7 million ($1.52
per share) in fiscal 1994.
23
<PAGE>
QUARTERLY RESULTS
The following table contains selected unaudited quarterly financial data for
the fiscal years ended March 31, 1995 and 1996. 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.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
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,
1996 1995 1995 1995 1995 1994 1994 1994
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA
Net sales $ 28,938 $ 30,217 $ 31,681 $ 34,930 $ 40,630 $ 40,029 $ 40,752 $ 38,061
Cost of sales 14,868 15,219 14,232 17,898 23,871 24,316 25,110 24,203
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 14,070 14,998 17,449 17,032 16,759 15,713 15,642 13,858
Research and
development 3,937 4,279 4,040 3,860 4,179 3,600 3,385 3,212
Selling, general,
and
administrative 6,465 6,313 6,025 6,108 5,917 5,944 6,154 5,965
Goodwill
amortization 343 343 344 285 234 312 234 78
On-time charges
relating to
discontinued
operations -- -- -- 1,155 -- -- -- --
Write-off of in-
process research
and development
and other
acquisition related
expenses (1,097) -- -- 2,390 10,951 -- -- 16,875
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income (loss) 4,422 4,063 7,040 3,234 (4,522) 5,857 l5,869 (12,272)
Other income, net 497 927 1,170 927 743 871 632 811
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before income
taxes 4,919 4,990 8,210 4,161 (3,779) 6,728 l6,501 (11,461)
Income taxes 1,546 1,893 2,832 2,427 2,511 2,372 2,320 1,870
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 3,373 $ 3,097 $ 5,378 $ 1,734 $ (6,290) $ 4,356 $ 4,181 $(13,331)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)
per share (a) $ .37 $ .31 $ .52 $ .17 $ (.70) $ .47 $ .45 $ (1.49)
-------- -------- -------- -------- -------- -------- -------- --------
Shares used in
computation (a) 9,153 10,107 10,411 10,030 8,938 9,334 9,248 8,924
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) All share and per share amounts have been restated to give effect to the 3
for 2 stock dividend effected in the form of a stock split in October 1994.
The Company's operations have reflected, and may in the future reflect,
substantial fluctuations from period to period as a result of the impact of
general economic conditions, the timing of orders from major customers,
variations in manufacturing efficiencies, exchange rate fluctuations, management
decisions to commence or discontinue certain product lines, and the Company's
ability to design, introduce and manufacture new products on a cost-effective
and timely basis. The semiconductor industry has historically been
characterized by business cycles, with economic downturns resulting in
24
<PAGE>
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
the failure of one or more of its customers to compete successfully in such
market. The markets for components used in personal computer and consumer
electronics products are extremely price competitive.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal years ended March 31, 1994, 1995 and 1996, the Company
financed its operations primarily from existing cash and short-term investments
and cash flows from operations.
At March 31, 1996, the Company had $52.3 million in cash and short-term
investments. The Company also has short-term, unsecured, informal lines of
credit under which it may borrow up to $35.5 million, none of which was being
utilized at March 31, 1996. In addition, the Company has a credit facility with
certain domestic and foreign banks under which it may borrow up to $35 million
in support of its foreign currency transactions. At March 31, 1996, the Company
had outstanding Japanese yen forward contracts totaling approximately $500,000
which mature through July 1996.
During the first quarter of fiscal 1995, the Company acquired Origin and Micro
Power for approximately $24.1 million in cash. On March 31, 1995, the Company
completed the acquisition of Startech in exchange for a combination of cash and
common stock valued at $13.2 million. In June 1995, the Company acquired SMI in
exchange for 43,334 shares of common stock and the conversion to equity of $1.25
million of loans previously granted to SMI. Certain of the purchase agreements
include provisions for adjustments to the final purchase price and/or include
deferred compensation arrangements which may result in additional payments of up
to $9.8 million over the next five years, in some combination of cash and common
stock.
In October 1995, the Company entered into a wafer production agreement with IC
Works, Inc. (IC Works). Under the terms of the agreement, Exar will invest
approximately $15 million for the purchase and installation of equipment at IC
Works, over the next twelve months, in exchange for a predetermined supply of
wafers over the next five years. Under a separate but related agreement, Exar
made a minority equity investment in IC Works of approximately $4.5 million.
The Company constructed new facilities on its property in Fremont, California
which were completed in November 1995. The total cost of the facility,
including moving costs, was approximately $14 million all of which had been paid
as of March 31, 1996.
The Company anticipates that it will finance its operations with cash flows from
operations, existing cash and short-term investment balances, borrowings under
existing bank credit lines, and some combination of long-term debt and/or lease
financing and additional sales of equity securities. The combination and
sources of capital will be determined by management based on the needs of the
Company and prevailing market conditions.
25
<PAGE>
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1996. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule for each of the years in the three-year period
ended March 31, 1996. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Exar Corporation and
subsidiaries as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1996, in conformity with generally accepted accounting principles. Also in
our opinion, the related 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.
KPMG PEAT MARWICK LLP
Palo Alto, California
May 2, 1996
26
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 49,302 $ 57,029
Short-term investments 2,981 5,133
Accounts receivable, net of allowances of $2,692 and $2,985 19,319 29,719
Inventories 18,065 18,411
Prepaid expenses and other 582 1,687
Deferred income taxes 5,697 7,277
---------- ----------
Total current assets 95,946 119,256
PROPERTY, PLANT, AND EQUIPMENT, Net 34,185 22,192
GOODWILL, net of accumulated amortization of $2,095 and $780 5,026 4,866
OTHER ASSETS 3,917 3,766
---------- ----------
TOTAL ASSETS $ 139,074 $ 150,080
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,680 $ 27,326
Accrued compensation and related benefits 4,017 4,925
Other accrued expenses 1,699 1,912
Income taxes payable -- 3,807
---------- ----------
Total current liabilities 18,396 37,970
---------- ----------
DEFERRED INCOME TAXES 1,852 1,857
---------- ----------
LONG-TERM OBLIGATIONS 979 2,557
---------- ----------
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;
9,918,371 and 9,309,066 shares issued 77,688 67,217
Cumulative translation adjustments 200 682
Retained earnings 53,379 39,797
Treasury stock; 927,766 shares of Common stock at cost (13,420) --
---------- ----------
Total stockholders' equity 117,847 107,696
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,074 $ 150,080
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
NET SALES $ 125,766 $ 159,472 $ 161,659
COST AND EXPENSES:
Cost of sales 62,217 97,500 109,213
Research and development 16,116 14,375 11,473
Selling, general and administrative 24,911 23,980 19,974
Goodwill amortization 1,315 780 --
Write-off of in-process research and development and other acquisition
related expenses 1,293 27,826 --
Discontinued product line 1,155 --
---------- --------- ---------
Total costs and expenses 107,007 164,461 140,660
---------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 18,759 (4,989) 20,999
OTHER INCOME (EXPENSE):
Interest income 3,266 2,471 2,414
Interest expense (156) (99) (85)
Other, net 411 606 675
---------- --------- ---------
Total other income, net 3,521 2,978 3,004
---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 22,280 (2,011) 24,003
INCOME TAXES 8,698 9,073 8,538
---------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 13,582 (11,084) 15,465
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- 200
---------- --------- ---------
NET INCOME (LOSS) $ 13,582 ($ 11,084) $ 15,665
---------- --------- ---------
---------- --------- ---------
PER SHARE:
Income (loss) before cumulative effect of change
in accounting principle $ 1.37 ($ 1.25) $ 1.50
Cumulative effect of change in accounting principle -- -- 0.02
---------- --------- ---------
Net income (loss) $ 1.37 ($ 1.25) $ 1.52
---------- --------- ---------
---------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 9,925 8,835 10,287
---------- --------- ---------
---------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- - -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock Cumulative Total
----------------------- ----------------------- Translation Retained Stockholders'
Shares Amount Shares Amount Adjustments Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, April 1, 1993 9,990,966 $ 72,988 -- $ -- $ 569 $ 35,216 $ 108,773
Exercise of stock options 324,503 2,855 2,855
Income tax benefit from
stock options exercised and sold -- 1,100 1,100
Stock issued under Employee
Stock Participation Plan 60,673 849 849
Acquisition of treasury stock (1,727,052) (23,645) (23,645)
Translation adjustment (219) (219)
Net income 15,665 15,665
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCES, March 31, 1994 10,376,142 77,792 (1,727,052) (23,645) 350 50,881 105,378
Stock issued in connection
with acquisitions 349,587 8,750 8,750
Exercise of stock options 246,661 2,566 2,566
Income tax benefit from stock
options exercised and sold 739 739
Stock issued under Employee
Stock Participation Plan 63,728 1,015 1,015
Retirement of treasury stock (1,727,052) (23,645) 1,727,052 23,645 --
Translation adjustment 332 332
Net loss (11,084) (11,084)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCES, March 31, 1995 9,309,066 67,217 -- -- 682 39,797 107,696
Stock issued in connection
with acquisition 43,334 1,150 1,150
Exercise of stock options 488,222 6,110 6,110
Income tax benefit from
stock options exercised and sold 1,990 1,990
Stock issued under Employee
Stock Participation Plan 77,749 1,221 1,221
Acquisition of treasury stock (927,766) ( 13,420) (13,420)
Translation adjustment (482) (482)
Net income 13,582 13,582
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCES, March 31, 1996 9,918,371 $77,688 (927,766) ($13,420) $200 $53,379 117,847
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS)
- - --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,582 ($11,084) $ 15,665
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,627 5,725 3,795
Provision for doubtful accounts and sales returns 203 626 471
Write-down of investments to estimated net realizable value - - 1,256
Write-off of in process research and development 905 27,826 -
Deferred income taxes 1,575 (531) (925)
Changes in operating assets and liabilities:
Accounts receivable 10,354 (849) (1,650)
Inventories 718 (267) (248)
Prepaid expenses and other 844 364 (752)
Accounts payable (14,841) 5,009 (274)
Accrued compensation and related benefits (1,092) (1,165) (716)
Other accrued expenses (539) (4,438) (422)
Income taxes payable (1,817) 1,671 (1,775)
--------- --------- ---------
Net cash provided by operating activities 15,519 2,887 14,425
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of building (13,358) - -
Purchases of equipment and leasehold improvements (2,518) (6,798) (7,546)
Purchases of short-term investments (4,049) (6,450) (23,000)
Proceeds from sales of short-term investments 6,202 8,316 28,687
Purchases of long-term investments (4,500) - -
Proceeds from sales of long-term investments 2,760 - -
Other assets (857) (1,228) (98)
Acquisitions, net of cash acquired (355) (26,357) -
--------- --------- ---------
Net cash used in investing activities (16,675) (32,517) (1,957)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 7,331 3,581 3,704
Long-term obligations - 346 -
Acquisition of treasury stock (13,420) - (23,645)
--------- --------- ---------
Net cash provided by (used in) financing activities (6,089) 3,927 (19,941)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (482) 332 (219)
--------- --------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (7,727) (5,371) (7,692)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 57,029 62,400 70,092
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 49,302 $ 57,029 $ 62,400
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 7,275 $ 7,857 $ 10,853
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- - --------------------------------------------------------------------------------
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, document imaging, consumer
electronics and other selected products. Principle markets include sales
in North America, Asia, Europe and other countries.
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. At March
31, 1996, short-term investments consisted of auction-rate securities of
$2,000,000 and money market and/or mutual fund investments of $981,000. At
March 31, 1995, short-term investments consisted of certificates of
deposits of $2,000,000, auction-rate securities of $1,260,000, commercial
paper of $950,000 and money market and/or mutual fund investments of
$923,000.
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." 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. As of March 31, 1996
and 1995, 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 standard cost
(first-in, first-out method) or market.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are stated
at cost. Depreciation and amortization on plant and equipment are computed
using the straight-line method over the shorter of the estimated useful
lives of the assets. Estimated useful lives are as follows:
Computer software and computer equipment 3-5 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.
31
<PAGE>
LONG LIVED ASSETS - On April 1, 1995 the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Adoption of SFAS No. 121 did not have a material effect on the Company's
consolidated financial statements.
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 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.
NET INCOME PER SHARE - Net income per share is calculated based on the
weighted average number of common and dilutive common share equivalents
outstanding. Common share equivalents reflect the dilutive effect of
outstanding stock options.
FOREIGN CURRENCY - The functional currency of each of the Company's foreign
subsidiaries is the local currency of that country. Material translation
adjustments are included in stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in other income.
The Company enters into foreign currency exchange contracts from time-to-
time to hedge certain currency exposures. At March 31, 1996, the Company
had Japanese yen forward contracts for the conversion of 50,000,000 yen to
U.S. dollars ($477,000 at March 31, 1996) which mature through July 1996.
The Company is exposed to credit-related losses in the event of
nonperformance by the parties to its foreign currency exchange contracts,
but the credit exposure on such contracts was not significant at March 31,
1996. Net foreign currency transaction gains were $347,000, $511,000, and
$1,400,000 in 1996, 1995, and 1994, respectively.
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 consumer electronics
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 24% of net
accounts receivable 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.
32
<PAGE>
2. INVENTORIES
Inventories at March 31 consisted of the following:
1996 1995
---- ----
(In thousands)
Raw materials $ 762 $ 301
Work in process 11,563 11,746
Finished goods 5,740 6,364
-------- --------
Total $ 18,065 $ 18,411
-------- --------
-------- --------
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31 consisted of the following:
1996 1995
---- ----
(In thousands)
Land $ 6,561 $ 6,561
Building 13,358 --
Machinery and equipment 44,382 40,976
Leasehold improvements 55 1,287
Construction in progress 852 2,747
-------- --------
65,208 51,571
Accumulated depreciation and
amortization (31,023) (29,379)
-------- --------
Total $ 34,185 $ 22,192
-------- --------
-------- --------
In November 1995, the Company moved to a new facility constructed on its
property in Fremont, California. Construction of the facility was
substantially completed during fiscal 1996 at a total cost of approximately
$14 million.
4. BORROWING ARRANGEMENTS
The Company has two short-term, unsecured, informal bank lines of credit
under which it may borrow up to $35,500,000 through January 31, 1997. In
addition, the Company has a credit facility with certain domestic and
foreign banks under which it may borrow up to $35,000,000 in support of its
foreign currency transactions. Interest rates are based on the federal
funds rate (5.0% at March 31, 1996) plus .30% to .375%. At March 31, 1996,
the Company had outstanding Japanese yen forward contracts totaling
approximately $500,000.
33
<PAGE>
5. INCOME TAXES
The provision for income taxes for the years ended March 31 consisted of
the following:
1996 1995 1994
---- ---- ----
(In thousands)
Current:
Federal $ 4,063 $ 6,317 $ 6,329
State 736 1,704 1,977
Foreign 334 568 108
-------- -------- --------
5,133 8,589 8,414
-------- -------- --------
Deferred:
Federal 1,167 (172) (598)
State 221 (359) (207)
Foreign 187 - 80
-------- -------- --------
1,575 (531) (725)
-------- -------- --------
Charge in lieu of taxes
attributable to employee
stock plans 1,990 1,015 849
-------- -------- --------
Total $ 8,698 $ 9,073 $ 8,538
-------- -------- --------
-------- -------- --------
Consolidated pretax income includes foreign income of approximately
$758,000, $1,066,000, and $399,000, in 1996, 1995, and 1994, respectively.
The Company adopted SFAS No. 109 effective April 1, 1993. The principal
impact to the Company was a change in the recognition criteria for deferred
tax assets. The cumulative effect of adopting SFAS No. 109 was to increase
1994 net income by $200,000 ($0.02 per share). Significant components of
the Company's net deferred tax asset at March 31, 1996 and 1995 are as
follows:
1996 1995
---- ----
Deferred tax assets: (In thousands)
Reserves and accruals not
currently deductible $ 3,128 $ 4,571
Net operating loss and tax
credit carryforwards 1,947 2,291
State income taxes 567 371
Other 55 44
-------- --------
Total deferred tax assets 5,697 7,277
-------- --------
Deferred tax liabilities:
Depreciation (1,473) (1,460)
Other (379) (397)
-------- --------
Total deferred tax liabilities (1,852) (1,857)
-------- --------
Net deferred tax assets $ 3,845 $ 5,420
-------- --------
-------- --------
34
<PAGE>
The Company's net deferred tax assets at March 31, 1995 include $2,535,000
of deferred tax assets arising from the acquisitions of Micro Power
Systems, Inc. (MPS), Origin Technology, Inc. and Startech Semiconductor,
Inc. (see Note 9). Approximately $1,266,000 of the acquired deferred tax
assets relate to net operating loss carryforwards which previously had not
been recognized. In accordance with the provisions of SFAS No. 109, the
portion of the deferred tax assets relating to net operating loss
carryforwards have been recognized as a reduction of the recorded value of
goodwill. No valuation allowance for deferred tax assets was required for
the years ended March 31, 1996 and 1995 as management believes it is more
likely than not that the Company will generate sufficient taxable income to
realize its deferred tax assets.
Certain of the Company's subsidiaries have net operating loss and tax
credit carryforwards of approximately $2,720,000 for state income tax
purposes and $4,840,000 for federal income tax purposes, which are
available to offset future taxable income through 1997 and 2008,
respectively. Current federal and California tax law includes provisions
limiting the use of net operating loss and tax credit carryforwards in the
event of certain changes in ownership, as defined. The Company's ability
to utilize its net operating loss and tax credit carryforwards could be
limited according to these provisions.
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 for income taxes for each of the years ended
March 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Income taxes at statutory rate $ 7,798 ($ 704) $ 8,401
State income taxes, net of federal income
tax benefit 1,091 954 1,217
Write-off of in-process research and development 317 9,739 -
Goodwill amortization 460 273 -
Benefit of acquired net operating losses
not previously recognized - (574) -
Benefit from utilization of net operating losses - (70) -
Tax-exempt interest income (95) (168) (531)
Benefit of foreign sales corporation (533) (541) (648)
Foreign income taxed at rates higher than
U.S. tax rates 68 175 48
Other, net (408) (11) 51
-------- -------- --------
Total $ 8,698 $ 9,073 $ 8,538
-------- -------- --------
-------- -------- --------
</TABLE>
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 Rohm
Company Ltd. (see Note 10) 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, 1996. However, management believes
the unitary taxation method is inappropriate for the Company and has filed
refund claims or protests with respect to such amounts.
35
<PAGE>
6. 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
$721,000, $385,000, and $311,000, during 1996, 1995 and 1994, respectively.
BONUS PLANS - The Company's bonus plans provide for incentive bonuses for
substantially all employees of the Company based upon the achievement of
specified operating and performance results. Incentive bonuses totaled
$478,000, $400,000, and $1,100,000 for 1996, 1995 and 1994, respectively.
The Company's bonus plans may be amended or discontinued at the discretion
of the Board of Directors.
7. 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
by 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
1,000,000 shares of common stock under its Employee Stock Participation
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 offering period.
Shares purchased by and distributed to employees were 77,749 in 1996,
63,728 in 1995, and 60,673 in 1994.
The Company has reserved 616,766 shares of common stock for future issuance
under its Employee Stock Participation plan.
36
<PAGE>
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 2,655,000 and 262,500 shares of common stock,
respectively. Options are granted at fair market value on the date of
grant. Options are exercisable in four equal annual installments
commencing one year after the date of grant and expire seven years from the
grant date. The stock option plans were retroactively amended in 1993 to
make canceled stock options available for future grant. The amount of
shares presented as available for future grant has been restated to reflect
this amendment.
Option activity for both plans is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------
Shares Number of Price per
Available Shares Share
--------- ------ -----
<S> <C> <C> <C>
Balances, March 31, 1993 1,152,845 1,212,293 $ 3.67 - $ 18.83
Options granted (664,650) 664,650 14.09 - 17.00
Options exercised - (324,503) 3.67 - 17.17
Options canceled 104,730 (104,730) 4.83 - 17.66
--------- --------- ------------------
Balances March 31, 1994 592,925 1,447,710 3.67 - 18.83
Additional shares reserved 285,000 - -
Options granted (519,500) 519,500 16.09 - 22.50
Options exercised - (246,661) 3.67 - 20.25
Options canceled 123,511 (121,644) 4.84 - 18.17
--------- --------- ------------------
Balances March 31, 1995 481,936 1,598,905 3.79 - 22.50
Additional shares reserved 250,000 - -
Options granted (758,600) 758,600 12.63 - 37.25
Options exercised - (373,400) 3.79 - 21.50
Options canceled 373,027 (373,027) 4.84 - 37.25
--------- --------- ------------------
Balances March 31, 1996 346,363 1,611,078 $ 4.84 - $ 37.25
--------- --------- ------------------
--------- --------- ------------------
</TABLE>
Options to purchase 427,783 shares were exercisable at March 31, 1996.
On December 15, 1995, the Board authorized an option repricing program
under which certain outstanding options were repriced to $12.63, the fair
market value of the Company's common stock on the date of the repricing.
37
<PAGE>
OTHER OPTIONS - In connection with the acquisition of Startech
Semiconductor Inc. (see Note 9), the Company assumed outstanding Startech
options which converted into options to purchase up to 150,373 shares of
Exar common stock for $21.50 per share. The options are exercisable at
prices ranging from $0.22 to $17.32 and expire in December 1996.
Activity for these options is summarized as follows:
Outstanding Options
-------------------
Number of Price per
Shares Share
------ -----
Balances, March 31, 1995 150,373 $ .22 - $ 17.32
Options exercised (117,795) .22 - 17.32
-------- -------------------
Balances March 31, 1996 32,578 $ 2.16 - $ 17.32
-------- -------------------
-------- -------------------
8. GEOGRAPHIC AREA INFORMATION
The Company and its subsidiaries market products in the United States and
in foreign countries. The Company's foreign operations consist primarily
of its wholly owned subsidiaries in Japan and the United Kingdom.
Identifiable assets represent assets used in the Company's operations in
each geographic area.
Geographic financial information for each year is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net sales:
United States $ 56,030 $ 62,344 $ 42,040
Export sales to Japan and Asia 34,354 22,674 43,537
Export sales to western Europe 14,280 11,653 10,258
Export sales to rest of world 1,847 1,347 991
Japan 19,061 60,862 64,833
Western Europe 194 592 -
-------- -------- --------
$125,766 $159,472 $161,659
-------- -------- --------
-------- -------- --------
Net income (loss):
United States $ 13,158 ($ 11,581) $ 15,454
Japan 330 299 211
Western Europe 94 198 -
-------- -------- --------
$ 13,582 ($ 11,084) $ 15,665
-------- -------- --------
-------- -------- --------
Identifiable assets:
United States $127,735 $121,358 $113,566
Japan 9,884 27,437 18,653
Western Europe 1,455 1,285 -
-------- -------- --------
$139,074 $150,080 $132,219
-------- -------- --------
-------- -------- --------
</TABLE>
38
<PAGE>
9. ACQUIRED COMPANIES
In May 1994, the Company acquired all of the outstanding common stock of
Origin Technology, Inc., (Origin) for $1.4 million in cash and invested
an additional $1.0 million in newly issued common stock of Origin. The
purchase agreement includes provisions for additional payments to the
selling shareholders of up to $1.5 million through 1999 based on
Origin's future operating performance. Such contingent payments were
accrued and are included in long-term liabilities at March 31, 1995. In
1996, the Company reversed the $1.5 million accrual as Origin's
operating results did not meet performance objectives pursuant to the
purchase agreement. Management believes Origin's ability to meet future
performance objectives under the agreement is unlikely.
10. TRANSACTIONS WITH RELATED PARTIES
Rohm Co., Ltd., a manufacturer of semiconductor devices and other
electronic components in Japan, was the majority stockholder of Exar from
1971 until 1990. As of January 1994, Rohm was no longer an affiliate of
the Company. For the year ended March 31, 1994, the Company had the
following transactions with Rohm and/or its affiliates: i) sales and
services $26.1 million, ii) purchases of inventory and other services $64.9
million and iii)rent paid to Rohm $.8 million.
In June 1994, the Company acquired all of the outstanding common stock of
MPS for $21.7 million in cash.
On March 31, 1995, the Company acquired all of the outstanding common stock
of Startech Semiconductor, Inc. (Startech) in exchange for 349,587 shares
of common stock, the assumption of Startech's outstanding stock options
with an aggregate value of $8,750,000, and cash of $4,450,000. The
purchase agreement includes provisions for adjustments to the final
purchase price, which may result in additional payments of up to $6 million
in October 1996 based on Startech's future operating performance. In
addition, the Company may be required to pay up to $2,336,000 in deferred
compensation to certain key employees of Startech through April 1998.
During 1996, the Company paid $388,000 related to Startech's deferred
compensation arrangement.
In June 1995, the Company acquired Silicon Microstructures, Inc. (SMI) in
exchange for 43,334 shares of common stock, the conversion to equity of
$1,250,000 of loans previously granted to SMI and acquisition related costs
of $355,000. In addition, the Company may be required to issue up to
$1,500,000 in additional shares based on SMI's future operating
performance.
For accounting purposes, the acquisitions have been accounted for as
purchases. Accordingly, the results of operations for 1996 and 1995
include the operations of the acquired companies subsequent to the dates of
acquisition. As a result of these transactions, the Company recorded
approximately $7.1 million of goodwill which is being amortized over a
period of five years. The remaining portion of the excess purchase price
represented in-process research and development which was charged to
operations (approximately $1.3 million in 1996, net of the $1.5 million
Origin reversal discussed above, and approximately $27.8 million in 1995).
Contingent consideration in connection with the Startech and SMI
acquisitions has not been accrued and will be reflected in the Company's
consolidated financial statements when issued or paid.
Had the acquisitions been effective at the beginning of 1995, the impact
would have been to increase revenues by $14.6 million, to increase
operating loss by $503,000, and to decrease net loss by $125,000 ($.01 per
share). Had the acquisitions been effective at the beginning of 1994, the
impact would have been to increase revenues by $27 million, and to increase
operating income and net income by $1.6
39
<PAGE>
million and $1.4 million ($.14 per share), respectively. The acquisition
of SMI in 1996 has not had a significant impact on the Company's
consolidated results of operations.
40
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities are leased under lease agreements
expiring through August 2001. Rent expense was $1,058,000, $1,200,000, and
$650,000 for 1996, 1995, and 1994, respectively. Future minimum lease
payments for 1997, 1998, 1999, 2000, and 2001 are $314,000, $56,000,
$56,000, $56,000 and $14,000, respectively.
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 informal 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 remediation costs of approximately $1.1 million.
In June 1995 the Company filed a $9 million arbitration claim against
SGS-Thompson Microelectronics, Inc. ("SGS-Thompson"), its foundry supplier
of wafers used in its mass storage products, alleging inter alia breach of
an Agreement between the parties, arising out of SGS-Thompson's refusal to
provide Exar with various products called for under the Agreement. In
September 1995 SGS-Thompson filed a counter claim for $8 million alleging
breach of the Agreement by the Company. The Company believes the counter
claim is without merit. This dispute is currently in arbitration.
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 or results of
operations.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 NASD. 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.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the fiscal year
ended March 31, 1996, all filing requirements applicable to its officers,
directors, and greater than ten-percent beneficial owners were complied with.
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 captions "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
42
<PAGE>
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."
43
<PAGE>
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 26
Consolidated Balance Sheets
March 31, 1996 and 1995 27
Consolidated Statements of Operations
for the years ended
March 31, 1996, 1995 and 1994 28
Consolidated Statements of Stockholders' Equity
for the years ended
March 31, 1996, 1995, and 1994 29
Consolidated Statements of Cash Flows
for the years ended
March 31, 1996, 1995 and 1994 30
Notes to Consolidated Financial
Statements 31-40
(2) Index to Financial Statement Schedules. The following Consolidated
Financial Statement Schedules of Exar Corporation and its subsidiaries for each
of the years ended March 31, 1996, 1995 and 1994 are filed as part of this Form
10-K:
Form 10K
Page No.
II Valuation and Qualifying Accounts 46
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.
44
<PAGE>
Exhibit Exhibit
Footnote Number Description
(f) 2.1 Agreement and Plan of Reorganization
Dated June 3, 1994
(f) 2.2 First Amendment to Agreement and Plan of
Reorganization Dated March 31, 1995
(e) 3.1 Restated Certificate of Incorporation of the
Company.
(e) 3.2 Bylaws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
(b)* 10.1 1984 Incentive Stock Option Plan of the
Company, as amended, and related forms of
stock option grant and exercise.
(a) 10.2 Cross License and Second Source Agreement
between the Company and Rohm Co., Ltd. dated
as of July 1, 1985.
(b)* 10.3 1986 Directors' Stock Option Plan of the
Company, as amended, and related forms of
stock option grant and exercise.
(d)* 10.4 1989 Employee Stock Participation Plan of the
Company and related Offering.
(c) 10.5 Foundry Services and Facility Access
Agreement, dated April 20, 1988, by and among
the Company and Exel.
(b) 10.6 Addendum to Cross License and Second Source
Agreement between the Company and Rohm Co.,
Ltd. dated as of March 1, 1991.
(e)* 10.7 1991 Stock Option Plan of the Company and
related forms of stock option grant and
exercise.
(e)* 10.8 1991 Non-Employee Directors' Stock Option
Plan of the Company and related forms of
stock option grant and exercise.
(*) 10.9 Key Employee Incentive Compensation Program.
(*) 10.10 Description of Fiscal Year 1996 Executive
Incentive Program.
45
<PAGE>
11.1 Statement Re Computation of Per Share
Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors'
24.1 Power of Attorney. Reference is made to the
signature page.
- - -------------------------
(a) Filed as an exhibit to Amendment No. 1 to the Registration Statement,
filed with the Commission on July 24, 1985 and incorporated herein by
reference.
(b) 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.
(c) Filed as an exhibit to the Company's Amendment No. 1 on Form 8 to the
Current Report on Form 8-K, filed with the Commission on June 2, 1988
and incorporated herein by reference.
(d) 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.
(e) 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.
(f) 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.
* Indicates management contracts or compensatory plans and arrangements
filed pursuant to Item 601(b)(10) of Regulation S-K.
- - -------------------------
(b) Reports on Form 8-K. The Company filed no Current Report on Form 8-K with
the Commission during the quarter ended March 31, 1996.
46
<PAGE>
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/ George D. Wells
---------------------
George D. Wells
Chief Executive Officer, President and Director
Date: June 28, 1996
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald W. Guire and George D. Wells, 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/ George D. Wells Chief Executive Officer, President June 28, 1996
- - ------------------------- and Director
(George D. Wells)
/s/ Ronald W. Guire Executive Vice President, Chief June 28, 1996
- - ------------------------- Financial Officer
(Ronald W. Guire) Secretary and Director
(Principal Financial and Accounting
Officer)
/s/ Raimon L. Conlisk Director and Chairman of the Board June 28, 1996
- - -------------------------
(Raimon L. Conlisk)
/s/ James E. Dykes Director June 28, 1996
- - -------------------------
(James E. Dykes)
/s/ George E. Grega Director June 28, 1996
- - -------------------------
(George E. Grega)
47
<PAGE>
48
<PAGE>
SCHEDULE II
- - --------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
- - --------------------------------------------------------------------------------
Balance at Balance
Beginning Write-offs and at end
Classification of Year Additions Recoveries of Year
- - --------------------------------------------------------------------------------
Year ended March 31, 1996:
Allowance for doubtful
accounts and sales returns $ 2,985 $ 203 $ 496 $ 2,692
- - --------------------------------------------------------------------------------
Year ended March 31, 1995:
Allowance for doubtful
accounts and sales returns $ 2,359 $ 1,169 $ 543 $ 2,985
- - --------------------------------------------------------------------------------
Year ended March 31, 1994:
Allowance for doubtful
accounts and sales returns $ 1,888 $ 834 $ 363 $ 2,359
- - --------------------------------------------------------------------------------
49
<PAGE>
EXHIBIT 10.7
EXAR CORPORATION
PLAN DOCUMENT
KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM
FISCAL YEAR 1996
(APRIL 1, 1995 - MARCH 31, 1996)
50
<PAGE>
PLAN DOCUMENT
KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM
FISCAL YEAR 1996
CONTENTS:
A. PURPOSE
B. EFFECTIVE DATES
C. PLAN CHANGES
D. PLAN ADMINISTRATION
E. PARTICIPATION
F. OVERALL PLAN CONCEPTS
G. PROCEDURE
H. METHOD OF CALCULATION
I. CHANGES IN STATUS
J. INTERPRETATION OF PLAN TERMS
ATTACHMENT:
LETTER ACKNOWLEDGING PARTICIPATION
ADDENDUM "A" - SPECIAL LIMITED INCENTIVE POOL FUNDING FOR FY 1996
51
<PAGE>
A. PURPOSE
The purpose of the Key Employee Incentive Compensation Program is to encourage
and reward performance which contributes to the company's success. Financial
incentives which complement base salary will be awarded to participants in the
plan for achieving corporate, department, and personal objectives.
B. EFFECTIVE DATE
This fiscal 1996 Plan was approved by the Board of Directors. The period April
1, 1995 through March 31, 1996 will be used for purposes of determining
performance achievement and for payout calculations.
C. PLAN CHANGES
The company, at its sole discretion through the Board of Directors, may amend,
alter, or cancel this Key Employee Incentive Compensation Program at any time.
D. PLAN ADMINISTRATION
The Key Employee Incentive Compensation Program will be administered by the Plan
Committee consisting of the President and the Senior Vice President/CFO with the
staff support of the Human Resources Director. The role of the plan committee
is to interpret the provisions and intent of the plan, evaluate and determine
eligibility and measurement criteria, assess performance results, and amend and
modify the plan administration, as necessary. The President will approve the
final recommendations to be submitted for Board of Directors' approval.
E. PARTICIPATION
Eligibility in the annual incentive plan is determined by the recommendations of
senior management and the approval of the President and Board of Directors.
1. NEW HIRES
(a) New hires after the beginning of the plan year who are approved as
participants will have prorated incentive awards.
(b) New hires in the final quarter (January 1 - March 31) of the plan year
are not eligible to participate for that plan year.
2. Since this is an ANNUAL plan, participation is established annually.
Participants in previous year(s) are not automatically included in subsequent
years. A number of factors may change from year to year, such as: business
conditions, employee individual contribution, criticality of certain positions,
etc.
52
<PAGE>
3. Inclusion in the plan does not constitute a guarantee of employment or
specific earnings.
F. OVERALL PLAN CONCEPTS
NOTE: ALTHOUGH THE BELOW PLAN CONCEPTS, PROCEDURES AND METHODS OF CALCULATION
ARE IN PLACE FOR FISCAL YEAR 1996, THERE IS IN PLACE A SPECIAL LIMITED INCENTIVE
POOL FUNDING ARRANGEMENT FOR FISCAL 1996 TO ENABLE SOME PAYOUT TO PARTICIPANTS
IN ELIGIBLE DEPARTMENTS IN THE EVENT THE CORPORATE OBJECTIVES FALL SHORT OF THE
THRESHOLD. THESE PROVISIONS ARE COVERED IN ADDENDUM "A" TO THIS DOCUMENT.
(1) INCENTIVE POOL: The plan is funded when ALL the established corporate
objectives are met as determined by the Board of Directors. The minimum
threshold for ALL of the corporate objectives must be met before the incentive
pool is funded.
(2) INCENTIVE PAYOUT: Payout occurs when the pool is funded, when the
established major departmental objectives are satisfactorily met as determined
by the Plan Committee, and when personal performance is satisfactory.
(3) INCENTIVE AMOUNT: Individual payments are expressed as a percent of
the participant's annual base pay as of March 31 prior to the plan year.
(4) TARGET INCENTIVE AWARD: Participants selected for participation in the
plan will be assigned to one of several target incentive award categories. The
higher the level of importance of the position of the success of the company,
the higher the percentage of target incentive award.
For Example:
Assume the participant is approved for a target incentive award of 15% and all
CORPORATE, DEPARTMENT, and INDIVIDUAL personal targets are met at exactly 100%,
then the participant's performance incentive will be 15% of his annual base
salary (as of March 31, prior to the beginning of the plan year). If targets
are not met at 100%, but within the threshold of the target, the payout will be
reduced. If the targets are exceeded to the outstanding level the payout could
reach 150% of target award. In the above example that would be 22.5% of annual
base salary. (15% x 150%)
G. PROCEDURE
The employee selected for inclusion in this Key Employee Incentive Compensation
Program will be notified in writing. The participant will be provided a copy of
the corporate performance measures and the department performance measures. Any
changes in the plan or the measurement criteria must be approved in writing by
the President and the Board of Directors.
Payment will be subject to ordinary deductions, such as FICA, SDI, and income
taxes. No other deduction will be made.
Payment, when earned, will be made as soon as administratively possible,
generally not later than 90 days after the end of the plan year.
53
<PAGE>
H. METHOD OF CALCULATION
(1) ESSENTIAL ELEMENTS OF CALCULATION
(a) INCENTIVE POOL FUNDING: The pool is funded when all corporate
objectives are met. If any one of the objectives is below the established
threshold the pool will NOT be funded. If the objectives are met just at
threshold the pool will be funded at 50%. If the target objectives are met at
100% the pool will be funded at 100%. If the objectives are exceeded to the
OUTSTANDING level, the pool will be funded at 150%.
(b) DEPARTMENT INCENTIVE POOL: This pool is funded from the corporate
incentive pool and is based on the department meeting or exceeding the threshold
of performance objectives established by senior executives and approved by the
Board of Directors. The sum of the individual payouts in a department cannot
exceed the department pool. Further, the sum of the department pools cannot
exceed the corporate pool.
(c) PERSONAL CONTRIBUTION MODIFIER: Each participant is able to modify the
amount of payout, based on individual contribution to Exar's success. The
personal objectives are related to the participant's critical job
responsibilities which are linked directly to departmental or corporate
objectives. The payout can be modified (increased/decreased) based on appraisal
by appropriate managers and approved by senior executives and by the Board.
(2) ILLUSTRATIVE
Corporate Performance Department Performance Personal Contribution
- - --------------------- ---------------------- ---------------------
determines total size x determines share of x modifier determines
of corporate pool corporate pool awarded amount of payout
funding to department
(3) Examples
Example 1 Example 2
--------- ---------
Employee's annual base salary (3/31/95): $ 70,000 $ 70,000
Target Incentive Award 20% (14,000) 15% (10,500)
Corporate Performance 105% 120%
Department Performance 92% 110%
Personal Contribution Modifier 85% 95%
54
<PAGE>
Example 1:
Target
Total Individual Incentive Incentive
Corp. Dept. Personal Award Modifier Award Payment
- - ----- ----- -------- ---------------- --------- ---------
105% x 92% x 85% = 82.11% x $14,000 = $11,495.40
Example 2:
120% x 110% x 95% = 125.4% x $10,500 = $13,167.00
Reference Plan Document (page 4, Paragraph H (1) (a), (b), (c)). The sums of
the department pools cannot exceed the corporate pool. Further, the sum of
individual payouts in a department cannot exceed the departmental pool.
I. CHANGES IN STATUS
1. Participants who give notice of termination or who terminate employment,
voluntarily or involuntarily, prior to the date of payout are not eligible for
payment.
2. Participants who retire or become totally disabled during the plan year
will receive the eligible award payment on a prorated basis.
3. If a participant dies during the plan year the beneficiary will receive the
entire eligible payment.
4. Employees who ,during the plan year, are promoted to incentive eligible
positions and are approved by the President and the Board of Directors for
inclusion in the Plan may receive payments on a prorated basis. Employees
promoted in the last quarter of the plan year are not eligible in that year.
5. Rehired employees who were previously eligible as participant in this Plan
must be approved as any other new participant.
J. INTERPRETATION OF PLAN TERMS
The plan committee with the approval of the Board of Directors is responsible
for the interpretation of this plan. Any resolution or dispute regarding
eligibility, determination of procedures, measurements, or awards is the sole
responsibility of the Plan Committee with Board of Directors' approval.
55
<PAGE>
I acknowledge receiving a copy of the Plan Document Fiscal 1996 Key Employee
Incentive Compensation Program for the period April 1, 1995 through March 31,
1996. I have read and understand the terms of this Plan, and also understand
that this plan neither constitutes a contract of employment nor a representation
as to my future earnings. The Letter of Notification and the Plan constitute
the entire agreement and supersede any prior written and oral agreements. I
understand that participants are eligible for payment only when corporate,
departmental, and individual performance measures are met. I understand that
should I terminate employment or submit notice of termination on or before the
date of payout I forfeit all rights to the payout. Further, I understand that
the President and the Board of Directors have the sole discretionary authority
for interpreting the provisions of the plan, determining eligibility, and
approving any bonus payout.
-----------------------------
Employee Name
-----------------------------
Employee Signature
-----------------------------
Date
56
<PAGE>
FISCAL YEAR 1996 KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM
ADDENDUM "A"
SPECIAL LIMITED INCENTIVE POOL FUNDING FOR FY 1996 PLAN
1. Notwithstanding paragraph H (Method of Calculation) in the 1996 Plan
Document, special provisions for the FY1996 Plan will enable a limited payout to
certain participants of the Plan when corporate objectives are below threshold,
with the following conditions:
a. When the Operating Income Corporate Objective is at or above 80%
of the Target Threshold, there will be funding of the special incentive pool for
participants of qualifying departments. For FY 1996 the Operating Income
Threshold is $29.9 Million. 80% of the Threshold is $23.92 Million. Note, this
Special Funding Arrangement is not based on achievement of sales objectives.
The Special Pool is funded from operating income.
b. Only those departments whose overall performance was at or above
threshold of the overall department objectives may participate in the Special
Limited Incentive Pool Funding.
c. When the Operating Income Corporate Objective is below 80% of the
Threshold (under $23.9 Million), there will be no funding of the Special Limited
Incentive Pool.
2. As with the regular incentive plan, final payout to individuals will
be modified to reflect individual performance.
3. Provisions for the Special Funding:
Department Performance Special Funding(% of Modified Dept. Pool)
---------------------- -----------------------------------------
150% Outstanding 50.0%
100% Target 33.3%
At Threshold 1.0%
Below Threshold 0
4. Example (See attachment)
57
<PAGE>
EXAMPLE Attachment to Addendum A
FY 1996 Key Employee Incentive Compensation Program
Target
Award
----- Individual. Modified
Dept XYZ Sal % $ Performance Target Award $
- - -------- --- --- --- ----------- --------------
Emp A 60K l5% 9.0K 95% 8.5K
Emp B 70K 15% 10.5K 115% 12.1K
Emp C 80K 20% 16.0K 125% 20.0K
----- -----
Dept Pool @100% 35.5K Mod Dept Pool 40.6K
Assume the Corporation achieved 90% of Threshold for Operating Profit. The
Special Limited Pool is now funded.
Assume the XYZ Department achieved at 110% overall for department objectives;
therefore, the Special Funding for the department participants will be a 36.3%
which equates to $12.9K (*)
Dept Performance Special Funding
---------------- ---------------
% $
--- ---
150% Outstanding 50.0% 17.8K
* 110% ACT'L DEPT PERF. 36.3% 12.9K
100% Target 33.3% 11.7K
At Threshold 1.0% 0.4K
Below Threshold 0 0
The $12.9K is about 31.8% of the department modified pool of $40.6K; therefore
each participant within the department will have his/her modified target award
reduced, as follows:
Mod x 31.8% = Final
TA Adjust. Payout
--- ------ ------
Emp A 8.5K x .318 = $2.7K
Emp B 12.1K x .318 = $3.8K
Emp C 20.0K x .318 = $6.4K
----- -----
Total 40.6K x .318 = $12.9K
58
<PAGE>
EXHIBIT 10.10
DESCRIPTION OF FISCAL YEAR 1996 EXECUTIVE INCENTIVE PROGRAM
The FY 1996 Executive Incentive Program is a cash incentive program that rewards
eligible members of the company's senior management team for meeting or
exceeding Exar's annual corporate objectives, as established by the Compensation
Committee and ratified by the Board of Directors. Eligible participants may
receive cash bonuses up to 100% of base salary, determined by three factors:
the company's return on assets employed (ROAE), sales growth, and the
participant's position with the company. Assets taken into account in
calculating ROAE are adjusted to exclude cash in excess of certain specified
amounts. Generally, only the corporate executive officers are eligible for
participation in this program.
59
<PAGE>
EXHIBIT 11.1
- - --------------------------------------------------------------------------------
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - --------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
- - --------------------------------------------------------------------------------
1996 1995 1994
- - --------------------------------------------------------------------------------
Net Income (Loss) $13,582 ($11,084) $15,665
- - --------------------------------------------------------------------------------
Weighted average common shares outstanding 9,495 8,835 9,940
- - --------------------------------------------------------------------------------
Dilutive effect of stock options 430 -- 347
- - --------------------------------------------------------------------------------
Weighted average shares outstanding 9,925 8,835 10,287
- - --------------------------------------------------------------------------------
Net income (Loss) per share $1.37 ($1.25) $1.52
- - --------------------------------------------------------------------------------
60
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
1. Exar International, Inc. (a Virgin Islands corporation).
2. Exar IC Design, Ltd. (a California corporation).
3. Exar Japan Corporation (a Japan corporation).
4. Origin Technology, Inc. (a California corporation).
5. Micro Power Systems, Inc. (a California corporation).
6. Startech Semiconductor, Inc. (a Delaware corporation).
7. Silicon Microstructures, Inc. (a California corporation).
8. Exar, Ltd., (a United Kingdom corporation).
61
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exar Corporation:
We consent to the incorporation by reference in registration statements (Nos.
33-58991 and 33-59071) on Form S-8 and S-3 of Exar Corporation of our report
dated May 2, 1996 relating to the consolidated balance sheets of Exar
Corporation and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 1996, and the related
consolidated financial statement schedule, which report appears in the March 31,
1996, annual report on Form 10-K of Exar Corporation.
KPMG PEAT MARWICK LLP
Palo Alto, California
June 27, 1996
62
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 49,302
<SECURITIES> 2,981
<RECEIVABLES> 19,319
<ALLOWANCES> 0
<INVENTORY> 18,065
<CURRENT-ASSETS> 95,946
<PP&E> 34,185
<DEPRECIATION> 0
<TOTAL-ASSETS> 139,074
<CURRENT-LIABILITIES> 18,396
<BONDS> 0
0
0
<COMMON> 77,688
<OTHER-SE> 40,159
<TOTAL-LIABILITY-AND-EQUITY> 139,074
<SALES> 125,766
<TOTAL-REVENUES> 125,766
<CGS> 62,217
<TOTAL-COSTS> 107,007
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 22,280
<INCOME-TAX> 8,698
<INCOME-CONTINUING> 13,582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,582
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 0
</TABLE>
