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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-14225
EXAR CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware 94-1741481
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) (Identification No.)
48720 Kato Road, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 668-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 31, 1997 was $169,859,603 based on the last sales price
reported for such date.
The number of shares outstanding of the Registrant's Common Stock was 9,244,060
as of May 31, 1997, net of 977,766 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement filed not later than 120
days after the close of the fiscal year are incorporated in Part III of this
report.
PART I
Except for the historical information contained herein, the following discussion
contains forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section under the heading entitled "Risk
Factors", as well as in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ITEM 1 BUSINESS
GENERAL
Exar Corporation ("Exar" or the "Company") designs, develops and markets analog
and mixed-signal integrated circuits for use in communications, video and
imaging, silicon microstructures 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, enables the Company to deliver products that provide effective
solutions to customer needs. Exar is emphasizing the development and sale of
analog and mixed-signal application-specific standard products ("ASSPs"). The
Company also produces digital integrated circuits used in communications
products, as well as general purpose analog integrated circuits.
INDUSTRY BACKGROUND
Integrated circuits may be divided into three general categories analog (or
linear), digital and mixed-signal. Analog circuits typically are used to
condition, process, measure or control physical properties such as temperature,
pressure, sound or speed. They include devices such as amplifiers, filters,
switches and power circuits. Digital circuits perform logic and memory
functions, and include devices such as memories and microprocessors. Mixed-
signal circuits combine analog circuitry with digital logic or memory in a
single integrated circuit or chip set to provide an interface between the analog
and digital worlds.
The Company believes that the market for analog and mixed-signal integrated
circuits, as compared to the market for digital integrated circuits, is
characterized by longer product life cycles, smaller unit volumes and generally
lower capital requirements. The analog market is a highly fragmented group of
niche markets, serving numerous and widely differing applications. For each
application, different users may have unique requirements for circuits with
specific characteristics.
Integrated circuits are either standard products or custom products (including
both full custom and semi-custom). Standard products are available to customers
"off-the-shelf." Standard application-specific products that are tailored to
address specific applications and to meet the needs of multiple customers are
often referred to as ASSPs. Custom products are designed to an individual
customer's specifications. Compared to standard products, custom products
typically involve greater design costs for the customer, but enable the customer
to save space, improve performance, reduce manufacturing costs, or maintain
greater confidentiality with respect to the customer's ultimate product design.
PRODUCTS AND MARKETS
The Company divides its integrated circuit products into four major market
groups: communications, video and imaging, silicon microstructures and other
products.
The following chart shows selected applications and representative products in
each of the Company's major market groups:
MARKET APPLICATION PRODUCT
Communications High speed communication T/E-Carrier circuits:
transmission equipment, -repeaters
central office equipment -line interface
and private branch -circuits
exchanges -framers
-buffers
-transcoders
Wireline communication Analog-to-digital
test systems converter/dual digital-
to-analog converter
Computer serial UARTS/DUARTS/QUARTS
asynchronous interfaces
Telephone sets, headsets Speakerphone and other
telephony oriented
components
Caller ID Systems, Phase-locked loops,
pagers, cellular function generators and
telephones, two-way tone decoders
radios
Video and Scanners Analog-to-digital
Imaging Digital cameras converters (ADCs)
Digital copiers Digital-to-analog
converters (DACs)
Video systems Automatic track finding
(ATF) circuits; ADCs;
DACs
Silicon Automotive engine Silicon sensors
Microstructures controls
Proximity sensors Sensor interface circuits
Other Audio systems Switched capacitor
filters
Audio enhancement
circuits
Personal computers Frequency timing generators
Input/Output
Automotive Timing circuits
RF transmitters/receivers
Hearing aids Amplifiers
Communications
Exar markets integrated circuits for a variety of applications in both the
telecommunications and data communication markets.
Exar's transmission telecommunications circuits are used in SONET/SDH
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/STS1/SONET interfaces. The
majority of these circuits require bipolar, mixed-signal and CMOS process
technologies optimized for telecommunications applications and have specialized
test and performance criteria. Certain of these products are based upon ANSI,
Bellcore and ITU standards. The Company also provides integrated circuits for
telephone handsets, including speakerphones, telephone circuitry and caller
identification systems.
The Company's data communications products include a broad line of Universal
Asynchronous Receiver and Transmitter ("UART") circuits and related products
known as DUART (Dual UART) and QUART (Quad UART) circuits for use in computer
serial interfaces. Exar created a highly integrated Quad UART with FIFO (first
in, first out) circuitry which has been established as the de facto industry
standard for Quad FIFO UARTs used in multi-channel networking applications
designed to work with Intel Corporation's microprocessors. Exar supplies a
family of V.35 transceiver products used for high speed data transmission,
primarily in networking equipment such as routers and bridges.
The Company's customers in the communications market include Cisco Systems,
Nokia, Digital Switch Corporation, Boca Research, Digiboard and U.S. Robotics.
VIDEO AND IMAGING
The Company supplies high-performance data converters, data acquisition
subsystems and other sophisticated electronic components to the document
imaging, video and other markets. The Company offers analog-to-digital
converters (ADCs), digital-to-analog converters (DACs) and integrated mixed
signal subsystems to the document imaging industry for products such as
scanners, digital cameras and digital copiers. The Company was first to market
a monolithic triple 10-bit ADC, with pixel-to-pixel correction for color
scanners. Advanced design techniques and process technologies are used to
integrate low-power converter architectures with surrounding analog functions to
minimize total system cost. The Company offers both standard and custom
solutions.
The family of ADCs includes full flash, half flash, pipeline and successive
approximation register converter architectures. Current products offer from 6
to 12 bits of resolution and operate in ranges from <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.
In the video market, the Company's products provide signal conditioning and
digitization of CCD signals. Products incorporating the Company's integrated
circuits include digital still cameras, camcorders and industrial cameras for
machine vision, surveillance and other applications.
The Company's customers in the video and imaging market include Sony
Corporation, Sharp, Canon, Epson and Logitech.
Silicon Microstructures
The Company's analog-to-digital techniques and amplifier expertise have been
applied to the design of sensor interface circuits. The acquisition of Silicon
Microstructures, Inc. ("SMI") in June 1995 expanded Exar's product offerings to
the motion, pressure and accelerometer markets. The Company develops and
markets silicon sensors for a variety of markets including medical, automotive
and consumer. 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.
The Company produces both moderate and very-low pressure sensors.
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.
The Company's customers for silicon microstructure products include Motorola,
Data Instruments, Graphic Controls and Analog Microelectronics.
Other Products and Markets
The Company has historically developed custom, semi-custom and ASSP products in
certain niche areas. The Company has discontinued the development of products
in the following areas and has offered last time buys on certain product
categories. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Restructuring and Other Charges").
Hearing Aids - The Company's BiCMOS processes and advanced filtering
technology allow the Company to provide a low-noise, low-power single chip
solution for hearing aid manufacturers.
Industrial Control - The Company's products in this area include integrated
circuits for use in security systems, magnetic card readers and process
control.
Automotive - Exar sells custom and semi-custom integrated circuits for use
in automotive applications, including body control systems, such as keyless
entry systems.
Consumer Electronics - Exar-designed products being sold to the consumer
products market include integrated circuits for use in graphic equalizer
systems, telephone answering devices, base band circuits for cellular
telephones, filter circuits for use in audio systems,
BBE (TM) audio chips for sound enhancement and timer circuits
for various products.
Personal Computers - Through the acquisition of Startech Semiconductor,
Inc. ("Startech") in March 1995, the Company supplies frequency timing
generators chips and Input/Output (I/O) chips to the personal computer and
workstation markets.
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.
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 domestic and international sales. For additional
geographic financial information, see Note 11 in Notes to Consolidated Financial
Statements.
YEARS ENDED MARCH 31
(In Thousands)
1997 1996 1995
U.S. Sales $53,374 $ 56,030 $62,344
International Sales:
Sales by Exar Japan 9,465 19,061 55,851
Other Sales 29,504 50,675 41,277
TOTAL $92,343 $125,766 $159,472
Exar markets its products in the United States principally through 22
independent sales representatives and five independent non-exclusive
distributors, as well as through the Company's direct sales force. Exar
currently has sales support offices in or near Atlanta, Boston, Chicago, Dallas,
Los Angeles, Philadelphia and San Jose.
Exar is represented internationally by approximately 31 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. Exar's international operations are subject to certain risks common to
foreign operations in general, such as governmental regulations and import
restrictions. While Exar has acted to minimize its exposure to exchange rate
fluctuations, there can be no assurance that the Company will not, from time to
time, experience exchange rate losses on products sold overseas by Exar Ltd. and
Exar Japan.
During the fiscal year ended March 31, 1997, 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, cost-effectiveness, foundry availability and ever-increasing speed.
BiCMOS processes permit the combination of bipolar and CMOS on a single device,
resulting in the ability to combine selectively the performance characteristics
of bipolar circuitry with the advantages of CMOS.
In addition, the Company can provide accurately matched thin-film resistors
and/or laser trim when needed to meet performance requirements.
Manufacturing
The Company uses outside sources for the supply of its integrated circuits.
Rohm Corporation ("Rohm") is the Company's largest supplier of wafer services.
During fiscal 1997, approximately 57% 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. The Company is not under any obligation to continue obtaining
manufacturing services from Rohm.
The Company also obtains CMOS and BiCMOS products from other independent
manufacturers. The Company has qualified second sources for certain of its
foundry requirements. However, a disruption in supply from one or more of the
Company's outside suppliers could have a material adverse effect on operations
due to significant lead times and initially lower yields associated with the use
of such sources.
Exar conducts electrical testing of integrated circuits in both wafer and
packaged form. The combination of various functionalities makes the test
process for analog and mixed-signal devices particularly difficult. Test
operations require the programming, maintenance and use of sophisticated
computer-based test systems and complex automatic handling systems. Exar has
special screening and qualification programs when high reliability quality
grades are required by customer specifications.
After testing, wafers are usually shipped to the Far East for assembly, where
they are cut into individual circuits and packaged. Following assembly, a
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.
In the fourth quarter of fiscal 1997, the Company began to implement a plan to
reduce manufacturing expenses by transferring its test and shipping operations
to off shore sub-contractors. The Company expects to complete the transfer by
the end of fiscal 1998. The Company plans to maintain a minimal level of test
operations at its local facilities to support its research and development
activities. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restructuring and Other Charges").
The raw materials and equipment used in the production of the Company's
integrated circuits are available from several suppliers. Although 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, 1997, 1996 and 1995, Exar's research and development expenses
were $13.9 million, $16.1 million, and $14.4 million, respectively.
Exar develops and utilizes an advanced sub-micron 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
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, National Semiconductor, Analog Devices, Inc.,
Crystal Semiconductor, Dallas Semiconductor, 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. Partly as a result of such competition, the Company intends to
discontinue its consumer electronics product line which is targeted primarily at
the Japanese market. 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.
At March 31, 1997, Exar's backlog was approximately $30.5 million, compared with
$32.9 million at March 31, 1996.
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, 1997, Exar had 353 employees, including 78 in marketing and
sales, 124 in research, development and engineering-related functions, 110 in
manufacturing and production and 41 in administration. Many of Exar's employees
are highly skilled, and competition in recruiting and retaining such personnel
is particularly intense in the labor market in which Exar operates. Exar
believes that its continued success depends in part on its ability to continue
to attract and retain highly qualified management, marketing and technical
personnel. The loss of key employees, none of whom is subject to an employment
agreement, could have a material and adverse effect on Exar. None of Exar's
employees are covered by collective bargaining agreements, and Exar has not
experienced any work stoppages. Exar believes that its employee relations are
good.
Executive Officers of the Company
The names of the Company's executive officers and certain information about them
is set forth below.
NAME AGE POSITION
Donald L. Ciffone, Jr. 42 Chief Executive Officer, President
and Director
Suhas "Sid" Bagwe 57 Vice President, Strategic Planning
and Business Development
Aurelio E. Fernandez 42 Senior Vice President, Worldwide
Sales
Roubik Gregorian 46 Chief Technology Officer, Vice
President, Communications Division
Ronald W. Guire 48 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Thomas W. Jones 49 Vice President, Reliability and
Quality Assurance
James Knutti 47 Vice President, Silicon
Microstructures Division
Thomas R. Melendrez 43 Corporate Vice President, General
Counsel
Stephen W. Michael 50 Vice President, Operations
Division
Mr. Ciffone joined Exar as CEO and President in October 1996 and was appointed
as director at that time. From August 1996 to October 1996, Mr. Ciffone was
Executive Vice President of Toshiba America, the U.S. semiconductor
subsidiary of Toshiba Semiconductor. Prior to joining Toshiba, he served
from 1991 to 1996, in a variety of senior management positions at VLSI
Technology, Inc. ("VLSI"). From 1978 to 1991, Mr. Ciffone held a variety of
marketing and operations positions at National Semiconductor, Inc.
Mr. Ciffone holds an MBA from the University of Santa Clara.
Mr. 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.
Mr. Fernandez joined Exar as Senior Vice President of Worldwide Sales in
November 1996. Prior to joining Exar, he was Vice President of Worldwide Sales
for IC Works, Inc. from November 1994 to November 1996. From 1984 to
November 1994, he held several senior sales management positions at VLSI.
Mr. Fernandez holds a BSEE from the University of Florida and an MBA from
Florida Atlantic University.
Dr. Gregorian joined Exar in March 1995 as Vice President, Startech Division
when the Company acquired Startech Semiconductor, Inc. where he served as
President. He was appointed Chief Technology Officer and Vice President of the
Communications Division in June, 1996. Prior to joining Startech in 1994, Dr.
Gregorian was Vice President of Research and Development and CTO for Sierra
Semiconductor, Inc. Dr. Gregorian holds 16 patents and received his MSEE and
PhD in Electrical Engineering from the University of California at Los Angeles,
as well as an MSEE from Tehran University.
Mr. Guire joined the Company in July 1984 and has been a director of the Company
since June 1985. He has served in a variety of officer positions, and has been
Chief Financial Officer of the Company since May 1985 and Executive Vice
President since July 1995. Mr. Guire is also 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. Jones joined the Company as Director of Total Quality Management in October
1992 and was promoted to Director of Reliability and Quality Assurance in
November 1992. He was promoted to his current position in July 1995. Mr. Jones
has over thirty years of industry experience, most recently with LSI Logic, Inc.
("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.
Dr. Knutti joined Exar in June 1995 when the Company acquired Silicon
Microstructures, Inc. ("SMI"). He was promoted to Vice President and General
Manager of Silicon Microstructures division in February 1997. Dr. Knutti
founded SMI in 1991 and was its first president and CEO. Prior to founding SMI,
Dr. Knutti was President and COO of IC Sensors, Inc. from 1987 to 1990. Dr.
Knutti holds a MSEE from Carnegie-Mellon University and a PhD in Electrical
Engineering from Stanford University.
Mr. Melendrez joined Exar in April of 1986 as Corporate Attorney. He was
promoted to Director, Legal Affairs in July 1991, and again to Corporate Vice
President, Legal Affairs in March 1993. In March 1996, Mr. Melendrez was
promoted to his current position. Mr. Melendrez has over 15 years legal
experience in the semiconductor and related industries. He received a B.A. from
the University of Notre Dame, and a J.D. from the University of San Francisco.
Mr. Michael joined the Company as Vice President of New Market Development in
September 1992. In July 1995 he was appointed to his current position as Vice
President, Operations Division. Mr. Michael has over 20 years of semiconductor
industry experience, most recently as Vice President, and General Manager,
Analog & Custom Products with Catalyst Semiconductor ("Catalyst"). He joined
Catalyst in 1987 and served in various senior positions.
Trademarks, Patents and Licenses
The Company seeks to protect its proprietary products through a combination of
patent rights, copyrights, mask work registrations and trade secrets. Exar
believes that these intellectual property rights are substantially less
significant to its business than such factors as technical expertise, marketing
ability and customer support.
Because of rapid technological developments in the semiconductor industry and
the broad and rapidly developing patent, mask-work rights and copyright
coverage, certain of Exar's products or processes may, from time to time, give
rise to alleged infringement of existing patents, mask-work rights or
copyrights. Exar has, on occasion, received notifications of alleged
infringements and some allegations remain unresolved. There can be no assurance
regarding the outcome of any particular alleged infringements. The Company
attempts to protect its trade secrets, mask-work rights and other proprietary
information through agreements with customers and suppliers, proprietary
information agreements with employees and other security measures. Although the
Company intends to protect its rights vigorously, there can be no assurance that
these measures will be successful.
ENVIRONMENTAL LAWS
Governmental regulations impose various controls on the discharge to the
environment of hazardous materials used in semiconductor processing. Failure to
comply with present or future regulations could result in the suspension or
cessation of the Company's operations. In addition, such regulations could
restrict Exar's ability to expand at its present location and incur other
substantial expense. Moreover, there can be no assurance that changes in
governmental regulations will not result in the imposition of other requirements
which could impede operating performance. Any failure by Exar to adequately
control hazardous substances could also subject it to future liabilities.
During 1987, Micro Power Systems, Inc. ("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 agreement with another company to
participate in the cost of the remedial investigations and the final clean up,
which is expected to continue for approximately 10 to 15 years. Micro Power has
recorded its share of the estimated liability, approximately $900,000 at March
31, 1997.
The California Regional Water Quality Control Board for the San Francisco Bay
Area (the "Board") conducted an investigation of contaminants detected in
subsurface groundwater at approximately 50 different sites in Santa Clara
County, California, including a location formerly leased by Exar in Sunnyvale,
California. The Board notified the Company in March 1996 that the Board does
not intend to name Exar as a discharger, and the Company considers the matter
closed.
RISK FACTORS
In addition to the other information contained in this Annual Report on Form 10-
K and other reports filed by the Company with the Securities and Exchange
Commission, prospective investors should consider the following factors in
evaluating the Company and its business.
FACTORS AFFECTING OPERATING RESULTS. Exar believes its future operating
results will be subject to quarterly and annual variations based on a wide
variety of factors, including customer demand for Exar's products, changes in
product mix, competitive pressures on prices and prices charged by Exar's
suppliers. The semiconductor industry has historically been characterized by
business cycles, with economic downturns resulting in diminished product demand
and erosion of average selling prices. Exar's future operating results could be
adversely affected by a downturn in this market or by a general economic
downturn or by the failure of one or more of its customers to compete
successfully in such market.
DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL CHANGE. The markets for the
Company's products are characterized by evolving industry standards and rapid
technological change and product obsolescence. The Company's future success will
be highly dependent upon the timely completion and introduction of new products
at competitive price and performance levels. The success of new products depends
on a number of factors, including successful and timely completion of product
development and introduction to market, correct judgment with respect to product
demand, market acceptance of the Company's and its customers' new products,
sufficient foundry capacity for volume manufacturing of wafers, achievement of
acceptable wafer fabrication yields by the Company's independent foundries and
the continued ability of the Company to offer new products at competitive
prices. Some of these factors are outside the control of the Company. There can
be no assurance that the Company will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or be able to respond effectively to new technological changes or
product announcements by others. A failure in any of these areas could
materially and adversely affect the Company's operating results.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. Redesigns or design delays often are required
for both the customer's products and the Company's chipsets as industry and
customer standards, protocols or design specifications are determined. Any
resulting delay in the production of the Company's products could have a
material adverse effect on the Company's operating results.
INTENSE COMPETITION. The semiconductor industry is intensely competitive
and is characterized by price erosion, rapid technological change and heightened
international competition in many markets. In this regard, Exar intends to
discontinue its consumer electronics product line which is targeted at the
Japanese market in part due to increased competition in this market. Exar
competes with major domestic and international semiconductor companies, many of
which have substantially greater financial and other resources than Exar with
which to pursue engineering, manufacturing, marketing and distribution of their
products. New entrants may also increase competition in the semiconductor
market. The ability of Exar to compete successfully in the rapidly evolving area
of integrated circuit technology depends on factors both within and outside of
its control, including success in designing and subcontracting the manufacture
of new products that implement new technologies, adequate sources of raw
materials such as wafers and plastics, protection of Company products by
effective utilization of intellectual property laws and other security measures,
product quality, reliability, price, efficiency of production, the pace at which
customers incorporate Exar's integrated circuits into their products, success of
competitors' products and general economic conditions. There can be no assurance
that Exar will be able to compete successfully in the future.
DEPENDENCE ON OUTSIDE FABRICATION FACILITIES. All of the semiconductor
wafers used in the manufacture of Exar's products are processed to Exar's
specifications by outside suppliers. In particular, Rohm is Exar's sole source
of bipolar wafers. Rohm is contractually obligated to supply Exar with bipolar
wafers pursuant to a long-term agreement and has committed to provide Exar with
wafers at a price that is commercially favorable. Exar has generally received
adequate deliveries of wafers and adequate yield and quality of product.
However, if for any reason wafer shipments were delayed or its suppliers
encountered yield or quality problems in the future, Exar's operating results
would be adversely affected. In addition, Exar could encounter lengthy delays
if for any reason it was forced to establish alternative manufacturing
arrangements.
While Exar believes that it has an adequate wafer supply to meet its currently
anticipated needs, there can be no assurance that in the future Exar will
receive sufficient quantities of wafers at favorable prices on a timely basis.
If the wafer manufacturers which Exar currently uses to manufacture its products
suffer a material curtailment of their manufacturing operations, Exar could
incur manufacturing delays of between three and six months. Although Exar
believes that there is an adequate level of high quality wafer manufacturing
capacity available world-wide which could perform manufacturing for Exar in
those circumstances, there can be no assurance that Exar would be able to
arrange sufficient alternative manufacturing capacity on comparable terms or
within that time period if its current suppliers curtailed or halted
manufacturing. Should wafer capacity limitations occur because of increased
demand for Exar's products or otherwise, Exar may be unable to meet demand for
its products in a timely fashion, which could result in customer dissatisfaction
and decreased revenues.
DEPENDENCE ON ASSEMBLY AND TEST SUBCONTRACTORS. Exar's products are
currently assembled to Exar's specifications by independent subcontractors.
Exar's reliance on subcontractors to assemble its products involves significant
risks, including reduced control over delivery schedules, quality assurance and
costs, the potential lack of adequate capacity and potential misappropriation of
proprietary intellectual property. Failure to obtain products on a timely basis
could delay product delivery to Exar's customers, thereby materially adversely
affecting Exar's businesses. In addition, Exar presently utilizes semiconductor
assembly contractors located throughout Asia and intends to transfer testing and
shipping operations to offshore subcontractors in fiscal 1998. Offshore assembly
and testing operations entail certain political and economic risks, including
political instability and expropriation, currency controls and changes in tax
laws, tariffs and freight rates. Exar's operations could be materially adversely
affected if the operations of any major subcontractor are interrupted, or if air
transportation from Asia is disrupted, for a substantial period of time.
PATENTS AND LITIGATION. The Company's ability to compete is affected by its
ability to protect its proprietary information. The Company relies on a
combination of patents, trademarks, copyrights, mask work registrations, trade
secret laws, confidentiality procedures and licensing arrangements to protect
its intellectual property rights. There can be no assurance that patents will
issue from any of the Company's pending applications or that any claims allowed
will be of sufficient scope or strength, or be issued in all countries where the
Company's products can be sold, to provide meaningful protection or any
commercial advantage to the Company. In addition, competitors of the Company may
be able to design around the Company's patents. The laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of the Company's
technology and products more likely. There can be no assurance that the steps
taken by the Company to protect its proprietary information will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
As is typical in the semiconductor industry, Exar has from time to time
received, and may in the future receive, communications from third parties
asserting patent rights, copyrights or other intellectual property rights
covering Exar's products or processes. There can be no assurance that other
intellectual property claims will not be made against Exar, or that any such
claims or litigation proceedings will not be decided against Exar. Furthermore,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation by or against the Company could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation
results in a favorable determination for the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, spend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology. There can
be no assurance that the Company would be successful in such development or that
such licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Any successful third party claim against the Company
or its customers for patent or intellectual property infringement would have a
material adverse effect on the Company's operating results.
KEY PERSONNEL. Exar's future success depends in large part on the continued
service of certain of Exar's key technical and management personnel and on
Exar's ability to continue to attract and retain qualified employees,
particularly those highly skilled design, process and test engineers involved in
the manufacture of existing products and the development of new products and
processes. The competition for such personnel is intense, and the loss of key
employees, most of whom are not subject to an employment agreement for a
specified term or a post-employment non-competition agreement, could have a
material and adverse effect on Exar.
ENVIRONMENTAL REGULATIONS. Exar is subject to a variety of federal, state
and local governmental regulations relating to the purchase, storage, use,
release and disposal of toxic, volatile or otherwise hazardous chemicals.
Although Exar believes that it has all permits necessary to conduct its
business, the failure to comply with present or future regulations could result
in the imposition of fines on Exar. In this regard, Exar has been involved in a
groundwater contamination and clean-up matter relating to a Santa Clara site
since its acquisition of Micro Power in July 1994. Although Exar does not
believe that this matter will have a material adverse effect on Exar's business,
there can be no assurance that there will not be such an adverse effect.
VARIATION IN PRODUCTION YIELDS. The manufacture and assembly of
semiconductor products is highly complex and sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used and the performance of manufacturing personnel
and production equipment. No assurance can be given that Exar or its suppliers
will not experience yield problems in the future, which could result in a
material adverse effect on Exar's results of operations. (See " Dependence on
Outside Fabrication Facilities").
FOREIGN TRADE AND CURRENCY EXCHANGE. Approximately 55% of Exar's revenues
in fiscal 1996 and approximately 42% in fiscal 1997 were derived from sales to
foreign customers. In addition, although a majority of Exar's manufacturing is
done domestically, Exar purchases its assembly services from foreign
subcontractors and intends to transfer testing and shipping operations to
offshore subcontractors in fiscal 1998. Both the manufacture and sale of Exar's
products may be adversely affected by political or economic conditions abroad.
Risks include unexpected changes in, or impositions of, legislative or
regulatory requirements, delays resulting from difficulty in obtaining export
licenses for certain technology, tariffs, quotas and other trade barriers and
restrictions, longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse taxes, the burdens of complying with a variety
of foreign laws and other factors beyond the Company's control. The Company is
also subject to general geopolitical risks in connection with its international
operations, such as political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships. Even though Exar
primarily transacts business internationally in United States currency (except
for Japan, where Exar transacts business in Japanese Yen), currency exchange
fluctuations in countries in which Exar does business (other than Japan) could
materially adversely affect Exar by resulting in pricing that is not competitive
with prices denominated in local currencies. The Company enters into foreign
currency contracts from time to time to hedge currency exposure in Japan.
POSSIBLE VOLATILITY OF STOCK PRICE. In recent years, the market value of
Exar Common Stock has been subject to significant fluctuation. The market price
of Exar Common Stock may continue to be subject to significant fluctuations in
response to operating results and other factors. In addition, the stock market
in recent years has experienced price and volume fluctuations that often have
been unrelated or disproportionate to the operating performance of companies.
These fluctuations, as well as general economic and market conditions, may
adversely affect the market price of Exar Common Stock.
RISKS RELATED TO RESTRUCTURING. In the fourth quarter of fiscal 1997, the
Company announced and began to implement a restructuring plan to i) reduce
manufacturing expenses by transferring its test and shipping operations to off
shore subcontractors, ii) focus the Company's product strategy to provide analog
and mixed signal products for the video, imaging, communications and silicon
microstructure markets and iii) narrow the Company's distribution channels to
create more leverage. The Company's restructuring actions consisted primarily
of writing down certain equipment as a result of the transfer of operations and
change in product focus; terminating 54 full-time employees, 24 of whom have
been terminated through March 31, 1997; writing down inventory associated with
product lines which are being discontinued; canceling certain facility leases
and cancellation of contracts as a result of a change in distribution channels;
and writing down goodwill associated with discontinued products. There is no
assurance that these actions will be successful or have a positive impact on
results of operations. Furthermore, should such actions have a negative impact
on the Company's ability to design and develop new products, market new or
existing products, or produce and/or purchase products at competitive prices,
these actions could have an adverse impact on the Company's results of
operations.
ITEM 2 PROPERTIES
The Company's corporate headquarters are located in Fremont, California and
consist of approximately 151,000 square feet. The land and building are owned
by the Company and house Exar's principal administrative, test, engineering,
marketing, customer service and sales departments.
ITEM 3 LEGAL PROCEEDINGS
In January 1997 the Company settled an arbitration claim with SGS-Thompson
Microelectronics, Inc., its foundry supplier of wafers used in its mass storage
products. The dispute was settled with no material impact on the Company's
financial position or results from operations.
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, 1997.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of Exar is traded on the Nasdaq National Market under the
symbol "EXAR." The following table sets forth the range of high and low sales
prices for the Company's common stock for the periods indicated, as reported by
Nasdaq. The listed quotations represent inter-dealer prices without retail
markup, markdown or commissions.
COMMON STOCK PRICES
HIGH LOW
FISCAL 1997
Quarter ended March 31, 1997 $17 3/8 $14
Quarter ended December 31,1996 $18 $12 3/4
Quarter ended September 30,1996 $14 3/4 $11 3/4
Quarter ended June 30, 1996 $17 3/4 $12 31/64
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
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 313 stockholders of record as of May 31, 1997.
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, 1997,
was $18.38 per share.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
Consolidated Statements
of Operations Data:
Net Sales $92,343 $125,766 $159,472 $161,659 $146,096
Income (Loss) From
Operations (15,238) 18,759 (4,989) 20,999 18,858
Net Income (Loss) (9,197) 13,582 (11,084) 15,665 13,687
Net Income (Loss) Per
Share (1.01) 1.37 (1.25) 1.52 1.33
Weighted Average Shares
Outstanding 9,071 9,925 8,835 10,287 10,260
MARCH 31,
(IN THOUSANDS)
1997 1996 1995 1994 1993
Consolidated Balance
Sheet Data:
Working Capital $68,822 $77,550 $ 81,286 $85,842 $90,827
Total Assets 125,537 139,074 150,080 132,219 138,898
Retained Earnings 44,182 53,379 39,797 50,881 35,216
Stockholders' Equity 109,817 117,847 107,696 105,378 108,773
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as in the section entitled
"Business - Risk Factors".
GENERAL
The Company derives revenue principally from the sale of integrated circuits for
use in communications, video and imaging, silicon microstructures and other
selected areas. The Company's gross margins from sales of integrated circuits
vary depending on competition from other manufacturers, the volume of products
manufactured and sold, the Company's ability to achieve certain manufacturing
efficiencies and the cost of material procured from the Company's suppliers.
The Company's newer analog and mixed-signal products tend to have higher gross
margins than many of the Company's more mature products and margins of any
particular product may erode over time.
The Company has wholly-owned subsidiaries in Japan 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.
The Company has made a number of changes in its underlying business over the
past three years in an effort to reduce its low-margin businesses and focus its
product strategy. At the same time, to increase its share of revenues from the
sale of proprietary products and to acquire additional technology, the Company
made significant investments through direct acquisition of companies with
related product lines.
In fiscal 1995, the Company acquired Origin Technology, Inc., Micro Power and
Startech and in June 1995, the Company acquired SMI. The acquisitions provided
the Company with product offerings that include data acquisition subsystems and
other sophisticated electronic components for the document imaging,
communications and silicon microstructures markets.
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 at the time of acquisition. (See Note 8 to
Notes to Consolidated Financial Statements).
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 1997, the Company announced and began to
implement a restructuring plan to i) reduce manufacturing expenses by
transferring its test and shipping operations to offshore sub-contractors; ii)
focus the Company's product strategy to provide analog and mixed signal products
for the video, imaging, communications and silicon sensor markets and iii)
narrow the Company's distribution channels to create more leverage. The
Company's restructuring actions consisted primarily of a write down of certain
equipment; severance costs; write down of inventory; cancellation of certain
facility leases; cancellation of contracts; and write down of goodwill. These
actions resulted in a charge of $5.3 million to operating expenses and $4.6
million to cost of goods sold in fiscal 1997. During the fourth quarter of
fiscal 1997, approximately $9.1 million was utilized. A remaining outlay of
approximately $924,000 is expected to occur during fiscal 1998.
In October 1995, the Company entered into a wafer production agreement with IC
Works, Inc. ("IC Works"). Under the terms of the agreement, Exar invested
approximately $13 million for the purchase and installation of equipment at IC
Works, in exchange for a predetermined supply of wafers over the next five
years. Under separate but related agreements, Exar has made a minority equity
investment in IC Works of approximately $7.5 million.
The dramatically changed market conditions for wafer pricing and availability,
as well as the recent business redirection of Exar, have led to a reassessment
of Exar's foundry relationships and process requirements. These factors
combined with delays in the commencement of anticipated production by the
foundry, resulted in the termination of the wafer production
agreement. The Company incurred a fourth quarter fiscal 1997 charge to
operating expenses of $9 million as a result of negotiations to terminate the
Company's 1995 wafer production agreement with IC Works. The reserve is being
taken to reflect the anticipated realizable value of equipment supplied to the
foundry by Exar as part of the agreement. The estimated realizable value of
equipment supplied to the foundry is based on management's best estimate of the
amount to be realized upon the ultimate disposition of its investment in the
foundry and the related equipment which is anticipated to occur during fiscal
1998. The amounts the Company will ultimately realize could differ materially
from the estimated amounts. (see "Liquidity and Capital Resources"). (See Note
9 to Notes to Consolidated Financial Statements).
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,
1997 1996 1995
Net sales 100.0% 100.0 % 100.0 %
Cost of sales 55.0 49.5 61.1
Cost of sales-inventory - -
write-off 5.0
Research and development 15.1 12.8 9.0
Selling, general and
administrative 23.1 19.8 15.0
Write-off of in-process
R&D and other one-time
charges 16.8 1.9 17.5
Goodwill amortization 1.5 1.1 .5
Operating income (loss) (16.5) 14.9 (3.1)
Other income, net 2.9 2.8 1.8
Income (loss) before
income taxes (13.6) 17.7 (1.3)
Income taxes (benefit) (3.6) 6.9 5.7
Net income (loss) (10.0)% 10.8% (7.0)%
FISCAL 1997 VS FISCAL 1996
Net sales during fiscal 1997 were approximately $92.3 million compared to $125.8
million in fiscal 1996, a decrease of approximately 27%. The Company experienced
decreases in net sales in essentially all of its continuing product lines. In
addition, the decrease in net sales reflects the discontinuance of hard disk
drive products which represented $3.7 million in sales in fiscal 1996. Such
decreases were offset, in part, by increased sales of pressure sensor products
as a result of the June 1995 SMI acquisition. (See Note 8 to Notes to
Consolidated Financial Statements).
In fiscal 1997, sales to domestic customers decreased by 5% to $53.4 million.
International sales, excluding second source consumer products, decreased by 44%
to approximately $38.9 million. The significant decrease in international sales
is due primarily to reduced demand for the Company's consumer products in Japan.
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, from time to time, 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.
Cost of sales as a percentage of net sales increased from 50% in fiscal 1996 to
55% in fiscal 1997 excluding the inventory write-off. The corresponding
decrease in gross margins is due primarily to changes in product mix and
manufacturing inefficiencies due to decreased production volumes, which lead in
part to the Company's decision to restructure its operations in the fourth
quarter of fiscal 1997. The Company incurred additional cost of sales of
approximately 5% due to the discontinuation of certain products and related
inventory write-off as part of its restructuring plan announced in the fourth
quarter of fiscal 1997. (See Note 9 to Notes to Consolidated Financial
Statements).
Expenditures for research and development decreased approximately $2.2 million
compared to fiscal 1996 due primarily to reduced headcount. Expenditures for
research and development, as a percentage of net sales, increased from
approximately 13% in fiscal 1996 to 15% in fiscal 1997. The increase in
research and development expenses as a percentage of net sales is primarily
attributable to the decrease in net sales.
Selling, general and administrative expenses for fiscal 1997 decreased by $3.6
million or 15% compared to fiscal 1996 due primarily to reduced headcount. As a
percentage of net sales, selling, general and administrative expenses increased
from approximately 20% of net sales in fiscal 1996 to 23% of net sales in fiscal
1997. The increase as a percentage of sales is due primarily to the decrease in
net sales.
The Company incurred $1.2 million in compensation expenses related to the
acquisition of Startech during fiscal 1997. (See Liquidity and Capital
Resources and Note 8 to Notes to Consolidated Financial Statements).
Net interest income during fiscal 1997 decreased to $2.3 from the $3.1 million
reported in fiscal 1996 due to lower average investment rates as well as lower
levels of cash and short-term investments in fiscal 1997.
The Company reported a loss for fiscal 1997 and recorded an effective income tax
benefit of 27% compared to the federal statutory rate of 35%, due primarily to
expenses without tax benefit and state income taxes. The tax rate was offset,
in part, by tax advantaged investment income and tax savings generated by use of
the Company's foreign sales corporation.
Net income (loss) was ($9.2) million and $13.6 million for fiscal 1997 and 1996,
respectively. Excluding the effects of restructuring and other acquisition
related expenses, the Company's net income would have been $4.2 million ($0.45
per share) compared to $15.5 million ($1.56 per share) in fiscal 1996 (excluding
the effects of the write-off of in-process research and development and other
acquisition related expenses).
To date, inflation has not had a significant impact on the Company's operating
results.
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 product 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.
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,
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.
QUARTERLY RESULTS
The following table contains selected unaudited quarterly financial data for the
fiscal years ended March 31, 1997 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.
QUARTERLY RESULTS
(THREE MONTHS ENDED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE
31, 31, 30, 30, 31, 31, 30, 30,
1997 1996 1996 1996 1996 1995 1995 1995
STATEMENT OF
INCOME DATA
Net sales $22,645 $21,819 $22,689 $25,190 $28,938 $30,217 $31,681 $34,930
Cost of sales 16,925 12,952 12,544 13,038 14,868 15,219 14,232 17,898
Gross profit 5,720 8,867 10,145 12,152 14,070 14,998 17,449 17,032
Research and
development 3,619 3,340 3,526 3,422 3,937 4,279 4,040 3,860
Selling,
general,
and
adminis-
trative 5,249 4,864 5,255 5,928 6,465 6,313 6,025 6,108
Goodwill
amortization 343 344 343 344 343 343 344 285
Restructuring
and other
charges 14,344 -- -- -- -- -- -- --
One-time
charges
relating to
discontinued
operations -- -- -- -- -- -- -- 1,155
Write-off of
in-process
research
and
development
and
acquisition
related
expenses 700 500 -- -- (1,097) -- -- 2,390
Operating
income
(loss) (18,535) (181) 1,021 2,458 4,422 4,063 7,040 3,234
Other income,
net 633 529 610 936 497 927 1,170 927
Income (loss)
before
income
taxes (17,902) 348 1,631 3,394 4,919 4,990 8,210 4,161
Income taxes (5,605) 245 701 1,327 1,546 1,893 2,832 2,427
Net income
(loss) $(12,297) $103 $930 $2,067 $3,373 $3,097 $5,378 $1,734
Net income
(loss)
per share $ (1.34) $ .01 $.10 $ .23 $ .37 $ .31 $ .52 $ .17
Shares used
in
computation 9,158 9,185 9,068 9,104 9,153 10,107 10,411 10,030
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company is currently transferring its test and shipping operations to
offshore sub-contractors to reduce manufacturing expenses. In addition, the
Company has refocused its product strategy to provide analog and mixed-signal
products for the video imaging, communications and silicon sensor markets and,
therefore, has eliminated certain product offerings. The semiconductor industry
is characterized by economic downturns resulting in diminished product demand,
erosion of average selling prices, intense competition, rapid technological
change, occasional shortages of materials, dependence upon highly skilled
engineering and other personnel and significant expenditures for product
development. In addition, the cyclical market patterns of the semiconductor
industry periodically results in shortages of wafer fabrication capacity. The
Company's ability to meet customer future demand is dependent upon obtaining
sufficient supply of products. The Company's operations have reflected, and may
in the future reflect, substantial fluctuation from period-to-period as a result
of the above factors, as well as general economic conditions, the timing of
orders from major customers, variations in manufacturing efficiencies, exchange
rate fluctuations, the availability and cost of products from the Company's
suppliers, management decisions to commence or discontinue certain product
lines, and the Company's ability to design, introduce and manufacture new
products on a cost-effective and timely basis. 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, 1997, 1996 and 1995, the Company
financed its operations primarily from existing cash and short-term investments
and cash flows from operations.
At March 31, 1997, the Company had $53.5 million in cash and short-term
investments. The Company also has short-term, unsecured, lines of credit under
which it may borrow up to $17.5 million, none of which was being utilized at
March 31, 1997. 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, 1997, the Company
had no outstanding foreign currency forward contracts.
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 $2.6 million over the next four years, in some combination of cash and common
stock.
In April 1997, the Company made an additional equity investment in IC Works of
$3 million.
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.
ITEM 8. FINANCIAL STATEMENTS
Independent Auditors' Report
Board of Directors and Stockholders
Exar Corporation:
We have audited the accompanying consolidated balance sheet of Exar Corporation
and subsidiaries as of March 31, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended. Our
audit also included the consolidated financial statement schedule for the year
ended March 31, 1997 listed in Item 14.(a)2. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Exar Corporation and its
subsidiaries as of March 31, 1997 and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles. Also in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
April 30, 1997
Independent Auditors' Report
Board of Directors and Stockholders
Exar Corporation:
We have audited the accompanying consolidated balance sheet of Exar Corporation
and subsidiaries as of March 31, 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-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 two-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 the results of their operations and their
cash flows for each of the years in the two-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
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1996
ASSETS
CURRENT ASSETS:
Cash and equivalents $48,479 $ 49,302
Short-term investments 5,053 2,981
Accounts receivable, net of allowances of
$3,158 and $2,692 13,644 19,319
Inventories 7,276 18,065
Prepaid expenses and other 3,225 582
Deferred income taxes 5,985 5,697
Total current assets 83,662 95,946
PROPERTY, PLANT, AND EQUIPMENT, Net 32,823 34,185
GOODWILL, net of accumulated amortization of
$3,469 and $2,095 3,211 5,026
OTHER ASSETS 5,841 3,917
TOTAL ASSETS $ 125,537 $139,074
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,818 $ 12,680
Accrued compensation and related benefits 5,277 4,247
Other accrued expenses 745 1,469
Total current liabilities 14,840 18,396
COMMITEMNTS AND CONTINGENCIES (See Note 10) - -
DEFERRED INCOME TAXES - 1,852
LONG-TERM OBLIGATIONS 880 979
STOCKHOLDERS' EQUITY:
Preferred stock; $.0001 par value; 2,250,000
shares authorized;
no shares outstanding - -
Common stock; $.0001 par value; 25,000,000
shares authorized;
10,123,076 and 9,918,371 shares issued 80,072 77,688
Cumulative translation adjustments (292) 200
Retained earnings 44,182 53,379
Treasury stock; 977,766 and 927,766 shares of
common stock at cost (14,145) (13,420)
Total stockholders' equity 109,817 117,847
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 125,537 $139,074
See notes to consolidated financial statements.
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
1997 1996 1995
NET SALES $92,343 $125,766 $159,472
COST AND EXPENSES:
Cost of sales 50,829 62,217 97,500
Cost of sales - inventory write-off 4,631 - -
Research and development 13,907 16,116 14,375
Selling, general and administrative 21,296 24,911 23,980
Goodwill amortization 1,374 1,315 780
Restructuring and other charges 14,344 - -
Write-off of in-process research and
development and other acquisition
related expenses 1,200 1,293 27,826
Discontinued product line - 1,155 -
Total costs and expenses 107,581 107,007 164,461
INCOME (LOSS) FROM OPERATIONS (15,238) 18,759 (4,989)
OTHER INCOME (EXPENSE):
Interest income 2,382 3,266 2,471
Interest expense (85) (156) (99)
Other, net 412 411 606
Total other income, net 2,709 3,521 2,978
INCOME (LOSS) BEFORE INCOME TAXES (12,529) 22,280 (2,011)
BENEFIT (PROVISION) FOR INCOME TAXES 3,332 (8,698) (9,073)
NET INCOME (LOSS) $(9,197) $13,582 $(11,084)
Net income (loss) per share $ (1.01) $ 1.37 $ (1.25)
SHARES USED IN COMPUTING PER SHARE
AMOUNTS 9,071 9,925 8,835
See notes to consolidated financial
statements.
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock Treasury Stock
Shares Amount Shares Amount
BALANCES, April 1, 1994 10,376,142 77,792 (1,727,052) (23,645)
Stock issued in connection with
acquisitions 349,587 8,750
Exercise of stock options 246,661 2,566
Income tax benefit from stock options
exercised and sold 739
Stock issued under Employee Stock
Participation Plan 63,728 1,015
Retirement of treasury stock (1,727,052) (23,645) 1,727,052 23,645
Translation adjustment
Net loss
BALANCES, March 31, 1995 9,309,066 67,217 - -
Stock issued in connection with
acquisitions 43,334 1,150
Exercise of stock options 488,222 6,110
Income tax benefit from stock options
exercised and sold 1,990
Stock issued under Employee Stock
Participation Plan 77,749 1,221
Acquisition of treasury stock (927,766) (13,420)
Translation adjustment
Net income
BALANCES, March 31, 1996 9,918,371 77,688 (927,766) (13,420)
Exercise of stock options 117,837 1,240
Income tax benefit from stock options
exercised and sold 110
Stock issued under Employee Stock
Participation Plan 86,868 1,034
Acquisition of treasury stock (50,000) (725)
Translation adjustment
Net loss
BALANCES, March 31, 1997 10,123,076 $80,072 (977,766) $(14,145)
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Cumulative Total
Translation Retained Stockholders'
Adjustments Earnings Equity
BALANCES, April 1, 1994 $ 350 $ 50,881 105,378
Stock issued in connection with
acquisitions 8,750
Exercise of stock options 2,566
Income tax benefit from stock options
exercised and sold 739
Stock issued under Employee Stock
Participation Plan 1,015
Retirement of treasury stock -
Translation adjustment 332 332
Net loss (11,084) (11,084)
BALANCES, March 31, 1995 682 39,797 107,696
Stock issued in connection with
acquisitions 1,150
Exercise of stock options 6,110
Income tax benefit from stock options
exercised and sold 1,990
Stock issued under Employee Stock
Participation Plan 1,221
Acquisition of treasury stock (13,420)
Translation adjustment (482) (482)
Net income 13,582 13,582
BALANCES, March 31, 1996 200 53,379 117,847
Exercise of stock options 1,240
Income tax benefit from stock options
exercised and sold 110
Stock issued under Employee Stock
Participation Plan 1,034
Acquisition of treasury stock (725)
Translation adjustment (492) (492)
Net loss (9,197) (9,197)
BALANCES, March 31, 1997 $(292) 44,182 $109,817
See notes to consolidated financial
statements.
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (IN
THOUSANDS)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(9,197) $13,582 $(11,084)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,491 5,627 5,725
Write-down of equipment 11,382 - -
Provision for doubtful accounts and sales
returns 464 203 626
Write-off of in process research and
development - 905 27,826
Deferred income taxes (5,050) 1,575 (531)
Changes in operating assets and
liabilities:
Accounts receivable 5,211 10,354 (849)
Inventories 10,789 718 (267)
Prepaid expenses and other (2,643) 844 364
Accounts payable (3,862) (14,841) 5,009
Accrued compensation and related benefits 1,030 (1,092) (1,165)
Other accrued expenses (724) (539) (4,438)
Income taxes payable - (1,817) 1,671
Net cash provided by operating
activities 13,891 15,519 22,887
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of building - (13,358) -
Purchases of equipment and leasehold
improvements (14,696) (2,518) (6,798)
Purchases of short-term investments (11,072) (4,049) (6,450)
Proceeds from maturities of short-term
investments 9,000 6,202 8,316
Purchases of long-term investments - (4,500) -
Proceeds from sales of long-term investments - 2,760 -
Other assets 986 (857) (1,228)
Acquisitions, net of cash acquired - (355) (26,357)
Net cash used in investing activities (15,782) (16,675) (32,517)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,384 7,331 3,581
Long-term obligations (99) - 346
Acquisition of treasury stock (725) (13,420) -
Net cash provided by (used in)
financing activities 1,560 (6,089) 3,927
EFFECT OF EXCHANGE RATE CHANGES ON CASH (492) (482) 332
NET DECREASE IN CASH AND EQUIVALENTS (823) (7,727) (5,371)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 49,302 57,029 62,400
CASH AND EQUIVALENTS AT END OF YEAR $48,479 $ 49,302 $ 57,029
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 2,750 $ 7,275 $ 7,857
See notes to consolidated financial statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
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, video and imaging, silicon
microstructures and other selected products. Principal markets include
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. 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, 1997 and 1996, there were no
significant differences between the fair market value and the underlying
cost of such investments. At March 31, 1997, short term investments
consisted of government agency securities of $2,000,000, auction rate
securities of $2,000,000 and mutual fund investments of $1,053,000. At
March 31, 1996, short-term investments consisted of auction-rate securities
of $2,000,000 and money market and mutual fund investments of $981,000.
INVENTORIES - Inventories are stated at the lower of standard cost (first-
in, first-out method) or market, which approximates actual cost.
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.
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
to be evaluated for impairment whenever events or changes in circumsatnces
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 (LOSS) 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. Net loss per share excludes common equivalent
shares, as their effect is anti-dilutive.
FOREIGN CURRENCY - The functional currency of each of the Company's foreign
subsidiaries is the local currency of that country. Accordingly, gains and
losses from the translation of the financial statements of the foreign
subsidiaries are included in stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in other income.
Net foreign currency transaction gains were $153,000, $347,000, and
$511,000 in 1997, 1996, and 1995, respectively.
The Company enters into foreign currency exchange contracts from time-to-
time to hedge certain currency exposures. These contracts are executed
with credit-worthy financial institutions and are denominated in currencies
of major industrial nations. Gains and losses on these contracts serve as
hedges in that they offset fluctuations that might otherwise impact the
Company's financial results. The Company is exposed to credit-related
losses in the event of nonperformance by the parties to its foreign
currency exchange contracts. At March 31, 1997, there were no such foreign
currency exchange contracts outstanding.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - Financial
instruments potentially subjecting the Company to concentrations of credit
risk consist primarily of accounts receivable and cash and short-term
investments. The majority of the Company's sales are derived from
manufacturers in the computer, communications and electronic imaging
industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for sales on credit.
The Company maintains reserves for potential credit losses and such losses
have been within management's expectations. Approximately 21% of net
accounts receivable at March 31, 1997 relates to sales to customers in
Japan. The Company's policy is to place its cash and short-term investments
with high credit quality financial institutions and limit the amounts
invested with any one financial institution or in any type of financial
instrument. The Company does not hold or issue financial instruments for
trading purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of financial
instruments have been determined by the Company, using available market
information and valuation methodology considered to be appropriate.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. The use of different market
assumptions and/or estimation methodologies could have a material effect on
estimated fair value amounts. The estimated fair value of the Company's
financial instruments at March 31, 1997 and 1996 was not materially
different from the values presented in the consolidated balance sheets.
RECLASSIFICATIONS - Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 presentation.
2. INVENTORIES
Inventories at March 31 consisted of the following:
1997 1996
(In thousands)
Raw materials $ - $ 762
Work in process 4,987 11,563
Finished goods 2,289 5,740
Total $7,276 $18,065
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31 consisted of the following:
1997 1996
(In thousands)
Land $6,561 $6,561
Building 13,433 13,358
Machinery and equipment 44,072 44,382
Leasehold improvements 48 55
Construction in progress 1,376 852
65,490 65,208
Accumulated depreciation and
amortization (32,667) (31,023)
Total $32,823 $34,185
4. BORROWING ARRANGEMENTS
The Company has a short-term, unsecured, bank line of credit under which it
may borrow up to $17,500,000 through January 31, 1998. 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 (5.5% at
March 31, 1997) plus .375%. At March 31, 1997, no amounts were outstanding
under these credit arrangements.
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31
consisted of the following:
1997 1996 1995
(In thousands)
Current:
Federal $1,112 $4,063 $6,317
State 278 736 1,704
Foreign 218 334 568
1,608 5,133 8,589
Deferred:
Federal (4,090) 1,167 (172)
State (960) 221 (359)
Foreign - 187 -
(5,050) 1,575 (531)
Charge in lieu of taxes
attributable to employee
stock plans 110 1,990 1,015
Total $(3,332) $8,698 $9,073
Consolidated pretax income (loss) includes foreign income (loss) of
approximately $(52,000), $758,000, and $1,066,000 in 1997, 1996, and 1995,
respectively.
Current net deferred tax assets at March 31, 1997 and 1996 were $5,985,000
and $5,697,000, respectively. Non-current net deferred tax assets at March
31, 1997 of $2,910,000 are included in other assets within the accompanying
balance sheet. Significant components of the Company's net deferred tax
asset at March 31, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets: (In thousands)
Write-down of fixed assets $4,705 $ -
Reserves and accruals
not currently deductible 4,089 3,128
Net operating loss and tax
credit carryforwards 1,864 1,947
State income taxes 28 567
Other 4 55
Total deferred tax assets 10,690 5,697
Deferred tax liabilities:
Depreciation (1,270) (1,473)
Other (525) (379)
Total deferred tax liabilities (1,795) (1,852)
Net deferred tax assets $8,895 $3,845
No valuation allowance for deferred tax assets was required for the years
ended March 31, 1997 and 1996 as management believes it is more likely than
not that the Company will generate sufficient taxable income to realize its
deferred tax assets.
The Company has net operating loss and tax credit carryforwards of
approximately $4,975,000 for federal income tax purposes, which are
available to offset future taxable income through 2012. 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 (benefit) for income taxes for each of
the years ended March 31:
1997 1996 1995
(In thousands)
Income tax (benefit) provision
at statutory rate $(4,385) $7,798 $(704)
Amortization and write-off
of goodwill 770 460 273
State income taxes,
net of federal income tax benefit 606 1,091 954
Write-off of in-process
research and development - 317 9,739
Benefit from utilization of
net operating losses - - (70)
Tax-exempt interest income (60) (95) (168)
Benefit of acquired net
operating losses not
previously recognized (70) - (574)
Benefit of foreign
sales corporation (490) (533) (541)
Foreign income taxed at
rates higher than
U.S. tax rates - 68 175
Other, net 297 (408) (11)
Total $(3,332) $8,698 $9,073
The California income tax authorities may propose to assess income taxes
using the unitary taxation method for some or all of the fiscal years 1986
to 1990, which remain open to examination under the statute of limitations.
This taxation method has the effect of apportioning taxable income of a
former foreign majority stockholder of the Company to Exar and could
possibly result in additional state income tax liability if successfully
asserted. The California income tax authorities have assessed Exar for
income taxes under the unitary taxation method for the years 1980 through
1985. Such assessments have been paid or accrued as of March 31, 1997.
However, management believes the unitary taxation method is inappropriate
for the Company and has filed refund claims or protests with respect to
such amounts.
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
$373,000, 721,000 and $385,000, during 1997, 1996 and 1995, respectively.
INCENTIVE COMPENSATION PLANS - The Company's incentive compensation
plans provide for incentive awards for substantially all employees of
the Company based upon the achievement of specified operating and
performance results. Incentive awards totaled $547,000, $478,000, and
$400,000, for 1997, 1996 and 1995, respectively. The Company's incentive
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 be void), will have the right to receive upon exercise that
number of common shares having a market value of two times the exercise
price of the right. The rights will expire on December 15, 2005.
EMPLOYEE STOCK PARTICIPATION PLAN - Exar is authorized to issue
1,000,000 shares of common stock under its Employee Stock Participation
Plan (the Plan). The Plan permits employees to purchase common stock
through payroll deductions. The purchase price is the lower of 85% of
the fair market value of the common stock at the beginning or end of
each three month offering period. Shares purchased by and distributed
to participating employees were 86,868 in 1997, 77,749 in 1996, and
63,728 in 1995 at weighted average prices of $11.90, $15.76 and
$19,57, respectively. The weighted average fair value of the fiscal
1997 and 1996 awards was $3.67 and $7.35 per share, respectively.
The Company has reserved 520,779 shares of common stock for future
issuance under its Employee Stock Participation plan.
STOCK OPTION PLANS - Exar has a Stock Option Plan and a Non-Employee
Directors' Stock Option Plan. Under these plans, the Company may grant
options to purchase up to 2,076,056 and 150,000 shares of common stock,
respectively. Options are granted at fair market value on the date of
grant. Options are generally exercisable in four equal annual
installments commencing one year after the date of grant and generally
expire seven years from the grant date.
Option activity for both plans is summarized as follows:
Outstanding Options
Exercise
Number of Price per
Shares Share
Outstanding, April 1, 1994 1,447,710 $13.87
Options granted 519,500 18.57
Options exercised (246,661) 10.43
Options canceled (121,644) 14.42
Outstanding, March 31, 1995
(338,983 exercisable at a
weighted average price of $13.95) 1,598,905 15.72
Options granted
(weighted average fair
value of $11.00) 758,600 23.62
Options exercised (373,400) 13.45
Options canceled (373,027) 26.48
Outstanding, March 31, 1996
(427,783 exercisable at a
weighted average price of $15.63) 1,611,078 17.52
Options granted
(weighted average fair value
of $7.92) 874,000 15.25
Options exercised (82,050) 9.92
Options canceled (481,643) 19.81
Outstanding, March 31, 1997 1,921,385 $16.22
At March 31, 1997, 254,006 options were available for future grant under
both plans.
Options Outstanding Options Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Price Exercisable Exercise Price
$ 4.84-$ 12.42 76,988 1.76 $ 9.82 76,988 $9.82
12.63- 14.09 240,387 4.22 13.11 126,312 13.25
14.25- 14.88 506,350 6.48 14.43 15,925 14.88
15.00- 16.59 438,352 5.93 16.01 58,902 15.98
17.00- 17.92 498,726 4.05 17.36 295,962 17.34
18.17- 37.25 160,582 4.97 26.61 71,500 24.07
$ 4.84-$ 37.25 1,921,385 5.12 16.22 645,589 16.20
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("SFAS 123") requires the disclosure of pro forma
net income (loss) and earnings (loss) per share had the Company adopted
the fair value method as of the beginning of fiscal 1996. Under SFAS
123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility
and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions:
expected life, 5.5 to 7.2 years; stock volatility, 35% in
1997 and 49% in 1996; risk free interest rates, 6.9% in 1997 and 6.8%
on 1996; and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of
the 1997 and 1996 awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been $(10,544,000)
million ($(1.16) per share) in 1997 and net income would have been
$13,049,000 ($1.32 per share) in 1996. However, the impact of outstanding
non-vested stock options granted prior to 1996 has been excluded from the
pro forma calculation; accordingly, the 1997 and 1996 pro forma amounts
are not indicative of future period pro forma amounts, when the
calculation will apply to all applicable stock options.
OTHER OPTIONS - In connection with the acquisition of Startech
Semiconductor Inc. (see Note 8), the Company assumed outstanding Startech
options which converted into options to purchase 150,323 shares of Exar
common stock for $21.50 per share. Unexercised options expired in December
1996.
Activity for these options is summarized as follows:
Outstanding Options
Weighted Average
Exercise
Number of Price per
Shares Share
Outstanding, April 1, 1995 150,323 $11.34
Options exercised (117,795) 9.89
Outstanding, March 31, 1996 32,578 15.55
Options exercised (32,578) 15.55
Outstanding, March 31, 1997 - $ -
8. 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
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.
In June 1994, the Company acquired all of the outstanding common stock of
Micro Power Systems, Inc., ("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
Company may be required to pay up to an additional $1,098,000 in deferred
compensation to certain key employees of Startech through March 1998. The
Company paid $1,150,000 and $388,000 related to Startech's deferred
compensation arrangement during 1997 and 1996, respectively.
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
over the next four years.
For accounting purposes, the acquisitions have been accounted for as
purchases. Accordingly, the results of operations include the operations
of the acquired companies subsequent to their respective 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). The acquisition of SMI in fiscal 1996 did not had a significant
impact on the Company's consolidated results of operations.
9. RESTRUCTURING AND OTHER ONE-TIME CHARGES
RESTRUCTURING
In the fourth quarter of fiscal 1997, the Company announced and began to
implement a restructuring plan to i) reduce manufacturing expenses by
transferring its test and shipping operations to off shore subcontractors,
ii) focus the Company's product strategy to provide analog and mixed signal
products for the video, imaging, communications and silicon sensor markets
and iii) narrow the Company's distribution channels to create more
leverage. The Company's restructuring actions consisted primarily of
writing down certain equipment as a result of the transfer of operations
and change in product focus; terminating 54 full-time employees, 24 of whom
have been terminated through March 31, 1997; writing down inventory
associated with product lines which are being discontinued; canceling
certain facility leases and cancellation of contracts as a result of a
change in distribution channels; and writing down goodwill associated with
discontinued products. These actions resulted in a charge of $5,345,000 to
operating expenses and $4,631,000 to cost of goods sold. The charges
include a non-cash charge of $8,454,000 and cash expenditures of
$1,522,000. The following schedule summarized the restructuring and other
one-time charges.
Total
Restructuring Balance at
Charge Utilized March 31, 1997
Write-down of inventory $4,631 $4,631 $ --
Write-down of equipment 3,382 3,382 --
Contract cancellations 684 394 290
Write-down of goodwill 441 441 --
Cancellation of leases 439 -- 439
Payments to employees
involuntarily terminated 399 204 195
Total $9,976 $9,052 $924
The Company expects that most of the contemplated restructuring action will
be completed within the next twelve months and will be financed through
cash.
OTHER CHARGES
During the fourth quarter of fiscal 1997, the Company incurred a charge of
$9 million relating to the write-down of capital assets and investments
made under the terms of a wafer production agreement and equity investment
agreements with IC Works, Inc. ("IC Works"). The charge was estimated in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" and reflects management's
estimate of the net realizable value of the equipment and investment in IC
Works. The Company terminated its 1995 wafer production agreement with the
foundry due to dramatically changed market conditions for wafer pricing and
availability, as well as the recent business redirection of Exar and delays
in the commencement of anticipated production by the foundry. The amounts
the Company will ultimately realize could differ materially from the
estimated amounts.
10. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities were leased under lease agreements
expiring through August 2001. Rent expense was $300,000, $1,058,000 and
$1,200,000, for 1997, 1996, and 1995, respectively. The Company expensed
all future lease obligations in 1997 as a part of the restructuring and
other charges (see Note 9).
In 1987, one of the Company's subsidiaries identified low-level groundwater
contamination at its principal manufacturing site. Although the area of
contamination appears to have been defined, the source of the contamination
has not been identified. The Company has reached an agreement with another
entity to participate in the cost of ongoing site investigations and the
operation of remedial systems to remove subsurface chemicals which is
expected to continue for 10 to 15 years. The accompanying consolidated
financial statements include the Company's share of estimated remaining
remediation costs of approximately $900,000 as of March 31, 1997.
The Company is involved in various claims, legal actions and complaints
arising in the normal course of business. Although the ultimate outcome of
these matters is not presently determinable, management believes that the
resolution of all such pending matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations, liquidity or cash flows.
11. 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:
1997 1996 1995
(In thousands)
Net sales:
United States $53,374 $56,030 $62,344
Export sales to
Japan and Asia 13,160 34,354 22,674
Export sales to
western Europe 15,144 14,280 11,653
Export sales to
rest of world 1,200 1,847 1,347
Japan 9,465 19,061 60,862
Western Europe - 194 592
$92,343 $125,766 $159,472
Income (loss) from
operations:
United States $(15,153) $18,105 $(5,253)
Japan (143) 559 66
Western Europe 58 95 198
$(15,238) $18,759 $(4,989)
Identifiable assets:
United States $119,997 $127,735 $121,358
Japan 5,739 9,884 27,437
Western Europe 1,596 1,455 1,285
$127,332 $139,074 $150,080
12. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share," (SFAS 128). The Company is required to adopt SFAS 128 in
the third quarter of fiscal 1998 and will restate at that time earnings per
share (EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted. SFAS 128 replaces current EPS reporting
requirements and requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. If SFAS 128 had
been in effect during the current and prior year periods, basic EPS would have
been $1.43 for the year ended March 31, 1996. Diluted EPS for the year ended
March 31, 1996 would not have been significantly different than primary EPS
currently reported for the period. Basic and diluted EPS for the year ended
March 31, 1997 would not have been significantly different than EPS currently
reported for the period.
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 National Market. Officers, directors and greater than ten-percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5s were
required for those persons, the Company believes that, during the fiscal year
ended March 31, 1997, 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 caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement under the captions "Certain
Transactions" and "Executive Compensation."
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 23-24
Consolidated Balance Sheets
March 31, 1997 and 1996 25
Consolidated Statements of Operations
for the years ended
March 31, 1997, 1996 and 1995 26
Consolidated Statements of
Stockholders' Equity
for the years ended
March 31, 1997, 1996, and 1995 27
Consolidated Statements of Cash Flows
for the years ended
March 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial
Statements 29-39
(2) Index to Financial Statement Schedules. The following Consolidated
Financial Statement Schedule of Exar Corporation and its subsidiaries for each
of the years ended March 31, 1997, 1996 and 1995 are filed as part of this Form
10-K:
Form 10K
Page No.
II Valuation and Qualifying Accounts 45
and Reserves
Schedules not listed above have been omitted because they are not applicable or
required, or the information required to be set forth therein is included in the
Consolidated Financial Statements or notes thereto.
Exhibit Exhibit
Footnote Number Description
(d) 2.1 Agreement and Plan of Reorganization
Dated June 3, 1994
(d) 2.2 First Amendment to Agreement and Plan of
Reorganization Dated March 31, 1995
(c) 3.1 Restated Certificate of Incorporation of the
Company.
(c) 3.2 Bylaws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
(a)* 10.1 1986 Directors' Stock Option Plan of the Company,
as amended, and related forms of stock option
grant and exercise.
(b)* 10.2 1989 Employee Stock Participation Plan of the
Company and related Offering.
(c)* 10.3 1991 Stock Option Plan of the Company and related
forms of stock option grant and exercise.
(c)* 10.4 1991 Non-Employee Directors' Stock Option Plan of
the Company and related forms of stock option
grant and exercise.
(*) 10.5 Key Employee Quarterly Cash Profit Sharing
Incentive Program.
(*) 10.6 Fiscal 1997 Executive Incentive Program.
11.1 Statement Re Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors' - Deloitte &
Touche LLP
23.2 Consent of Independent Auditors' - KPMG Peat
Marwick LLP
24.1 Power of Attorney. Reference is made to the
signature page.
27.1 Financial Data Schedule
(a) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991 and incorporated herein
by reference.
(b) Filed as an exhibit to the Company's report on Form 8-K, filed
with the Commission on January 19, 1990 and incorporated herein
by reference.
(c) Filed as an exhibit to the Company's Annual report on Form 10-K
for the fiscal year ended March 31, 1992 and incorporated herein
by reference.
(d) Filed as an exhibit to the Company's Annual report on Form 10-K
for the fiscal year ended March 31, 1994 and incorporated herein
by reference.
* 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 a Current Report on Form 8-K with
the Commission on February 7, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EXAR CORPORATION
By:/s/Donald L. Ciffone, Jr.
Donald L. Ciffone, Jr.
Chief Executive Officer, President and Director
Date: June 28, 1997
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald W. Guire and Donald L. Ciffone, Jr., and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said attorneys-in-
fact and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/Donald L. Ciffone,Jr. Chief Executive Officer, President
(Donald L. Ciffone Jr.) and Director June 28, 1997
/s/ Ronald W. Guire Executive Vice President,
(Ronald W. Guire) Chief Financial Officer June 28, 1997
Secretary and Director
(Principal Financial and Accounting Officer)
/s/ Raimon L. Conlisk Director and Chairman of the Board June 28, 1997
(Raimon L. Conlisk)
/s/James E. Dykes Director June 28, 1997
(James E. Dykes)
/s/George E. Grega Director June 28, 1997
(George E. Grega)
/s/ George D. Wells Director June 28, 1997
(George D. Wells)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000753568
<NAME> EXAR CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 48,479
<SECURITIES> 5,053
<RECEIVABLES> 13,644
<ALLOWANCES> 0
<INVENTORY> 7,276
<CURRENT-ASSETS> 83,662
<PP&E> 32,823
<DEPRECIATION> 0
<TOTAL-ASSETS> 125,537
<CURRENT-LIABILITIES> 14,840
<BONDS> 0
65,927
0
<COMMON> 0
<OTHER-SE> 43,890
<TOTAL-LIABILITY-AND-EQUITY> 125,537
<SALES> 92,343
<TOTAL-REVENUES> 92,343
<CGS> 50,829
<TOTAL-COSTS> 107,581
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (12,529)
<INCOME-TAX> 3,332
<INCOME-CONTINUING> (9,197)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,197)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.5
PLAN DOCUMENT
KEY EMPLOYEE QUARTERLY CASH PROFIT SHARING
INCENTIVE PROGRAM
FISCAL YEAR 1997
CONTENTS:
1. PURPOSE OF THE PROGRAM
2. PARTICIPATION
3. QUARTERLY BONUS AMOUNT
4. PAYMENT
5. DEFINITIONS
6. EXAMPLE
7. ADMINISTRATION
8. NO ALIENATION, ASSIGNMENT OR ENCUMBERMENT OF PAYMENTS
9. TERMINATION OR AMENDMENT OF THE PROGRAM
10. NO EMPLOYMENT CONTRACT
11. PLACE OF ADMINISTRATION; APPLICABLE LAWS
EXAR KEY EMPLOYEES QUARTERLY CASH PROFIT SHARING INCENTIVE PROGRAM
FOR FISCAL YEAR 1997
The Board, at its June 11, 1996 meeting, approved in concept an incentive
profit sharing program for those key employees of Exar Corporation who are not
eligible to participate in one of the other incentive compensation plans
sponsored by Exar Corporation.
This document formalizes the Fiscal Year 1997 Exar Key Employees Quarterly
Cash Profit Sharing Incentive Program under the following terms and conditions.
1. PURPOSE OF THE PROGRAM
The Fiscal Year 1997 Exar Key Employees Quarterly Cash Profit Sharing
Incentive Program (the "Program") is established effective April 1, 1996, to
create additional incentives for eligible employees of Exar Corporation ("Exar")
by awarding eligible employees a share of Exar's quarterly pre-tax profits under
the terms of the Program.
2. PARTICIPATION
Eligibility for this Program is determined by the recommendations of
senior management and the approval of the President and Board of Directors.
Participants in this program will not be eligible to participate in any other
cash incentive plan, including, but not limited to, the Sales Incentive Program
or the Employee Cash Profit Sharing Program, or the Executive Incentive
Compensation Program. The Board of Directors of Exar Corporation retains the
right, in its sole discretion, to determine eligibility under the Program.
To be eligible to participate in the Program for a specific Quarter, an
eligible employee must be on Exar's payroll as an active full-time employee
(i) for 45 calendar days preceding the first day of the Quarter, (ii) on the
first workday of the Quarter, (iii) on the last workday of the Quarter, and
(iv) on the date of payout. Eligible employees who are on an approved
disability or medical leave on any of the dates specified in (i), (ii), (iii) or
(iv), above, shall be deemed to be on the payroll on such date, provided,
however, that payments for a Quarter to eligible employees who are on such
approved medical or disability leave at any time during such Quarter shall be
subject to a pro rata reduction, as provided in Paragraph 3. If an employee who
is otherwise eligible to participate for a Quarter dies prior to the last
workday of the Quarter, the beneficiary or estate, as the case may be, of such
eligible employee shall be eligible to receive payments for the Quarter equal to
a pro rata portion of the payments to which the eligible employee otherwise
would have been entitled if he or she had not died. Such after-death pro rata
payments shall be calculated in a manner similar to the calculation of pro rata
payments for eligible employees on approved medical or disability leave.
3. QUARTERLY BONUS AMOUNT
The Program will be funded for a Quarter only if the pre-tax profits
for the Quarter exceed the target threshold amount for that Quarter. If such
target threshold amount is exceeded for the Quarter, a bonus pool for payments
will be established. The bonus pool for a Quarter shall be equal to a
designated percentage of the amount by which the pre-tax profits for the Quarter
(which includes the expense for the Program and other incentive plans sponsored
at least annually, but more frequently if the Board so determines, the target
threshold amount and the designated percentage applicable for each Quarter.
Each employee who is eligible to participate in the Program for a
Quarter shall receive a payment from the Program equal to such eligible
employee's pro rata share of the bonus pool determined for that Quarter. Each
eligible employee's pro rata share shall be determined by multiplying the bonus
pool by the ratio that such eligible employee's Salary for the Quarter bears to
the total Salary of all such eligible employees for the Quarter.
The Salary for any eligible employee who is on an approved medical or
disability leave for a portion of the Quarter shall be reduced pro rata for
calculating the amount of such eligible employee's payment from the Program, as
follows. The pro-rated Salary shall be equal to the eligible employee's
unreduced Salary for the Quarter multiplied by the ratio that the (i) number of
weeks in the Quarter reduced by the number of whole weeks the eligible employee
was on approved medical or disability leave for the Quarter bears to (ii) the
number of whole weeks in the Quarter. For this purpose, (i) three or more days
shall be treated as a whole week, (ii) fewer than three days shall not be
counted as a week, and (iii) each Quarter shall be deemed to have 13 weeks. It
is intended that an otherwise eligible employee who is on an approved medical or
disability leave for an entire Quarter will receive no payment under the Program
for such Quarter. It also is intended that if any eligible employee who dies
before the last workday of a Quarter also was on an approved medical or
disability leave prior to the date of death, such eligible employees reduced pro
rata Salary for the Quarter shall be calculated by taking into account both the
reduction as a result of the approved medical or disability leave and the death
of the eligible employee.
4. PAYMENT
Payments for each Quarter will be paid to each eligible employee for
that Quarter no later than the next payroll following thirty (30) days after the
end of the Quarter. Payments made under the Program are subject to all required
federal, state and local withholding.
If an eligible employee entitled to a payment from the Program dies
before receiving such payment, Exar shall make such payment to the eligible
employee's designated beneficiary, or to the eligible employee's estate if no
beneficiary is designated, on the date payments are made to other eligible
employees.
5. DEFINITIONS
For all purposes under the Program the following definitions shall
apply:
a. "Board" shall mean the Board of Directors of Exar Corporation or
the Compensation Committee of the Board, if so designated by the Board.
b. "Full-time employee" shall mean an employee regularly working 40
or more hours per week. "Full-time employee" shall exclude (i) employees
working on a part-time schedule of fewer than 40 hours per week; (ii) temporary
employees whose duration of employment will end on a predetermined date,
regardless of the number of hours worked per week; and (iii) individuals who
work on a contract or consultant basis.
c. "Quarter" shall mean each fiscal quarter in Exar's fiscal year.
The first day of each Quarter shall be April 1, July 1, October 1 and January 1.
d. "Salary" shall mean an eligible employee's compensation for
purposes of calculating payments under the Program and shall mean the base pay
of the eligible employee determined as of the first day of the relevant Quarter
and shall exclude any compensation in excess of base pay, such as overtime,
bonuses, lead or shift pay, or any other allowances.
6. EXAMPLE
a. Pool Funding
The operation of the Program is illustrated by the following example:
Assume for fiscal year 19XX that the Board has determined that the
annual pre-tax profit target threshold amount for the Program is $20 million, or
$5.0 million each Quarter. Further assume that the Board has determined that
the Key Employee Profit Sharing will commence funding with 96% of the first $50K
above the quarterly pre-tax profit threshold. This amounts to $48,000.
Additional funding of this pool will be made when quarterly pre-tax profit
exceeds the threshold plus $50,000. The additional funding will be 48% of pre-
tax profit plus the $50,000. Maximum funding of this pool will be determined
according to the percentage of pretax profit achievement within the rage of 85%
to 115% of the pre-tax profit from the approved, annual financial plan.
RESTATED:
FIRST POOL SECOND POOL
FUNDING FUNDING
Actual Performance $6,000,000 $6,000,000
First Pool Threshold (5,550,000)
Difference subject to Pool
Calculation 450,000
1st Pool Funding
96% of 1st 50 over threshold
(.96 X 50,000) (48,000)
Second Pool Threshold *($5,600,00)
Diff 400,000
Second Pool Funding
(48% of Second Pool Threshold)
(.48 X $400K) 192,000
Total Pool
(Not to Exceed Cap, see Table 240,000
on Max Pool Payout)
* Second Pool Funding Threshold is $50K
Greater than First Pool Funding Threshold
b. Individual Payout Calculation
Individuals selected and approved for participation in the Key
Employee Profit Sharing Program will participate at a pre-determined annual
level. This is referred to as the annual target award percentage and will be
either 15%, 20% or 25%. The annual target award dollar amount will be that
percentage times the individuals annual base salary as of March 31, prior to the
beginning of the plan year. For participating employees whose date of hire is
after March 31st, their starting annual base salary will be used, but any payout
will be on a pro-rated basis.
As an example of a quarterly payout calculation, assume that the
company met the quarterly financial plan for pre-tax profit at exactly 100%.
Further assume the participant's annual base salary was $100,000 and had a
target award of 20%. The quarterly payout would be $5,000
($100,000 x .20 / 4) annual salary x % target / 4 quarters.
As a second example, the company achieved 85% of the financial
plan. According to the table (see attachment), the pool will only be funded at
50%. Using the example in the above paragraph, the individual participant will
receive half the amount, $2,500 for the quarter, $100,000 x .20 / 4 quarters x %
pool funding.
7. ADMINISTRATION
The Program shall be administered by the President and Chief Financial
Officer of Exar. Any determination made by Exar in interpreting the Program
shall be final and binding upon all persons having an interest in the Program.
8. NO ALIENATION, ASSIGNMENT OR ENCUMBERMENT OF PAYMENTS
An eligible employee's interest in the program may not be eliminated,
assigned or encumbered, other than as provided in Paragraph 4 with respect to
payments to a beneficiary or an estate following the death of an eligible
employee.
9. TERMINATION OR AMENDMENT OF THE PROGRAM
The Board of Directors of Exar may terminate or amend the Program for
any purpose; provided, however, that no such termination or amendment shall be
effective for a Quarter which has ended prior to the time that the action to
terminate or amend the Program is taken.
10. NO EMPLOYMENT CONTRACT
The adoption and maintenance of the Program shall not be deemed to be a
contract of employment between Exar and any of its employees. Nothing in the
Program shall give any employee of Exar the right to be retained in Exar's
employ or to interfere with Exar's right to discharge any employee at any time.
11. PLACE OF ADMINISTRATION; APPLICABLE LAWS
The place of administration of the Program shall conclusively be deemed
to be within the State of California, and the Program and the provisions hereof
shall be governed by and construed in accordance with the substantive laws of
the State of California.
EXHIBIT 10.6
EXAR CORPORATION
EXECUTIVE INCENTIVE COMPENSATION PROGRAM
SPECIAL SECOND HALF FISCAL YEAR 1997 PLAN
1.0 INTENT
The intention of the Special Second Half Fiscal 1997 Plan is to provide
incentives to eligible Exar Corporation executives for achieving or surpassing
established revenue and pre-tax profit goals according to the Second Half F97
Financial Plan.
2.0 MANAGEMENT PARTICIPANT QUALIFICATIONS
2.1 Direct participation is limited to a small group of executives who
have an important influence on the operation, profits, and future of Exar.
Generally, only the corporate officers and the directors of major staff or line
functions may be eligible.
2.2 Participation shall be recommended by the President or Chief Financial
Officer and is subject to concurrence by the Compensation Committee of the
Board of Directors.
2.3 An invitation to participate and the information divulged in
connection with the program must be considered private and not be discussed with
others.
3.0 FUNDING OF THE INCENTIVE PLAN POOL
3.1 GENERAL:
The Incentive Plan Pool will be funded upon achievement of certain
revenue and pre-tax profit goals. Both revenue and pre-tax profit goals must be
met at pre-established threshold levels before any pool funding takes place.
Further, this plan will not be funded unless there is funding and payout for the
Fiscal 1997 Key Employee Quarterly Cash Profit Sharing Program
3.2 CALCULATION FOR POOL FUNDING
The size of the half year executive pool is the sum of the fiscal 1997
annual base salary of the participants times their respective half year target
award percentages. The pool size will be modified according to the actual
revenue and profit performance levels compared to the approved financial plan
for the second half of fiscal 1997.
3.3 CALCULATION FOR INDIVIDUAL PAYOUT
The individual payout is determined by factoring one's base salary,
individual target award percentage, actual corporate revenue and pre tax profit
results, and personal performance factors.
4.0 RULES
4.1 Pre tax profits or revenues generated by system changes will be
excluded for purposes of this program.
4.2 In calculating incentive compensation, "salary" will be the total base
compensation for the fiscal year, excluding any incentive pay, bonus
payments, auto allowance, etc.
4.3 It is recognized that certain unforeseen events or inequities
could develop in the plan as established. Consideration will be given
to unusual circumstances. Such consideration will be made at year end
only, and the decision of the Compensation Committee will be final.
4.4 Payments will be made in accordance with the final annual statements
as audited by the Company's independent Certified Public Accountants.
Amounts earned should be paid prior to June 15.
4.5 This Special Second Half Plan is in force for the second half of
fiscal year 1997, and it is not the intention to continue this
practice in subsequent years.
4.6 In order to remove any deterrent to a "Purchase Acquisition", the
write-off of in-process R&D will be added back to profits for
calculation of pre tax profit.
4.7 The Compensation Committee determines the target award for
participants.
4.8 The program is to be in force for the second half only, and only
those who are in the employ of the company and still a member of the
eligible executive group through March 31 1997 will qualify for
payments.
4.9 As business conditions, participants' position, or the corporation's
needs change, the Compensation Committee reserves the right to
modify or cancel at any time with prior notice this Incentive
Program, and participants should not presume continued
participation in an Incentive Program.
EXHIBIT 21.2
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).
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
1997 1996 1995
Net income (loss) $(9,197) $13,582 $(11,084)
Weighted average common
shares
outstanding 9,071 9,495 8,835
Dilutive effect of stock
options -- 430 --
Shares used in
computation 9,071 9,925 8,835
Net income (loss) per
share $(1.01) $1.37 $(1.25)
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Exar Corporation:
We consent to the incorporation by reference in Registration Statement Nos. 33-
58991 and 33-59071 of Exar Corporation on Forms S-8 and S-3 of our report dated
April 30, 1997, appearing in this Annual Report on Form 10-K of Exar Corporation
for the year ended March 31, 1997.
DELOITTE & TOUCHE, LLP
San Jose, California
June 27, 1997
EXHIBIT 23.2
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, respectively, of Exar Corporation
of our report dated May 2, 1996 relating to the consolidated balance sheet of
Exar Corporation and subsidiaries as of March 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the two-year period ended March 31, 1996, and the
related consolidated financial statement schedule, which report appears in
the March 31, 1997, annual report on Form 10-K of Exar Corporation.
KPMG PEAT MARWICK LLP
Palo Alto, California
June 26, 1997
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance at Write-offs Balance
Classification Beginning and at end
of Year Additions Recoveries of Year
Year ended March 31, 1997:
Allowance for doubtful
accounts and sales returns $2,692 $ 348 $ (118) $3,158
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
