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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1998
[ ] 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, 1998 was $219,705,499 based on the last sales price
reported for such date.
The number of shares outstanding of the Registrant's Common Stock was 9,552,413
as of May 31, 1998, 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.
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PART I
Except for the historical information contained herein, the following discussion
contains forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section 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 applications, 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 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.
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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:
<TABLE>
<CAPTION>
MARKET APPLICATION PRODUCT
- ------------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
Communications High speed communications T/E-Carrier circuits:
transmission equipment, central -repeaters
office equipment, and private -line interface circuits
branch exchanges -framers
-buffers
-transcoders
Serial interface devices:
-RS422/423
-V.35
-Multiprotocol (V.35, V.36,
X.21, RS232, EIA530 (A),
RS449)
Remote access and remote data Universal Asynchronous
collection, industrial automations Receiver & Transmitter
and POS (Point of Sale), handheld -single channel (UARTS)
and mobile, and serial I/O cards -dual channel (DUARTS)
-quad channel (QUARTS)
- ------------------------------- ---------------------------------- ---------------------------
Video and Imaging Scanners Analog-to-digital converters
Digital cameras (ADCs)
Digital copiers Digital-to-analog converters
(DACs)
Video systems Video and Imaging analog front
end subsystems
- ------------------------------- ---------------------------------- ---------------------------
Silicon Microstructures Automotive engine controls -Manifold pressure die
-Emission system pressure die
Medical anesthetist and respiration -Low pressure sensors
Medical blood pressure -Pressure die for catheter
Industrial pressure tips
Industrial HVAC -Low pressure and standard die
-Low pressure sensors
- ------------------------------- ---------------------------------- ---------------------------
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
- ------------------------------- ---------------------------------- ---------------------------
</TABLE>
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COMMUNICATIONS
Exar markets integrated circuits for a variety of applications in both the
telecommunications and data communications 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 multiprotocol 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, Boca Research, Digiboard, Alcatel, and 3Com.
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 less than 1 kHz to 40
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 and imaging market, the Company's products provide signal
conditioning and digitization of CCD signals. Products incorporating the
Company's integrated circuits include digital still cameras, camcorders and
industrial cameras for machine vision, surveillance, flatbed and sheetfed
scanners, film scanners, and multifunctional peripherals.
The Company's customers in the video and imaging market include Sony
Corporation, Hewlett Packard, Connectix and Kodak.
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SILICON MICROSTRUCTURES
The acquisition of Silicon Microstructures, Inc. ("SMI") in June 1995 expanded
Exar's product offerings to include pressure and accelerometer applications.
The Company develops and markets silicon sensors for a variety of markets
including automotive, medical, and industrial segments. 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 high performance silicon pressure sensors with low pressure
ranges. The Company supplies packaged sensor products as well as pressure die
to its customers.
The Company's customers for silicon microstructure products include Motorola,
Data Instruments, Seimens, Endosonics, 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, filter circuits for use in audio systems and timer circuits for
various products.
GENERAL PURPOSE ANALOG STANDARD PRODUCTS The Company also markets a line
of general purpose analog standard products such as timers, switching
regulators, operational amplifiers and filters. The Company offers current
and voltage output DACs which include products ranging from 8 to 16 bits of
resolution. Recent product introductions offer unique digital control
capabilities and wide bandwidth for the direct control of video and CCD
imaging signals.
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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 12 in Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
(IN THOUSANDS)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Sales $ 60,020 $ 53,374 $ 56,030
International Sales:
Sales by Exar Japan 3,032 9,465 19,061
Other Sales 38,963 29,504 50,675
------------- ------------- -------------
TOTAL $ 102,015 $ 92,343 $ 125,766
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Exar markets its products in the United States principally through 23
independent sales representatives and four independent non-exclusive
distributors, as well as through the Company's direct sales force. Exar
currently has sales support offices in or near Atlanta, Boston, Chicago, Dallas,
Los Angeles and San Jose.
Exar is represented internationally by approximately 34 sales representatives
and distributors. In addition, Exar is represented in Europe by its
wholly-owned subsidiaries, Exar Ltd., Exar SARL, 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., Exar SARL and Exar Japan.
During the fiscal year ended March 31, 1998, 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, 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.
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MANUFACTURING
The Company uses outside sources for the supply of its integrated circuits.
During fiscal 1998, Rohm Corporation ("Rohm") was the Company's largest supplier
of wafer services. Approximately 32% of the Company's sales of integrated
circuits were of products made from bipolar, BiCMOS, and CMOS wafers
manufactured for the Company by Rohm. These services are provided to the
Company pursuant to a foundry service agreement. The Company is not under any
obligation to continue obtaining manufacturing services from Rohm.
The Company also obtains CMOS and BiCMOS products from other world class
independent manufacturers, including TSMC and Chartered. The Company has
qualified second sources for certain of its foundry requirements. However, a
disruption in supply from one or more of the Company's outside suppliers could
have a material adverse effect on operations due to lead times and initially
lower yields associated with the volume production ramps of such sources.
Exar conducts electrical testing of integrated circuits in both wafer and
packaged form. The combination of various functionalities makes the test
process for analog and mixed-signal devices particularly difficult. Test
operations require the programming, maintenance and use of sophisticated
computer-based test systems and complex automatic handling systems. Exar has
special screening and qualification programs when high reliability quality
grades are required by customer specifications.
After testing, wafers are usually shipped to the Far East for assembly, where
they are cut into individual circuits and packaged. Following assembly, a
portion of the Company's products are returned to Exar for final testing and
quality assurance. Most of Exar's assembly work is performed by independent
contractors in Hong Kong, Indonesia, the Philippines, Korea and Japan.
In the fourth quarter of fiscal 1997, the Company began to implement a plan to
reduce manufacturing expenses by transferring its test and shipping operations
to off shore sub-contractors. By the end of fiscal 1998, the Company had
completed the transfer of approximately 70% of its test operations off-shore.
The Company plans to maintain a minimal level of test operations at its
California facilities to support its research and development activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restructuring and Other Charges."
The raw materials and equipment used in the production of the Company's
integrated circuits are available from several suppliers. Although 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 product. During the fiscal years
ended March 31, 1998, 1997 and 1996, Exar's research and development expenses
were $15.6 million, $13.9 million, and $16.1 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
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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 successfully 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.,
Phillips, Dallas Semiconductor, Level One Communications and Texas Instruments.
As the Company has marketed its products in Japan, it has encountered greater
competition from Japanese manufacturers. Partly as a result of such
competition, the Company has discontinued its older consumer electronics product
lines. 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 may include oral orders which are generally subsequently
confirmed by written purchase orders.
At March 31, 1998, Exar's backlog was approximately $20.6 million, compared with
$30.5 million (including last time buys of legacy products in excess of $10.0
Million) at March 31, 1997.
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, 1998, Exar had 347 employees, including 81 in marketing and
sales, 125 in research, development and engineering-related functions, 91 in
manufacturing and production and 50 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.
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EXECUTIVE OFFICERS OF THE COMPANY
The names of the Company's executive officers and certain information about them
is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------------
<S> <C> <C>
Donald L. Ciffone, Jr. 43 Chief Executive Officer, President and Director
Suhas "Sid" Bagwe 58 Vice President, Strategic Planning and Business
Development
Michael Class 41 Vice President, North American and European Sales
Roubik Gregorian 47 Chief Technology Officer, Vice President,
Communications Division
Ronald W. Guire 49 Executive Vice President, Chief Financial
Officer, Secretary and Director
Thomas W. Jones 50 Vice President, Reliability and Quality Assurance
James Knutti 48 Vice President, Silicon Microstructures Division
Thomas R. Melendrez 44 Corporate Vice President, General Counsel
Stephen W. Michael 51 Vice President, Operations Division
Linda Prosser 42 Vice President, Marketing Communications
John Sramek 47 Vice President, Video and Imaging Division
</TABLE>
Mr. Ciffone joined Exar as Chief Executive Officer and President in October 1996
and was appointed as a 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. Class joined Exar as Director of North American Sales in 1997. In January
1998 he was promoted to his current position as Vice President, North American
and European Sales. Mr. Class has over 15 years of experience in the
semiconductor industry, most recently with IC Works, Inc. as Area Sales Manager
for Western U.S. and Canada. Prior to joining IC Works, Inc., Mr. Class held
various sales management positions with Intel Corporation and VLSI Technology
from 1979 to 1995.
Dr. Gregorian joined Exar in March 1995 as Vice President, Startech Division
when the Company acquired Startech Semiconductor, Inc. where he served as
President. He was appointed Chief Technology Officer and Vice President of the
Communications Division in June, 1996. Prior to joining Startech in 1994, Dr.
Gregorian was Vice President of Research and Development and Chief Technology
Officer for Sierra Semiconductor, Inc. Dr. Gregorian holds 16 patents and
received his MSEE and Ph.D. in Electrical Engineering from the University of
California at Los Angeles, as well as an MSEE from Tehran University.
Mr. Guire joined Exar 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.
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Mr. Jones joined Exar as Manager of Total Quality Management in October 1992 and
was promoted to Director of Reliability and Quality Assurance in November 1993.
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 Chief Executive Officer.
Prior to founding SMI, Dr. Knutti was President and Chief Operating Officer
of IC Sensors, Inc. from 1987 to 1990. Dr. Knutti holds a MSEE from
Carnegie-Mellon University and a Ph.D. 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 Exar as Vice President of New Market Development in September
1992. In July 1995 he was appointed to his current position as Vice President,
Operations Division. Mr. Michael has over 20 years of semiconductor industry
experience, most recently as Vice President, and General Manager, Analog &
Custom Products with Catalyst Semiconductor ("Catalyst"). He joined Catalyst in
1987 and served in various senior positions.
Ms. Prosser joined Exar as Vice President, Marketing Communications in March
1997. Ms. Prosser has over 18 years experience in marketing communications, in
both corporate and consulting roles. From June 1997 to February 1998, she
provided consulting services to technology companies, and formerly she held
corporate positions including Vice President, Corporate Communications at VLSI
Technology, from June 1994 to May 1996; and Director of Corporate Communications
at Adobe Systems, from March 1990 to May 1994. Prior to joining Adobe Systems,
she held management positions at technology communications consulting firms
including Ketchum Communications, from 1985 to 1990; and Burson-Marsteller,
Inc., from 1982 to 1985. Ms. Prosser holds a Bachelor of Journalism degree from
the University of Missouri.
Mr. Sramek joined Exar as Group Manager for the Micro Power Business Unit in
June of 1994 and served in a variety of senior marketing positions until his
promotion to his current position in February 1998. Mr. Sramek has over twenty
years of experience in sales and product marketing in the semiconductor industry
with a variety of companies, including Micro Power Systems, Harris Semiconductor
and Genrad Inc. Mr. Sramek holds a M.B.A. from the University of Santa Clara, a
B.A. in English Literature from Bucknell University and a B.S. in Electrical
Engineering also from Bucknell University.
TRADEMARKS, PATENTS AND LICENSES
The Company seeks to protect its proprietary products through a combination of
patent rights, copyrights, mask work registrations and trade secrets. Exar
believes that these intellectual property rights are substantially less
significant to its business than such factors as technical expertise, marketing
ability and customer support.
Because of rapid technological developments in the semiconductor industry and
the broad and rapidly developing patent, mask-work rights and copyright
coverage, certain of Exar's products or processes may, from time to time, give
rise to alleged infringement of existing patents, mask-work rights or
copyrights. Exar has, on occasion, received notifications of alleged
infringements and some allegations remain unresolved. There can be no assurance
regarding the outcome of any particular alleged infringements. The Company
attempts to protect its trade secrets, mask-work rights and other proprietary
information through agreements with customers and suppliers, proprietary
information agreements with employees and other security measures. Although the
Company intends to protect its rights vigorously, there can be no assurance that
these measures will be successful.
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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 remaining remediation costs of approximately
$846,000 at March 31, 1998.
RISK FACTORS
In addition to the other information contained in this Annual Report on Form
10-K and other reports filed by the Company with the Securities and Exchange
Commission, prospective investors should consider the following factors in
evaluating the Company and its business.
DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL CHANGE. The markets for the
Company's products are characterized by evolving industry standards and rapid
technological change and product obsolescence. The Company's future success
will be highly dependent upon the timely completion and introduction of new
products at competitive price and performance levels. The success of new
products depends on a number of factors, including successful and timely
completion of product development and introduction to market, correct
judgment with respect to product demand, market acceptance of the Company's
and its customers' new products, sufficient foundry capacity for volume
manufacturing of wafers, achievement of acceptable wafer fabrication yields
by the Company's independent foundries and the continued ability of the
Company to offer new products at competitive prices. Some of these factors
are outside the control of the Company. There can be no assurance that the
Company will be able to identify new product opportunities successfully,
develop and bring to market new products, achieve design wins or be able to
respond effectively to new technological changes or product announcements by
others. A failure in any of these areas could materially and adversely affect
the Company's operating results.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. Redesigns or design delays often are required
for both the customer's products and the Company's chipsets as industry and
customer standards, protocols or design specifications are determined. Any
resulting delay in the production of the Company's products could have a
material adverse effect on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL; INTENSE COMPETITION FOR EMPLOYEES. Exar's future
success depends in large part on the continued service of certain of Exar's key
technical and management personnel and on Exar's ability to continue to attract
and retain qualified employees, particularly those highly skilled design,
process and test engineers involved in the manufacture of existing products and
the development of new products and processes. The competition for such
personnel is intense, and the loss of key employees, most of whom are not
subject to an employment agreement for a specified term or a post-employment
non-competition agreement, could have a material and adverse effect on Exar.
INTENSE COMPETITION. The semiconductor industry is intensely competitive
and is characterized by price erosion, rapid technological change and heightened
international competition in many markets. In this regard, Exar intends to
discontinue its consumer electronics product line which is targeted at the
Japanese market in part due to increased competition in this
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<PAGE>
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.
FACTORS AFFECTING OPERATING RESULTS. Exar believes its future operating
results will be subject to quarterly and annual variations based on a wide
variety of factors, including customer demand for Exar's products, changes in
product mix, competitive pressures on prices and prices charged by Exar's
suppliers. The semiconductor industry has historically been characterized by
business cycles, with economic downturns resulting in diminished product
demand and erosion of average selling prices. Exar's future operating results
could be adversely affected by a downturn in this market or by a general
economic downturn or by the failure of one or more of its customers to
compete successfully in such market.
DEPENDENCE ON OUTSIDE FABRICATION FACILITIES. All of the semiconductor wafers
used in the manufacture of Exar's products are processed to Exar's
specifications by outside suppliers. In particular, Rohm, with whom the
Company has a long-term supply agreement, is a major supplier of bipolar
wafers. Pursuant to such agreement, Rohm is contractually obligated to supply
Exar with bipolar wafers at a price that is commercially favorable. Bipolar
wafers are used in the production of the Company's older product lines.
Development of products using bipolar wafers has continued to decline as the
Company develops more products using CMOS and BICMOS technologies. Exar has
generally received adequate deliveries of wafers and adequate yield and
quality of product. However, if for any reason wafer shipments were delayed
or its suppliers encountered yield or quality problems in the future, Exar's
operating results would be adversely affected. In addition, Exar could
encounter lengthy delays if for any reason it was forced to establish
alternative manufacturing arrangements.
While Exar believes that it has an adequate wafer supply to meet its currently
anticipated needs, there can be no assurance that in the future Exar will
receive sufficient quantities of wafers at favorable prices on a timely basis.
If the wafer manufacturers which Exar currently uses to manufacture its products
suffer a material curtailment of their manufacturing operations, Exar could
incur manufacturing delays of between three and six months. Although Exar
believes that there is an adequate level of high quality wafer manufacturing
capacity available world-wide which could perform manufacturing for Exar in
those circumstances, there can be no assurance that Exar would be able to
arrange sufficient alternative manufacturing capacity on comparable terms or
within that time period if its current suppliers curtailed or halted
manufacturing. Should wafer capacity limitations occur because of increased
demand for Exar's products or otherwise, Exar may be unable to meet demand for
its products in a timely fashion, which could result in customer dissatisfaction
and decreased revenues.
DEPENDENCE ON ASSEMBLY AND TEST SUBCONTRACTORS. Exar's products are currently
assembled to Exar's specifications by independent subcontractors. Exar's
reliance on subcontractors to assemble its products involves significant
risks, including reduced control over delivery schedules, quality assurance
and costs, the potential lack of adequate capacity and potential
misappropriation of proprietary intellectual property. Failure to obtain
products on a timely basis could delay product delivery to Exar's customers,
thereby materially adversely affecting Exar's businesses. In addition, Exar
presently utilizes semiconductor assembly contractors located throughout Asia
and intends to continue to transfer testing and shipping operations to
offshore subcontractors in fiscal 1999. 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,
12
<PAGE>
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.
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 42% of Exar's revenues in
fiscal 1997 and approximately 41% in fiscal 1998 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 have the majority of its remaining testing and
shipping operations transferred to offshore subcontractors in fiscal 1999.
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
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<PAGE>
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 implemented a restructuring plan to i) reduce manufacturing expenses
by transferring its test and shipping operations to offshore subcontractors,
ii) focus the Company's product strategy to provide analog and mixed signal
products for the video, imaging, communications and silicon microstructure
markets and iii) narrow the Company's distribution channels to create more
leverage. The Company's restructuring actions consisted primarily of writing
down certain equipment as a result of the transfer of operations and change
in product focus; terminating 54 full-time employees, 44 of whom have been
terminated through March 31, 1998; writing down inventory associated with
product lines which are being discontinued; vacating 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 long term impact on results of operations. Furthermore, should such
actions have a negative impact on the Company's ability to design and develop
new products, market new or existing products, or produce and/or purchase
products at competitive prices, these actions could have an adverse impact on
the Company's results of operations.
ITEM 2 PROPERTIES
The Company's corporate headquarters are located in Fremont, California and
consist of approximately 151,000 square feet. The land and building are owned
by the Company and house Exar's principal administrative, test, engineering,
marketing, customer service and sales departments.
ITEM 3 LEGAL PROCEEDINGS
There are no material legal actions pending or contemplated.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
March 31, 1998.
14
<PAGE>
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.
<TABLE>
<CAPTION>
COMMON STOCK PRICES
-------------------
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1998
Quarter ended March 31, 1998 $24 $16
Quarter ended December 31, 1997 $27 1/4 $16 1/8
Quarter ended September 30, 1997 $26 7/8 $19 1/4
Quarter ended June 30, 1997 $21 3/4 $14 1/2
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
</TABLE>
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 262 stockholders of record as of May 31, 1998.
The Company believes it has in excess of 4,000 beneficial stockholders. The
last sales price for Exar's Common Stock, as reported by Nasdaq on May 31, 1998,
was $23 per share.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996 1995 1994
---------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net Sales $ 102,015 $ 92,343 $ 125,766 $ 159,472 $ 161,659
Income (Loss) From 8,986 (15,238) 18,759 (4,989) 20,999
Operations
Net Income (Loss) 7,518 (9,197) 13,582 (11,084) 15,665
Net Income (Loss) Per
Share:
Basic $ 0.81 $ (1.01) $ 1.43 $ (1.25) $ 1.58
Diluted $ 0.77 $ (1.01) $ 1.37 $ (1.25) $ 1.52
Shares Used in Computation of Net
Income (Loss) Per Share:
Basic 9,326 9,071 9,495 8,835 9,940
Diluted 9,730 9,071 9,925 8,835 10,287
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------
(IN THOUSANDS)
1998 1997 1996 1995 1994
---------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Working Capital $ 90,395 $ 68,822 $ 77,550 $ 81,286 $ 85,842
Total Assets 143,669 125,537 139,074 150,080 132,219
Retained Earnings 51,700 44,182 53,379 39,797 50,881
Stockholders' Equity 123,729 109,817 117,847 107,696 105,378
</TABLE>
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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
video, imaging and consumer electronics.
The Company has made a number of changes in its underlying business over the
past few 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 March 1995, the Company acquired Startech and in June 1995, the Company
acquired SMI. The acquisitions provided the Company with product offerings
that include sophisticated electronic components for the communications and
silicon microstructures markets. 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 $3.6 million of goodwill which is being
amortized over a period of five years. Certain other prior period
acquisitions resulted in goodwill which has been fully amortized as of March
31, 1998. The remaining portion of the excess purchase price as a result of
acquisitions in fiscal 1996 represented in-process research and development
which was charged to operations (approximately $.9 million in 1996) at the
time of acquisition. See Note 9 to Notes to Consolidated Financial
Statements.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 1997, the Company implemented 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; vacating 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 fiscal 1997 and 1998, approximately $9.1
million and $575,000 was utilized, respectively. A remaining outlay of
approximately $349,000 is expected to occur during fiscal 1999.
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
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<PAGE>
of Exar's foundry relationships and process requirements in the fourth
quarter of 1997. 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.
During the quarter ended December 31, 1997, the Company sold the capital
assets written down in connection with this prior year charge. The sales
proceeds exceeded the carrying value and, as a result, the Company reversed
$1.2 million of the related reserve during the quarter. Offsetting this
reversal, the Company decided during the same quarter to replace its current
information system under development with a system determined to better meet
the Company's needs and wrote off $1.2 million of capitalized costs
associated with system modules which the Company does not intend to use.
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.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 50.9 55.0 49.5
Cost of sales-inventory write-off - 5.0 -
Research and development 15.3 15.1 12.8
Selling, general and administrative 22.8 23.1 19.8
Write-off of in-process R&D and
other charges 1.2 16.8 1.9
Goodwill amortization 1.0 1.5 1.1
-------- -------- --------
Operating income (loss) 8.8 (16.5) 14.9
Other income, net 3.2 2.9 2.8
-------- -------- --------
Income (loss) before income taxes 12.0 (13.6) 17.7
Income taxes (benefit) 4.7 (3.6) 6.9
-------- -------- --------
Net income (loss) 7.3% (10.0)% 10.8%
-------- -------- --------
-------- -------- --------
</TABLE>
FISCAL 1998 VS FISCAL 1997
Net sales during fiscal 1998 were approximately $102.0 million compared to $92.3
million in fiscal 1997, an increase of approximately 10.5%. This increase was
primarily due to significant increases in net sales in the Company's
communications and silicon microstructure product lines as well as last time buy
activity pertaining to some of the Company's discontinued custom legacy
products. These increases were partially offset by a significant decrease in
net sales of discontinued consumer products.
In fiscal 1998, sales to domestic U.S. customers increased by 12.5% to $60.0
million. International sales increased by 7.8% to approximately $42.0 million.
The Company's international sales consist of sales from the United States to
overseas customers and sales by the Company's wholly-owned subsidiary in Japan.
Sales by the Company's foreign subsidiary are denominated in yen, while all
other international sales are denominated in U.S. dollars. The fact that the
Company operates internationally gives rise to exposures from changes in
currency exchange rates. The Company has adopted a set of practices intended to
minimize its foreign currency risk which includes the use, from time to time, of
foreign currency 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.
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<PAGE>
Cost of sales as a percentage of net sales decreased from 55.0% in fiscal
1997 (excluding a one-time inventory write-off) to 50.9% in fiscal 1998. The
resulting increase in gross margins is due primarily to manufacturing
efficiencies due to higher production volumes, changes in product mix and
efficiencies gained as a result of the Company's decision, in the fourth
quarter of fiscal 1997, to transfer its test and shipping operations to
offshore sub-contractors to reduce manufacturing expenses.
Expenditures for research and development increased approximately $1.7 million
or 12.0% compared to fiscal 1997 due primarily to increased spending on mask
sets and other related costs for new product development. Expenditures for
research and development, as a percentage of net sales, increased from
approximately 15.1% in fiscal 1997 to 15.3 % in fiscal 1998.
Selling, general and administrative expenses for fiscal 1998 increased by $2.0
million or 9.3 % compared to fiscal 1997 due primarily to increased spending on
marketing efforts. As a percentage of net sales, selling, general and
administrative expenses decreased from approximately 23.1% of net sales in
fiscal 1997 to 22.8% of net sales in fiscal 1998. The decrease as a percentage
of sales is due primarily to the increase in net sales.
The Company incurred $1.2 million in compensation expenses during fiscal 1998
(and $1.2 million in fiscal 1997) for the final payment related to the
acquisition of Startech. See Note 9 to Notes to Consolidated Financial
Statements.
Net interest income during fiscal 1998 increased to $3.1 million from the $2.3
million reported in fiscal 1997 due primarily to increased balances of cash and
short-term investments in fiscal 1998.
The Company's provision for income taxes is based on income from operations.
The Company's effective tax rate for fiscal 1998 was approximately 39%
compared with the federal statutory rate of 35%. The difference is due
primarily to non-deductible expenses, state income taxes and foreign losses,
which are taxed at rates different from U.S. income tax rates, partially
offset by tax advantaged investment income and tax savings generated from
utilization of the Company's foreign sales corporation.
Including one-time charges, actual net income for the fiscal year 1998 was
$7.5 million, or $0.77 per diluted share versus a loss for the fiscal year
1997 of $9.2 million, or a loss of $1.01 per diluted share. Pro forma net
income, excluding one-time charges, for fiscal year 1998 was $8.2 million, or
$0.85 per diluted share, a 79% increase over pro forma net income of $4.6
million, or $0.50 per diluted share, for the fiscal year 1997.
To date, inflation has not had a significant impact on the Company's operating
results.
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.
In fiscal 1997, sales to domestic customers decreased by 5% to $53.4 million.
International sales 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
intended to 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;
19
<PAGE>
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 10 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 9 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 primarily 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 $4.6 million ($0.50
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).
20
<PAGE>
QUARTERLY RESULTS
The following table contains selected unaudited quarterly financial data for the
fiscal years ended March 31, 1998 and 1997. In the opinion of management, this
unaudited information has been prepared on the same basis as the audited
information and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
<TABLE>
<CAPTION>
QUARTERLY RESULTS
-----------------
(THREE MONTHS ENDED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1998 1997 1997 1997 1997 1996 1996 1996
--------- -------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales $25,105 $26,577 $25,935 $24,398 $22,645 $21,819 $22,689 $25,190
Cost of sales 12,201 13,455 13,335 12,946 16,925 12,952 12,544 13,038
--------- -------- --------- -------- --------- -------- --------- ---------
Gross profit 12,904 13,122 12,600 11,452 5,720 8,867 10,145 12,152
Research and
development 3,906 3,953 3,948 3,774 3,619 3,340 3,526 3,422
Selling, general,
and
administrative 5,880 5,982 5,873 5,538 5,249 4,864 5,255 5,928
Goodwill
amortization 184 293 293 292 343 344 343 344
Restructuring and
other charges -- -- -- -- 14,344 -- -- --
Acquisition related
Expenses 1,176 -- -- -- 700 500 -- --
--------- -------- --------- -------- --------- -------- --------- ---------
Operating
Income (loss) 1,758 2,894 2,486 1,848 (18,535) (181) 1,021 2,458
Other income, net 1,175 844 683 611 633 529 610 936
--------- -------- --------- -------- --------- -------- --------- ---------
Income (loss)
Before income
Taxes 2,933 3,738 3,169 2,459 (17,902) 348 1,631 3,394
Income taxes 1,145 1,431 1,229 976 (5,605) 245 701 1,327
--------- -------- --------- -------- --------- -------- --------- ---------
Net income (loss) $1,788 $2,307 $1,940 $1,483 $(12,297) $103 $930 $2,067
--------- -------- --------- -------- --------- -------- --------- ---------
--------- -------- --------- -------- --------- -------- --------- ---------
Net income (loss)
Per share:
Basic $0.19 $0.25 $0.21 $0.16 $(1.34) $.01 $.10 $.23
--------- -------- --------- -------- --------- -------- --------- ---------
Diluted $0.18 $0.23 $0.20 $0.16 $(1.34) $.01 $.10 $.23
--------- -------- --------- -------- --------- -------- --------- ---------
Shares used in
Computation of
Net Income
(Loss) Per Share:
Basic 9,437 9,365 9,304 9,199 9,158 9,098 9,030 8,998
--------- -------- --------- -------- --------- -------- --------- ---------
Diluted 9,749 9,933 9,812 9,458 9,158 9,185 9,068 9,104
--------- -------- --------- -------- --------- -------- --------- ---------
--------- -------- --------- -------- --------- -------- --------- ---------
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company is currently completing the transfer of 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-
21
<PAGE>
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, 1998, 1997 and 1996, the Company
financed its operations primarily from existing cash and short-term investments
and cash flows from operations.
At March 31, 1998, the Company had $79.3 million in cash and short-term
investments. The Company also has short-term, unsecured, lines of credit under
which it may borrow up to $10 million, none of which was being utilized at March
31, 1998. In addition, the Company has a credit facility with certain domestic
and foreign banks under which it may borrow up to $25 million in support of its
foreign currency transactions. At March 31, 1998, the Company had no
outstanding foreign currency forward contracts.
The Company made a $4.5 million minority equity investment in IC Works, Inc., a
semiconductor manufacturer ("IC Works"), in February 1996. In April 1997, the
Company made an additional equity investment in IC Works of $3 million. The
Company has no contractual commitment to make further investments in IC Works.
See Note 10 to Notes to Consolidated Financial Statements.
The Company anticipates that it will finance its operations and future property,
plant and equipment needs 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.
YEAR 2000
What is commonly known as the "Year 2000 issue" arises because many computer
hardware and software systems use only two digits to represent the year. As a
result, these systems and programs may not calculate dates beyond 1999, which
may cause errors in information or systems failures.
The Company has completed the process of identifying the programs and
infrastructure that could be affected by the Year 2000 issue and has developed
an implementation plan to resolve the issue. The Plan includes replacing
certain existing systems with new systems that will be Year 2000 compliant and
will provide additional strategic information. The anticipated costs for the
new systems, of approximately $4 million to $5 million will be capitalized.
The Company believes, with appropriate replacement or modifications, it will be
able to operate its time-sensitive business-application software programs and
infrastructure into and beyond the year 2000. Some risks associated with the
year 2000 issue, however, are beyond the ability of the Company to control,
including the extent to which the Company's suppliers and service providers,
including providers of telephone services, can address the year 2000 issue.
The failure by a third party to adequately address the year 2000 issue could
have a material adverse impact on such third party, and could have an adverse
impact on the Company.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information under this item is not required in this annual report.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Exar Corporation:
We have audited the accompanying consolidated balance sheets of Exar Corporation
and subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the consolidated financial statement
schedule for the years ended March 31, 1998 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Exar Corporation and its
subsidiaries as of March 31, 1998 and 1997 and the results of their operations
and their cash flows for the years 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 23, 1998
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Exar Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of EXAR Corporation and subsidiaries for
the year ended March 31, 1996. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedule for the year ended March 31, 1996. These consolidated
financial statements and 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 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, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Exar Corporation and subsidiaries for the year 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
Mountain View, California
May 2, 1996
24
<PAGE>
EXAR CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 76,167 $ 48,479
Short-term investments 3,140 5,053
Accounts receivable, net of allowances of $3,411 and $3,158 16,764 13,644
Inventories 6,781 7,276
Prepaid expenses and other 1,521 3,225
Deferred income taxes 5,217 5,985
------------- -----------
Total current assets 109,590 83,662
PROPERTY, PLANT, AND EQUIPMENT, Net 26,746 32,823
GOODWILL, net of accumulated amortization of $5,061 and $3,469 1,534 3,211
OTHER ASSETS 5,799 5,841
------------- -----------
TOTAL ASSETS $ 143,669 $ 125,537
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,534 $ 7,433
Accrued compensation and related benefits 8,564 4,664
Accrued sales commissions 1,107 613
Other accrued expenses 1,990 2,130
------------- -----------
Total current liabilities 19,195 14,840
COMMITMENTS AND CONTINGENCIES (see note 11) - -
LONG-TERM OBLIGATIONS 745 880
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;
10,475,503 and 10,123,076 shares issued 86,091 80,072
Cumulative translation adjustments 83 (292)
Retained earnings 51,700 44,182
Treasury stock; 977,766 shares of common stock at cost (14,145) (14,145)
------------- -----------
Total stockholders' equity 123,729 109,817
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 143,669 $ 125,537
------------- -----------
------------- -----------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 102,015 $ 92,343 $ 125,766
COST AND EXPENSES:
Cost of sales 51,937 50,829 62,217
Cost of sales - inventory write-off - 4,631 -
Research and development 15,581 13,907 16,116
Selling, general and administrative 23,273 21,296 24,911
Goodwill amortization 1,062 1,374 1,315
Restructuring and other charges - 14,344 -
Write-off of in-process research and
development and other acquisition
related expenses 1,176 1,200 1,293
Discontinued product line - - 1,155
--------- --------- ----------
Total costs and expenses 93,029 107,581 107,007
--------- --------- ----------
INCOME (LOSS) FROM OPERATIONS 8,986 (15,238) 18,759
OTHER INCOME (EXPENSE):
Interest income 3,165 2,382 3,266
Interest expense (76) (85) (156)
Other, net 224 412 411
--------- --------- ----------
Total other income, net 3,313 2,709 3,521
--------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 12,299 (12,529) 22,280
BENEFIT (PROVISION) FOR INCOME TAXES (4,781) 3,332 (8,698)
--------- --------- ----------
NET INCOME (LOSS) $ 7,518 $ (9,197) $ 13,582
--------- --------- ----------
--------- --------- ----------
NET INCOME (LOSS) PER SHARE:
BASIC $ 0.81 $ (1.01) $ 1.43
--------- --------- ----------
--------- --------- ----------
DILUTED $ 0.77 $ (1.01) $ 1.37
--------- --------- ----------
--------- --------- ----------
SHARES USED IN COMPUTATION OF NET
INCOME (LOSS) PER SHARE:
BASIC 9,326 9,071 9,495
--------- --------- ----------
--------- --------- ----------
DILUTED 9,730 9,071 9,925
--------- --------- ----------
--------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Cumulative Total
Translation Retained Stockholders'
Common Stock Treasury Stock Adjustments Earnings Equity
---------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, April 1, 1995 9,309,066 $67,217 - $ - $ 682 $39,797 $107,696
Stock issued in connection with acquisitions 43,334 1,150 1,150
Exercise of stock options 488,222 6,110 6,110
Income tax benefit from stock option transactions 1,990 1,990
Stock issued under Employee Stock Participation Plan 77,749 1,221 1,221
Acquisition of treasury stock (927,766) (13,420) (13,420)
Translation adjustment (482) (482)
Net income 13,582 13,582
---------- ------- --------- --------- ------ ------- ---------
BALANCES, March 31, 1996 9,918,371 77,688 (927,766) (13,420) 200 53,379 117,847
Exercise of stock options 117,837 1,240 1,240
Income tax benefit from stock option transactions 110 110
Stock issued under Employee Stock Participation Plan 86,868 1,034 1,034
Acquisition of treasury stock (50,000) (725) (725)
Translation adjustment (492) (492)
Net income (9,197) (9,197)
---------- ------- --------- --------- ------ ------- ---------
BALANCES, March 31, 1997 10,123,076 80,072 (977,766) (14,145) (292) 44,182 109,817
Exercise of stock options 273,800 3,987 3,987
Income tax benefit from stock option transactions 867 867
Stock issued under Employee Stock Participation Plan 78,627 1,165 1,165
Translation adjustment 375 375
Net income 7,518 7,518
---------- ------- --------- --------- ------ ------- ---------
BALANCES, March 31, 1998 10,475,503 $86,091 (977,766) $(14,145) $ 83 $51,700 $123,729
---------- ------- --------- --------- ------ ------- ---------
---------- ------- --------- --------- ------ ------- ---------
</TABLE>
See notes to consolidated financial statements
27
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,518 $ (9,197) $ 13,582
Reconciliation of net income (loss) to net
provided by operating activities: -
Depreciation and amortization 6,190 6,491 5,627
Write-down of equipment - 11,382 -
Provision for doubtful accounts and sales returns 254 464 203
Write-off of in process research and development - - 905
Deferred income taxes 3,607 (5,050) 1,575
Changes in operating assets and liabilities:
Accounts receivable (3,374) 5,211 10,354
Inventories 495 10,789 718
Prepaid expenses and other (246) (2,643) 844
Accounts payable 15 (3,862) (14,841)
Accrued compensation and related benefits 3,900 1,030 (1,092)
Accrued sales commissions 494 105 (83)
Other accrued expenses (615) (829) (456)
Income taxes payable 2,817 110 (1,817)
---------- ---------- -----------
Net cash provided by operating activities 21,055 14,001 15,519
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of building - - (13,358)
Purchases of equipment and leasehold improvements (4,837) (14,696) (2,518)
Proceeds from disposition of equipment and
leasehold improvements 7,581 - -
Purchases of short-term investments (4,087) (11,072) (4,049)
Proceeds from maturities of short-term investments 6,000 9,000 6,202
Purchases of long-term investments (3,000) - (4,500)
Proceeds from sale of long-term investments - - 2,760
Other assets (416) 986 (857)
Acquisitions, net of cash acquired - - (355)
---------- ---------- -----------
Net cash provided by (used in)
investing activities 1,241 (15,782) (16,675)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,152 2,274 7,331
Long-term obligations (135) (99) -
Acquisition of treasury stock - (725) (13,420)
---------- ---------- -----------
Net cash provided by (used in) 5,017 1,450 (6,089)
---------- ---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 375 (492) (482)
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 27,688 (823) (7,727)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 48,479 49,302 57,029
---------- ---------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 76,167 $ 48,479 $ 49,302
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 391 $ 2,750 $ $ 7,275
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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, 1998 and 1997, there were no
significant differences between the fair market value and the underlying
cost of such investments. At March 31, 1998, short term investments
consisted of government agency securities of $2,000,000 and auction rate
securities of $1,140,000. 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.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are
stated at cost. Depreciation and amortization on plant and equipment are
computed using the straight-line method over the estimated useful lives of
the assets. Estimated useful lives are as follows:
Computer software and computer equipment 3-5 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 - In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
29
<PAGE>
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
rights of return and price protection on merchandise unsold by the
distributors. For sales made to distributors, reserves are provided for
estimated returns and price allowances at the time of shipment.
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 $19,000, $153,000, and
$347,000 in 1998, 1997 and 1996, 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, 1998,
there were no such foreign currency exchange contracts outstanding.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - Financial
instruments potentially subjecting the Company to concentrations of credit
risk consist primarily of accounts receivable and cash and short-term
investments. The majority of the Company's sales are derived from
manufacturers in the computer, communications and electronic imaging
industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for sales on credit.
The Company maintains reserves for estimated credit losses and such losses
have been within management's expectations. Approximately 12% of net
accounts receivable at March 31, 1998 relates to sales to customers in
Japan (21% at March 31, 1997). 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.
The Company participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a
material adverse effect on the Company's future financial position or
results of operations: advances and trends in new technologies;
competitive pressures in the form of new products or price reductions on
current products; changes in product mix; changes in the overall demand
for products and services offered by the Company; changes in certain
strategic partnerships or customer relationships; litigation or claims
against the Company based on intellectual property, patent, product,
regulatory or other factors; risks associated with changes in domestic
and international economic and/or political conditions or regulations;
availability of necessary components, and the Company's ability to
attract and retain employees necessary to support its growth.
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, 1998 and 1997 was not materially
different from the values presented in the consolidated balance sheets.
RECLASSIFICATIONS - Certain amounts in the 1997 financial statements have
been reclassified to conform to the 1998 presentation.
30
<PAGE>
2. INVENTORIES
Inventories at March 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Work in process $4,579 $ 4,987
Finished goods 2,202 2,289
-------- --------
Total $6,781 $7,276
-------- --------
</TABLE>
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Land $ 6,584 $ 6,561
Building 13,433 13,433
Machinery and equipment 40,817 44,072
Leasehold improvements 44 48
Construction in progress 1,607 1,376
--------- ---------
62,485 65,490
Accumulated depreciation and
amortization (35,739) (32,667)
--------- ---------
Total $ 26,746 $ 32,823
--------- ---------
--------- ---------
</TABLE>
4. BORROWING ARRANGEMENTS
The Company has a short-term, unsecured, bank line of credit under which it
may borrow up to $10,000,000. In addition, the Company has a credit
facility with certain domestic and foreign banks under which it may borrow
up to $25,000,000 in support of its foreign currency transactions.
Interest rates are based on the London Interbank Offered Rate "LIBOR"
(5.6875% at March 31, 1998). At March 31, 1998, no amounts were
outstanding under these credit arrangements.
31
<PAGE>
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31
consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 293 $ 1,112 $ 4,063
State 14 278 736
Foreign - 218 334
---------- ----------- ----------
307 1,608 5,133
---------- ----------- ----------
Deferred:
Federal 3,047 (4,090) 1,167
State 560 (960) 221
Foreign - - 187
---------- ----------- ----------
3,607 (5,050) 1,575
---------- ----------- ----------
Charge in lieu of taxes attributable
to employee stock plans 867 110 1,990
---------- ----------- ----------
Total $ 4,781 $ (3,332) $ 8,698
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
Consolidated pretax income (loss) includes foreign income (loss) of
approximately $(780,000), $(52,000), and $758,000 in 1998, 1997, and 1996,
respectively.
Current net deferred tax assets at March 31, 1998 and 1997 were $5,217,000
and $5,985,000, respectively. Non-current net deferred tax assets at March
31, 1998 and 1997 of $71,000 and $2,910,000, respectively, are included in
other assets within the accompanying balance sheets. Significant
components of the Company's net deferred tax assets at March 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Write-down of fixed assets $ - $ 4,705
Reserves and accruals not currently deductible 5,468 4,089
Net operating loss and tax credit carryforwards 615 1,864
General business credits 394 -
State income taxes 43 28
Other 168 4
---------- --------
Total deferred tax assets 6,688 10,690
---------- --------
Deferred tax liabilities:
Depreciation (1,070) (1,270)
Other (330) (525)
---------- --------
Total deferred tax liabilities (1,400) (1,795)
---------- --------
Net deferred tax assets $ 5,288 $ 8,895
---------- --------
---------- --------
</TABLE>
32
<PAGE>
No valuation allowance for deferred tax assets was required for the years
ended March 31, 1998 and 1997 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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate $ 4,305 $ (4,385) $ 7,798
Amortization and write-off of goodwill 371 770 460
State income taxes, net of federal income
tax benefit 457 606 1,091
Write-off of in-process research and development - - 317
Tax-exempt interest income (114) (60) (95)
Benefit of acquired net operating losses
not previously recognized - (70) -
Benefit of foreign sales corporation (175) (490) (533)
Foreign income taxed at rates higher than
U.S. tax rates (18) - 68
Other, net (45) 297 (408)
----------- ------------- -------------
Total $ 4,781 $ (3,332) $ 8,698
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The California income tax authorities may propose to assess income taxes
using the unitary taxation method for some or all of the fiscal years 1986
to 1990, which remain open to examination under the statute of limitations.
This taxation method has the effect of apportioning taxable income of 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, 1998.
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. NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," (SFAS 128). SFAS 128 requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Prior periods have been
restated to conform with SFAS 128.
33
<PAGE>
A summary of the Company's EPS is as follows (In thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
NET INCOME (LOSS) $ 7,518 $ (9,197) $ 13,582
--------- ---------- ----------
--------- ---------- ----------
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding
used in computation of basic net income
(loss) per share 9,326 9,071 9,495
Dilutive effect of stock options 404 - 430
--------- ---------- ---------
Shares used in computation of diluted net
income (loss) per share 9,730 9,071 9,925
--------- ---------- ---------
--------- ---------- ---------
BASIC NET INCOME (LOSS) PER SHARE $ 0.81 $ (1.01) $ 1.43
--------- ---------- ---------
--------- ---------- ---------
DILUTED NET INCOME (LOSS) PER SHARE $ 0.77 $ (1.01) $ 1.37
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Options to purchase 661,400 and 1,011,416 shares of common stock at prices
ranging from $21.50 to $37.25 and $16.09 to $37.25 were outstanding as of
March 31, 1998 and 1996, respectively, but not included in the computation
of diluted net income per share because the options' exercise prices were
greater than the average market price of the common shares as of such dates
and, therefore, would be anti-dilutive under the treasury stock method.
Diluted net loss per share for the year ended March 31, 1997 excludes
common equivalent shares, as their effect is anti-dilutive.
7. EMPLOYEE BENEFIT PLANS
EXAR SAVINGS PLAN - The Exar Savings Plan covers substantially all
employees of the Company. The Savings Plan provides for voluntary salary
reduction contributions in accordance with Section 401(k) of the Internal
Revenue Code as well as contributions from the Company based on the
achievement of specified operating results. Exar made contributions of
$379,000, $373,000 and $721,000, during 1998, 1997 and 1996, 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 $3,616,000, $547,000, and $478,000, 1998, 1997 and
1996, respectively. The Company's incentive plans may be amended or
discontinued at the discretion of the Board of Directors.
8. STOCKHOLDERS' EQUITY
PREFERRED SHARE PURCHASE RIGHTS PLAN - In December 1995, the Company's
Board of Directors (the Board) adopted a Preferred Share Purchase Rights
Plan under which the Board declared a dividend of one purchase right for
each outstanding share of common stock of Exar held as of January 10, 1996.
Each right entitles the registered holder to purchase one one-hundredth of
a share of Exar's Series A Junior Participating Preferred Stock at a price
of $118.50. The rights become exercisable ten days after the announcement
that an entity or person has commenced a tender offer to acquire or has
acquired 15% or more of the outstanding Exar common stock ("the
Distribution Date").
After the Distribution Date, the Board may exchange the rights at an
exchange ratio of one common share or one one-hundredth of a preferred
share per right. Otherwise, each holder of a right, other than rights
beneficially owned by the acquiring entity or person (which will thereafter
be void), will have the right to receive upon exercise that
34
<PAGE>
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 78,627 in 1998, 86,868 in 1997, and 77,749 in
1996 at weighted average prices of $14.81, $11.90 and $15.76, respectively.
The weighted average fair value of the fiscal 1998, 1997 and 1996 awards
was $6.15, $3.67 and $7.35 per share, respectively.
The Company has reserved 529,020 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 2,901,056 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.
During fiscal year 1998, shareholders approved 825,000 additional shares of
the Company's Common Stock to be reserved under the 1997 Equity Incentive
Plan (the "1997 Plan"). The 1997 plan differs from prior plans in that,
the 1997 Plan allows for selected employees and directors to elect to defer
$5,000 to $50,000 of their annual salaries in return for options to
purchase Common Stock at an aggregate discount from the current fair market
value equal to the salary reduction amount.
Option activity for both plans is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------
Weighted
Average
Exercise
Number of Price per
Shares Share
----------- ----------
<S> <C> <C>
Outstanding, April 1, 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 (645,589 exercisable at a weighted
Average price of $16.20) 1,921,385 16.22
Options granted (weighted average fair value of $12.62) 796,169 22.24
Options exercised (273,800) 14.56
Options canceled (250,432) 18.01
----------- ----------
Outstanding, March 31, 1998 2,193,322 $18.39
----------- ----------
----------- ----------
</TABLE>
35
<PAGE>
At March 31, 1998, 533,269 options were available for future grant under
both plans.
<TABLE>
<CAPTION>
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
- ------------------ ----------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.56 - $ 14.09 192,507 3.62 $12.31 120,931 $12.32
14.25 - 14.88 389,200 5.45 14.36 109,575 14.42
15.00 - 16.59 402,364 5.19 16.08 131,225 16.06
17.00 - 17.92 415,051 3.23 17.32 323,751 17.32
18.17 - 37.25 794,200 6.10 23.62 78,825 26.37
- ------------------ ----------- ------------ --------- ----------- --------------
$ 4.84 - $ 37.25 2,193,322 5.05 18.39 764,307 16.81
----------- -----------
----------- -----------
</TABLE>
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, 6.2 to 7.3 years; stock volatility, 44%,
35% and 49% in 1998, 1997 and 1996 respectively; risk free interest
rates, 6.0%, 6.9% and 6.8% in 1998, 1997 and 1996; respectively; and no
dividends during the expected term. The Company's calculations are
based on a single option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 1998, 1997
and 1996 awards had been amortized to expense over the vesting period of
the awards, pro forma net income (loss) would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------------- -----------
<S> <C> <C> <C>
Pro Forma Net Income (Loss) $4,696,000 $ (10,544,000) $13,049,000
---------- -------------- -----------
---------- -------------- -----------
Pro Forma Net Income (Loss) Per Share:
Basic $ 0.50 $ (1.16) $ 1.31
---------- -------------- -----------
---------- -------------- -----------
Diluted $ 0.48 $ (1.16) $ 1.31
---------- -------------- -----------
---------- -------------- -----------
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculation; accordingly, the 1998,
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.
9. ACQUIRED COMPANIES
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
36
<PAGE>
options with an aggregate value of $8,750,000, and cash of $4,450,000. The
Company paid certain key employees $1,176,000, $1,150,000 and $388,000
related to Startech's deferred compensation arrangement during 1998, 1997
and 1996, respectively. There are no further deferred compensation
obligations under this arrangement.
In June 1995, the Company acquired Silicon Microstructures, Inc., ("SMI")
in exchange for 43,334 shares of common stock, the conversion to equity of
$1,250,000 of loans previously granted to SMI and acquisition related costs
of $355,000. In addition, the Company may be required to issue up to
$1,500,000 in additional shares based on SMI's future operating performance
over the next three years. This has not been accrued and will be reflected
in the Company's consolidated financial statements when issued or paid.
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 $3.6 million of goodwill which is being amortized over a
period of five years. Certain other prior period acquisitions resulted in
goodwill which has been fully amortized as of March 31, 1998. The
remaining portion of the excess purchase price as a result of acquisitions
in fiscal 1996 represented in-process research and development which was
charged to operations, at the time of acquisition (approximately $.9
million in 1996).
10. RESTRUCTURING AND OTHER CHARGES
RESTRUCTURING
In the fourth quarter of fiscal 1997, the Company announced and began to
implement a restructuring plan to i) reduce manufacturing expenses by
transferring its test and shipping operations to off shore subcontractors,
ii) focus the Company's product strategy to provide analog and mixed signal
products for the video, imaging, communications and silicon sensor markets
and iii) narrow the Company's distribution channels to create more
leverage. The Company's restructuring actions consisted primarily of
writing down certain equipment as a result of the transfer of operations
and change in product focus; terminating 54 full-time employees, 44 of whom
have been terminated through March 31, 1998; writing down inventory
associated with product lines which are being discontinued; vacating
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 summarizes the restructuring and other
charges.
<TABLE>
<CAPTION>
Total Utilized Balance at Utilized Balance at
Restructuring In March 31, In March 31,
Charge 1997 1997 1998 1998
------------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Write-down of inventory $4,631 $4,631 $ -- $ -- $--
Write-down of equipment 3,382 3,382 -- -- --
Contract cancellations 684 394 290 290 --
Write-down of goodwill 441 441 -- -- --
Costs of vacating leases 439 -- 439 156 283
Payments to employees
Involuntarily terminated 399 204 195 129 66
------------- -------- ----------- --------- -----------
Total $9,976 $9,052 $924 $575 $349
------------- -------- ----------- --------- -----------
------------- -------- ----------- --------- -----------
</TABLE>
37
<PAGE>
OTHER CHARGES
During the fourth quarter of fiscal 1997, the Company incurred a charge of
$9 million relating to the write-down of capital assets and investments
made under the terms of a wafer production agreement and equity investment
agreements with IC Works, Inc. ("IC Works"). The charge was estimated in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" and reflects management's
estimate of the net realizable value of the equipment and investment in IC
Works. The Company terminated its 1995 wafer production agreement with the
foundry due to dramatically changed market conditions for wafer pricing and
availability, as well as the recent business redirection of Exar and delays
in the commencement of anticipated production by the foundry. During the
quarter ended December 31, 1997, the Company sold the capital assets
written down in connection with this prior year charge. The sales proceeds
exceeded the carrying value and, as a result, the Company reversed $1.2
million of the related reserve during the quarter. Offsetting this
reversal, the Company decided during the quarter to replace its current
information system under development with a system determined to better
meet the Company's needs and wrote off $1.2 million of capitalized costs
associated with system modules which the Company does not intend to use.
11. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities are leased under lease agreements
expiring through August 2001. Rent expense was $300,000 and $1,058,000 for
1997 and 1996 respectively. The Company expensed all future lease
obligations in 1997 as a part of the restructuring and other charges (see
Note 10).
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 $846,000 as of March 31, 1998.
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.
38
<PAGE>
12. GEOGRAPHIC AREA INFORMATION
The Company and its subsidiaries market products in the United States and
in foreign countries. The Company's foreign operations consist primarily
of its wholly owned subsidiaries in Japan and the United Kingdom.
Identifiable assets represent assets used in the Company's operations in
each geographic area. Geographic financial information for each year is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
(In thousands)
<S> <C> <C> <C>
Net sales:
United States $ 60,020 $ 53,374 $ 56,030
Export sales to Japan and Asia 16,852 13,160 34,354
Export sales to western Europe 21,001 15,144 14,280
Export sales to rest of world 1,110 1,200 1,847
Japan 3,032 9,465 19,061
Western Europe - - 194
------------ ----------- -----------
$ 102,015 $ 92,343 $ 125,766
------------ ----------- -----------
------------ ----------- -----------
Income (loss) from operations:
United States $ 9,350 (15,153) $ 18,105
Japan (467) (143) 559
Western Europe 103 58 95
------------ ----------- -----------
$ 8,986 $ (15,238) $ 18,759
------------ ----------- -----------
------------ ----------- -----------
Identifiable assets:
United States $ 141,422 $ 119,623 $ 130,321
Japan 2,102 5,739 8,580
Western Europe 145 175 173
------------ ----------- -----------
$ 143,669 $ 125,537 $139,074
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board adopted Statements
of Financial Accounting Standards No. 130 (Reporting Comprehensive Income),
which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and No. 131 (Disclosures about Segments of an Enterprise and
Related information), which establishes annual and interim reporting
standards for an enterprises business segments and related disclosures
about it's products, services, geographic areas, and major customers. The
Company has not yet identified its reporting segments under the new
standard. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For a listing of executive officers and certain key employees of the Company and
certain information about them, see Part I "Executive Officers of the Company."
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Proposal 1: Election of
Directors" contained in the Company's Definitive Proxy Statement filed not later
than 120 days following the close of the fiscal year ("Definitive Proxy
Statement").
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Market. Officers, directors and greater than ten-percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
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, 1998, 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."
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Index to Consolidated Financial Statements. The following Consolidated
Financial Statements of Exar Corporation and its subsidiaries are filed as part
of this Form 10-K:
<TABLE>
<CAPTION>
Form 10K
Page No.
<S> <C>
Independent Auditors' Reports 23-24
Consolidated Balance Sheets
March 31, 1998 and 1997 25
Consolidated Statements of Operations
for the years ended
March 31, 1998, 1997 and 1996 26
Consolidated Statements of Stockholders' Equity
for the years ended
March 31, 1998, 1997, and 1996 27
Consolidated Statements of Cash Flows
for the years ended
March 31, 1998, 1997 and 1996 28
Notes to Consolidated Financial
Statements 29-39
</TABLE>
(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, 1998, 1997 and 1996 are filed as part of this Form
10-K:
<TABLE>
<CAPTION>
Form 10K
Page No.
<S> <C>
II Valuation and Qualifying Accounts 45
and Reserves
</TABLE>
Schedules not listed above have been omitted because they are not applicable or
required, or the information required to be set forth therein is included in the
Consolidated Financial Statements or notes thereto.
41
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Footnote Number Description
<S> <C> <C>
(d) 2.1 Agreement and Plan of Reorganization
Dated June 3, 1994
(d) 2.2 First Amendment to Agreement and Plan of
Reorganization Dated March 31, 1995
(c) 3.1 Restated Certificate of Incorporation of the Company.
(c) 3.2 Bylaws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
(a)* 10.1 1986 Directors' Stock Option Plan of the Company, as
amended, and related forms of stock option grant and
exercise.
(b)* 10.2 1989 Employee Stock Participation Plan of the Company
and related Offering.
(c)* 10.3 1991 Stock Option Plan of the Company and related
forms of stock option grant and exercise.
(c)* 10.4 1991 Non-Employee Directors' Stock Option Plan of the
Company and related forms of stock option grant and
exercise.
* 10.5 Fiscal 1998 Key Employee Incentive Compensation
Program.
* 10.6 Fiscal 1998 Executive Incentive Compensation Program.
(e)* 10.7 1996 Non-Employee Directors' Stock Option Plan
(e)* 10.8 1997 Equity Incentive Plan
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
</TABLE>
- ----------------------------------
42
<PAGE>
<TABLE>
<S> <C>
(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.
(e) Filed as an exhibit to the Company's registration
statement on Form S-8 (Registration Statement No. 333-37369),
filed with the commission on October 7, 1998 and incorporated
herein by reference.
* Indicates management contracts or compensatory plans
and arrangements filed pursuant to Item 601(b)(10) of
Regulation S-K.
</TABLE>
- --------------------------------------------
(b) There were no reports filed on Form 8-K during the fourth quarter of 1998.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EXAR CORPORATION
By: /s/ Donald L. Ciffone Jr.
--------------------------
Donald L. Ciffone Jr.
Chief Executive Officer, President and Director
Date: June 19, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Donald L. Ciffone Jr. Chief Executive Officer, June 19, 1998
- ------------------------- President and Director
(Donald L. Ciffone Jr.)
/s/ Ronald W. Guire Executive Vice President,
- ------------------------- Chief Financial Officer June 19, 1998
(Ronald W. Guire) Secretary and Director
(Principal Financial and
Accounting Officer)
/s/ Raimon L. Conlisk Director and Chairman June 19, 1998
- ------------------------- of the Board
(Raimon L. Conlisk)
/S/ James E. Dykes Director June 19, 1998
- -------------------------
(James E. Dykes)
/s/ George D. Wells Director June 19, 1998
- -------------------------
(George D. Wells)
</TABLE>
44
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------
Balance at Balance
Beginning of Write-offs and at End
Classification Year Additions Recoveries of Year
- ------------------------------ -------------- --------- ---------------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1998:
Allowance for doubtful
accounts and sales returns $3,158 $ 716 $ 463 $3,411
- ------------------------------ -------------- --------- ---------------- ----------
Year ended March 31, 1997:
Allowance for doubtful
accounts and sales returns $2,692 $ 348 $ (118) $3,158
- ------------------------------ -------------- --------- ---------------- ----------
Year ended March 31, 1996:
Allowance for doubtful
accounts and sales returns $2,985 $ 203 $496 $2,692
- ------------------------------ -------------- --------- ---------------- ----------
</TABLE>
<PAGE>
EXHIBIT 10.5
PLAN DOCUMENT
KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM
FISCAL YEAR 1998
CONTENTS
--------
A. Purpose
B. Effective Dates
C. Plan Changes
D. Plan Administration
E. Participation
F. Overall Plan Concepts
G. Procedure
H. Method Of Calculation
I. Changes In Status
J. Interpretation Of Plan Terms
1
<PAGE>
A. PURPOSE
The purpose of the Key Employee Incentive Compensation Program is to
encourage and reward performance which contributes to the company's
success. Financial incentives which complement base salary will be awarded
to participants in the plan for achieving corporate and personal
objectives.
B. EFFECTIVE DATE
This fiscal 1998 Plan was approved by the Board of Directors on March 20,
1997. The period April 1, 1997 through March 31, 1998 will be used for
purposes of determining performance achievement and for payout
calculations.
C. PLAN CHANGES
The Company, at its sole discretion through the Board of Directors, may
amend, alter, or cancel this Key Employee Incentive Compensation Program at
any time.
D. PLAN ADMINISTRATION
The Key Employee Incentive Compensation Program will be administered by the
Plan Committee consisting of the President/CEO and the Executive Vice
President/CFO with the staff support of the Human Resources Director. The
role of the Plan Committee is to interpret the provisions and intent of the
plan, evaluate and determine eligibility and measurement criteria, assess
performance results, amend and modify the plan administration, and
communicate the Plan provisions to participants, as necessary. The
President/CEO will approve the final recommendations to be submitted for
Board of Directors' approval.
E. PARTICIPATION
Eligibility in the annual incentive plan is determined by the
recommendations of senior management and the approval of the President/CEO
and the Board of Directors.
1. NEW HIRES
(a) New hires after the beginning of the plan year who are approved
as participants will have prorated incentive awards.
(b) New hires in the final quarter (January 1 - March 31) of the plan
year are not eligible to participate for that plan year.
2. Since this is an ANNUAL plan, participation is established annually.
Participants in previous year(s) are not automatically included in
subsequent years. A number of factors may change from year to year,
such as: business conditions, individual employee contribution,
criticality of certain positions, etc.
3. Inclusion in the plan does not constitute a guarantee of employment or
specific earnings.
2
<PAGE>
F. OVERALL PLAN CONCEPTS
1. INCENTIVE POOL: The plan is funded when the established corporate
pre-tax profit objective is met as determined by the Board of
Directors. The minimum threshold for the corporate pre-tax profit
objective must be met before the incentive pool is funded.
2. INCENTIVE PAYOUT: Payout occurs when the pool is funded, when the
Corporate objectives are satisfactorily met and when personal
performance is satisfactory.
3. INCENTIVE AMOUNT: Individual payments are expressed as a percent of
the participant's annual base pay as of March 31 prior to the plan
year.
4. TARGET INCENTIVE AWARD: Participants selected for participation in
the plan will be assigned to one of several target incentive award
categories. The higher the level of importance of the position to the
success of the company, the higher the percentage of target incentive
award.
For Example:
Assume the participant is approved for a target incentive award of 15%
and the pre-tax target, and INDIVIDUAL personal targets are met at
exactly 100%, then the participant's performance incentive will be 15%
of his annual base salary (as of March 31, prior to the beginning of
the plan year). If the target is not met at 100%, but within the
threshold of the target, the payout will be reduced. If the target
and the individual performance are exceeded to the outstanding level
the payout could reach 150% of target award. In the above example
that would be 22.5% of annual base salary (15% x 150%).
G. PROCEDURE
The employee selected for inclusion in this Key Employee Incentive
Compensation Program will be notified in writing and provided a copy of the
corporate pre-tax profit target. Any changes in the plan or the
measurement criteria must be approved in writing by the President/CEO and
the Board of Directors.
Payment will be subject to ordinary deductions, such as FICA, SDI, and
income taxes. No other deduction will be made.
Payment, when earned, will be made as soon as administratively possible,
generally not later than 75 days after the end of the plan year.
H. METHOD OF CALCULATION
1. ESSENTIAL ELEMENTS OF CALCULATION
(a) INCENTIVE POOL FUNDING: The pool is funded when the corporate
pre-tax profit is met. If the profit is below the established
threshold, the pool will NOT be funded. If the objectives are met
just at threshold, the pool will be funded at 50%. If the target
objectives are met at 100%, the pool will be funded at 100%. If the
objectives are exceeded to the OUTSTANDING level, the pool will be
funded at 150%.
(b) PERSONAL CONTRIBUTION MODIFIER: Each participant's payout can be
modified based on individual contribution to Exar's success. The
personal objectives are related to the participant's critical job
responsibilities and are linked directly to departmental or corporate
objectives. The payout can be modified (increased/decreased) based on
appraisal by appropriate managers and approved by the President/CEO
and by the Board.
3
<PAGE>
2. ILLUSTRATIVE
CORPORATE PERFORMANCE PERSONAL CONTRIBUTION
------------------------ -------------------------
determines total size of x modifier determines amount
corporate pool funding of payout to individual
3. EXAMPLES
<TABLE>
<CAPTION>
EXAMPLE 1 EXAMPLE 2
------------- --------------
<S> <C> <C>
Employee's annual base salary (3/31/97) $ 70,000 $ 70,000
Target Incentive Award 20% (14,000) 15% (10,500)
Corporate Performance 105% 120%
Personal Contribution Modifier 85% 95%
</TABLE>
<TABLE>
<CAPTION>
TOTAL INDIV. TARGET
AWARD INCENTIVE INCENTIVE
CORP PERSONAL MODIFIER AWARD PAYMENT
- ---- -------- ------------ ---------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Example 1:
105% X 85% = 89.25% X $ 14,000 = 12,495.00
Example 2:
120% X 95% = 114% X $ 10,500 = $ 11,970
</TABLE>
I. CHANGES IN STATUS
1. Participants who give notice of termination or who terminate
employment, voluntarily or involuntarily, prior to the date of payout
are not eligible for payment.
2. Participants who retire or become totally disabled during the plan
year will receive the eligible award payment on a prorated basis.
3. If a participant dies during the plan year the employee's beneficiary
will receive the entire eligible payment.
4. Employees who, during the plan year, are promoted to incentive
eligible positions and are approved by the President and the Board of
Directors for inclusion in the Plan may receive payments on a prorated
basis. Employees promoted in the last quarter of the plan year are
not eligible in that year.
5. Rehired employees who were previously eligible as a participant in
this Plan must be approved as any other new participant.
4
<PAGE>
J. INTERPRETATION OF PLAN TERMS
The Plan Committee, with the approval of the Board of Directors, is
responsible for the interpretation of this plan. Any resolution or dispute
regarding eligibility, determination of procedures, measurements, or awards
is the sole responsibility of the Plan Committee with Board of Directors'
approval.
I acknowledge receiving a copy of the Plan Document Fiscal 1998 Key Employee
Incentive Compensation Program for the period April 1, 1997 through March 31,
1998. I have read and understand the terms of this Plan, and also understand
that this plan neither constitutes a contract of employment nor a
representation as to my future earnings. The Letter of Notification and the
Plan constitute the entire agreement and supersede any prior written and oral
agreements. I understand that participants are eligible for payment only
when corporate and individual performance measures are met. I understand
that should I terminate employment or submit notice of termination on or
before the date of payout I forfeit all rights to the payout. Further, I
understand that the President/CEO and the Board of Directors have the sole
discretionary authority for interpreting the provisions of the plan,
determining eligibility, and approving any payout.
_____________________________
Employee Name
_____________________________
Employee Signature
_____________________________
Date
5
<PAGE>
Example:
KEY EMPLOYEE
Base Salary: 80K
Target Award: 25% ($20K)
Max Award: 37.5% ($30K)
Individual Performance Factor (MBO's): 105%
Corporate Results:
Profit Achievement $10.1M (at threshold)
Pool Funding 50% ($625K)
Formula:
$80K x .25 x .50 x 1.05 = $10.5K
- - - - -
Base T.A. Corp. Pers Prelimary
Modif. Perf. Payout
Modify. Calculation
AVAILABLE KEY I.C. POOL
@ Target = $1.25M
Corp. Performance = 50%
Final Pool (.59 x 580K) = $625K
If the sum of the preliminary payout calculations for all participants
exceeds the final pool, participant payouts are reduced proportionately.
6
<PAGE>
EXHIBIT 10.6
PLAN DOCUMENT
EXECUTIVE INCENTIVE COMPENSATION PROGRAM
FISCAL YEAR 1998 PLAN
1.0 INTENT
The intention of the Executive Incentive Compensation Program for Fiscal
Year 1998 is to provide incentives to eligible Exar Corporation executives
for achieving or surpassing established revenue and pre-tax profit goals
derived from the FY 1998 Financial Plan. (see Attachment 1, FY 1998
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/CEO or Executive
Vice-President/CFO 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. The pre-tax profit goal must be met
at the 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 Year 1998 Key Employee Incentive Program
3.2 Calculation for Pool Funding
The size of the executive pool is the sum of the fiscal year 1998
annual base salary of the participants times their respective 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 fiscal year 1998. Use the table in Attachment 2 to
determine the pool size. For example, if the actual revenue level
were $95M, the pool for revenue achievement would be $149.8K. If the
pre-tax profit were $11.6M, the pool for the pre-tax profit
achievement would be $300K. The total pool would be $449.8K ($149.8K
+ $300K).(see Attachment 4 for example)
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. (see
Attachment 4 for example of individual calculation)
1
<PAGE>
4.0 RULES
4.1 Pre-tax profits or revenues generated by "creative accounting" or 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 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.
4.6 The Compensation Committee determines the target award for
participants. (See Attachment 3, Participants)
4.7 The program is to be in force for FY'98, and only those who are in the
employ of the company and still a member of the eligible executive
group through the date of payout will qualify for payments.
4.8 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.
2
<PAGE>
Example:
EXECUTIVE
Base Salary: 200K
Target Award (T.A.): 40% ($80K)
Max Award: 100% ($200K)
Individual Performance Factor (MBO's): 95%
Corporate Results:
% OF POOL
TARGET FUNDING %
------- ----------
Revenue Achievement $101 101% 68%
Profit Achievement $10.1M 87% 25%
Corporate Modifier 93%
Formula:
$200K x .40 x .93 x .95 = $70,680
_ _ _ _ _
Base T.A. Corp. Indiv. Prelimary
Modif. Perf. Payout
Modif. Calculation
AVAILABLE EXECUTIVE POOL
@ Target = $600K
Corp. Performance = 93%
Final Pool (.93 x 600K) = $558K
If the sum of the preliminary payout calculations for all participants exceeds
the final pool, participant payouts are reduced proportionately.
3
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
1. Exar International, Inc. (a Virgin Islands Foreign Sales corporation).
2. Exar Japan Corporation (a Japan corporation).
3. Micro Power Systems, Inc. (a California corporation).
4. Silicon Microstructures, Inc. (a California corporation).
5. Exar Ltd., (a United Kingdom Limited Liability corporation).
6. Exar SARL (a French Limited Liability corporation).
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exar Corporation:
We consent to the incorporation by reference in registration statements (Nos.
33-58991, 333-37369 and 333-37371) on Form S-8 and (No. 33-59071) on Form S-3 of
Exar Corporation of our report dated April 23, 1998, appearing in this Annual
Report on Form 10-K of Exar Corporation for the year ended March 31, 1998.
DELOITTE & TOUCHE, LLP
San Jose, California
June 19, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exar Corporation:
We consent to the incorporation by reference in the registration statements
on Form S-8 (No. 33-58991, 333-37369 and 333-37371) and Form S-3 (No.
33-59071) of Exar Corporation of our report dated May 2, 1996, relating to
the consolidated statements of operations, stockholders' equity, and cash
flows of Exar Corporation and subsidiaries for the year ended March 31, 1996,
and the related consolidated financial statement schedule, which report
appears in the March 31, 1998, annual report on Form 10-K of Exar Corporation.
KPMG PEAT MARWICK LLP
Mountain View, California
June 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 76,167
<SECURITIES> 3,140
<RECEIVABLES> 16,764
<ALLOWANCES> 0
<INVENTORY> 6,781
<CURRENT-ASSETS> 109,590
<PP&E> 26,746
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,669
<CURRENT-LIABILITIES> 19,195
<BONDS> 0
71,946
0
<COMMON> 0
<OTHER-SE> 51,783
<TOTAL-LIABILITY-AND-EQUITY> 143,669
<SALES> 102,015
<TOTAL-REVENUES> 102,015
<CGS> 51,937
<TOTAL-COSTS> 93,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 12,299
<INCOME-TAX> 4,781
<INCOME-CONTINUING> 7,518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,518
<EPS-PRIMARY> .81
<EPS-DILUTED> .77
</TABLE>
