<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 2000
REGISTRATION NO. 333-30398
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EXAR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 94-1741481
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
48720 KATO ROAD
FREMONT, CALIFORNIA 94538
(510) 668-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
DONALD L. CIFFONE, JR.
CHIEF EXECUTIVE OFFICER
EXAR CORPORATION
48720 KATO ROAD
FREMONT, CALIFORNIA 94538
(510) 668-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT L. JONES, ESQ. PETER T. HEALY, ESQ.
MATTHEW W. SONSINI, ESQ. O'MELVENY & MYERS LLP
COOLEY GODWARD LLP Embarcadero Center West
Five Palo Alto Square 275 Battery Street
3000 El Camino Real San Francisco, California 94111
Palo Alto, California 94036 (415) 984-8833
(650) 843-5000
</TABLE>
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value.... 3,450,000 $69.56 $239,990,625 $63,358
</TABLE>
(1) Includes 450,000 shares of common stock issuable upon exercise of the
Underwriter's over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and based
upon the average high and low sales prices on February 29, 2000 as reported
on the Nasdaq National Market.
(3) Of this amount, $33,882 has already been paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed without
notice. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale of these securities is not
permitted.
<PAGE>
Prospectus (Not Complete)
Issued March 7, 2000
3,000,000 SHARES
[LOGO]
EXAR CORPORATION
COMMON STOCK
----------------
Exar Corporation is offering 3,000,000 shares of common stock in a firmly
underwritten offering.
------------------------
Our common stock is traded on the Nasdaq National Market under the symbol
"EXAR." The last reported sale price for our common stock on the Nasdaq National
Market on March 6, 2000 was $82.81 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
---------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Offering Price.............................................. $ $
Discounts and Commissions to Underwriters................... $ $
Offering Proceeds to Exar................................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters the right to purchase up to an additional
450,000 shares of common stock to cover any over-allotments. The underwriters
can exercise this right at any time within thirty days after the offering. Banc
of America Securities LLC expects to deliver the shares of common stock to
investors on , 2000.
BANC OF AMERICA SECURITIES LLC
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
NEEDHAM & COMPANY, INC.
------------------------
, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Price Range of Our Common Stock............................. 14
Capitalization.............................................. 15
Selected Consolidated Financial Data........................ 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 26
Management.................................................. 35
Underwriting................................................ 38
Legal Matters............................................... 40
Experts..................................................... 40
Where You Can Find More Information......................... 41
Index to Consolidated Financial Statements.................. F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
Information contained in our web site does not constitute part of this
document.
EXAR and the Exar logos are our trademarks in the U.S. and other
jurisdictions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that may be
important to you. You should read the entire prospectus carefully, including the
financial data and related notes, before making an investment decision. The
terms "we," "us," "our" and "Exar Corporation" mean Exar Corporation and its
subsidiaries. Unless otherwise indicated, all information in this prospectus
(i) assumes that the underwriters do not exercise their over-allotment option
and (ii) reflects a three-for-two stock split effected on February 15, 2000.
EXAR CORPORATION
We design, develop and market high-performance, high-bandwidth mixed-signal
(analog and digital) silicon solutions for the worldwide communications
infrastructure. Our analog and mixed-signal design expertise, combined with our
systems understanding, enables us to provide integrated circuits, or ICs, for
wide area network, or WAN, equipment that enables high-speed communications. Our
customers include leading communications original equipment manufacturers, or
OEMs, such as Alcatel Alsthom S.A., Cisco Systems, Inc., Lucent Technologies
Inc., Nokia Corporation and Tellabs, Inc.
The volume of data traffic across the public communications network has
increased significantly in the past few years. As a result, the existing
communications infrastructure does not have the bandwidth to accommodate the
increased levels of traffic. Significant bottlenecks in today's communications
infrastructure are the points at which the copper, coaxial or fiber optic
transmission media connect to the WAN. To address the dramatic growth in traffic
and this particular bottleneck, communications OEMs must develop and introduce
sophisticated systems that incorporate increasingly complex communications ICs
that enhance the bandwidth of this bridge between the analog physical world and
the digital computing environment.
We provide physical interface and access control ICs for communications
equipment that is based upon the T/E carrier and Asynchronous Transfer Mode, or
ATM, transmission standards, and we are developing products for the Synchronous
Optical Network/Synchronous Digital Hierarchy, or SONET/ SDH, transmission
standards. We provide our customers with complete solutions that include
hardware, software and application support, thereby facilitating system
integration and reducing our customers' time to market. Additionally, our
substantial analog and mixed-signal design expertise and use of standard CMOS
semiconductor manufacturing processes, enable us to offer ICs that provide
compelling price/performance solutions for communications OEMs. We also provide
ICs for the serial communications market and the video and imaging markets.
Our objective is to be the leading provider of high-performance,
high-bandwidth ICs for the worldwide communications infrastructure. Our
strategies for achieving this objective include:
- focusing on high-growth communications markets;
- leveraging our analog and mixed-signal expertise to provide integrated
system level solutions;
- expanding our revenue content per system;
- strengthening and expanding strategic OEM relationships;
- leveraging our broad product portfolio to accelerate communications
product development;
- using CMOS process technologies to provide compelling price/performance
solutions; and
- leveraging the fabless semiconductor business model.
Our principal executive offices are located at 48720 Kato Road, Fremont, CA
94538, and our telephone number is (510) 668-7000.
1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Exar............................ 3,000,000 shares
Common stock to be outstanding after this offering...... 17,927,575 shares
Use of proceeds......................................... For capital expenditures and general
corporate purposes, including working
capital.
Nasdaq National Market symbol........................... EXAR
</TABLE>
- ------------------------
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of January 31, 2000 and
does not include the following:
- 3,678,756 shares of common stock issuable upon exercise of outstanding
stock options with a weighted average exercise price of $15.03 per share;
- 1,114,257 additional shares reserved for future issuance under our stock
option plans; and
- 1,229,026 additional shares reserved for sale under our employee stock
purchase plan.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present our summary consolidated statement of
operations data for fiscal 1996 through 1999 and our summary consolidated
balance sheet data as of December 31, 1999. Consolidated balance sheet data is
presented on an actual basis and as adjusted to reflect the sale of 3,000,000
shares of common stock offered by us in this offering at an assumed public
offering price of $82.81 per share and after deducting the estimated
underwriting discounts and commissions and offering expenses and giving effect
to the application of the net proceeds. The summary consolidated financial data
gives effect to the three-for-two stock split effected on February 15, 2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------- -------------------
1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales........................... $125,766 $ 92,343 $102,015 $71,868 $56,770 $55,509
Gross profit........................ 63,549 36,883 50,078 38,482 30,266 31,100
Income (loss) from operations....... 18,759 (15,238) 8,986 4,051 3,882 1,076
Net income (loss)................... 13,582 (9,197) 7,518 5,424 4,705 8,051
Net income (loss) per share:
Basic............................. $ 0.95 $ (0.68) $ 0.54 $ 0.39 $ 0.33 $ 0.57
Diluted........................... $ 0.91 $ (0.68) $ 0.52 $ 0.38 $ 0.32 $ 0.52
Shares used in the computation of
net income (loss) per share:
Basic............................. 14,243 13,606 13,989 14,088 14,127 14,128
Diluted........................... 14,888 13,606 14,595 14,400 14,512 15,556
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $111,722 $346,359
Total assets................................................ 155,992 390,629
Long-term obligations....................................... 582 582
Retained earnings........................................... 65,175 65,175
Stockholders' equity........................................ 138,825 373,462
</TABLE>
3
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE INVESTING IN
OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS
COULD BE HARMED. THIS COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE, AND YOU MAY
LOSE PART OR ALL OF YOUR INVESTMENT. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS ABOUT
FUTURE PLANS, OBJECTIVES, INTENTIONS AND EXPECTATIONS. MANY FACTORS, INCLUDING
THOSE DESCRIBED BELOW, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE DISCUSSED IN ANY FORWARD-LOOKING STATEMENT.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY BECAUSE OF A NUMBER OF FACTORS,
MANY OF WHICH ARE BEYOND OUR CONTROL.
Our operating results fluctuate significantly. Some of the factors that
affect our quarterly and annual results, many of which are difficult to control
or predict, are:
- the reduction, rescheduling or cancellation of orders by customers;
- fluctuations in the timing and amount of customer requests for product
shipments;
- fluctuations in the manufacturing output, yields and inventory levels of
our suppliers;
- changes in the mix of products that our customers purchase;
- our ability to introduce new products on a timely basis;
- the announcement or introduction of products by our competitors;
- the availability of third-party foundry capacity and raw materials;
- competitive pressures on selling prices;
- the amounts and timing of costs associated with product warranties and
returns;
- the amounts and timing of investments in research and development;
- market acceptance of our products;
- costs associated with acquisitions and the integration of acquired
operations;
- the ability of our customers to obtain components from their other
suppliers;
- general conditions in the communications and semiconductor industries;
- fluctuations in interest rates; and
- general economic conditions.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE; THEREFORE, OUR SUCCESS
DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
- rapidly changing technologies;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.
To develop new products for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise. In addition, we must have
our products designed into our customers' future products and maintain close
working relationships with key customers in order to develop new products that
meet their changing needs.
4
<PAGE>
In addition, products for communications applications are based on
continually evolving industry standards. Our ability to compete will depend on
our ability to identify and ensure compliance with these industry standards. As
a result, we could be required to invest significant time and effort and to
incur significant expense to redesign our products to ensure compliance with
relevant standards.
We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors. In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense. Failure in any
of these areas could harm our operating results.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY
ENGINEERING AND MANAGEMENT PERSONNEL AND OUR ABILITY TO IDENTIFY, HIRE AND
RETAIN ADDITIONAL PERSONNEL.
There is intense competition for qualified personnel in the semiconductor
industry, in particular the highly skilled design, applications and test
engineers involved in the development of new communications ICs. Competition is
especially intense in the Silicon Valley, where our corporate headquarters is
located. We may not be able to continue to attract and retain engineers or other
qualified personnel necessary for the development of our business or to replace
engineers or other qualified personnel who may leave our employ in the future.
Our anticipated growth is expected to place increased demands on our resources
and will likely require the addition of new management and engineering personnel
and the development of additional expertise by existing management personnel.
Loss of the services of, or failure to recruit, key engineers or other technical
and management personnel could harm our business.
WE DEPEND ON THIRD-PARTY FOUNDRIES TO MANUFACTURE OUR ICS.
We do not own or operate a semiconductor fabrication facility. Most of our
products are based on CMOS processes. Although two foundries manufacture our
products based on CMOS processes, most are manufactured at a single foundry. In
addition, one foundry manufactures most of our BiCMOS products. We do not have
long-term wafer supply agreements with our CMOS foundries that guarantee wafer
or product quantities, prices, delivery or lead times, as our CMOS foundries
manufacture our products on a purchase order basis. We provide these foundries
with rolling forecasts of our production requirements; however, the ability of
each foundry to provide wafers to us is limited by the foundry's available
capacity. Therefore, our CMOS foundries could choose to prioritize capacity for
other customers or reduce or eliminate deliveries to us on short notice.
Accordingly, we cannot be certain that these foundries will allocate sufficient
capacity to satisfy our requirements. In addition, we cannot be certain that we
will continue to do business with our foundries on terms as favorable as our
current terms. Other significant risks associated with our reliance on
third-party foundries include:
- the lack of control over delivery schedules;
- the unavailability of, or delays in obtaining access to, key process
technologies;
- limited control over quality assurance, manufacturing yields and
production costs; and
- potential misappropriation of our intellectual property.
We could experience a substantial delay or interruption in the shipment of
our products or an increase in our costs due to the following:
- a sudden demand for semiconductor devices;
- a manufacturing disruption experienced by one or more of our foundries or
sudden reduction or elimination of any existing source or sources of
semiconductor devices;
- time required to identify or qualify alternative manufacturing sources for
existing or new products; or
5
<PAGE>
- failure of our suppliers to obtain the raw materials and equipment used in
the production of our ICs.
TO SECURE FOUNDRY CAPACITY, WE MAY BE REQUIRED TO ENTER INTO FINANCIAL AND OTHER
ARRANGEMENTS WITH FOUNDRIES, AND SUCH AGREEMENTS MAY RESULT IN THE DILUTION OF
OUR EARNINGS OR THE OWNERSHIP OF OUR STOCKHOLDERS OR OTHERWISE HARM OUR
OPERATING RESULTS.
Allocation of a foundry's manufacturing capacity may be influenced by a
customer's size or the existence of a long-term agreement with the foundry. To
address foundry capacity constraints, we and other semiconductor companies that
rely on third-party foundries have utilized various arrangements, including
equity investments in or loans to foundries, in exchange for guaranteed
production capacity, joint ventures to own and operate foundries, or "take or
pay" contracts that commit a company to purchase specified quantities of wafers
over extended periods. While we are not currently a party to any of these
arrangements, we may decide to enter into these arrangements in the future. We
cannot be sure, however, that these arrangements will be available to us on
acceptable terms or at all. Any of these arrangements could require us to commit
substantial capital and, accordingly, could require us to obtain additional debt
or equity financing. This could result in the dilution of our earnings or the
ownership of our stockholders or otherwise harm our operating results.
IF OUR FOUNDRIES DISCONTINUE THE MANUFACTURING PROCESSES NEEDED TO MEET OUR
DEMANDS, OR FAIL TO UPGRADE THE TECHNOLOGIES NEEDED TO MANUFACTURE OUR PRODUCTS,
WE MAY FACE PRODUCTION DELAYS.
Our wafer and product requirements typically represent a small portion of
the total production of the foundries that manufacture our products. As a
result, we are subject to the risk that a foundry will cease production on an
older or lower-volume process that it uses to produce our parts. Additionally,
we cannot be certain our foundries will continue to devote resources to the
production of our products or continue to advance the process design
technologies on which the manufacturing of our products is based. Each of these
events could increase our costs and harm our ability to deliver our products on
time.
THE MARKETS IN WHICH WE PARTICIPATE ARE INTENSELY COMPETITIVE.
Our target markets are intensely competitive. Our ability to compete
successfully in our target markets depends on the following factors:
- designing new products that implement new technologies;
- subcontracting the manufacture of new products and delivering them in a
timely manner;
- product quality and reliability;
- technical support and service;
- timely product introduction;
- product performance;
- product features;
- price;
- end-user acceptance of our customers' products;
- compliance with evolving standards; and
- market acceptance of competitors' products.
In addition, our competitors or customers may offer new products based on
new technologies, industry standards or end-user or customer requirements,
including products that have the potential to replace or provide lower-cost or
higher-performance alternatives to our products. The introduction of new
products by our competitors or customers could render our existing and future
products obsolete
6
<PAGE>
or unmarketable. In addition, our competitors and customers may introduce
products that integrate the functions performed by our ICs on a single IC, thus
eliminating the need for our products.
Because the IC markets are highly fragmented, we generally encounter
different competitors in our various market areas. Competitors with respect to
our communications products include Conexant Systems Inc., PMC-Sierra, Inc. and
TranSwitch Corporation. In addition, the expansion of our communications product
portfolio may in the future bring us into competition with other established
communications IC companies, such as Applied Micro Circuits Corp. and Vitesse
Semiconductor Corporation. Competitors in our other markets include Analog
Devices Incorporated, Philips Electronics and Texas Instruments Incorporated.
Many of our competitors have greater financial, technical and management
resources than we do. Some of these competitors may be able to sell their
products at prices below which it would be profitable for us to sell our
products.
IF WE ARE UNABLE TO FURTHER PENETRATE THE MARKETS FOR COMMUNICATIONS ICS OR IF
THESE MARKETS FAIL TO GROW AS EXPECTED, OUR REVENUES COULD STOP GROWING AND MAY
DECLINE.
A significant portion of our revenues in recent periods has been, and is
expected to continue to be, derived from sales of communications ICs,
particularly products based on the T/E carrier and ATM transmission standards.
In order for us to be successful, we must continue to penetrate these markets.
Furthermore, if these markets fail to grow as expected, our business could be
harmed.
WE EXPECT THAT REVENUES CURRENTLY DERIVED FROM NON-COMMUNICATIONS PRODUCTS WILL
DECLINE IN FUTURE PERIODS, AND OUR BUSINESS WILL BE HARMED IF OUR COMMUNICATIONS
PRODUCTS FAIL TO COMPENSATE FOR THIS DECLINE.
We do not intend to increase our funding of development efforts relating to
our video and imaging and other non-communications products, and as a result
revenues from these products may decline in future periods. In addition, the
markets for these products are subject to extreme price competition, and we may
not be able to reduce our costs in response to declining average selling prices.
Even if we reduce our costs, our customers in these markets may not purchase
these products. Moreover, these markets may decrease in size in the future. If
our communications products fail to compensate for any revenue shortfall, our
business could be harmed.
OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST OUR PRODUCTS
SUBJECTS US TO A NUMBER OF RISKS, INCLUDING AN INADEQUATE SUPPLY OF PRODUCTS AND
HIGHER MATERIALS COSTS.
We depend on independent subcontractors for the assembly and testing of our
products. Our reliance on these subcontractors involves the following
significant risks:
- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of excess demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other factors;
and
- potential misappropriation of our intellectual property.
These risks may lead to delayed product delivery or increased costs, which
would harm our profitability and customer relationships.
7
<PAGE>
OUR RELIANCE UPON FOREIGN SUPPLIERS EXPOSES US TO RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
We use semiconductor wafer foundries and assembly and test subcontractors
throughout Asia for most of our products. We intend to continue transferring our
testing and shipping operations to foreign subcontractors. Our dependence on
these subcontractors involves the following substantial risks:
- political and economic instability;
- disruption to air transportation from Asia; and
- changes in tax laws, tariffs and freight rates.
These risks may lead to delayed product delivery or increased costs, which
would harm our profitability and customer relationships.
OUR RELIANCE ON FOREIGN CUSTOMERS COULD CAUSE FLUCTUATIONS IN OUR OPERATING
RESULTS.
International sales accounted for 36.5% of net sales for fiscal year 1999
and 35.1% of net sales for the nine months ended December 31, 1999.
International sales may account for an increasing portion of our revenues, which
would subject us to the following risks:
- changes in regulatory requirements;
- tariffs and other barriers;
- timing and availability of export licenses;
- political and economic instability;
- difficulties in accounts receivable collections;
- difficulties in staffing and managing foreign subsidiary and branch
operations;
- difficulties in managing distributors;
- difficulties in obtaining governmental approvals for communications and
other products;
- limited intellectual property protection;
- foreign currency exchange fluctuations;
- the burden of complying with and the risk of violating a wide variety of
complex foreign laws and treaties; and
- potentially adverse tax consequences.
In addition, because sales of our products have been denominated to date
primarily in United States Dollars (except in Japan, where we transact a portion
of our business in Japanese Yen), increases in the value of the United States
Dollar could increase the relative price of our products so that they become
more expensive to customers in the local currency of a particular country.
Future international activity may result in increased foreign currency
denominated sales. Furthermore, because some of our customer purchase orders and
agreements are governed by foreign laws, we may be limited in our ability to
enforce our rights under these agreements and to collect damages, if awarded.
WE RELY ON OUR DISTRIBUTORS AND SALES REPRESENTATIVES TO SELL MANY OF OUR
PRODUCTS.
We sell many of our products through distributors and sales representatives.
Our distributors and sales representatives could reduce or discontinue sales of
our products. They may not devote the resources necessary to sell our products
in the volumes and within the time frames that we expect. In addition, we depend
upon the continued viability and financial resources of these distributors and
sales representatives, some of which are small organizations with limited
working capital. These distributors and sales representatives, in turn, depend
substantially on general economic conditions and conditions within the
semiconductor industry. We believe that our success will continue to depend upon
these distributors and sales representatives. If some or all of our distributors
and sales representatives
8
<PAGE>
experience financial difficulties, or otherwise become unable or unwilling to
promote and sell our products, our business could be harmed.
BECAUSE OUR COMMUNICATIONS ICS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY
EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND
DEVELOPMENT AND THE GENERATION OF SALES REVENUE.
Due to the communications IC product cycle, it usually takes us more than 12
months to realize volume shipments after we first contact a customer. We first
work with customers to achieve a design win, which may take nine months or
longer. Our customers then complete the design, testing and evaluation process
and begin to ramp up production, a period which typically lasts an additional
three months or longer. As a result, a significant period of time may elapse
between our research and development efforts and our realization of revenue, if
any, from volume purchasing of our communications products by our customers.
OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE.
Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business.
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, AND WE MAY ORDER MATERIALS IN
ADVANCE OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, WE HAVE LIMITED ABILITY TO
REDUCE EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE SHORTFALLS.
Our operating expenses are relatively fixed, and, therefore, we have limited
ability to reduce expenses quickly in response to any revenue shortfalls.
Consequently, our operating results will be harmed if our revenues do not meet
our revenue projections. We may experience revenue shortfalls for the following
reasons:
- significant pricing pressures that occur because of declines in average
selling prices over the life of a product;
- sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers and, in turn, harm our ability to
meet our sales obligations; and
- the reduction, rescheduling or cancellation of customer orders.
In addition, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which is highly unpredictable and can
fluctuate substantially. From time to time, in response to anticipated long lead
times to obtain inventory and materials from our outside suppliers and
foundries, we may order materials in advance of anticipated customer demand.
This advance ordering may result in excess inventory levels or unanticipated
inventory write-downs if expected orders fail to materialize.
PERIODS OF RAPID GROWTH AND EXPANSION COULD CONTINUE TO PLACE A SIGNIFICANT
STRAIN ON OUR LIMITED PERSONNEL AND OTHER RESOURCES.
To manage our possible future growth effectively, we will be required to
continue to improve our operational, financial and management systems and to
successfully hire, train, motivate and manage our employees. In addition, the
integration of past and future potential acquisitions and the evolution of our
business plan will require significant additional management, technical and
administrative resources. We cannot be certain that we will be able to manage
the growth and evolution of our current business effectively.
9
<PAGE>
WE HAVE IN THE PAST AND MAY IN THE FUTURE MAKE ACQUISITIONS, WHICH WILL INVOLVE
NUMEROUS RISKS. WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO ADDRESS THESE RISKS
SUCCESSFULLY WITHOUT SUBSTANTIAL EXPENSE, DELAY OR OTHER OPERATIONAL OR
FINANCIAL PROBLEMS.
The risks involved with acquisitions include:
- diversion of management's attention;
- failure to retain key personnel;
- amortization of acquired intangible assets;
- customer dissatisfaction or performance problems with an acquired company;
- the cost associated with acquisitions and the integration of acquired
operations; and
- assumption of known or unknown liabilities or other unanticipated events
or circumstances.
We cannot assure you that we will be able to address these risks
successfully without substantial expense, delay or other operational or
financial problems.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY.
Our ability to compete is affected by our ability to protect our
intellectual property rights. We rely on a combination of patents, trademarks,
copyrights, mask work registrations, trade secrets, confidentiality procedures
and non-disclosure and licensing arrangements to protect our intellectual
property rights. Despite these efforts, we cannot be certain that the steps we
take to protect our proprietary information will be adequate to prevent
misappropriation of our technology, or that our competitors will not
independently develop technology that is substantially similar or superior to
our technology.
More specifically, we cannot assure you that our pending patent applications
or any future applications will be approved, or that any issued patents will
provide us with competitive advantages or will not be challenged by third
parties. Nor can we assure you that, if challenged, our patents will be found to
be valid or enforceable, or that the patents of others will not have an adverse
effect on our ability to do business. Furthermore, others may independently
develop similar products or processes, duplicate our products or processes or
design around any patents that may be issued to us.
WE COULD BE HARMED BY LITIGATION INVOLVING PATENTS AND OTHER INTELLECTUAL
PROPERTY RIGHTS.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
We may be accused of infringing the intellectual property rights of third
parties. Furthermore, we have certain indemnification obligations to customers
with respect to the infringement of third-party intellectual property rights by
our products. We cannot be certain that infringement claims by third parties or
claims for indemnification by customers or end users of our products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not harm our business.
Any litigation relating to the intellectual property rights of third
parties, whether or not determined in our favor or settled by us, would at a
minimum be costly and could divert the efforts and attention of our management
and technical personnel. In the event of any adverse ruling in any such
litigation, we could be required to pay substantial damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or obtain a license under the intellectual property rights of
the third party claiming infringement. A license might not be available on
reasonable terms, or at all.
EARTHQUAKES AND OTHER NATURAL DISASTERS MAY DAMAGE OUR FACILITIES OR THOSE OF
OUR SUPPLIERS.
Our corporate headquarters in California is located near major earthquake
faults which have experienced earthquakes in the past. In addition, some of our
suppliers are located near fault lines. In
10
<PAGE>
the event of a major earthquake or other natural disaster near our headquarters,
our operations could be harmed. Similarly, a major earthquake or other natural
disaster near one or more of our major suppliers, like the one that occurred in
Taiwan in September 1999, could disrupt the operations of those suppliers, which
could limit the supply of our products and harm our business.
OUR STOCK PRICE IS VOLATILE.
The market price of our common stock has fluctuated significantly to date.
In the future, the market price of our common stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in:
- our anticipated or actual operating results;
- announcements or introductions of new products;
- technological innovations or setbacks by us or our competitors;
- conditions in the communications and semiconductor markets;
- the commencement of litigation;
- changes in estimates of our performance by securities analysts;
- announcements of merger or acquisition transactions; and
- general economic and market conditions.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that have affected the market prices of many high
technology companies, particularly semiconductor companies, and that have often
been unrelated or disproportionate to the operating performance of companies.
These fluctuations, as well as general economic and market conditions, may harm
the market price of our common stock.
THE ANTI-TAKEOVER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND OF THE
DELAWARE GENERAL CORPORATION LAW MAY DELAY, DEFER OR PREVENT A CHANGE OF
CONTROL.
Our board of directors has the authority to issue up to 2,250,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
and restrictions, including voting rights, of those shares without any further
vote or action by our stockholders. The rights of the holders of common stock
will be subject to, and may be harmed by, the rights of the holders of any
shares of preferred stock that may be issued in the future. The issuance of
preferred stock may delay, defer or prevent a change in control, as the terms of
the preferred stock that might be issued could potentially prohibit our
consummation of any merger, reorganization, sale of substantially all of our
assets, liquidation or other extraordinary corporate transaction without the
approval of the holders of the outstanding shares of preferred stock. In
addition, the issuance of preferred stock could have a dilutive effect on our
stockholders. Our stockholders must give 120 days advance notice prior to the
relevant meeting to nominate a candidate for director or present a proposal to
our stockholders at a meeting. These notice requirements could inhibit a
takeover by delaying stockholder action. We may trigger our stockholder rights
plan in the event our board of directors does not agree to an acquisition
proposal. The rights plan may make it more difficult and costly to acquire our
company. The Delaware anti-takeover law restricts business combinations with
some stockholders once the stockholder acquires 15% or more of our common stock.
The Delaware statute makes it more difficult for our company to be acquired
without the consent of our board of directors and management.
INVESTORS WILL EXPERIENCE DILUTION AS A RESULT OF THIS OFFERING.
Investors in this offering will incur immediate and substantial dilution in
the net tangible book value per share of our common stock.
11
<PAGE>
IF WE HAVE NOT ADEQUATELY PREPARED FOR THE TRANSITION TO YEAR 2000, OUR
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD SUFFER.
We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities Year 2000 ready. To date,
none of our systems, applications, equipment or facilities have experienced
material difficulties from the transition to Year 2000, nor have we been
notified that any of our suppliers have had any such difficulties. However, due
to the breadth of potential issues related to the Year 2000, we cannot guarantee
that we will not experience any problems in the future and the final
determination may take several months. Where practicable, we have attempted to
mitigate our risks with respect to any failures of our critical external
suppliers related to the Year 2000. The effect on our results of operations from
any failure of our systems, applications, equipment or facilities, or our
critical external suppliers, related to the Year 2000 issue cannot yet be
determined.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. We intend such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and we are including this
statement for purposes of complying with these safe harbor provisions. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions, including those set forth under "Risk Factors."
Words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this prospectus might
not occur.
13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 3,000,000 shares of
common stock that we are offering at an assumed public offering price of $82.81
will be approximately $234.6 million after deducting the underwriting discounts
and commissions and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we estimate the net
proceeds from this offering will be approximately $269.9 million.
We expect to use the net proceeds from this offering for capital
expenditures and general corporate purposes, including working capital. We may
also use a portion of the net proceeds to invest in wafer fabrication facilities
with our suppliers or to make equity investments in, or enter into other
arrangements with, our suppliers, related joint ventures or other companies to
secure manufacturing capacity. We may use a portion of the net proceeds to
acquire or license other complementary products, technologies or businesses when
the opportunity arises; however, we currently have no commitments or agreements
with respect to any such transactions. As of the date of this prospectus, we
cannot specify with certainty the particular uses for the net proceeds we will
receive in this offering. Accordingly, our management will have broad discretion
in applying the net proceeds of this offering. Pending such uses, the net
proceeds of this offering will be primarily invested in investment grade,
interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings to support the development of our business
and do not anticipate paying cash dividends for the foreseeable future. Payment
of future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results and current and anticipated cash needs.
PRICE RANGE OF OUR COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
EXAR. The following table sets forth for the period indicated the high and low
sale prices for our common stock, as reported by the Nasdaq National Market, as
adjusted for our three-for-two stock split effected on February 15, 2000.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Year ended March 31, 1998
First Quarter............................................. $14.50 $ 9.67
Second Quarter............................................ $17.92 $12.83
Third Quarter............................................. $18.17 $10.75
Fourth Quarter............................................ $16.00 $10.67
Year ended March 31, 1999
First Quarter............................................. $17.13 $12.08
Second Quarter............................................ $14.42 $ 9.25
Third Quarter............................................. $12.50 $ 8.00
Fourth Quarter............................................ $11.25 $ 8.75
Year ended March 31, 2000
First Quarter............................................. $16.92 $10.58
Second Quarter............................................ $26.00 $17.00
Third Quarter............................................. $43.08 $21.00
Fourth Quarter through March 6, 2000...................... $92.75 $38.00
</TABLE>
On March 6, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $82.81. As of January 31, 2000, there were 14,927,575
shares of our common stock outstanding, after giving effect to the three-for-two
stock split, held by approximately 234 holders of record.
14
<PAGE>
CAPITALIZATION
The following table sets forth on an unaudited basis our capitalization as
of December 31, 1999 and as adjusted to reflect the sale of the 3,000,000 shares
of common stock we are offering at an assumed public offering price of $82.81
per share and the receipt of the estimated net proceeds, after deducting the
underwriting discounts and our estimated offering expenses. The table shows the
effect of a three-for-two stock split effected on February 15, 2000. You should
read this table in conjunction with the consolidated financial statements and
notes and "Selected Consolidated Financial Data" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
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; 16,714,898 and 17,530,049 shares outstanding,
as adjusted(1)............................................ 97,350 308,116
Accumulated other comprehensive income...................... 171 171
Retained earnings........................................... 65,175 65,175
Treasury stock; 2,184,849 shares and 0 shares of common
stock at cost, as adjusted................................ (23,871) --
-------- --------
Total stockholders' equity.............................. $138,825 $373,462
======== ========
</TABLE>
- ------------------------
(1) Excludes 4,067,909 shares of common stock issuable upon exercise of stock
options outstanding as of December 31, 1999 at a weighted average exercise
price of $14.69 per share.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read our selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included in this prospectus. The consolidated statement of
operations data for the years ended March 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of March 31, 1998 and 1999 are derived from
our audited consolidated financial statements included in this prospectus. The
consolidated statement of operations data for the year ended March 31, 1996 and
the consolidated balance sheet data as of March 31, 1996 and 1997 are derived
from audited consolidated financial statements not included in this prospectus.
The consolidated statement of operations data for the nine month periods ended
December 31, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1999 are derived from unaudited interim consolidated financial
statements included in this prospectus. The unaudited interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, which we consider necessary for a fair presentation of
the data. Historical results of operations are not necessarily indicative of
results that may be expected for any future period. The selected consolidated
financial data gives effect to the three-for-two stock split effected on
February 15, 2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------- -------------------
1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales............................. $125,766 $92,343 $102,015 $71,868 $56,770 $55,509
Gross profit.......................... 63,549 36,883 50,078 38,482 30,266 31,100
Income (loss) from operations......... 18,759 (15,238) 8,986 4,051 3,882 1,076
Net income (loss)..................... 13,582 (9,197) 7,518 5,424 4,705 8,051
Net income (loss) per share:
Basic............................... $ 0.95 $ (0.68) $ 0.54 $ 0.39 $ 0.33 $ 0.57
Diluted............................. $ 0.91 $ (0.68) $ 0.52 $ 0.38 $ 0.32 $ 0.52
Shares used in the computation of
net income (loss) per share:
Basic............................... 14,243 13,606 13,989 14,088 14,127 14,128
Diluted............................. 14,888 13,606 14,595 14,400 14,512 15,556
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------------------- AS OF DECEMBER 31,
1996 1997 1998 1999 1999
-------- -------- -------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................... $ 77,550 $ 68,822 $ 90,395 $ 91,885 $111,722
Total assets.......................... 139,074 125,537 143,669 138,296 155,992
Long-term obligations................. 979 880 745 664 582
Retained earnings..................... 53,379 44,182 51,700 57,124 65,175
Stockholders' equity.................. 117,847 109,817 123,729 125,757 138,825
</TABLE>
16
<PAGE>
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. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN THE SECTION
ENTITLED "RISK FACTORS."
OVERVIEW
We design, develop and market analog and mixed-signal ICs for the
communications markets and the video and imaging markets. Our primary customers
are large communications OEMs.
Over the past several years, we have actively refocused our business on
products for the communications markets. In the 1970's, we designed,
manufactured and marketed custom and general purpose analog circuits supporting
many different applications. In the 1980's, we transitioned our products to
analog and mixed signal application specific standard products, or ASSPs,
focusing on telecommunications, data communications, computer peripherals and
consumer electronics. Through the mid 1990's, we continued this product
transition through internal development and strategic acquisitions and moved to
a fabless semiconductor business model. In 1997, we chose to focus our product
strategy and development efforts on the communications markets. For that year,
our communications products represented 43.2% of our net sales. For the nine
months ended December 31, 1999, our communications product sales increased to
74.6% of our net sales.
International sales represented 42.2%, 41.2%, 36.5% and 35.1% of our net
sales for the years ended March 31, 1997, 1998 and 1999 and for the nine months
ended December 31, 1999. Our international sales consist of sales from the
United States to overseas customers and sales by our wholly-owned subsidiary in
Japan. Sales by our Japanese subsidiary are denominated in Yen, while all other
international sales are denominated in United States Dollars. Our international
operations give rise to exposures from changes in currency exchange rates. We
have adopted a set of practices to minimize our foreign currency risk which
include the occasional use of foreign currency exchange contracts to hedge
amounts receivable from our foreign subsidiaries. In addition, foreign sales may
be subject to tariffs in certain countries or with regard to certain products;
however, our profit margin on international sales of ICs, adjusted for
differences in product mix, is not significantly different from that realized on
our sales to domestic customers.
We recognize revenue from the sale of products when shipped. Our distributor
agreements generally permit the return of up to 10% of their purchases annually
for purposes of stock rotation and also provide for credits to distributors in
the event we reduce the price of any product. We record an allowance based on
future authorized and historical patterns of returns, price protection and other
concessions at the time revenue is recognized.
Our gross margins vary depending on product mix, competition, the volume of
products sold, our suppliers' ability to achieve certain manufacturing
efficiencies and the cost of materials procured from our suppliers. Our newer
analog and mixed-signal products, especially our communications products,
generally have higher gross margins than our more mature products, and margins
of any particular product may erode over time.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain cost, expense and income items. The table
and subsequent discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
-------------------------------------- -----------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 55.0 50.9 46.5 46.7 44.0
Cost of sales-inventory write-off............ 5.0 -- -- -- --
----- ----- ----- ----- -----
Gross profit................................. 40.0 49.1 53.5 53.3 56.0
Research and development..................... 15.1 15.3 18.9 18.2 22.3
Selling, general and administrative.......... 23.1 22.8 27.1 26.1 31.1
Goodwill amortization........................ 1.5 1.0 0.9 0.9 0.7
Restructuring and other charges.............. 15.5 -- 1.0 1.3 --
Acquisition related expenses................. 1.3 1.2 -- -- --
----- ----- ----- ----- -----
Operating income (loss)...................... (16.5) 8.8 5.6 6.8 1.9
Other income, net............................ 2.9 3.2 6.6 6.5 19.4
----- ----- ----- ----- -----
Income (loss) before income taxes............ (13.6) 12.0 12.2 13.3 21.3
Income taxes (benefit)....................... (3.6) 4.7 4.6 5.0 6.8
----- ----- ----- ----- -----
Net income (loss)............................ (10.0)% 7.3% 7.6% 8.3% 14.5%
===== ===== ===== ===== =====
</TABLE>
PRODUCT LINE SALES AS A PERCENTAGE OF NET SALES
The following table sets forth product line revenue information as a
percentage of net sales. The table and subsequent discussion should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
-------------------------------------- -----------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Communications............................... 43.2% 47.8% 57.1% 54.3% 74.6%
Video and Imaging............................ 26.9 25.0 21.4 22.7 17.8
Other........................................ 29.9 27.2 21.5 23.0 7.6
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
NET SALES. Net sales for the nine months ended December 31, 1999 decreased
by 2.2% to $55.5 million, compared to $56.8 million for the nine months ended
December 31, 1998. This decrease was primarily due to decreases in sales of
discontinued consumer and custom products in our legacy product lines (due in
part to the fiscal 1999 closure of one of our third-party wafer fabrication
facilities), as well as the sale of our silicon microstructures business unit
and related product lines in November 1998. These decreases were offset by a
34.4% or $10.6 million increase in sales of our communications products during
the nine months ended December 31, 1999. This increase in communications product
sales was fueled by increased sales of our serial communications products and
18
<PAGE>
increased sales of our transmission products as both of these product lines
gained market acceptance and design wins.
In the nine months ended December 31, 1999, sales to domestic customers
decreased by 1.1% to $36.0 million. International sales decreased by 4.2% to
$19.5 million.
COST OF SALES. Cost of sales as a percentage of net sales for the nine
months ended December 31, 1999 decreased to approximately 44.0%, compared to
46.7% for the nine months ended December 31, 1998. The resulting increase in
gross margins is due primarily to a greater mix of communications products,
which generally have higher gross margins than many of our more mature products.
Gross margins from sales of ICs vary depending on product mix, competition from
other manufacturers, the volume of products manufactured and sold, the ability
of our suppliers to achieve manufacturing efficiencies and the cost of materials
procured from our suppliers. Margins on any particular product generally erode
over time.
RESEARCH AND DEVELOPMENT. Research and development expenses for the nine
months ended December 31, 1999 represented 22.3% of net sales, compared to 18.2%
of net sales for the nine months ended December 31, 1998. Research and
development spending for the nine months ended December 31, 1999 increased by
19.6% as we continued to invest in the development of our communications
products. These spending increases resulted from additional staffing in the
communications products areas, increases in expenditures for supplies and
equipment for the development of communications products, and an increase in
employee compensation and benefits expenses associated with a pre-tax gain
recognized in Other Income in the first quarter of fiscal 2000. In the future,
we expect to increase spending on research and development activities,
particularly for communications products. We expect research and development
expenses to continue to fluctuate as a percentage of net sales as a result of
the timing of expenditures and changes in the level of net sales. However, we
intend to continue spending approximately 20% of net sales on research and
development activities to support our growth.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the nine months ended December 31, 1999 represented 31.1% of net
sales, compared to 26.1% for the nine months ended December 31, 1998. Selling,
general and administrative expenses for the nine months ended December 31, 1999
increased by 16.8%. The increase was due to growth in communications product
sales and an increase in employee compensation and benefits expenses associated
with a pre-tax gain recognized in Other Income in the first quarter of fiscal
2000. In the short term, many of the selling, general and administrative
expenses are fixed, causing a decline as a percentage of net sales in periods of
rapidly rising sales and an increase as a percentage of net sales when sales
growth is slower or declining.
OTHER INCOME. Other income in the nine months ended December 31, 1999
includes a first quarter pre-tax $7.0 million gain on the sale of an investment
related to a minority equity investment in IC Works, Inc. In April 1999, we
received approximately 1.1 million shares of common stock in Cypress
Semiconductor, Inc. in exchange for our investment in IC Works due to the merger
of Cypress Semiconductor and IC Works. We sold this stock during the first
quarter of fiscal 2000, resulting in a pre-tax gain of $7.0 million in other
income and a related employee compensation and benefits expense of $3.0 million
in costs and expenses.
PROVISION FOR INCOME TAXES. The provision for income taxes is based on
income from operations. The effective tax rate for the first nine months of
fiscal 2000 was approximately 32.0% compared with the federal statutory rate of
35%. The difference is due to utilization of capital loss carryforwards that
offset the gain on sale of the IC Works investment and tax savings generated
from utilization of our
19
<PAGE>
foreign sales corporation partially offset by non-deductible expenses, state
income taxes and foreign income, which is taxed at rates different from U.S.
income tax.
To date, inflation has not had a significant impact on our operating
results.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
NET SALES. Net sales during fiscal 1999 were $71.9 million compared to
$102.0 million in fiscal 1998, a decrease of 29.6%. This decrease was primarily
due to decreases in net sales of discontinued consumer and custom products in
our legacy product lines, as well as the sale of our silicon microstructures
business unit and related product lines. The abrupt closure of one of our
third-party wafer fabrication facilities during the third quarter of fiscal 1999
had a further negative impact of $2.0 million on our fiscal 1999 net sales from
legacy products.
In fiscal 1999, sales to domestic customers decreased by 24.0% to
$45.6 million. International sales decreased by 37.5% to $26.3 million.
COST OF SALES. Cost of sales as a percentage of net sales decreased from
50.9% in fiscal 1998 to 46.5% in fiscal 1999. The resulting increase in gross
margins is due primarily to a greater mix of our newer analog and mixed-signal
products which generally have higher gross margins than our more mature
products.
RESEARCH AND DEVELOPMENT. Research and development expenses, as a
percentage of net sales, increased from 15.3% in fiscal 1998 to 18.9% in fiscal
1999. Research and development expenses decreased by $2.0 million or 13.0%
compared to fiscal 1998. The decrease in research and development expenses is
attributable to our control of operating expenses in response to decreased
sales, to lower employee benefits costs and to the restructuring activities
associated with the sale of our silicon microstructures business unit and
related product lines.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, as a percentage of net sales, increased from 22.8% in fiscal 1998 to
27.1% in fiscal 1999. Selling, general and administrative expenses for fiscal
1999 decreased by $3.8 million or 16.2% compared to fiscal 1998. The decrease in
selling, general and administrative expenses is attributable to decreased
commissions expense, to lower employee benefits costs and to our control of
operating expenses in response to decreased sales.
RESTRUCTURING AND OTHER CHARGES. Restructuring and other charges in fiscal
1999 of $731,000 relate to the sale of our silicon microstructures business unit
and related product lines to OSI Systems, Inc. in the third quarter and
represent the loss on the sale of assets, severance costs related to the
termination of 38 employees and other disposition related expenses. The
restructuring action was completed during the fourth quarter of fiscal 1999 and
was financed with cash. In addition to the $2.6 million in proceeds from the
sale of the silicon microstructures business unit and related product lines, we
may receive additional contingent performance-based payments from this sale of
up to $3.9 million over the next two years.
During the third quarter of fiscal 1998, we sold the capital assets that we
had written down in fiscal 1997 in connection with the termination of a foundry
arrangement. The sales proceeds exceeded the carrying value and, as a result, we
reversed $1.2 million of the related reserve during the quarter. Offsetting this
reversal, we decided during the quarter to replace our information system under
development with a system determined to better meet our needs and wrote off
$1.2 million of capitalized costs associated with system modules which we did
not intend to use.
OTHER INCOME. Other income during fiscal 1999 increased to $4.1 million
from $3.1 million in fiscal 1998 due to increased balances of cash and
short-term investments.
20
<PAGE>
PROVISION FOR INCOME TAXES. Our effective tax rate for fiscal 1999 was 38%
compared with the federal statutory rate of 35%. The discrepancy is due to
non-deductible expenses, state income taxes and foreign losses, which are taxed
at rates different from U.S. income tax rates, partially offset by tax
advantaged investment income and tax savings generated from utilization of our
foreign sales corporation.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
NET SALES. Net sales during fiscal 1998 were $102.0 million compared to
$92.3 million in fiscal 1997, an increase of 10.5%. This increase was primarily
due to significant increases in net sales in our communications and silicon
microstructures product lines as well as last time buy activity pertaining to
some of our discontinued custom legacy products. These increases were partially
offset by a significant decrease in sales of discontinued consumer products.
In fiscal 1998, sales to U.S. customers increased by 12.5% to
$60.0 million. International sales increased by 7.8% to $42.0 million.
COST OF SALES. Cost of sales as a percentage of net sales decreased from
55.0% in fiscal 1997, excluding the one-time inventory write-off discussed
below, 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 our decision, in
the fourth quarter of fiscal 1997, to transfer our test and shipping operations
to foreign subcontractors to reduce manufacturing expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$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.
Research and development expenses, as a percentage of net sales, increased from
15.1% in fiscal 1997 to 15.3% in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE. 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. Selling, general
and administrative expenses decreased from 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.
RESTRUCTURING AND OTHER CHARGES. Restructuring and other charges in fiscal
1997 included $5.3 million of restructuring costs and $9.0 million of other
charges arising from:
- A restructuring plan announced and commenced in the fourth quarter of
fiscal 1997 to (i) reduce our manufacturing expenses by transferring our
test and shipping operations to foreign subcontractors, (ii) focus our
product strategy to provide analog and mixed-signal products for the
communications, video and imaging and silicon sensor markets and
(iii) narrow our distribution channels to create more sales leverage. In
1997, these actions resulted in a charge of $5.4 million to operating
expenses and $4.6 million to cost of sales (relating to an inventory
write-off). The charges included a non-cash charge of $8.5 million and
cash expenditures of $1.5 million. As of December 31, 1999, an accrual of
approximately $133,000 remained related to associated lease obligations.
- The termination of a wafer production agreement. In October 1995, we
entered into a wafer production agreement with IC Works. Under the terms
of the agreement, we 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. We also made a minority equity
investment in IC Works of $7.5 million under separate but related
agreements. The dramatically changed market conditions for wafer pricing
and availability, as well as our
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recent business redirection, led to a reassessment of our foundry
relationships and process requirements. These factors combined with delays
in the commencement of anticipated production by the foundry, resulted in
the termination of the wafer production agreement. As a result, we
incurred a fourth quarter fiscal 1997 charge to operating expenses of
$9.0 million as a result of negotiations to terminate the 1995 wafer
production agreement with IC Works.
ACQUISITION RELATED EXPENSES. Acquisition related expenses represent
compensation costs of $1.2 million during fiscal 1998 and $1.2 million in fiscal
1997 arising from the acquisition of Startech Semiconductor, Inc. in fiscal
1995.
OTHER INCOME. Other income during fiscal 1998 increased to $3.1 million
from $2.3 million in fiscal 1997 due to increased balances of cash and
short-term investments.
PROVISION FOR INCOME TAXES. The effective tax rate for fiscal 1998 was 39%
compared with the federal statutory rate of 35%. The discrepancy is due to
non-deductible expenses, state income taxes and foreign losses, which are taxed
at rates different from U.S. income tax rates, partially offset by tax
advantaged investment income and tax savings generated from utilization of our
foreign sales corporation.
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<PAGE>
QUARTERLY RESULTS
The following tables contain selected unaudited quarterly financial data for
the seven quarters ended December 31, 1999 and this data as a percentage of net
sales. In the opinion of management, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein. Results for a particular
quarter are not necessarily indicative of the results for any subsequent
quarter. The data gives effect to the three-for-two stock split effected on
February 15, 2000.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
--------- ---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ $21,764 $19,198 $15,808 $15,098 $16,251 $18,550 $20,708
Cost of sales............................ 10,067 9,145 7,292 6,882 7,302 8,160 8,947
------- ------- ------- ------- ------- ------- -------
Gross profit............................. 11,697 10,053 8,516 8,216 8,949 10,390 11,761
Research and development................. 3,412 3,576 3,360 3,212 4,759 3,669 3,950
Selling, general and administrative...... 5,422 4,893 4,475 4,709 6,406 5,253 5,609
Goodwill amortization.................... 184 185 146 126 126 126 126
Restructuring and other charges.......... -- -- 731 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income (loss).................. 2,679 1,399 (196) 169 (2,342) 1,342 2,076
Other income, net........................ 1,091 1,424 1,182 1,016 8,044 1,296 1,423
------- ------- ------- ------- ------- ------- -------
Income before income taxes............... 3,770 2,823 986 1,185 5,702 2,638 3,499
Income taxes............................. 1,404 1,068 402 466 1,807 857 1,124
------- ------- ------- ------- ------- ------- -------
Net income............................... $ 2,366 $ 1,755 $ 584 $ 719 $ 3,895 $ 1,781 $ 2,375
======= ======= ======= ======= ======= ======= =======
Net income per share:
Basic.................................. $ 0.17 $ 0.12 $ 0.04 $ 0.05 $ 0.28 $ 0.13 $ 0.17
======= ======= ======= ======= ======= ======= =======
Diluted................................ $ 0.16 $ 0.12 $ 0.04 $ 0.05 $ 0.27 $ 0.11 $ 0.14
======= ======= ======= ======= ======= ======= =======
Shares used in the computation of
net income per share:
Basic.................................. 14,308 14,119 13,954 13,966 13,998 14,074 14,313
======= ======= ======= ======= ======= ======= =======
Diluted................................ 14,955 14,427 14,154 14,065 14,614 15,652 16,402
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
--------- ---------- --------- ---------- --------- ---------- ---------
(AS A PERCENTAGE OF NET SALES)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 46.3 47.6 46.1 45.6 44.9 44.0 43.2
----- ----- ----- ----- ----- ----- -----
Gross profit............................. 53.7 52.4 53.9 54.4 55.1 56.0 56.8
Research and development................. 15.7 18.6 21.3 21.3 29.3 19.8 19.1
Selling, general and administrative...... 24.9 25.5 28.3 31.2 39.4 28.3 27.1
Goodwill amortization.................... 0.8 1.0 0.9 0.8 0.8 0.7 0.6
Restructuring and other charges.......... -- -- 4.6 -- -- -- --
----- ----- ----- ----- ----- ----- -----
Operating income (loss).................. 12.3 7.3 (1.2) 1.1 (14.4) 7.2 10.0
Other income, net........................ 5.0 7.4 7.4 6.7 49.5 7.0 6.9
----- ----- ----- ----- ----- ----- -----
Income before income taxes............... 17.3 14.7 6.2 7.8 35.1 14.2 16.9
Income taxes............................. 6.4 5.6 2.5 3.0 11.1 4.6 5.4
----- ----- ----- ----- ----- ----- -----
Net income............................... 10.9% 9.1% 3.7% 4.8% 24.0% 9.6% 11.5%
===== ===== ===== ===== ===== ===== =====
</TABLE>
The sequential quarter decrease in net sales for the four quarters ended
March 31, 1999 was primarily due to decreases in sales of discontinued consumer
and custom products in our legacy product lines (due in part to the fiscal 1999
closure of one of our third-party wafer fabrication facilities), as well as the
sale of the our silicon microstructures business unit and related product lines
in November 1998. Since September 30, 1998, gross margins have increased each
quarter primarily due to manufacturing efficiencies from higher production
volumes, efficiencies gained as a result of our decision, in the fourth quarter
of fiscal 1997, to transfer our test and shipping operations to foreign
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<PAGE>
subcontractors to reduce manufacturing expenses, and a greater mix of
communications products which generally have higher gross margins than our more
mature products.
Research and development and selling, general and administrative expenses
increased in the quarter ended June 30, 1999 primarily due to $3.0 million in
employee compensation and benefits expenses resulting from a $7.0 million
pre-tax gain on the sale of an investment related to a minority equity
investment in IC Works included in Other income. In April 1999, we received in
excess of 1.1 million shares of common stock in Cypress Semiconductor in
exchange for our investment in IC Works due to the merger of Cypress
Semiconductor and IC Works. We sold this stock during the same quarter.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 2000, we financed our operations
primarily from cash flows from operations and existing cash and short-term
investments. At December 31, 1999, we had $103.8 million of cash and short-term
investments. We have a short term, unsecured line of credit available under
which we may borrow up to $10.0 million, none of which was being utilized at
December 31, 1999. In addition, we have a credit facility with certain domestic
and foreign banks under which we may execute up to $25.0 million in foreign
currency transactions. At December 31, 1999, we had foreign currency contracts
outstanding to buy 10 million Yen, or approximately $95,000.
For the nine months ended December 31, 1999, we generated $6.4 million of
cash from our operating activities, the result of net income of $8.1 million,
non-cash items of $2.5 million, a net increase in working capital of
$3.3 million, partially offset by $7.5 million of gains on sales of an
investment and equipment.
Net capital and other asset expenditures during the nine months ended
December 31, 1999 totaled $2.2 million including purchases of computer equipment
and software used for product development. Other investing activities during the
nine months ended December 31, 1999 included the net purchases of $17.6 million
of short term investments, which was offset by $13.1 million of proceeds from
the sale of our minority equity investment in IC Works, and $548,000 of proceeds
from the sale of equipment.
During the nine months ended December 31, 1999, we repurchased 177,450
shares of our common stock for $3.4 million and received $8.4 million from the
issuance of 734,110 common stock shares upon the exercise of stock options under
our stock option plans.
We have no material firm capital commitments.
We anticipate that we will continue to finance our operations with cash
flows from operations, existing cash and short-term investment balances,
borrowings under existing bank credit lines, and some combination of long-term
debt and/or lease financing and additional sales of equity securities. The
combination and sources of capital will be determined by management based on our
needs and prevailing market conditions. We believe that cash, cash equivalents,
short-term investments, borrowings from the line of credit and cash flows from
operations will be sufficient to satisfy working capital requirements and
capital equipment needs for at least the next twelve months. From time to time,
we evaluate potential acquisitions and equity investments complementary to our
design expertise and market strategy, including investments in, or other
arrangements with, wafer fabrication foundries. To the extent we pursue these
transactions, we could be required to seek additional equity or debt financing.
There can be no assurance that we would be able to obtain additional financing
on acceptable terms, or at all. The sale of additional equity or convertible
debt could result in dilution to our stockholders.
24
<PAGE>
YEAR 2000
Many computer systems may experience problems interpreting dates around the
Year 2000. We have completed the process of identifying the programs and
infrastructure in all areas that could be affected by the Year 2000 issue and
have developed an implementation plan to resolve any issues. As of the date of
this filing, we have experienced no significant problems related to Year 2000
issues.
In 1999, we implemented a new business system that is Year 2000 compliant at
a cost of $5.3 million. In addition, the replacement of our remaining legacy
systems is estimated to cost $300,000. The amount capitalized for the
acquisition and implementation of the new business system and the replacement of
the remaining legacy systems was $5.3 million. We have expensed approximately
$300,000 of project costs in prior periods. The new business system
implementation was substantially complete as of March 31, 1999, and the
capitalized portion is being depreciated over an average of six years.
We believe that we will continue to be able to operate our time sensitive
business-application software programs and infrastructure. However, due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, we are unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on our results of operations,
liquidity or financial condition. We continue to work with key suppliers and
customers to assess their Year 2000 readiness. The failure by a third party to
adequately address the Year 2000 issue could harm the party's ability to furnish
products and services to us and, therefore, could harm our business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY FLUCTUATIONS. We are exposed to foreign currency
fluctuations primarily through our operations in Japan. This exposure is the
result of timing differences between incoming and outgoing cashflows denominated
in foreign currency. Operational currency requirements are typically forecast
for a three-month period. If there is a need to hedge this risk, we will enter
into transactions to purchase or sell currency in the open market or enter into
forward currency exchange contracts which are currently available under our bank
lines of credit. While it is expected that this method of hedging foreign
currency risk will be utilized in the future, the hedging methodology and/or
usage may be changed to manage exposure to foreign currency fluctuations.
If our foreign operations forecasts are overstated or understated during
periods of currency volatility, unanticipated currency gains or losses could be
experienced. At the end of the third quarter of fiscal 2000, we did not have
significant foreign currency denominated net assets or net liabilities positions
and had foreign currency contracts outstanding to buy 10 million Japanese Yen,
or approximately $95,000.
INTEREST RATE SENSITIVITY. We maintain investment portfolio holdings of
various issuers, types and maturity dates with various banks and investment
banking institutions. We do not regularly hold investments with maturity dates
beyond 90 days. The market value of these investments on any day during the
investment term may vary as a result of market interest rate fluctuations. This
exposure is not hedged because a hypothetical 10% movement in interest rates
during the investment term would not likely have a material impact on investment
income. The actual impact on investment income in the future may differ
materially from this analysis, depending on actual balances and changes in the
timing and the amount of interest rate movements. The short-term investments are
classified as "available-for-sale" securities and the cost of securities sold is
based on the specific identification method. This designation is reevaluated as
of each balance sheet date. At December 31, 1999, short-term investments
consisted of auction rate securities of $19.6 million. As of December 31, 1999,
there were no significant differences between the fair market value and the
underlying cost of such investments.
25
<PAGE>
BUSINESS
OVERVIEW
We design, develop and market high-performance, high-bandwidth mixed-signal
(analog and digital) silicon solutions for the worldwide communications
infrastructure. We use our high-speed, analog and mixed-signal design expertise,
system-level knowledge and standard CMOS process technologies to offer ICs for
the communications markets that address asynchronous transmission standards,
such as T/E carrier and ATM. We are leveraging this expertise to develop
products based on optical transmission standards, such as SONET/SDH.
Additionally, we provide solutions for the serial communications market as well
as the video and imaging markets. Our major customers include Alcatel, Cisco,
Hewlett-Packard, Lucent, Nokia and Tellabs.
INDUSTRY BACKGROUND
Communications technology has evolved from simple analog voice signals
transmitted over networks of copper telephone lines to complex analog and
digital voice and data signals transmitted over hybrid networks of media, such
as copper, coaxial and fiber optic cables. This evolution has been driven by
large increases in the number of users and the complexity and variety of the
data transmitted over networks, resulting from:
- the substantial growth in the Internet and its transformation from a
text-based medium to a multimedia platform containing pictures, video and
sound;
- the growth of wireless communications; and
- the increased demand for remote network access and higher speed, higher
bandwidth communication between local area networks, or LANs, and wide
area networks, or WANs.
The majority of installed communications systems were designed to transmit
only voice communications, and, therefore, they are inadequate for the
high-bandwidth transmission of both voice and data. As a result, new equipment
is being deployed to augment existing transmission media and increase their
bandwidth. Access to the public network is typically based on asynchronous
technologies, such as T/E carrier over copper wire. The demand for greater
bandwidth is driving a migration from lower-speed T1/E1 to higher-speed T3/E3
transmission rates. The T1/E1 standard permits the transmission of data at
1.5Mbps/2.0Mbps, and the T3/E3 standard permits the transmission of data at
45Mbps/34Mbps. The backbone of the public network is built on an optical fiber
transmission medium that employs synchronous technologies such as SONET/SDH.
Similar to the utilization of faster transmission rates over copper wire,
SONET/SDH protocols such as OC-3 (155Mbps) and OC-12 (622Mbps) are being
upgraded to OC-48 (2.5Gbps) and OC-192 (10Gbps) to increase the bandwidth over a
single optical fiber.
To address the evolving requirements of communications networks, OEMs must
develop and introduce increasingly sophisticated systems at a rapid rate. To
achieve the performance and functionality required of these systems,
communications OEMs utilize increasingly complex communications ICs, which now
account for a significant portion of the value-added proprietary content of
these systems. As a result of the rapid pace of new equipment introductions, the
proliferation of transmission standards, and the difficulty of designing and
producing these ICs, equipment suppliers are increasingly outsourcing the design
and production of the ICs incorporated into their systems.
These trends have created a significant opportunity for IC suppliers that
can design cost-effective solutions for high-speed communications. The worldwide
T/E carrier IC market has experienced steady growth, and Dataquest estimates
that it will reach $616 million by 2003. The ATM IC market is expected to grow
at a compound annual growth rate of 28%, from $309 million in 1998 to nearly
$1.1
26
<PAGE>
billion in 2003, according to Dataquest. The SONET/SDH IC market reached $510
million in 1998, and Dataquest expects that it will grow at a compound annual
growth rate of 22% to $922 million by 2002.
The key ICs contained in a typical communications system include physical
interface, access control, channel processor, bus interface and switch fabric
devices. The physical interface device consists of a transmitter and receiver
that, when integrated, is called a transceiver. Transceivers interface with the
physical transmission media, such as copper wire or optical fiber. Most of these
high-speed, mixed-signal ICs convert parallel digital inputs into a single
analog bit stream that is up to 32 times faster than the original signal.
Transceivers therefore serve as a bridge between analog transmission media and
the digital devices that process data. Access control circuits are digital ICs
that format, or frame, the data and perform error checking. The bus interface
manages the transfer of data along numerous channels between elements, such as
the channel processor and the switch fabric, which work together to shape, route
and control the data.
Because physical interface and access control ICs interface with the
transmission media and are critical to increasing bandwidth, these ICs must
offer high-speed and robust performance. Therefore, communications equipment
OEMs seek IC suppliers that possess extensive analog and digital expertise to
provide high-speed, mixed-signal solutions to bridge the analog physical world
and the digital computing environment. This must be coupled with system-level
expertise so that a supplier can quickly bring to market high-performance,
highly-reliable ICs with optimal feature sets.
THE EXAR SOLUTION
We design, develop and market high-performance, high-bandwidth mixed-signal
ICs for use in the worldwide communications infrastructure. Our analog and
mixed-signal design expertise, combined with our systems understanding, enables
us to provide physical interface and access control solutions for WAN
communications equipment. We currently offer ICs based upon the T/E carrier and
ATM transmission standards and are leveraging our expertise to develop products
based upon the SONET/ SDH transmission standards. In addition, we provide
solutions for the serial communications market and the video and imaging
markets. We believe our products offer our customers the following benefits:
- increased bandwidth through the integration of multiple channels on a
single device;
- reduced system noise/jitter to improve data integrity;
- reduced overall system cost through the integration of multiple functions
on a single device; and
- accelerated time to market by allowing them to focus on core competencies
and outsource standards-based solutions.
Key elements of our solution include:
LEADING ANALOG AND MIXED-SIGNAL DESIGN EXPERTISE. We have 28 years of
experience in developing analog and mixed-signal ICs. As a result, we have
developed a significant base of knowledge in these areas and a library of design
elements. For example, we believe that we have particularly strong expertise in
the design of high-speed, low-jitter phase lock loops, which are key elements in
our mixed-signal transceiver products. As a result, we can provide our customers
with products that typically exceed standard specifications and allow them
flexibility in designing other parts of their systems.
BROAD PRODUCT OFFERINGS. We offer a variety of physical interface and
access control products based upon the T1/E1, T3/E3 and ATM transmission
standards. We are currently developing multiple channel products for each
transmission standard to enable our customers to minimize board space and
overall cost in multi-port applications. We are also developing products based
upon SONET/SDH standards.
27
<PAGE>
COMPREHENSIVE SOLUTIONS TO ENHANCE SYSTEM INTEGRATION. The combination of
our design and system level expertise allows us to provide a solution that
encompasses hardware, software and applications support. Using our solutions, we
believe that OEMs can efficiently integrate our devices into their systems,
better leverage their development resources and reduce their time to market.
COMPELLING PRICE/PERFORMANCE SOLUTIONS. We use our systems expertise and
our analog, digital and mixed-signal design techniques to architect
high-performance products based on standard CMOS process technologies. We
believe that these CMOS processes are proven, stable, predictable and able to
meet the application speed and power/performance requirements at a lower price
point than other semiconductor manufacturing processes.
STRATEGY
Our objective is to be the leading provider of high-performance,
high-bandwidth IC solutions for the worldwide communications infrastructure. To
achieve this objective, we employ the following strategies:
FOCUS ON HIGH-GROWTH COMMUNICATIONS MARKETS. We target high-growth
communications markets, including T/E carrier, ATM and SONET/SDH. We have built
substantial expertise in the areas of analog and mixed-signal design, systems
architecture and applications support. We believe that the integration of these
capabilities enables us to develop solutions addressing the high-bandwidth
requirements of communications systems OEMs.
LEVERAGE ANALOG AND MIXED-SIGNAL DESIGN EXPERTISE TO PROVIDE INTEGRATED
SYSTEM LEVEL SOLUTIONS. Utilizing our strong analog and mixed-signal design
expertise, we can integrate mixed-signal physical interface devices with digital
access control devices. We are currently developing products that integrate
transceivers with framers on a single IC and are exploring opportunities to
integrate other functions. These configurations would enable OEMs to use less
board space and reduce their overall system cost.
EXPAND OUR REVENUE CONTENT PER SYSTEM. Our analog and mixed signal design
expertise has enabled us to build a technological lead and a strong market
position in T3/E3 transceivers. We are leveraging this lead and our established
customer relationships to capture design wins for our access control products,
thereby increasing our overall revenue content per system.
STRENGTHEN AND EXPAND STRATEGIC OEM RELATIONSHIPS. Our customer base
includes Alcatel, Cisco, Lucent, Nokia and Tellabs. To promote the early
adoption of our solutions, we actively seek collaborative relationships with
strategic OEMs during product development. We believe that OEMs recognize the
value of our early involvement because designing their system products in
parallel with our development can accelerate their time to market. In addition,
we believe that collaborative relationships help us to obtain early design wins
and to reduce the risk of market acceptance of our new products.
LEVERAGE BROAD PRODUCT PORTFOLIO TO ACCELERATE COMMUNICATIONS PRODUCT
DEVELOPMENT. We believe we have developed a strong presence in the serial
communications market as well as the video and imaging markets, where we have
leading industry customers, proven technological capabilities and a strong
product portfolio. Our design expertise has enabled us to offer a diverse
portfolio of both industry standard and proprietary universal asynchronous
receiver transmitters, or UARTs. We also have established important customer
relationships in Taiwan for our high-performance, low-power video products and
continue to work closely with key customers such as Hewlett-Packard for our
imaging products. Our sales to these markets provide us with resources to invest
in and accelerate our communications product development.
USE STANDARD CMOS PROCESS TECHNOLOGIES TO PROVIDE COMPELLING
PRICE/PERFORMANCE SOLUTIONS. We primarily design our products to be
manufactured using standard CMOS processes. We believe that
28
<PAGE>
these processes are proven, stable and predictable and benefit from the
extensive semiconductor manufacturing infrastructure devoted to CMOS processes.
Therefore, we believe that we can achieve a given level of performance at a
lower cost than others employing alternative processes.
LEVERAGE FABLESS SEMICONDUCTOR MODEL. We have longstanding relationships
with world-class third-party assembly, test and wafer foundries to manufacture
our semiconductor devices. Our fabless approach allows us to avoid substantial
capital spending, obtain competitive pricing, reduce time to market, reduce
technology and product risks, and facilitate the migration of our products to
new process technologies, which reduce costs and optimize performance. By
leveraging the fabless model, we can focus on our core competencies of IC design
and development.
PRODUCTS
We design, develop and market high-performance, high-bandwidth, physical
interface and access control solutions for the worldwide communications
infrastructure. Our current IC products for the communications market are
designed to respond to the growing demand for high-speed networking equipment
based on transmission standards such as T/E carrier, ATM and SONET/SDH. We also
design, develop and market IC products that address the needs of the serial
communications market and the video and imaging markets. We use our design
methodologies to develop products ranging from application specific standard
products, or ASSPs, designed for industry-wide applications, to semi-custom
solutions for specific customer applications. These complementary products
enable us to offer a range of solutions for our customers' applications.
COMMUNICATIONS
Our products for T/E carrier, ATM and SONET/SDH applications include
high-speed analog, digital and mixed-signal physical interface and access
control ICs. The physical interface ICs consist of a transmitter and receiver
that, when integrated, is called a transceiver chip. Transceivers interface with
the physical transmission media. Most of these high-speed, mixed-signal ICs
convert parallel digital inputs into a single analog bit stream that is up to 32
times faster than the original signal. Access control circuits are digital
circuits that format, or frame, the data and perform error checking. The figure
below illustrates where our products are employed within WAN equipment.
TYPES OF COMMUNICATIONS ICS USED IN WAN EQUIPMENT
[Diagram depicting two-way data transmission between Communications Equipment
and Physical Transmission Media highlighting the Physical Interface and Access
Controller products of the Company.]
Left margin: Box containing the caption, "Physical Transmission Media (optical
fiber, coaxial cable, twisted pair copper)", connected by an arrow to a box
containing the caption, "Equipment (e.g., switches, multiplexers, digital cross
connects, routers)," and below the caption a row of boxes connected by two-way
arrows containing the following captions: "Physical Interface" (with the words,
"receivers and transmitters," "transceivers" and "jitter attenuator" connected
by an arrow to the box), "access controller," (with the words "framers," "ATM
UNIs" and "M13 multiplexer" connected by an arrow to the box), "channel
Processor," "Bus Interface" and "Switch Fabric."
29
<PAGE>
Our communications products include transmitters and receivers,
transceivers, framers, ATM user network interfaces, or ATM UNIs, a jitter
attenuator and an M13 multiplexer. These products are used in SONET/SDH
multiplexers, private branch exchanges (PBX), central office switches and
digital cross connects. We introduced in early 1999 and began volume production
in October 1999 our second generation physical interface solution, an integrated
single chip transceiver. Subsequently, we announced a dual channel version of
this transceiver that meets the same performance levels while requiring less
board space and lower overall power in multi-port applications. We recently
introduced our integrated, single IC jitter attenuator, a proprietary solution
that allows OEMs to meet difficult jitter tolerance specifications while
reducing overall system costs. Our access control products include framers, ATM
UNIs and an M13 multiplexer. These newer products are achieving greater market
acceptance as our strong transceiver products have allowed us to compete for
adjacent component opportunities. We also supply a family of V.35 transceiver
and multiprotocol products used for high-speed data transmission, primarily in
networking equipment such as routers and bridges.
The following table describes some of our key communications products:
<TABLE>
<S> <C>
PRODUCT DESCRIPTION APPLICATIONS
T3/E3/STS-1 1-channel/2-channel transceiver and SONET/SDH multiplexers and digital cross connects
T3/E3/STS-1 1-channel receiver and transmitter
T3/E3 jitter attenuator Multiplexers, switches and digital cross connects
T3/E3 M13 multiplexer Multiplexers, frame relay and Internet access
switches
T3/E3 framer Multiplexers and digital cross connects
T3/E3 ATM UNIs ATM switches/routers/hubs
4-channel E1 transceiver and framer Routers, Internet access equipment, frame relay
and ATM switches/routers/hubs
Multi-channel E1 transceivers Multiplexers, frame relay and ATM
switches/routers/ hubs
T1/E1 clock adaptors Frame relay access devices and remote access
servers
Multiprotocol serial interface Multiplexers, access equipment and routers
V.35 serial interface Multiplexers, access equipment and routers
</TABLE>
We expect to introduce a number of new communications ICs in 2000 to provide
an expanded line of T/E carrier products as well as SONET/SDH products. The T/E
carrier products are expected to include multi-channel transceivers, framers and
ATM UNIs. SONET/SDH product introductions are expected to start at the OC-48
(2.5 Gbps) rate, and we intend to subsequently introduce OC-3 (155 Mbps) and
OC-12 (622 Mbps) products.
SERIAL COMMUNICATIONS
UARTs convert data streams from parallel to serial, enabling a serial data
stream to communicate with a central processing unit, or CPU. We sell our UART
products to the remote access, data collection, industrial automation and
handheld/mobile markets. Many of these products include high performance
features, such as automated flow control and large First-In First-Out, or FIFO,
buffers. We have designed a highly integrated quad, or four channel, UART with
FIFO circuitry, which we believe is the de facto industry standard for quad FIFO
UARTs used in multi-channel networking applications.
30
<PAGE>
The following table describes some of our key serial communications
products:
<TABLE>
<S> <C>
PRODUCT DESCRIPTION APPLICATIONS
8-channel PCI UART with 64byte FIFO PCI interface for network control management
8-channel UART with 64byte FIFO Network management, remote access servers and
point of sale systems
Single/Dual/Quad channel UART with 128byte FIFO Process control systems
Single/Quad channel UART with 64byte FIFO Personal digital assistants and GPS
Single/Dual/Quad channel UART with 16byte FIFO Hub management, high-speed modems and PC I/O
cards
Dual channel UART with 8byte FIFO Process control systems, switches and serial port
equipment
Dual channel UART with 16byte FIFO Process control systems, switches and serial port
equipment
Dual channel UART Serial port equipment
</TABLE>
During 2000, we expect to expand our family of PCI multi-channel UARTs to
include quad channel as well as dual channel devices.
VIDEO AND IMAGING
The video market is composed of several segments, including digital still
cameras, or DSCs, PC video cameras, security cameras, camcorders and digital
camcorders. Among these applications, one of the fastest growing segments is
DSCs, which Dataquest forecasts will grow from 6.2 million units in 1999 to 13.0
million units in 2003. To create images that are more comparable to film cameras
and include features such as steady-shot and digital zoom, DSCs and digital
camcorders are requiring higher resolution and higher speed data acquisition
subsystems, also known as analog front ends, or AFEs, and analog-to-digital
converters, or ADCs.
We supply high-performance ADCs and integrated AFEs for products such as
DSCs, digital copiers, scanners and multifunctional peripherals, or MFPs, which
incorporate scanning, faxing and copying functions in a single integrated
system. We use advanced design techniques and process technologies to integrate
low-power converter architectures with surrounding analog functions, reducing
total system cost.
The following table describes some of our key video and imaging products:
<TABLE>
<S> <C>
PRODUCT DESCRIPTION APPLICATIONS
10bit/18 or 27Msps AFEs DSCs, camcorders and video conferencing
3-channel 12, 14 or 16bit/6 or 12 Msps AFEs Scanners, MFPs and digital color copiers
10bit/20 or 40 Msps ADC High-end DSCs and broadcast video
Video boards, scanners and battery powered
8bit/6Msps ADC devices
8, 10 or 12 bit serial input DAC Voltage control and power control for wireless
(digital-to-analog converter) equipment
</TABLE>
During 2000, we plan to focus our product development efforts on video
applications, specifically for DSCs and digital camcorders. These applications
require higher resolution and speed. Key planned
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<PAGE>
product introductions include 12bit/24Msps and 10bit/45Msps AFEs in single and
dual channel configurations.
SALES AND CUSTOMERS
We market our products in the United States through 21 independent sales
representatives and four independent, non-exclusive distributors, as well as
through our own direct sales force. We currently
32
<PAGE>
have sales support offices in or near Atlanta, Boston, Chicago, Dallas, Los
Angeles and Fremont. We are represented internationally by 29 sales
representatives and distributors. In addition, we are represented in Europe by
our wholly-owned subsidiaries, Exar Ltd. and Exar-SARL, and in the Asia/ Pacific
Region by our wholly-owned subsidiaries, Exar Japan and Exar Taiwan.
Some of our larger customers include the following:
<TABLE>
COMMUNICATIONS SERIAL COMMUNICATIONS VIDEO AND IMAGING
<S> <C> <C>
- Alcatel Alsthom S.A. - Cisco Systems, Inc. - Eastman Kodak Company
- Cisco Systems, Inc. - Digi International, Inc. - Hewlett-Packard Company
- Lucent Technologies, Inc. - LM Ericsson Telephone Co. - Hitachi, Ltd.
- Marconi Communications Plc. - Pitney Bowes, Inc. - Logitech International S.A.
- Nokia Corporation - Symbol Technologies, Inc. - Microtek International, Inc.
- Tellabs, Inc. - NEC Corporation
- Pretek Electronics Corp.
</TABLE>
Through the nine months ended December 31, 1999, no single customer
accounted for more than 10% of our sales.
MANUFACTURING
We outsource all of our fabrication and assembly, as well as the majority of
our testing operations. This fabless manufacturing model allows us to focus on
our core competencies of product design and development.
We use world-class independent wafer foundries, such as Chartered
Semiconductor Manufacturing and Taiwan Semiconductor Manufacturing Company, or
TSMC. Chartered and TSMC manufacture all of our CMOS products, Rohm Co. Ltd.
manufactures all of our Bipolar products and Chartered manufacturers most of our
BiCMOS products. We do not have long term supply agreements with Chartered or
TSMC. Our supply agreement with Rohm expires in 2006. The majority of our
current products are implemented in standard CMOS. We use CMOS manufacturing
processes to take advantage of that technology's lower power consumption,
cost-effectiveness, foundry availability and ever-increasing speed. Currently,
most of our new product development is being implemented in CMOS.
Wafers are usually shipped to our subcontractors in Asia for wafer test and
assembly, where they are cut into individual die and packaged. Most of our
assembly work is performed by independent contractors in Hong Kong, Indonesia,
the Philippines and Japan. Following assembly, final test and quality assurance
is performed either at our Fremont, California facility or at our
subcontractors' facilities in Asia. We conduct electrical testing of both wafers
and packaged ICs. The combination of various functions makes the test process
for analog and mixed-signal devices particularly difficult. Test operations
require the programming, maintenance and use of sophisticated computer-based
test systems and complex automatic handling systems.
In the fourth quarter of fiscal 1997, we began to implement a plan to reduce
manufacturing expenses by transferring our testing and shipping to foreign
subcontractors. During fiscal 2000, we completed the transfer of approximately
80% of our testing to foreign subcontractors. Direct shipment to customers
reached 60% during that year, with a future goal of 80%. We plan to maintain a
minimal level of test operations at our California facilities to support our
research and development activities.
33
<PAGE>
RESEARCH AND DEVELOPMENT
We believe that the continued introduction of new products in our target
markets is essential to our growth. As of December 31, 1999, our research and
development staff consisted of 107 employees, 60 of whom hold advanced
engineering degrees. We have successfully recruited 19 engineers through the
first three quarters of our current fiscal year while experiencing minimal
attrition. Over the next year, we will seek to significantly increase our
engineering headcount to add more design and application personnel. In the nine
months ended December 31, 1999, our communications research and development
spending increased 61% over the comparable nine month period in the previous
fiscal year. To support our growth, we intend to continue spending approximately
20% of revenue on research and development activities.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and a history of price reduction as production
efficiencies are achieved in successive generations of products. Although the
market for analog 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, we face substantial competition
in each market in which we participate. Competition in our markets is based
principally on technical innovation, product features, timely introduction of
new products, quality and reliability, performance, price, technical support and
service. We believe that we compete favorably in all of these areas.
Because the IC markets are highly fragmented, we generally encounter
different competitors in our various market areas. Competitors with respect to
our communications products include Conexant, PMC-Sierra and TranSwitch. In
addition, the expansion of our communications product portfolio may in the
future bring us into competition with other established communications IC
companies, such as Applied Micro Circuits Corp. and Vitesse. Competitors in our
other markets include Analog Devices, Philips and Texas Instruments.
BACKLOG
We define backlog to include OEM and distributor orders for which product
shipment is expected to occur primarily within the succeeding six months. As of
December 31, 1999, our backlog was $19.3 million, compared with $13.8 million as
of December 31, 1998.
Sales are made pursuant to purchase orders for scheduled delivery of
standard items or agreements covering purchases over a period of time, which are
frequently subject to revision and/or 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, our
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 that we reduce the price of any product. Because of
the possibility of changes in delivery schedules, cancellations of orders,
distributor returns or price reductions, our backlog, as of any particular date,
may not be representative of actual sales for any succeeding period. Generally,
customer orders for standard products can be canceled 30 days, and orders for
custom products can be canceled 90 days, prior to the scheduled shipment date
without substantial penalty.
INTELLECTUAL PROPERTY RIGHTS
We have 61 patents issued and 15 patent applications pending in the U.S. We
have 10 patents issued and 24 patent applications pending in various foreign
countries. None of our domestic and foreign patents that have issued will expire
in the near future unless we choose not to pay renewal fees. To protect our
intellectual property, we also rely on a combination of mask work registrations,
33
<PAGE>
trademarks, copyrights, trade secrets, employee and third-party nondisclosure
agreements and licensing arrangements. We have also entered into license
agreements from time to time to gain access to externally developed products or
technologies.
There can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property, or disclose such intellectual property
or trade secrets, or that we can meaningfully protect our intellectual property.
Furthermore, there can be no assurance that our pending patent applications or
any future applications will be approved, or that any issued patents will
provide us with competitive advantages, or will not be challenged by third
parties, or that if challenged, will be found to be valid or enforceable, or
that the patents of others will not have an adverse effect on our ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate our products, or design around
any patents that may be issued to us.
We cannot be sure that our products or technologies do not infringe patents
that may be granted in the future pursuant to pending patent applications or
that our products do not infringe any patents or proprietary rights of third
parties. From time to time, we receive communications from third parties
alleging patent infringement. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, we could be prevented
from selling our products or could be required to obtain licenses from the
owners of these patents or be required to redesign our products to avoid
infringement. We cannot assure you that licenses would be available to us on
acceptable terms, or at all, or that we would be successful in any attempts to
redesign our products or processes to avoid infringement. Our failure to obtain
these licenses or to redesign our products could harm our business.
EMPLOYEES
As of December 31, 1999, we employed 272 full-time employees, with 47 in
administration, 107 in engineering and product development, 45 in operations and
73 in marketing and sales. Of the 107 engineering and product development
employees, 60 hold advanced degrees. Our ability to attract, motivate and retain
qualified personnel is essential to our continued success. None of our employees
is represented by a collective bargaining agreement, nor have we ever
experienced any work stoppage. We believe our employee relations are good.
FACILITIES
Our executive offices, marketing and sales, research and development and
engineering operations are located in Fremont, California in two buildings that
we own consisting of approximately 157,000 square feet. We also own
approximately 5.3 acres of undeveloped property adjacent to our headquarters,
which is presently being held for future office expansion. We lease additional
space for sales offices in Foxboro, Massachusetts; Atlanta, Georgia; Plano,
Texas; Palatine, Illinois; Irvine, California; Kawasaki, Japan; Velizy, France;
East Sussex, England; Remseck and Munich, Germany; and Taipei, Taiwan.
34
<PAGE>
MANAGEMENT
The names of our executive officers and directors, and their ages as of
January 31, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Donald L. Ciffone, Jr....... 44 Chief Executive Officer, President and Director
Michael Class............... 42 Vice President, Worldwide Sales
Roubik Gregorian............ 48 Chief Technology Officer, Senior Vice President/General
Manager, Communications Division
Ronald W. Guire............. 51 Executive Vice President, Chief Financial Officer,
Secretary and Director
Susan J. Hardman............ 38 Vice President, Corporate Marketing
Thomas W. Jones............. 52 Vice President, Reliability and Quality Assurance
Thomas R. Melendrez......... 46 Corporate Vice President, General Counsel
Stephen W. Michael.......... 53 Vice President, Operations Division
John Sramek................. 48 Vice President, Video and Imaging Division
Raimon L. Conlisk........... 77 Chairman of the Board of Directors
Frank P. Carrubba........... 61 Director
James E. Dykes.............. 61 Director
Richard Previte............. 64 Director
</TABLE>
DONALD L. CIFFONE, JR. joined us as Chief Executive Officer and President in
October 1996 and was appointed director at that time. From August 1996 to
October 1996, Mr. Ciffone was Executive Vice President of Toshiba America, the
U.S. semiconductor subsidiary of Toshiba Semiconductor. Prior to joining
Toshiba, he served from 1991 to 1996 in a variety of senior management positions
at VLSI Technology, Inc. From 1978 to 1991, Mr. Ciffone held a variety of
marketing and operations positions at National Semiconductor, Inc. Mr. Ciffone
holds an M.B.A. from the University of Santa Clara.
MICHAEL CLASS joined us as Director of Western Area Sales in 1996. In
January 1998, he was promoted to the position of Vice President, North
American/European Sales and was promoted to Vice President, Worldwide Sales in
July, 1999. Mr. Class has over 20 years of experience in the semiconductor
industry, most recently with IC Works, Inc. as Area Sales Manager for Western
U.S. and Canada. Prior to joining IC Works, Mr. Class held various sales
management positions with Intel Corporation and VLSI from 1979 to 1995. He holds
a B.S. in Electrical Engineering from Lehigh University and an M.B.A. from
LaSalle University.
ROUBIK GREGORIAN joined us in March 1995 as Vice President, Startech
Division, when we acquired Startech Semiconductor, Inc., where he served as
President. He was appointed Chief Technology Officer and Vice President of the
Communications Division in June 1996, and to his current position as Chief
Technology Officer, Senior Vice President/General Manager, Communications
Division, in June 1998. Prior to joining Startech in 1994, Dr. Gregorian was
Vice President of Research and Development and Chief Technology Officer for
Sierra Semiconductor, Inc. Dr. Gregorian has been issued 16 patents and received
his M.S.E.E. and Ph.D. in Electrical Engineering from the University of
California at Los Angeles, as well as an M.S.E.E. from Tehran University.
RONALD W. GUIRE joined us in July 1984 and has been a director since
June 1985. He has served as Chief Financial Officer since May 1985 and Executive
Vice President since July 1995. Mr. Guire is also Chairman of the Board of Xetel
Corporation, an electronics contract manufacturer. Mr. Guire was a
35
<PAGE>
partner in the certified public accounting firm of Graubart & Co. from 1979
until he joined Exar in July 1984. Mr. Guire holds a B.S. in Accounting from
California College of Commerce.
SUSAN J. HARDMAN joined us in February 1997 and became Vice President,
Corporate Marketing in February 2000. Prior to this position, she served as
Senior Director of Business Development as well as Director of Marketing for our
communication products. Ms. Hardman has over 16 years experience in the
semiconductor industry. From 1989 to 1997, Ms. Hardman was with VLSI in a
variety of management positions, most recently as Director of Product Marketing
for VLSI's networking products division. From 1983 to 1989, she was with
Motorola holding a variety of engineering roles. Ms. Hardman holds a B.S. in
Chemical Engineering from Purdue University and an M.B.A. from the University of
Phoenix.
THOMAS W. JONES joined us as Director of Total Quality Management in
October 1992 and became Director of Reliability and Quality Assurance in
November 1992. He was promoted to his current position of Vice President,
Reliability and Quality Assurance in July 1995. Mr. Jones has over 30 years of
industry experience, most recently with LSI Logic, Inc., as Director of Quality
Assurance. Mr. Jones joined LSI in September 1990. In December 1989, Mr. Jones
joined Elcon Products International as Director of Manufacturing. From 1970 to
December 1989, he was with Siliconix, where he held various management positions
including Director of Operations and Director of Quality and Reliability.
Mr. Jones holds a B.S.E.E. equivalent degree from Port Talbot College of
Technology.
THOMAS R. MELENDREZ joined us in April 1986 as Corporate Attorney. He was
promoted to Director, Legal Affairs in July 1991, and again to Corporate Vice
President, Legal Affairs in March 1993. In March 1996, Mr. Melendrez was
promoted to his current position of Corporate Vice President, General Counsel.
Mr. Melendrez has over 20 years legal experience in the semiconductor and
related industries. He received a B.A. from the University of Notre Dame and a
J.D. from the University of San Francisco.
STEPHEN W. MICHAEL joined us as Vice President New Market Development in
September 1992. In July 1995, he was appointed to his current position of Vice
President, Operations Division. Mr. Michael has over 20 years of semiconductor
industry experience, most recently as Vice President and General Manager, Analog
and Custom Products with Catalyst Semiconductor. He joined Catalyst in 1987 and
served in various senior positions.
JOHN SRAMEK joined us as Group Manager for the Micro Power Business Unit in
June of 1994 and served in a variety of senior marketing positions until his
promotion to his current position as Vice President, Video and Imaging Division,
in February 1998. Mr. Sramek has over 20 years of experience in sales and
product marketing in the semiconductor industry with a variety of companies
including Micro Power Systems, Inc., Harris Semiconductor and Genrad Inc.
Mr. Sramek holds a B.A. in English Literature and a B.S. in Electrical
Engineering from Bucknell University and an M.B.A. from the University of Santa
Clara.
RAIMON L. CONLISK has served as a director of our Company since
August 1985, was appointed Vice Chairman of the Board in August 1990, and was
appointed Chairman of the Board in April 1995. Mr. Conlisk has also served as a
director since 1991 and was appointed Chairman of the Board in December 1997 of
SBE, Inc., a manufacturer of communications and computer products. From 1977
until his retirement in 1999, Mr. Conlisk was President of Conlisk Associates, a
management consulting firm serving high-technology companies in the United
States and foreign countries. From 1991 to 1998, Mr. Conlisk served as a
director of Xetel Corporation, a contract manufacturer of electronic equipment.
Mr. Conlisk was also President from 1984 to 1989, and Chairman from 1989 until
retirement in June 1990, of Quantic Industries, Inc., a privately held
manufacturer of electronic systems. He was a director of Quantic from 1970 until
retirement. From 1970 to 1973 and from 1987 to 1990, Mr. Conlisk served as a
director of the American Electronics Association.
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<PAGE>
FRANK P. CARRUBBA joined us as a director in August 1998. Dr. Carrubba
served as Executive Vice President and Chief Technical Officer of Royal Philips
Electronics, headquartered in Eindhoven, the Netherlands, from 1991 to 1997.
From 1982 to 1991, Dr. Carrubba was with the Hewlett-Packard Company, where he
was a member of the Group Management Committee and was Director of H-P
Laboratories. Prior to joining Hewlett-Packard, he spent 22 years as a member of
the technical staff at IBM Corporation's Thomas J. Watson Research Laboratory in
Yorktown Heights, New York. Dr. Carrubba was one of the original designers of
RISC Architecture, for which he was named Inventor of the Year in 1992.
JAMES E. DYKES joined us as a director in May 1994. Mr. Dykes served as
President and CEO of the Signetics division of North American Philips
Corporation, a manufacturer of industrial and consumer electronics, from 1989 to
1993 and, from 1987 to 1988, as President and CEO of TSMC, a semiconductor
foundry in Taiwan. Prior to joining TSMC, Mr. Dykes held various management
positions with other semiconductor and related companies, including General
Electric Company, a diversified international manufacturer of defense,
electrical and other products, and Harris Semiconductor, Inc., a manufacturer of
semiconductors and integrated circuits. From August 1994 to June 1997,
Mr. Dykes served as President and Chief Operating Officer of Intellon Corp., a
wireless network communications company. From July 1997 to July 1998, Mr. Dykes
served as Executive Vice President, Corporate Development of the Thomas
Group, Inc., a management services company. Mr. Dykes is also a director of the
Thomas Group Inc., Cree Research, Inc., a developer of blue light-emitting
diodes, and Thesus Logic, Inc., a privately held semiconductor company.
RICHARD PREVITE joined us as a director in October 1999. Mr. Previte is
Chief Executive Officer and Chairman of the Board of Directors of marketFusion.
He is also a director and Vice Chairman of the Board of Directors of Advanced
Micro Devices, or AMD. Additionally, Mr. Previte served as Chairman of the Board
from 1997 to June 1999, and acted as Chief Executive Officer from February 1999
to June 1999 of Vantis Corporation, a subsidiary of AMD. Mr. Previte served as
President of AMD from 1990 to 1999, Executive Vice President and Chief Operating
Officer from 1989 to 1990 and Chief Financial Officer and Treasurer from 1969 to
1989.
37
<PAGE>
UNDERWRITING
GENERAL
We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC, FleetBoston
Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and Needham & Company,
Inc. are the representatives of the underwriters. We have entered into an
underwriting agreement with the representatives. Subject to the terms and
conditions of the underwriting agreement, we have agreed to sell to the
underwriters, and each underwriter has severally agreed to purchase, the number
of shares of common stock listed next to its name below at the public offering
price, less the underwriting discounts and commissions described on the cover
page of the prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Banc of America Securities LLC..............................
FleetBoston Robertson Stephens Inc..........................
U.S. Bancorp Piper Jaffray Inc..............................
Needham & Company, Inc......................................
---------
Total..................................................... 3,000,000
=========
</TABLE>
The underwriting agreement is subject to a number of terms and conditions
and provides that the underwriters must buy all of the shares if they buy any of
them. The underwriters will sell the shares to the public when and if the
underwriters buy the shares from us.
The underwriters initially will offer the shares to the public at the price
specified on the cover page of the prospectus. The underwriters may allow
selected dealers a concession of not more than $ per share. The
underwriters may also allow, and any other dealers may reallow, a concession of
not more than $ per share to some other dealers. If all the shares are
not sold at the public offering price, the underwriters may change the public
offering price and the other selling terms. No change in the public offering
price will vary the proceeds to be received by us as specified on the cover page
of the prospectus. The common stock is offered subject to a number of
conditions, including:
- receipt and acceptance of the common stock by the underwriters; and
- the right on the part of the underwriters to reject orders in whole or in
part.
We have granted the underwriters an option to buy up to 450,000 additional
shares of common stock. These additional shares would cover sales of shares by
the underwriters that exceed the number of shares specified in the table above.
The underwriters may exercise this option at any time within 30 days after the
date of the prospectus. If the underwriters exercise this option, they will each
purchase, subject to a number of terms and conditions, additional shares
approximately in proportion to the amounts specified above. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the 3,000,000 shares are being offered.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters. These amounts are shown assuming no
exercise and full exercise of the underwriters' option to purchase additional
shares:
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share underwriting discounts and commissions..... $ $
Total underwriting discounts and commissions to be
paid by us......................................... $ $
</TABLE>
38
<PAGE>
The expenses of the offering, not including the underwriting discounts and
commissions, are estimated to be approximately $750,000 and will be paid by us.
Expenses of the offering, exclusive of the underwriting discounts and
commissions, include the SEC filing fee, the NASD filing fee, Nasdaq listing
fees, printing expenses, transfer agent and registration and other miscellaneous
fees.
We, our executive officers and directors have entered into lock-up
agreements with the underwriters. Under these agreements, subject to exceptions,
we may not issue any new shares of common stock, and our executive officers and
directors may not offer, sell, contract to sell or otherwise dispose of or hedge
any common stock or securities convertible into or exchangeable for shares of
common stock. These restrictions will be in effect for a period of 90 days after
the date of the prospectus. At any time and without notice, Banc of America
Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements.
We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make in respect of those liabilities.
In connection with the offering, the underwriters may engage in activities
that stabilize, maintain or otherwise affect the price of the common stock.
These transactions may include:
- short sales;
- over-allotment;
- syndicate covering transactions;
- purchases to cover positions created by short sales; and
- stabilizing transactions.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. In order to cover a
short position, the underwriters may bid for and purchase shares of common stock
in the open market or may exercise their over-allotment option. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of the offering to repay the underwriting discounts
and commissions received by them.
As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by the prospectus.
In connection with the offering, some underwriters and any selling group
members who are qualified market makers on the Nasdaq National Market may engage
in passive market making transactions in the common stock on the Nasdaq National
Market in accordance with Rule 103 of Regulation M. Rule 103 permits passive
market making during the period when Regulation M would otherwise prohibit
market activity by the participants in the offering. Passive market making may
occur during the business day before the pricing of the offering, before the
commencement of offers or sales of the common stock. Passive market makers must
comply with applicable volume and price limitations and must be identified as a
passive market maker. In general, a passive market maker must display its
39
<PAGE>
bid at a price not in excess of the highest independent bid for the security. If
all independent bids are lowered below the passive market maker's bid, however,
the bid must then be lowered when purchase limits are exceeded. Net purchases by
a passive market maker on each day are limited to a specified percentage of the
passive market maker's average daily trading volume in the common stock during a
specified period and must be discontinued when such limit is reached.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for Exar Corporation by Cooley Godward LLP, Palo Alto, California,
and for the underwriters by O'Melveny & Myers LLP, San Francisco, CA. One
partner of Cooley Godward LLP owns 2,250 shares of Exar's common stock, and
another partner owns 2,000 shares of common stock.
EXPERTS
The consolidated financial statements as of March 31, 1998 and 1999 and for
each of the three years in the period ended March 31, 1999 included in and
incorporated by reference in this prospectus and the related financial statement
schedule incorporated by reference in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and incorporated by reference in the registration
statement, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
40
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are a Delaware corporation. Our principal executive offices are located
at 48720 Kato Road, Fremont, CA 94538, and our telephone number is (510)
668-7000. Our common stock is quoted on the Nasdaq National Market. Our trading
symbol is "EXAR." You may inspect reports and other information concerning us at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
We are a reporting company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission, or the SEC. You may inspect and copy such material at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the SEC's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. You may also obtain copies of such
material from the SEC at prescribed rates for the cost of copying by writing to
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms. You can also find our SEC filings at the SEC's website
at www.sec.gov.
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
- Registration Statement on Form 8-A, filed February 12, 1986;
- Annual Report on Form 10-K, filed June 24, 1999;
- Quarterly Report on Form 10-Q, filed August 6, 1999;
- Quarterly Report on Form 10-Q, filed November 12, 1999; and
- Quarterly Report on Form 10-Q, filed February 14, 2000.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Exar Corporation
48720 Kato Road
Fremont, CA 94538
(510) 668-7000
This prospectus is part of a Registration Statement we filed with the SEC.
You should rely only on the information incorporated by reference or provided in
this prospectus and the Registration Statement.
41
<PAGE>
EXAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999
and December 31, 1999 (unaudited)....................... F-3
Consolidated Statements of Operations for the years ended
March 31, 1997, 1998 and 1999 and the nine months ended
December 31, 1998 and 1999 (unaudited).................. F-4
Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss) for the years ended
March 31, 1997, 1998 and 1999 and the nine months ended
December 31, 1999 (unaudited)........................... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1998 and 1999 and the nine months ended
December 31, 1998 and 1999 (unaudited).................. F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE>
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 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three year period
ended March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 1999 and the results of their operations
and their cash flows, for each of the years in the three year period ended
March 31, 1999, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE, LLP
San Jose, California
April 20, 1999 (February 15, 2000 as to the
fourth paragraph of Note 1)
F-2
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 76,167 $ 79,154 $ 84,198
Short-term investments.................................... 3,140 2,000 19,630
Accounts receivable, net of allowances of $3,411, $2,047
and $1,820.............................................. 16,764 11,450 10,968
Inventories............................................... 6,781 5,873 7,714
Prepaid expenses and other................................ 1,521 939 1,111
Deferred income taxes..................................... 5,217 4,047 4,365
-------- -------- --------
Total current assets.................................... 109,590 103,463 127,986
PROPERTY, PLANT, AND EQUIPMENT, Net......................... 26,746 27,684 26,968
GOODWILL, net of accumulated amortization of $5,061, $4,922
and $5,300................................................ 1,534 504 126
OTHER ASSETS................................................ 5,799 6,645 912
-------- -------- --------
TOTAL ASSETS................................................ $143,669 $138,296 $155,992
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 7,534 $ 4,265 $ 4,282
Accrued compensation and related benefits................. 8,564 3,560 6,364
Accrued sales commissions................................. 1,107 1,053 1,123
Other accrued expenses.................................... 1,990 1,775 1,426
Income taxes payable...................................... -- 925 3,069
-------- -------- --------
Total current liabilities............................... 19,195 11,578 16,264
COMMITMENTS AND CONTINGENCIES (see Note 10)
DEFERRED INCOME TAXES....................................... -- 297 321
LONG-TERM OBLIGATIONS....................................... 745 664 582
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; 15,712,857, 15,980,788 and 16,714,898 shares
issued.................................................. 86,091 88,908 97,350
Accumulated other comprehensive income.................... 83 204 171
Retained earnings......................................... 51,700 57,124 65,175
Treasury stock; 1,466,649, 2,007,399 and 2,184,849 shares
of common stock at cost................................. (14,145) (20,479) (23,871)
-------- -------- --------
Total stockholders' equity.............................. 123,729 125,757 138,825
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $143,669 $138,296 $155,992
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $92,343 $102,015 $71,868 $56,770 $55,509
COST AND EXPENSES:
Cost of sales............................... 50,829 51,937 33,386 26,504 24,409
Cost of sales--inventory write-off.......... 4,631 -- -- -- --
Research and development.................... 13,907 15,581 13,560 10,348 12,378
Selling, general and administrative......... 21,296 23,273 19,499 14,790 17,268
Goodwill amortization....................... 1,374 1,062 641 515 378
Restructuring and other charges............. 14,344 -- 731 731 --
Acquisition related expenses................ 1,200 1,176 -- -- --
------- -------- ------- ------- -------
Total costs and expenses.................. 107,581 93,029 67,817 52,888 54,433
------- -------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS................. (15,238) 8,986 4,051 3,882 1,076
OTHER INCOME (EXPENSE):
Interest income............................. 2,382 3,165 4,156 3,196 3,766
Interest expense............................ (85) (76) (65) (44) --
Gain on sale of investment.................. -- -- -- -- 7,003
Other, net.................................. 412 224 622 545 (6)
------- -------- ------- ------- -------
Total other income, net................... 2,709 3,313 4,713 3,697 10,763
------- -------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES............. (12,529) 12,299 8,764 7,579 11,839
PROVISION (BENEFIT) FOR INCOME TAXES.......... (3,332) 4,781 3,340 2,874 3,788
------- -------- ------- ------- -------
NET INCOME (LOSS)............................. $(9,197) $ 7,518 $ 5,424 $ 4,705 $ 8,051
======= ======== ======= ======= =======
NET INCOME (LOSS) PER SHARE:
BASIC......................................... $ (0.68) $ 0.54 $ 0.39 $ 0.33 $ 0.57
======= ======== ======= ======= =======
DILUTED....................................... $ (0.68) $ 0.52 $ 0.38 $ 0.32 $ 0.52
======= ======== ======= ======= =======
SHARES USED IN COMPUTATION OF NET INCOME
(LOSS) PER SHARE:
BASIC......................................... 13,606 13,989 14,088 14,127 14,128
======= ======== ======= ======= =======
DILUTED....................................... 13,606 14,595 14,400 14,512 15,556
======= ======== ======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED MARCH 31, 1997, 1998, 1999 AND THE NINE MONTHS ENDED DECEMBER 31,
1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURE STOCK OTHER
--------------------- --------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS)
---------- -------- ---------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, March 31, 1996................ 14,877,556 $77,688 (1,391,649) $(13,420) $53,379 $ 200
Comprehensive loss:
Net loss.............................. (9,197)
Other comprehensive income:
Foreign currency translation
adjustments........................... (492)
Comprehensive loss......................
Exercise of stock options............... 176,755 1,240
Income tax benefit from stock option.... 110
Stock issued under Employee Stock
Participation Plan.................... 130,096 1,034
Acquisition of treasury stock........... (75,000) (725)
---------- ------- ---------- -------- ------- --------
BALANCES, March 31, 1997................ 15,184,407 80,072 (1,466,649) (14,145) 44,182 (292)
Comprehensive income:
Net income............................ 7,518
Other comprehensive income:
Foreign currency translation
adjustments........................... 375
Comprehensive income....................
Exercise of stock options............... 410,700 3,987
Income tax benefit from stock option.... 867
Stock issued under Employee Stock
Participation Plan.................... 117,750 1,165
---------- ------- ---------- -------- ------- --------
BALANCES, March 31, 1998................ 15,712,857 86,091 (1,466,649) (14,145) 51,700 83
Comprehensive income:
Net income............................ 5,424
Other comprehensive income:
Foreign currency translation
adjustments........................... 121
Comprehensive income....................
Exercise of stock options............... 140,476 1,330
Income tax benefit from stock option.... 312
Stock issued under Employee Stock
Participation Plan.................... 127,455 1,175
Acquisition of treasury stock........... (540,750) (6,334)
---------- ------- ---------- -------- ------- --------
BALANCES, March 31, 1999................ 15,980,788 88,908 (2,007,399) (20,479) 57,124 204
Comprehensive income:
Net income*........................... 8,051
Other comprehensive income:
Foreign currency translation
adjustments*.......................... (33)
Comprehensive income*...................
Exercise of stock options*.............. 667,914 7,552
Income tax benefit from stock option*...
Stock issued under Employee Stock
Participation Plan*................... 66,196 890
Acquisition of treasury stock*.......... (177,450) (3,392)
---------- ------- ---------- -------- ------- --------
BALANCES, December 31, 1999*............ 16,714,898 $97,350 (2,184,849) $(23,871) $65,175 $ 171
========== ======= ========== ======== ======= ========
*UNAUDITED
<CAPTION>
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME (LOSS)
------------- --------------
<S> <C> <C>
BALANCES, March 31, 1996................ $117,847
Comprehensive loss:
Net loss.............................. (9,197) $ (9,197)
Other comprehensive income:
Foreign currency translation
adjustments........................... (492) (492)
--------
Comprehensive loss...................... $ (9,689)
========
Exercise of stock options............... 1,240
Income tax benefit from stock option.... 110
Stock issued under Employee Stock
Participation Plan.................... 1,034
Acquisition of treasury stock........... (725)
--------
BALANCES, March 31, 1997................ 109,817
Comprehensive income:
Net income............................ 7,518 $ 7,518
Other comprehensive income:
Foreign currency translation
adjustments........................... 375 375
--------
Comprehensive income.................... $ 7,893
========
Exercise of stock options............... 3,987
Income tax benefit from stock option.... 867
Stock issued under Employee Stock
Participation Plan.................... 1,165
--------
BALANCES, March 31, 1998................ 123,729
Comprehensive income:
Net income............................ 5,424 $ 5,424
Other comprehensive income:
Foreign currency translation
adjustments........................... 121 121
========
Comprehensive income.................... $ 5,545
========
Exercise of stock options............... 1,330
Income tax benefit from stock option.... 312
Stock issued under Employee Stock
Participation Plan.................... 1,175
Acquisition of treasury stock........... (6,334)
--------
BALANCES, March 31, 1999................ 125,757
Comprehensive income:
Net income*........................... 8,051 $ 8,051
Other comprehensive income:
Foreign currency translation
adjustments*.......................... (33) (33)
========
Comprehensive income*................... $ 8,018
========
Exercise of stock options*.............. 7,552
Income tax benefit from stock option*... --
Stock issued under Employee Stock
Participation Plan*................... 890
Acquisition of treasury stock*.......... (3,392)
--------
BALANCES, December 31, 1999*............ $138,825
========
*UNAUDITED
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ ---------------------
1997 1998 1999 1998 1999
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... ($ 9,197) $ 7,518 $ 5,424 $ 4,705 $ 8,051
Reconciliation of net income (loss) to net cash provided
by operating activities:
Depreciation and amortization........................... 6,491 6,190 4,762 3,812 2,999
Write-down of equipment................................. 11,382 -- -- -- --
Provision for doubtful accounts and sales returns....... 464 254 (1,364) (544) (227)
Deferred income taxes................................... (5,050) 3,607 1,510 -- (294)
Gain on sale of investment.............................. -- -- -- -- (7,003)
Gain on sale of equipment............................... -- (387) (289) (289) (474)
Changes in operating assets and liabilities:
Accounts receivable................................... 5,211 (3,374) 6,678 4,559 709
Inventories........................................... 10,789 495 908 245 (1,841)
Prepaid expenses and other............................ (2,643) (246) 319 (388) (172)
Accounts payable...................................... (3,862) 15 (3,269) (3,390) 17
Accrued compensation and related benefits............. 1,030 3,900 (5,004) (5,700) 2,804
Accrued sales commissions............................. 105 494 (54) 67 70
Other accrued expenses................................ (829) (615) (238) 141 (401)
Income taxes payable.................................. 110 2,817 1,500 2,633 2,144
-------- ------- ------- ------- --------
Net cash provided by operating activities........... 14,001 20,668 10,883 5,851 6,382
-------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements......... (14,696) (4,837) (5,335) (4,287) (1,905)
Proceeds from disposition of equipment and leasehold
improvements............................................ -- 7,968 977 797 548
Purchases of short-term investments....................... (11,072) (4,087) (137) (137) (21,340)
Proceeds from maturities of short-term investments........ 9,000 6,000 1,277 -- 3,710
Purchases of long-term investments........................ -- (3,000) -- -- --
Proceeds from sale of investment.......................... -- -- -- -- 13,080
Other assets.............................................. 986 (416) (889) (10) (344)
-------- ------- ------- ------- --------
Net cash provided by (used in) investing
activities........................................ (15,782) 1,628 (4,107) (3,637) (6,251)
-------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 2,274 5,152 2,505 2,033 8,442
Long-term obligations..................................... (99) (135) (81) (61) (104)
Acquisition of treasury stock............................. (725) -- (6,334) (5,575) (3,392)
-------- ------- ------- ------- --------
Net cash provided by (used in) financing
activities........................................ 1,450 5,017 (3,910) (3,603) 4,946
-------- ------- ------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (492) 375 121 97 (33)
-------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. (823) 27,688 2,987 (1,292) 5,044
CASH AND EQUIVALENTS AT BEGINNING OF YEAR................... 49,302 48,479 76,167 76,167 79,154
-------- ------- ------- ------- --------
CASH AND EQUIVALENTS AT END OF YEAR......................... $ 48,479 $76,167 $79,154 $74,875 $ 84,198
======== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 2,750 $ 391 $ 633 $ 543 $ 920
======== ======= ======= ======= ========
Cash paid for interest.................................... $ -- $ -- $ -- $ -- $ 725
======== ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--Exar Corporation (Exar or the Company) designs,
develops and markets analog and mixed-signal ICs for use in communications and
video and imaging products. Principal markets include North America, Asia and
Europe.
USE OF MANAGEMENT ESTIMATES--The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires the use of management estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from estimates.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements
include the accounts of Exar and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION--All share amounts and per share calculations in the
accompanying consolidated financial statements give effect to the three-for-two
stock split effected on February 15, 2000.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments with
original maturities of three months or less, when purchased, to be cash
equivalents.
SHORT-TERM INVESTMENTS--The Company's policy is to invest in various short-term
instruments with investment grade credit ratings. Generally, such investments
have contractual maturities of less than one year. The Company classifies its
short-term investments as "available-for-sale" securities and the cost of
securities sold is based on the specific identification method. At March 31,
1998, short-term investments consisted of government agency securities of
$2,000,000 and auction rate securities of $1,140,000. At March 31, 1999,
short-term investments consisted of auction rate securities of $2,000,000. At
December 31, 1999, short-term investments consisted of auction rate securities
of $19,630,000. As of March 31, 1998, March 31, 1999, and December 31, 1999,
there were no significant differences between the fair market value and the
underlying cost of such investments.
INVENTORIES--Inventories are stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY, PLANT, AND EQUIPMENT-- Property, plant, and equipment are stated at
cost. Depreciation of plant and equipment are computed using the straight-line
method over the estimated useful lives of the assets. Estimated useful lives are
as follows:
<TABLE>
<S> <C>
Computer software and computer equipment.................... 3-6 years
Machinery and equipment..................................... 5-7 years
Buildings and fixtures...................................... 5-30 years
</TABLE>
GOODWILL--Goodwill is amortized on a straight-line basis over a period of five
years.
LONG LIVED ASSETS--Long-lived assets are evaluated for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company's policy is to review the recoverability of
all long lived assets based upon undiscounted cash flows on an
F-7
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
annual basis at a minimum, and in addition, whenever events or changes indicate
that the carrying amount of the asset may not be recoverable. An impairment loss
would be recognized when the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposition is
less than its carrying amount.
INCOME TAXES--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires the asset and liability
approach for financial accounting and reporting of income taxes. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
REVENUE RECOGNITION--Revenue is recognized when title transfers (which is
usually at the time of shipment) including sales made to distributors under
agreements allowing limited right of return and price protection on merchandise
unsold by the distributors. For sales made to distributors, reserves are
provided for returns and price allowances at the time of shipment.
COMPREHENSIVE INCOME (LOSS)--In 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from nonowner sources. Comprehensive
income (loss) for the years ended March 31, 1997, 1998, 1999, and nine months
ended December 31, 1999, has been disclosed within the consolidated statements
of shareholders' equity and comprehensive income (loss).
FOREIGN CURRENCY--The functional currency of each of the Company's foreign
subsidiaries is the local currency of that country. Accordingly, gains and
losses from the translation of the financial statements of the foreign
subsidiaries are included in stockholders' equity. Gains and losses resulting
from foreign currency transactions are included in other income. Net foreign
currency transaction gains/(losses) were $153,000, $19,000, $59,000, and
($81,000) in 1997, 1998, 1999, and nine months ended December 31, 1999,
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. If the
Company's foreign operations forecasts are overstated or understated during
periods of currency volatility, unanticipated currency gains or losses could be
experienced. At December 31, 1999, the Company did not have significant foreign
currency denominated net assets or net liabilities positions, and had foreign
currency contracts outstanding to buy 10.0 million Japanese Yen, or
approximately $95,000.
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
F-8
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
short-term investments. The majority of the Company's sales are derived from
manufacturers in the computer, communications and electronic imaging industries.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral for sales on credit. The Company maintains reserves
for potential credit losses and such losses have been within management's
expectations. Approximately 7% of net accounts receivable at December 31, 1999
relates to sales to customers in Japan. The Company's policy is to place its
cash and short-term investments with high credit quality financial institutions
and limit the amounts invested with any one financial institution or in any type
of financial instrument. The Company does not hold or issue financial
instruments for trading purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The estimated fair value of financial
instruments have been determined by the Company, using available market
information and valuation methodology considered to be appropriate. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies could have a material effect on estimated fair value
amounts. The estimated fair value of the Company's financial instruments at
March 31, 1998, 1999 and December 31, 1999 was not materially different from the
values presented in the consolidated balance sheets.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------- ------------
1998 1999 1999
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Work in process................................. $4,579 $3,262 $5,024
Finished goods.................................. 2,202 2,611 2,690
------ ------ ------
Total........................................... $6,781 $5,873 $7,714
====== ====== ======
</TABLE>
F-9
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------- ------------
1998 1999 1999
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land......................................... $ 6,584 $ 6,584 $ 6,584
Building..................................... 13,433 13,433 13,433
Machinery and equipment...................... 40,817 28,660 35,357
Leasehold improvements....................... 44 50 68
Construction in progress..................... 1,607 5,023 101
-------- -------- --------
62,485 53,750 55,543
Accumulated depreciation and amortization.... (35,739) (26,066) (28,575)
-------- -------- --------
Total........................................ $ 26,746 $ 27,684 $ 26,968
======== ======== ========
</TABLE>
4. BORROWING ARRANGEMENTS
The Company has available a short-term, unsecured, bank line of credit under
which it may borrow up to $10,000,000, none of which was being utilized at
December 31, 1999. In addition, the Company has a credit facility with certain
domestic and foreign banks under which it may execute up to $25,000,000 in
foreign currency transactions. At December 31, 1999, the Company had one
outstanding foreign currency forward contract to purchase 10.0 million Japanese
Yen, or approximately $95,000.
F-10
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31
consisted of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 1,112 $ 293 $ 882
State............................................ 278 14 636
Foreign.......................................... 218 -- --
------- ------ ------
1,608 307 1,518
------- ------ ------
Deferred:
Federal.......................................... (4,090) 3,047 1,489
State............................................ (960) 560 21
Foreign.......................................... -- -- --
------- ------ ------
(5,050) 3,607 1,510
------- ------ ------
Charge in lieu of taxes attributable
to employee stock plans.......................... 110 867 312
------- ------ ------
Total.............................................. $(3,332) $4,781 $3,340
======= ====== ======
</TABLE>
Consolidated pretax income (loss) includes foreign losses of approximately
$52,000, $780,000, and $622,000, in 1997, 1998, and 1999, respectively.
Current net deferred tax assets at March 31, 1998 and 1999 were $5,217,000
and $4,047,000, respectively. Non-current net deferred tax assets (liabilities)
at March 31, 1998 and 1999 of $71,000 and $(269,000), respectively, are included
in deferred income taxes and other assets, respectively, within the
F-11
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
accompanying balance sheet. Significant components of the Company's net deferred
tax asset at March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not currently deductible......... $ 6,212 $ 4,550
Net operating loss and tax credit carryforwards........ 8,981 8,393
General business credits............................... 1,365 1,161
State income taxes..................................... 43 219
Other.................................................. 168 207
-------- -------
Total deferred tax assets............................ 16,769 14,530
-------- -------
Deferred tax liabilities:
Depreciation........................................... (1,070) (1,005)
Other.................................................. (330) (323)
-------- -------
Total deferred tax liabilities....................... (1,400) (1,328)
-------- -------
Valuation allowance...................................... (10,081) (9,424)
-------- -------
Net deferred tax assets.................................. $ 5,288 $ 3,778
======== =======
</TABLE>
The valuation allowance for deferred tax assets relates to (i) the tax
benefits of certain acquired net operating losses for which the utilization is
limited to the taxable income of the acquired subsidiary, (ii) capital loss
carryforwards and (iii) state tax credits. The valuation allowance relates to
the amount of such benefits for which realization is not assured. During 1999,
the Company reversed valuation allowances of $657,000, primarily due to a change
in the assessment of the realization of the tax benefits of certain net
operating loss carryforwards.
The Company has net operating loss carryforwards of approximately
$19,700,000 for federal income tax purposes, which are available to offset
future taxable income through 2012. The federal tax law includes provisions
limiting the use of net operating loss carryforwards in the event of certain
changes in ownership, as defined. Consequently, the Company's ability to utilize
certain of its acquired net operating loss carryforwards is subject to an annual
limitation.
F-12
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
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>
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) provision at statutory rate... $(4,385) $4,305 $3,067
State income taxes, net of federal income tax
benefit.......................................... 606 457 762
Change in valuation allowance...................... -- -- (657)
Amortization and write-off of goodwill............. 770 371 224
Tax-exempt interest income......................... (60) (114) (38)
Benefit of acquired net operating losses not
previously recognized............................ (70) -- --
Benefit of foreign sales corporation............... (490) (175) (175)
Foreign losses providing no benefit................ -- (18) 261
Tax credits........................................ -- (424) (200)
Other, net......................................... 297 379 96
------- ------ ------
$(3,332) $4,781 $3,340
======= ====== ======
</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, 1999. Subsequent to March 31, 1999, the Company
settled the assessment with the California income tax authorities for an amount
which had been previously accrued. Accordingly, the settlement did not have a
material effect on the Company's financial position or results of operations.
F-13
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
6. NET INCOME (LOSS) PER SHARE
SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income by the weighted average
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
A summary of the Company's EPS is as follows (In thousands, except per share
amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss).................................. $(9,197) $7,518 $5,424 $4,705 $8,051
======= ====== ====== ====== ======
Shares used in computation:
Weighted average common shares outstanding used
in computation of basic net income (loss) per
share.......................................... 13,606 13,989 14,088 14,127 14,128
Dilutive effect of stock options................. -- 606 312 385 1,428
------- ------ ------ ------ ------
Shares used in computation of diluted net income
(loss) per share............................... 13,606 14,595 14,400 14,512 15,556
======= ====== ====== ====== ======
Basic net income (loss) per share.................. $ (0.68) $ 0.54 $ 0.39 $ 0.33 $ 0.57
======= ====== ====== ====== ======
Diluted net income (loss) per share................ $ (0.68) $ 0.52 $ 0.38 $ 0.32 $ 0.52
======= ====== ====== ====== ======
</TABLE>
Options to purchase 992,100, 2,367,771, 2,103,610 and 20,250 shares of
common stock at prices ranging from $14.33 to $24.83, $10.37 to $24.83, $10.73
to $24.83 and above $32.42 were outstanding as of March 31, 1998, March 31,
1999, December 31, 1998 and December 31, 1999, respectively, but not included in
the computation of diluted net income per share because the options' exercise
prices were greater than the average market price of the common shares as of
such dates and, therefore, would be anti-dilutive under the treasury stock
method. Diluted net loss per share for the year ended March 31, 1997 excludes
common equivalent shares of 1,324,387 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 $373,000, $379,000 and $86,000,
during fiscal years 1997, 1998 and 1999, respectively.
INCENTIVE COMPENSATION PLANS--The Company's incentive compensation plans provide
for incentive awards for substantially all employees of the Company based upon
the achievement of specified operating and performance results. Incentive awards
totaled $547,000, $3,616,000, $681,000 and
F-14
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
$285,000 in fiscal 1997, 1998, 1999, and the nine months ended December 31,
1999, 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 number of common shares having a market
value of two times the exercise price of the right. The rights will expire on
December 15, 2005.
EMPLOYEE STOCK PARTICIPATION PLAN--Exar is authorized to issue 2,250,000 shares
of common stock under its Employee Stock Participation Plan (the Plan). The Plan
permits employees to purchase common stock through payroll deductions. The
purchase price is the lower of 85% of the fair market value of the common stock
at the beginning or end of each three month offering period. Shares purchased by
and distributed to participating employees were 130,096 in fiscal 1997, 117,750
in fiscal 1998, 127,455 in fiscal 1999, and 66,196 in nine months ended
December 31, 1999, at weighted average prices of $7.93, $9.87, $9.21 and $13.42,
respectively. The weighted average fair value of the fiscal 1997, fiscal 1998,
fiscal 1999, and nine months ended December 31, 1999 awards were $2.45, $4.10,
$2.77 and $7.99 per share, respectively.
The Company has reserved 1,229,026 shares of common stock for future
issuance under its Employee Stock Participation Plan.
STOCK OPTION PLANS--Exar has a Stock Option Plan and a Non-Employee Directors'
Stock Option Plan. Under these plans, the Company may grant options to purchase
up to 3,594,052 and 375,000 shares of common stock, respectively. Options are
granted at fair market value on the date of grant. Options are generally
exercisable in four equal annual installments commencing one year after the date
of grant and generally expire seven years from the grant date.
During fiscal 1999, shareholders approved 675,000 additional shares of the
Company's Common Stock to be reserved under the 1997 Equity Incentive Plan (the
"1997 Plan") and 150,000 additional shares of the Company's 1996 Non-Employee
Directors, Stock Option Plan (the "1996 Directors Plan"). During the nine months
ended December 31, 1999, shareholders approved 675,000 additional shares of the
Company's Common Stock under the 1997 Equity Incentive Plan (the "1997 Plan").
The
F-15
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
1997 plan differs from prior plans in that, the 1997 plan allows for selected
employees and directors to elect to defer $5,000 to $50,000 of their yearly
salaries in return for options to purchase Common Stock at an aggregate discount
from current fair market value equal to the salary reduction amount.
Option activity for both plans is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------
WEIGHTED
AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
---------------- --------------
<S> <C> <C>
Outstanding, March 31, 1996 (641,674 exercisable at a
weighted average price of $10.42)......................... 2,416,617 $11.68
Options granted (weighted average fair value of $5.28).... 1,311,000 10.17
Options exercised......................................... (123,075) 6.61
Options canceled.......................................... (722,464) 13.21
---------- ------
Outstanding, March 31, 1997 (968,383 exercisable at a
weighted average price of $10.80)......................... 2,882,078 10.81
Options granted (weighted average fair value of $8.41).... 1,194,253 14.83
Options exercised......................................... (410,700) 9.71
Options canceled.......................................... (375,648) 12.01
---------- ------
Outstanding, March 31, 1998 (1,146,460 exercisable at a
weighted average price of $11.21)......................... 3,289,983 12.26
Options granted (weighted average fair value of $6.04).... 1,192,370 10.57
Options exercised......................................... (140,476) 9.49
Options canceled.......................................... (452,289) 12.72
---------- ------
Outstanding, March 31, 1999 (1,542,018 exercisable at a
weighted average price of $11.77)......................... 3,889,588 11.81
Options granted (weighted average fair value of $11.88)... 947,383 24.09
Options exercised......................................... (667,914) 11.43
Options canceled.......................................... (101,148) 13.59
---------- ------
Outstanding, December 31, 1999.............................. 4,067,909 $14.69
========== ======
</TABLE>
F-16
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1999, 1,122,630 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>
3.5$0 - $ 9.96..... 1,098,821 4.83 $ 9.57 441,766 $ 9.29
10.00 - 11.46.... 960,023 3.82 10.82 564,274 10.94
11.63 - 15.46.... 446,461 3.98 13.20 226,397 13.00
15.75 - 24.83.... 793,418 4.82 17.20 349,410 17.15
24.89 - 32.42.... 769,186 6.70 25.09 8,439 24.89
--------- ---- ------ --------- ------
3.5$0 - $32.42..... 4,067,909 4.85 $14.69 1,590,286 $12.21
</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,
6.7 to 7.8 years; stock volatility, 35%, 44% and 43% in fiscal 1997, fiscal 1998
and fiscal 1999 respectively; risk free interest rates, 6.1%, 6.0% and 5.4% in
fiscal 1997, fiscal 1998 and fiscal 1999; 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 fiscal 1997, fiscal 1998 and fiscal 1999 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>
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Pro Forma Net Income (Loss)................................. $(10,544) $4,696 $2,412
======== ====== ======
Pro Forma Net Income (Loss) Per Share:
Basic................................................. $ (0.77) $ 0.34 $ 0.17
======== ====== ======
Diluted............................................... $ (0.77) $ 0.32 $ 0.17
======== ====== ======
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1996 has
been excluded from the pro forma calculation; accordingly, the fiscal 1997,
fiscal 1998 and fiscal 1999 pro forma amounts
F-17
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
are not indicative of future period pro forma amounts, when the calculation will
apply to all applicable stock options.
9. RESTRUCTURING AND OTHER CHARGES
RESTRUCTURING
In the fourth quarter of fiscal 1997, the Company announced and began to
implement a restructuring plan to i) reduce manufacturing expenses by
transferring its test and shipping operations to foreign subcontractors,
ii) focus the Company's product strategy to provide analog and mixed-signal
products for the communications, video and imaging and silicon sensor markets
and iii) narrow the Company's distribution channels to create more leverage. The
Company's restructuring actions consisted primarily of writing down certain
equipment as a result of the transfer of operations and change in product focus;
terminating 54 full-time employees; writing down inventory associated with
product lines which were being discontinued; canceling certain facility leases
and cancellation of contracts as a result of a change in distribution channels;
and writing down goodwill associated with discontinued products. These actions
resulted in a charge of $5,345,000 to operating expenses and $4,631,000 to cost
of sales. The charges included a non-cash charge of $8,454,000 and cash
expenditures of $1,522,000. As of March 31, 1999, an accrual of approximately
$190,000 remained related to associated lease obligations. As of December 31,
1999, an accrual of approximately $133,000 remained related to associated lease
obligations.
In the third quarter of fiscal 1999, the Company sold its silicon
microstructures business unit to OSI Systems, Inc. ("OSI") for $2,600,000, with
additional contingent performance-based payments of up to $3,900,000 over the
next two years. The resulting restructuring charge of $731,000 represents the
loss on the sale of assets, severance costs related to the termination of 38
employees and other disposition related expenses. The restructuring action was
completed during the fourth quarter of fiscal 1999 and was financed through the
use of cash.
OTHER CHARGES
During the fourth quarter of fiscal 1997, the Company incurred a charge of
$9,000,000 relating to the write-down of capital assets and investments made
under the terms of a wafer production agreement and equity investment agreements
with IC Works, Inc. ("IC Works"). The charge was estimated in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" and reflects management's estimate of the net
realizable value of the equipment and investment in IC Works. The Company
terminated its 1995 wafer production agreement with the foundry due to
dramatically changed market conditions for wafer pricing and availability, as
well as the recent business redirection of 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
$1,200,000 of the related reserve during the quarter. Offsetting this reversal,
the
F-18
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
9. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
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 $1,200,000 of capitalized costs associated with system modules
which the Company does not intend to use.
As a result of a merger completed on April 1, 1999 of IC Works, Inc. and
Cypress Semiconductor, the Company received in excess of 1.1 million shares of
Cypress Semiconductor common stock in exchange for the Company's minority equity
investment in IC Works, Inc. The Company sold this stock during the first
quarter of fiscal 2000 resulting in a pre-tax gain of $7,000,000 in other income
and a related employee compensation and benefits expense of $3,000,000 in cost
and expenses.
10. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities were leased under lease agreements
expiring through August 2001. Rent expense was $300,000 for 1997. The Company
expensed all future lease obligations in 1997 as a part of the restructuring and
other charges (see Note 9).
In 1987, one of the Company's subsidiaries identified low-level groundwater
contamination at its principal manufacturing site. Although the area of
contamination appears to have been defined, the source of the contamination has
not been identified. The Company has reached an agreement with another entity to
participate in the cost of ongoing site investigations and the operation of
remedial systems to remove subsurface chemicals which is expected to continue
for 10 to 15 years. The accompanying consolidated financial statements include
the Company's share of estimated remaining remediation costs of approximately
$764,000 as of March 31, 1999, and $660,000 as of December 31, 1999.
The Company is involved in various claims, legal actions and complaints
arising in the normal course of business. Although the ultimate outcome of these
matters is not presently determinable, management believes that the resolution
of all such pending matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, liquidity or
cash flows.
11. INDUSTRY AND SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that certain selected information about operating
segments be reported in interim financial reports. It also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is evaluated regularly by the chief operating
decision maker, or decision making group in deciding how to allocate resources
and in assessing performance. SFAS No. 131 differs from accounting standard SFAS
No. 14, which required companies to disclose certain financial information about
an industry segment in which they operate. Under both SFAS No. 14 and SFAS
No. 131, the Company operates in one reportable segment and is engaged in the
design, development and marketing of a variety of analog and mixed-signal ICs
for use in communications, and in the video and imaging products. The nature of
the Company's products and
F-19
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998, 1999, AND THE NINE MONTHS ENDED DECEMBER 31,
1998 AND 1999
(INFORMATION AS OF DECEMBER 31, 1998 AND 1999 AND THE NINE MONTHS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
11. INDUSTRY AND SEGMENT INFORMATION (CONTINUED)
production processes as well as type of customers and distribution methods are
consistent among all of the Company's devices. The Company's foreign operations
consist primarily of its wholly owned subsidiaries in Japan and the United
Kingdom. The Company's principle markets include North America, Asia, Europe and
other countries. Total sales by geographic area represent sales to unaffiliated
customers (inventory movements to Japan for sale by the Japan region directly to
end customers in Japan are not significant and eliminated in consolidation and
not included below).
Identifiable assets represent assets used in the Company's operations in
each geographic area.
Geographic financial information for each fiscal year is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDING
1997 1998 1999 DECEMBER 31, 1999
-------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
United States................................ $ 53,374 $ 60,020 $ 45,631 $ 36,032
Export sales to Japan and Asia............... 13,160 16,852 8,658 10,058
Export sales to Western Europe............... 15,144 21,001 15,731 8,059
Export sales to rest of world................ 1,200 1,110 975 640
Japan........................................ 9,465 3,032 873 720
-------- -------- -------- --------
$ 92,343 $102,015 $ 71,868 $ 55,509
======== ======== ======== ========
Income (loss) from operations:
United States................................ $(15,153) $ 9,350 $ 4,572 $ 2,192
Japan........................................ (143) (467) (512) (249)
Western Europe............................... 58 103 (9) (867)
-------- -------- -------- --------
$(15,238) $ 8,986 $ 4,051 $ 1,076
======== ======== ======== ========
Identifiable assets:
United States................................ $119,623 $141,422 $137,078 $155,126
Japan........................................ 5,739 2,102 1,121 918
Western Europe............................... 175 145 97 310
-------- -------- -------- --------
$125,537 $143,669 $138,296 $156,354
======== ======== ======== ========
</TABLE>
12. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. On a forward looking basis, although
the Company has not fully assessed the implications of this new statement, the
Company does not believe adoption of this statement will have a material impact
on the Company's financial position or results of operations.
F-20
<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
3,000,000 SHARES
[LOGO]
EXAR CORPORATION
----------------
PROSPECTUS
, 2000
---------------------
BANC OF AMERICA SECURITIES LLC
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
NEEDHAM & COMPANY, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by Exar Corporation in connection with the
sale of the common stock being registered. All the amounts shown are estimates
except for the registration fee.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee........................................ $ 63,358
NASD Filing fee............................................. 24,000
Nasdaq additional listing fee............................... 17,500
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 125,000
Transfer Agent and Registrar Fees and expenses.............. 5,000
Blue Sky Fees and expenses.................................. 5,000
Miscellaneous............................................... 10,142
--------
Total....................................................... $750,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, Exar has broad
powers to indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act of
1933.
Exar's certificate of incorporation and by-laws include provisions to
(i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by
Section 102(b)(7) of the General Corporation Law of Delaware and (ii) require
Exar to indemnify its directors and executive officers to the fullest extent
permitted by Section 145 of the Delaware Law, including circumstances in which
indemnification is otherwise discretionary. Pursuant to Section 145 of the
Delaware Law, a corporation generally has the power to indemnify its present and
former directors, officers, employees and agents against expenses incurred by
them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interest of the corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful. Exar
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors' duty of care, and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the directors' duty of loyalty to Exar, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for acts or omissions that the director believes to be
contrary to the best interests of Exar or its stockholders, for any transaction
from which the director derived an improper personal benefit, for acts or
omissions involving a reckless disregard for the directors' duty to Exar or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to Exar or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to Exar or its stockholders, for improper transactions
between the director and Exar and for improper distributions to stockholders and
loans to directors and officers. These provisions also do not affect a
director's responsibilities under any other law, such as the federal securities
law or state or federal environmental laws.
II-1
<PAGE>
The Company has entered into indemnity agreements with each of its directors
and executive officers that require Exar to indemnify such persons against
expenses, judgments, fines, settlements and other amounts incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a director or an executive officer of Exar
or any of its affiliated enterprises, provided such person acted in good faith
and in a manner such persons reasonably believed to be in, or not opposed to,
the best interests of Exar and, with respect to any criminal proceeding, has no
reasonable cause to believe his conduct was unlawful. The indemnification
agreements also set forth procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of Exar as to which indemnification is being sought.
Exar has an insurance policy covering the officers and directors of Exar
with respect to certain liabilities, including liabilities arising under the
Securities Act or otherwise.
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement.
5.1 Legal Opinion of Cooley Godward LLP.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Cooley Godward LLP (see Exhibit 5.1).
</TABLE>
UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Exar has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, County of
Alameda, State of California, on March 7, 2000.
<TABLE>
<S> <C> <C>
EXAR CORPORATION
By: /s/ DONALD L. CIFFONE, JR.
-----------------------------------------
Donald L. Ciffone, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- Chairman of the Board March 7, 2000
Raimon L. Conlisk
/s/ DONALD L. CIFFONE, JR. President, Chief Executive
------------------------------------------- Officer and Director March 7, 2000
Donald L. Ciffone, Jr. (Principal Executive Officer)
Executive Vice President, Chief
* Financial Officer, Secretary
------------------------------------------- and Director (Principal March 7, 2000
Ronald W. Guire Financial and Accounting
Officer)
*
------------------------------------------- Director March 7, 2000
Frank P. Carrubba
*
------------------------------------------- Director March 7, 2000
James E. Dykes
*
------------------------------------------- Director March 7, 2000
Richard Previte
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ DONALD L. CIFFONE, JR.
--------------------------------------
Donald L. Ciffone, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------- ------------------------------------------------------------ -----------
<C> <S> <C>
1.1 Underwriting Agreement.
5.1 Legal Opinion of Cooley Godward LLP.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Cooley Godward LLP (see Exhibit 5.1).
</TABLE>
<PAGE>
3,000,000 SHARES
EXAR CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
DATED MARCH __, 2000
BANC OF AMERICA SECURITIES LLC
FLEETBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
<PAGE>
UNDERWRITING AGREEMENT
March __, 2000
BANC OF AMERICA SECURITIES LLC
FLEETBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
As Representatives of the several Underwriters
c/o BANC OF AMERICA SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Exar Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
SCHEDULE A (the "Underwriters") an aggregate of 3,000,000 shares (the "Firm
Common Shares") of its Common Stock, par value $.0001 per share (the "Common
Stock"). In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 450,000 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2. The Firm Common Shares and, if and to
the extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares." Banc of America Securities LLC, FleetBoston
Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and Needham & Company,
Inc. have agreed to act as representatives of the several Underwriters (in such
capacity, the "Representatives") in connection with the offering and sale of the
Common Shares.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-3
(File No. 333-30398), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements, exhibits
and schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), all documents
incorporated or deemed to be incorporated by reference therein, including any
information deemed to be a part thereof at the time of effectiveness pursuant to
Rule 430A or Rule 434 under the Securities Act or the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder (collectively, the
"Exchange Act"), is called the "Registration Statement." Any registration
statement filed by the Company pursuant to Rule 462(b) under the Securities Act
is called the "Rule 462(b) Registration Statement," and from and after the date
and time of filing of the Rule 462(b) Registration Statement the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
Such prospectus, in the form first used by the Underwriters to confirm sales of
the Common Shares, is called the "Prospectus;" provided, however, if the Company
has, with the consent of Banc of America Securities LLC, elected to rely upon
Rule 434 under the Securities Act, the term "Prospectus" shall mean the
Company's prospectus subject to completion (each, a "preliminary prospectus")
dated February 18, 2000 (such preliminary prospectus is called the "Rule 434
preliminary prospectus"), together with the applicable term sheet (the "Term
Sheet") prepared and filed by the Company with the Commission under Rules 434
and 424(b) under the Securities Act and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. All references in
this Agreement to the Registration
<PAGE>
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). All
references in this Agreement to financial statements and schedules and other
information which is "contained," "included" or "stated" in the Registration
Statement or the Prospectus (and all other references of like import) shall be
deemed to mean and include all such financial statements and schedules and other
information which is or is deemed to be incorporated by reference in the
Registration Statement or the Prospectus, as the case may be; and all references
in this Agreement to amendments or supplements to the Registration Statement or
the Prospectus shall be deemed to mean and include the filing of any document
under the Exchange Act which is or is deemed to be incorporated by reference in
the Registration Statement or the Prospectus, as the case may be.
All references in this Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" in
the Registration Statement or the Prospectus (and all other references of like
import) shall be deemed to mean and include all such financial statements and
schedules and other information which is or is deemed to be incorporated by
reference in the Registration Statement or the Prospectus, as the case may be;
and all references in this Agreement to amendments or supplements to the
Registration Statement or the Prospectus shall be deemed to mean and include the
filing of any document under the Exchange Act which is or is deemed to be
incorporated by reference in the Registration Statement or the Prospectus, as
the case may be.
The Company hereby confirms its agreements with the
Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The
Registration Statement and any Rule 462(b) Registration Statement have
been declared effective by the Commission under the Securities Act. The
Company has complied to the Commission's satisfaction with all requests
of the Commission for additional or supplemental information. No stop
order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement is in effect and no proceedings for
such purpose have been instituted or are pending or, to the best
knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when
filed complied in all material respects with the Securities Act and, if
filed by electronic transmission pursuant to EDGAR (except as may be
permitted by Regulation S-T under the Securities Act), was identical to
the copy thereof delivered to the Underwriters for use in connection
with the offer and sale of the Common Shares. Each of the Registration
Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and
at all subsequent times during which the Prospectus is required to be
delivered pursuant to the Securities Act, complied and will comply in
all material respects with the Securities Act and did not and will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times during which
the Prospectus is required to be delivered pursuant to the Securities
Act, did not and will not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The representations and warranties set forth
in the two immediately preceding sentences do not apply to statements
in or omissions from the Registration Statement, any Rule 462(b)
Registration Statement, or any post-effective amendment thereto, or the
Prospectus, or any amendments or
2
<PAGE>
supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in
writing by the Representatives expressly for use therein. There are no
contracts or other documents required to be described in the Prospectus
or to be filed as exhibits to the Registration Statement which have not
been described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company
has delivered to the Representatives four complete manually signed
copies of the Registration Statement and of each consent and
certificate of experts filed as a part thereof, and conformed copies of
the Registration Statement (without exhibits) and preliminary
prospectuses and the Prospectus, as amended or supplemented, in such
quantities and at such places as the Representatives have reasonably
requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The
Company has not distributed and will not distribute, prior to the later
of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material
in connection with the offering and sale of the Common Shares other
than a preliminary prospectus, the Prospectus or the Registration
Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights and remedies of creditors or
by general equitable principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to
be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement, will be
validly issued, fully paid and nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There
are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement,
except for such rights as have been duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed
in the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations, whether or not
arising from transactions in the ordinary course of business, of the
Company and its subsidiaries, considered as one entity (any such change
is called a "Material Adverse Change"); (ii) the Company and its
subsidiaries, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction
or agreement not in the ordinary course of business; and (iii) there
has been no dividend or distribution of any kind declared, paid or made
by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of
any class of capital stock.
3
<PAGE>
(h) INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, who have
expressed their opinion with respect to the financial statements (which
term as used in this Agreement includes the related notes thereto) and
supporting schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus, are independent
public or certified public accountants as required by the Securities
Act and the Exchange Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the
consolidated financial position of the Company and its subsidiaries as
of and at the dates indicated and the results of their operations and
cash flows for the periods specified. The supporting schedules included
in the Registration Statement present fairly the information required
to be stated therein. Such financial statements and supporting
schedules have been prepared in conformity with generally accepted
accounting principles as applied in the United States applied on a
consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial
statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Consolidated Financial
Data," "Selected Consolidated Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent
with that of the audited financial statements contained in the
Registration Statement.
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and, in the
case of the Company, to enter into and perform its obligations under
this Agreement. Each of the Company and each subsidiary is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the
State of California) where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change. All of the issued and outstanding capital
stock of each subsidiary has been duly authorized and validly issued,
is fully paid and nonassessable and, except for an insubstantial number
of shares that may be owned by foreign residents as required by the
laws of the jurisdiction of such subsidiary's incorporation, is owned
by the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or claim. The
Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries
listed in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999.
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The
authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit
plans described in the Prospectus or upon exercise of outstanding
options described in the Prospectus). The Common Stock (including the
Common Shares) conforms in all material respects to the description
thereof contained in the Prospectus. All of the issued and outstanding
shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable and have been issued in compliance
with federal and state securities laws. None of the outstanding shares
of Common Stock were issued in violation of any preemptive rights,
rights of first refusal or other similar rights to subscribe for or
purchase securities of the Company. There are no authorized or
outstanding options, warrants, preemptive rights, rights of first
refusal or
4
<PAGE>
other rights to purchase, or equity or debt securities convertible into
or exchangeable or exercisable for, any capital stock of the Company or
any of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus
and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(l) STOCK EXCHANGE LISTING. The Common Stock (including the
Common Shares) is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934 (the "Exchange Act") and is listed on
the Nasdaq National Market, and the Company has taken no action
designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting
the Common Stock from the Nasdaq National Market, nor has the Company
received any notification that the Commission or the National
Association of Securities Dealers, Inc. (the "NASD") is contemplating
terminating such registration or listing.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. Neither the Company nor any of
its subsidiaries is in violation of its charter or by-laws or is in
default (or, with the giving of notice or lapse of time, would be in
default) ("Default") under any indenture, mortgage, loan or credit
agreement, note, contract, franchise, lease or other instrument to
which the Company or any of its subsidiaries is a party or by which it
or any of them may be bound, or to which any of the property or assets
of the Company or any of its subsidiaries is subject (each, an
"Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change.
The Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the
Prospectus (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary, (ii) will not
conflict with or constitute a breach of, or Default or a Debt Repayment
Triggering Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, or
require the consent of any other party to, any Existing Instrument,
except for such conflicts, breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in
a Material Adverse Change and (iii) will not result in any violation of
any law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any
court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and
by the Prospectus, except such as have been obtained or made by the
Company and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the NASD. As used
herein, a "Debt Repayment Triggering Event" means any event or
condition which gives, or with the giving of notice or lapse of time
would give, the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right
to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company or any of its subsidiaries.
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as disclosed in
the Prospectus, there are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge,
threatened (i) against or affecting the Company or any of its
subsidiaries, (ii) which has as the subject thereof property owned or
leased by, or, to the best of the Company's knowledge, any officer or
director of the Company or any of its subsidiaries or (iii) relating to
environmental or discrimination matters, where in any such case (A)
there is a reasonable possibility that such action, suit or proceeding
might be determined adversely to the Company or
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such subsidiary and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a
Material Adverse Change or adversely affect the consummation of the
transactions contemplated by this Agreement. No material labor dispute
with the employees of the Company or any of its subsidiaries, or, to
the best of the Company's knowledge, with the employees of any
principal supplier of the Company, exists or, to the best of the
Company's knowledge, is threatened or imminent.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company and its
subsidiaries own or possess sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals, trade secrets and other
similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct their businesses as now conducted; and
the expected expiration of any of such Intellectual Property Rights
would not result in a Material Adverse Change. Neither the Company nor
any of its subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision,
would result in a Material Adverse Change.
(p) ALL NECESSARY PERMITS, ETC. The Company and each
subsidiary possess such valid and current certificates, authorizations
or permits issued by the appropriate state, federal or foreign
regulatory agencies or bodies necessary to conduct their respective
businesses, except those the absence of which could not reasonably be
expected to result in a Material Adverse Change, and neither the
Company nor any subsidiary has received any notice of proceedings
relating to the revocation or modification of, or non-compliance with,
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could result in a Material Adverse Change.
(q) TITLE TO PROPERTIES. The Company and each of its
subsidiaries has good and marketable title to all the properties and
assets reflected as owned in the financial statements referred to in
Section 1(i) above as of the dates of such financial statements (or
elsewhere in the Prospectus), in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims
and other defects, except such as are disclosed in the Prospectus, as
could not be expected to result in a Material Adverse Change, as do not
materially and adversely affect the value of such property or as do not
materially interfere with the use made or proposed to be made of such
property by the Company or such subsidiary. The real property,
improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases,
with such exceptions as are not material and do not materially
interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company
or such subsidiary.
(r) TAX LAW COMPLIANCE. The Company and its consolidated
subsidiaries have filed all necessary federal, state and foreign income
and franchise tax returns and have paid all taxes required to be paid
by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them except as may be
being contested in good faith and by appropriate proceedings. The
Company has made adequate charges, accruals and reserves in the
applicable financial statements referred to in Section 1(i) above in
respect of all federal, state and foreign income and franchise taxes
for all periods as to which the tax liability of the Company or any of
its consolidated subsidiaries has not been finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not,
and after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and
will
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conduct its business in a manner so that it will not become subject to
the Investment Company Act.
(t) EXCHANGE ACT COMPLIANCE. The documents incorporated by
reference in the Prospectus, at the time they were or hereafter are
filed with the Commission, complied and will comply in all material
respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time of
the Registration Statement and any amendments thereto become effective
and at the First Closing Date and the Second Closing Date, as the case
may be, will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(u) INSURANCE. Each of the Company and its subsidiaries are
insured by recognized, financially sound and reputable institutions
with policies in such amounts and with such deductibles and covering
such risks as are generally deemed adequate and customary for their
businesses including, but not limited to, policies covering real and
personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction and acts of vandalism. The Company
does not believe that it or any subsidiary will not be able (i) to
renew a single time its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business
as now conducted and at a cost that would not result in a Material
Adverse Change. Neither of the Company nor any subsidiary has been
denied any insurance coverage which it has sought or for which it has
applied within the past two years.
(v) NO PRICE STABILIZATION OR MANIPULATION. The Company has
not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(w) RELATED PARTY TRANSACTIONS. There are no business
relationships or related-party transactions involving the Company or
any subsidiary or any other person required to be described in the
Prospectus which have not been described as required.
(x) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the
Company nor any of its subsidiaries nor, to the best of the Company's
knowledge, any employee or agent of the Company or any subsidiary, has
made any contribution or other payment to any official of, or candidate
for, any federal, state or foreign office in violation of any law or of
the character required to be disclosed in the Prospectus.
(y) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a
system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(z) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as disclosed in
the Prospectus or as could not reasonably be expected to, individually
or in the aggregate, result in a Material Adverse Change (i) neither
the Company nor any of its subsidiaries is in violation of any federal,
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state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum and petroleum products
(collectively, "Materials of Environmental Concern"), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment
Concern (collectively, "Environmental Laws"), which violation includes,
but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business
of the Company or its subsidiaries under applicable Environmental Laws,
or noncompliance with the terms and conditions thereof, nor has the
Company or any of its subsidiaries received any written communication
within the past two years, whether from a governmental authority,
citizens group, employee or otherwise, that alleges that the Company or
any of its subsidiaries is in violation of any Environmental Law; (ii)
there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the
Company has received written notice, and no written notice to the
Company by any person or entity alleging potential liability for
investigatory costs, cleanup costs, governmental responses costs,
natural resources damages, property damages, personal injuries,
attorneys' fees or penalties arising out of, based on or resulting from
the presence, or release into the environment, of any Material of
Environmental Concern at any location owned, leased or operated by the
Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's
knowledge, threatened against the Company or any of its subsidiaries or
any person or entity whose liability for any Environmental Claim the
Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that reasonably could result in
a violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed
either contractually or by operation of law.
(aa) PERIODIC REVIEW OF COSTS OF ENVIRONMENTAL COMPLIANCE. In
the ordinary course of its business, the Company conducts a periodic
review of the effect of Environmental Laws on the business, operations
and properties of the Company and its subsidiaries, in the course of
which it identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties). On the basis of such review and the amount of its
established reserves, the Company has reasonably concluded that such
associated costs and liabilities would not, individually or in the
aggregate, result in a Material Adverse Change.
(bb) ERISA COMPLIANCE. The Company and its subsidiaries and
any "employee benefit plan" (as defined under the Employee Retirement
Income Security Act of 1974, as amended, and the regulations and
published interpretations thereunder (collectively, "ERISA"))
established or maintained by the Company, its subsidiaries or their
"ERISA Affiliates" (as defined below) are in compliance in all material
respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations
described in Sections 414(b),(c),(m) or (o) of the Internal Revenue
Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such
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subsidiary is a member. No "reportable event" (as defined under ERISA)
has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as
defined under ERISA). Neither the Company, its subsidiaries nor any of
their ERISA Affiliates has incurred or reasonably expects to incur any
material liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii)
Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit
plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates that is intended to be qualified under
Section 401(a) of the Code is so qualified and nothing has occurred,
whether by the Company's action or failure to act, which would cause
the loss of such qualification.
(cc) YEAR 2000. All disclosure regarding year 2000 compliance
that is required to be described under the Securities Act (including
disclosures required by Staff Legal Bulletin No. 5) has been included
in the Prospectus. The Company has not and does not believe that it
will incur additional significant operating expenses or costs to ensure
that its information systems will continue to be year 2000 compliant,
other than as disclosed in the Prospectus.
Any certificate signed by an officer of the Company and
delivered to the Representative or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter as
to the matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
(a) THE FIRM COMMON SHARES. The Company agrees to issue and
sell to the several Underwriters the Firm Common Shares upon the terms
herein set forth. On the basis of the representations, warranties and
agreements herein contained, and upon the terms but subject to the
conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company the respective number of Firm
Common Shares set forth opposite their names on SCHEDULE A. The
purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $___ per share.
(b) THE FIRST CLOSING DATE. Delivery of certificates for the
Firm Common Shares to be purchased by the Underwriters and payment
therefor shall be made at the offices of Banc of America Securities
LLC, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed to by the Company and the Representative) at
6:00 a.m. San Francisco time, on March __, 2000,or such other time and
date not later than 10:30 a.m. San Francisco time, on March __, 2000 as
the Representatives shall designate by notice to the Company (the time
and date of such closing are called the "First Closing Date"). The
Company hereby acknowledges that circumstances under which the
Representatives may provide notice to postpone the First Closing Date
as originally scheduled include, but are in no way limited to, any
determination by the Company or the Representatives to recirculate to
the public copies of an amended or supplemented Prospectus or a delay
as contemplated by the provisions of Section 10.
(c) THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In
addition, on the basis of the representations, warranties and
agreements herein contained, and upon the terms but subject to the
conditions herein set forth, the Company hereby grants an option to the
several Underwriters to purchase, severally and not jointly, up to an
aggregate of 375,000 Optional Common Shares from the Company at the
purchase price per share to be paid by the Underwriters
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for the Firm Common Shares. The option granted hereunder is for use by
the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Common Shares. The option
granted hereunder may be exercised at any time (but not more than once)
upon notice by the Representatives to the Company, which notice may be
given at any time within 30 days from the date of this Agreement. Such
notice shall set forth (i) the aggregate number of Optional Common
Shares as to which the Underwriters are exercising the option, (ii) the
names and denominations in which the certificates for the Optional
Common Shares are to be registered and (iii) the time, date and place
at which such certificates will be delivered (which time and date may
be simultaneous with, but not earlier than, the First Closing Date; and
in such case the term "First Closing Date" shall refer to the time and
date of delivery of certificates for the Firm Common Shares and the
Optional Common Shares). Such time and date of delivery, if subsequent
to the First Closing Date, is called the "Second Closing Date" and
shall be determined by the Representatives and shall not be earlier
than three nor later than five full business days after delivery of
such notice of exercise. If any Optional Common Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to
purchase the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may
determine) that bears the same proportion to the total number of
Optional Common Shares to be purchased as the number of Firm Common
Shares set forth on SCHEDULE A opposite the name of such Underwriter
bears to the total number of Firm Common Shares. The Representatives
may cancel the option at any time prior to its expiration by giving
written notice of such cancellation to the Company.
(d) PUBLIC OFFERING OF THE COMMON SHARES. The Representatives
hereby advise the Company that the Underwriters intend to offer for
sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been
executed and the Registration Statement has been declared effective as
the Representatives, in their sole judgment, have determined is
advisable and practicable.
(e) PAYMENT FOR THE COMMON SHARES. Payment for the Common
Shares shall be made at the First Closing Date (and, if applicable, at
the Second Closing Date) by wire transfer of immediately available
funds to the order of the Company.
It is understood that the Representatives have been
authorized, for their own account and the accounts of the several
Underwriters, to accept delivery of and receipt for, and make payment
of the purchase price for, the Firm Common Shares and any Optional
Common Shares the Underwriters have agreed to purchase. Banc of America
Securities LLC, individually and not as the Representatives of the
Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not
have been received by the Representatives by the First Closing Date or
the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter
from any of its obligations under this Agreement.
(f) DELIVERY OF THE COMMON SHARES. The Company shall deliver,
or cause to be delivered, to the Representatives for the accounts of
the several Underwriters certificates for the Firm Common Shares at the
First Closing Date, against the irrevocable release of a wire transfer
of immediately available funds for the amount of the purchase price
therefor. The Company shall also deliver, or cause to be delivered, to
the Representatives for the accounts of the several Underwriters,
certificates for the Optional Common Shares the Underwriters have
agreed to purchase at the First Closing Date or the Second Closing
Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase
price therefor. The certificates for the Common Shares shall be in
definitive form and
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registered in such names and denominations as the Representatives shall
have requested at least two full business days prior to the First
Closing Date (or the Second Closing Date, as the case may be) and shall
be made available for inspection on the business day preceding the
First Closing Date (or the Second Closing Date, as the case may be) at
a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified
in this Agreement is a further condition to the obligations of the
Underwriters.
(g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than
12:00 p.m. on the second business day following the date the Common
Shares are released by the Underwriters for sale to the public, the
Company shall deliver or cause to be delivered copies of the Prospectus
in such quantities and at such places as the Representatives shall
request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. The Company further
covenants and agrees with each Underwriter as follows:
(a) REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND
SUPPLEMENTS. During such period beginning on the date hereof and ending
on the later of the First Closing Date or such date, as in the opinion
of counsel for the Underwriters, the Prospectus is no longer required
by law to be delivered in connection with sales by an Underwriter or
dealer (the "Prospectus Delivery Period"), prior to amending or
supplementing the Registration Statement (including any registration
statement filed under Rule 462(b) under the Securities Act) or the
Prospectus (including any amendment or supplement through incorporation
by reference of any report filed under the Exchange Act), the Company
shall furnish to the Representatives for review a copy of each such
proposed amendment or supplement, and the Company shall not file any
such proposed amendment or supplement to which the Representatives
reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of this
Agreement, the Company shall promptly advise the Representatives in
writing (i) of the receipt of any comments of, or requests for
additional or supplemental information from, the Commission, (ii) of
the time and date of any filing of any post-effective amendment to the
Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) of the time and date
that any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of any order preventing or
suspending the use of any preliminary prospectus or the Prospectus, or
of any proceedings to remove, suspend or terminate from listing or
quotation the Common Stock from any securities exchange upon which the
Common Stock is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for
any of such purposes. If the Commission shall enter any such stop order
at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. Additionally,
the Company agrees that it shall comply with the provisions of Rules
424(b), 430A and 434, as applicable, under the Securities Act and will
use its reasonable efforts to confirm that any filings made by the
Company under such Rule 424(b) were received in a timely manner by the
Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER
SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if in the
opinion of the Representatives or counsel for the Underwriters it is
otherwise necessary to amend or supplement the Prospectus to comply
with law, the Company agrees promptly to prepare (subject to Section
3(a) hereof), file with the
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Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law. The Underwriters shall cease to use
the Prospectus upon reasonable written notice from an officer of the
Company that an amendment or supplement to the Prospectus is required.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE
PROSPECTUS. The Company agrees to furnish the Representatives, without
charge, during the Prospectus Delivery Period, as many copies of the
Prospectus and any amendments and supplements thereto (including any
documents incorporated or deemed incorporated by reference therein) as
the Representatives may reasonably request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the state securities or blue sky laws or Canadian
provincial securities laws or securities laws of those jurisdictions
designated by the Representatives, and shall comply with such laws and
shall continue such qualifications, registrations and exemptions in
effect so long as required for the distribution of the Common Shares.
The Company shall not be required to qualify as a foreign corporation
or to take any action that would subject it to general service of
process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The
Company will advise the Representatives promptly of the suspension of
the qualification or registration of (or any such exemption relating
to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and
in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company shall use its
best efforts to obtain the withdrawal thereof at the earliest possible
moment.
(f) USE OF PROCEEDS. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described
under the caption "Use of Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company
will make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited)
covering the twelve-month period ending March 31, 2001 that satisfies
the provisions of Section 11(a) of the Securities Act.
(i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents
required to be filed under the Exchange Act.
(j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES.
During the period of 90 days following the date of the Prospectus, the
Company will not, without the prior written consent of Banc of America
Securities LLC (which consent may be withheld at the sole discretion of
Banc of America Securities LLC), directly or indirectly, sell, offer,
contract or grant any option to sell, pledge, transfer or establish an
open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Exchange Act, or otherwise dispose of or transfer, or
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announce the offering of, or file any registration statement under the
Securities Act in respect of, any shares of Common Stock, options or
warrants to acquire shares of the Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common
Stock (other than as contemplated by this Agreement with respect to the
Common Shares); provided, however, that the Company may issue shares of
its Common Stock or options to purchase its Common Stock, or Common
Stock upon exercise of options, pursuant to any stock option, stock
bonus or other stock plan or arrangement described in the Prospectus.
(k) FUTURE REPORTS TO THE REPRESENTATIVES. During the period
of three years hereafter the Company will furnish to the
Representatives at 600 Montgomery Street, San Francisco, CA 94111, and
to O'Melveny & Myers LLP at the address set forth in Section 13: (i) as
soon as practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
stockholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public or certified public
accountants; (ii) as soon as practicable after the filing thereof,
copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed
by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its capital
stock.
Banc of America Securities LLC, on behalf of the several
Underwriters, may, in its sole discretion, waive in writing the performance by
the Company of any one or more of the foregoing covenants or extend the time for
their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, reasonable attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the state securities or blue sky laws or
the provincial securities laws of Canada, and, if requested by the
Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with listing the Common Shares on the Nasdaq National Market, and
(ix) all other fees, costs and expenses referred to in Item 14 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
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accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the
Representatives shall have received from Deloitte & Touche LLP,
independent public or certified public accountants for the Company, a
letter dated the date hereof addressed to the Underwriters, in form and
substance satisfactory to the Representatives, containing statements
and information of the type ordinarily included in accountant's
"comfort letters" to underwriters, delivered according to Statement of
Auditing Standards No. 72 (or any successor bulletin), with respect to
the audited and unaudited financial statements and certain financial
information contained, or incorporated by reference, in the
Registration Statement and the Prospectus (and the Representatives
shall have received an additional four conformed copies of such
accountants' letter for each of the several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER;
NO OBJECTION FROM NASD. For the period from and after effectiveness of
this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with
the Commission (including the information required by Rule
430A under the Securities Act) in the manner and within the
time period required by Rule 424(b) under the Securities Act;
or the Company shall have filed a post-effective amendment to
the Registration Statement containing the information required
by such Rule 430A, and such post-effective amendment shall
have become effective; or, if the Company elected to rely upon
Rule 434 under the Securities Act and obtained the
Representatives' consents thereto, the Company shall have
filed a Term Sheet with the Commission in the manner and
within the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of
the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment to the Registration
Statement, shall be in effect and no proceedings for such
purpose shall have been instituted or threatened by the
Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and
arrangements.
(c) NO MATERIAL ADVERSE CHANGE. For the period from and after
the date of this Agreement and prior to the First Closing Date and,
with respect to the Optional Common Shares, the Second Closing Date in
the judgment of the Representatives there shall not have occurred any
Material Adverse Change.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Cooley Godward LLP, counsel for the
Company, dated as of such Closing Date, the form of which is attached
as EXHIBIT A (and the Representatives shall have received an additional
four conformed copies of such counsel's legal opinion for each of the
several Underwriters).
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(e) OPINION OF PATENT COUNSEL FOR THE COMPANY. On each of the
First Closing Date and the Second Closing Date the Representatives
shall have received the favorable opinion of Townsend and Townsend and
Crew LLP, intellectual property counsel for the Company, the form of
which is attached as EXHIBIT B (and the Representatives shall have
received an additional four conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(f) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the
First Closing Date and the Second Closing Date the Representatives
shall have received the favorable opinion of O'Melveny & Myers LLP,
counsel for the Underwriters, dated as of such Closing Date, with
respect to the matters set forth in paragraphs (i), (vii), (viii),
(ix), (xi), (xi), (xii), and the next-to-last paragraph of EXHIBIT A
(and the Representatives shall have received an additional four
conformed copies of such counsel's legal opinion for each of the
several Underwriters).
(g) OFFICERS' CERTIFICATE. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received a
written certificate executed by the Chairman of the Board, Chief
Executive Officer or President of the Company and the Chief Financial
Officer or Chief Accounting Officer of the Company, dated as of such
Closing Date, to the effect set forth in subsection (b)(ii) of this
Section 5, and further to the effect that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not
occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of
the Company set forth in Section 1 of this Agreement are true
and correct in all material respects with the same force and
effect as though expressly made on and as of such Closing
Date; and
(iii) the Company has complied with all the
agreements herein and satisfied all the conditions herein on
its part to be performed or satisfied at or prior to such
Closing Date.
(h) BRING-DOWN COMFORT LETTER. On each of the First Closing
Date and the Second Closing Date the Representatives shall have
received from Deloitte & Touche LLP, independent public or certified
public accountants for the Company, a letter dated such date, in form
and substance satisfactory to the Representatives, to the effect that
they reaffirm the statements made in the letter furnished by them
pursuant to subsection (a) of this Section 5, except that the specified
date referred to therein for the carrying out of procedures shall be no
more than three business days prior to the First Closing Date or Second
Closing Date, as the case may be (and the Representatives shall have
received an additional four conformed copies of such accountants'
letter for each of the several Underwriters).
(i) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE
COMPANY. On the date hereof, the Company shall have furnished to the
Representatives an agreement in the form of EXHIBIT C hereto from each
director, and each officer listed in the section entitled "Management"
contained in the Prospectus, and such agreement shall be in full force
and effect on each of the First Closing Date and the Second Closing
Date.
(j) ADDITIONAL DOCUMENTS. On or before each of the First
Closing Date and the Second Closing Date, the Representatives and
counsel for the Underwriters shall have received such information,
documents and opinions as they may reasonably require for the purposes
of enabling them to pass upon the issuance and sale of the Common
Shares as contemplated herein,
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or in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representatives pursuant to Section 5, Section 7, Section
10 or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of
(i) the execution of this Agreement by the parties hereto and (ii) notification
by the Commission to the Company and the Representatives of the effectiveness of
the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated
by any party by notice to each of the other parties hereto, and any such
termination shall be without liability on the part (a) of the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 4 and
6 hereof, (b) of any Underwriter to the Company, or (c) of any party hereto to
any other party except that the provisions of Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act and the Exchange Act against any
loss, claim, damage, liability or expense, as incurred, to which such
Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule
434 under the Securities Act, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading; or (ii) upon any untrue
statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission
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therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading; or (iii) in whole or in part upon
any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or
(v) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to,
the Common Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered
by clause (i) or (ii) above, provided that the Company shall not be
liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such
loss, claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by
such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any
and all expenses (including the fees and disbursements of counsel
chosen by Banc of America Securities LLC) as such expenses are
reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement
shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives
expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any
preliminary prospectus, the foregoing indemnity agreement shall not
inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased
Common Shares, or any person controlling such Underwriter, if copies
of the Prospectus were timely delivered to the Underwriter pursuant
to Section 2 and a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of
the Common Shares to such person, and if the Prospectus (as so
amended or supplemented) would have cured the defect giving rise to
such loss, claim, damage, liability or expense. The indemnity
agreement set forth in this Section 8(a) shall be in addition to any
liabilities that the Company may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND
OFFICERS. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of
its officers who signed the Registration Statement and each person, if
any, who controls the Company within the meaning of the Securities Act
or the Exchange Act, against any loss, claim, damage, liability or
expense, as incurred, to which the Company, or any such director,
officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent
of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises
out of or is based upon any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto),
or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
the Registration Statement, any preliminary prospectus, the Prospectus
(or any amendment or supplement thereto), in reliance upon and in
conformity with written information
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furnished to the Company by the Representatives expressly for use
therein; and to reimburse the Company, or any such director, officer or
controlling person for any legal and other expense reasonably incurred
by the Company, or any such director, officer or controlling person in
connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The
Company hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) are the statements set forth
in the table in the first paragraph and as the third, ninth, tenth,
eleventh, twelfth and thirteenth paragraphs under the caption
"Underwriting" in the Prospectus; and the Underwriters confirm that
such statements are correct. The indemnity agreement set forth in this
Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES.
Promptly after receipt by an indemnified party under this Section 8 of
notice of the threatened commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section 8, notify the indemnifying party
in writing of the threatened commencement thereof, but the omission so
to notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section
8 or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity
from an indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it shall elect, jointly with
all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that a conflict may arise between
the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying
party, the indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party
of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel
(together with local counsel), approved by the indemnifying party (Banc
of America Securities LLC in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to
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indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified
party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
Section 8(c) hereof, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid request
and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of
such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or
consent to the entry of judgment in any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise
or consent includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such
action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any
reason held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate public offering price of the Common Shares as set
forth on such cover. The relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 8(c), any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
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The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several, and not joint, in proportion
to their respective underwriting commitments as set forth opposite their names
in SCHEDULE A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on SCHEDULE A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination. In
any such case either the Representatives or the Company shall have the right to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 10. Any action taken under this Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq National Market, or trading in securities generally on either the Nasdaq
National Market or
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the New York Stock Exchange shall have been suspended or limited, or minimum or
maximum prices shall have been generally established on any of such stock
exchanges by the Commission or the NASD; (ii) a general banking moratorium shall
have been declared by any of federal, New York, Delaware or California
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any change
in the United States or international financial markets, or any substantial
change or development involving a prospective substantial change in United
States' or international political, financial or economic conditions, as in the
judgment of the Representatives is material and adverse and makes it
impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus or to enforce contracts for the sale of securities;
(iv) in the judgment of the Representatives there shall have occurred any
Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the reasonable judgment of the Representatives may interfere materially with
the conduct of the business and operations of the Company regardless of whether
or not such loss shall have been insured. Any termination pursuant to this
Section 11 shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 4 and
6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Senior Managing Director, Syndicate
with a copy to both:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: Jeffrey Lapic, Esq.
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and
O'Melveny & Myers LLP
Embarcadero Center West
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
Facsimile: (415) 984-8701
Attention: Peter T. Healy, Esq.
If to the Company:
Exar Corporation
48720 Kato Road
Fremont, California 94538
Facsimile: (510) 668-7002
Attention: Thomas R. Melendrez, Esq.
with a copy to both:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Facsimile: (650) 849-7400
Attention: Matthew W. Sonsini, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS.
(a) CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH
STATE.
(b) CONSENT TO JURISDICTION. Any legal suit, action or
proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby ("Related Proceedings") may be
instituted in the federal courts of the United States of America
located in the City and County
22
<PAGE>
of San Francisco or the courts of the State of California in each case
located in the City and County of San Francisco (collectively, the
"Specified Courts"), and each party irrevocably submits to the
exclusive jurisdiction (except for proceedings instituted in regard to
the enforcement of a judgment of any such court (a "Related Judgment"),
as to which such jurisdiction is non-exclusive) of such courts in any
such suit, action or proceeding. Service of any process, summons,
notice or document by mail to such party's address set forth above
shall be effective service of process for any suit, action or other
proceeding brought in any such court. The parties irrevocably and
unconditionally waive any objection to the laying of venue of any suit,
action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court
that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a
sophisticated business person who was adequately represented by counsel during
negotiations regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
[SIGNATURE PAGE FOLLOWS]
23
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
EXAR CORPORATION
By:__________________________
[Title]
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Representatives in San Francisco, California as of the date
first above written.
BANC OF AMERICA SECURITIES LLC
FLEETBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By BANC OF AMERICA SECURITIES LLC
By: :__________________________
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM COMMON
UNDERWRITERS SHARES
TO BE PURCHASED
<S> <C>
Banc of America Securities LLC .................................................[___]
FleetBoston Robertson Stephens Inc. ............................................[___]
U.S. Bancorp Piper Jaffray Inc. ................................................[___]
Needham & Company, Inc. ........................................................[___]
-----
Total..................................................................[___]
-----
-----
</TABLE>
<PAGE>
EXHIBIT A
OPINION OF COMPANY COUNSEL
THE FINAL OPINION IN DRAFT FORM SHOULD BE ATTACHED AS EXHIBIT A AT THE TIME THIS
AGREEMENT IS EXECUTED.
Opinion of counsel for the Company to be delivered pursuant to
Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT A include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in the State of California
and, to the best knowledge of such counsel, in each other jurisdiction
in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for
such jurisdictions (other than the State of California) where the
failure to so qualify or to be in good standing would not, individually
or in the aggregate, result in a Material Adverse Change.
(iv) MicroPower Systems, Inc. ("MPSI") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to
conduct its business as currently conducted and, to the best knowledge
of such counsel, is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material
Adverse Change.
(v) All of the issued and outstanding capital stock of MPSI
has been duly authorized and validly issued, is fully paid and
non-assessable and is owned of record by the Company, directly or
through subsidiaries.
(vi) The authorized, issued and outstanding capital stock of
the Company (including the Common Stock) conform to the descriptions
thereof set forth or incorporated by reference in the Prospectus. All
of the outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable. The form of
certificate used to evidence the Common Stock is in due and proper form
and complies with all applicable requirements of the charter and
by-laws of the Company and the General Corporation Law of the State of
Delaware.
(vii) No stockholder of the Company or any other person has
any preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the State of Delaware or (ii) to the best knowledge
of such counsel, otherwise.
A-1
<PAGE>
(viii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(ix) The Common Shares to be purchased by the Underwriters
from the Company have been duly authorized for issuance and sale
pursuant to the Underwriting Agreement and, when issued and delivered
by the Company pursuant to the Underwriting Agreement against payment
of the consideration set forth therein, will be validly issued, fully
paid and nonassessable.
(x) Each of The Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if
any, has been issued under the Securities Act and no proceedings for
such purpose have been instituted or are pending or are contemplated or
threatened by the Commission. Any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) under the Securities Act
has been made in the manner and within the time period required by such
Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus including any document
incorporated by reference therein, and each amendment or supplement to
the Registration Statement and the Prospectus including any document
incorporated by reference therein, as of their respective effective or
filing dates (other than the financial statements and supporting
schedules included or incorporated by reference therein or in exhibits
to or excluded from the Registration Statement or the financial or
statistical information derived therefrom, as to which no opinion
need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act and the Exchange Act.
(xii) The Common Shares have been approved for listing on the
Nasdaq National Market.
(xiii) The statements (i) in or incorporated by reference in
the Prospectus under the caption "Description of Capital Stock," and
(ii) in Item 14 and Item 15 of the Registration Statement, insofar as
such statements constitute matters of law, summaries of legal matters,
the Company's charter or by-law provisions, documents or legal
proceedings, or legal conclusions, has been reviewed by such counsel
and fairly present and summarize, in all material respects, the
information required to be disclosed with respect to such matters
referred to therein.
(xiv) To the best knowledge of such counsel, there are no
legal or governmental actions, suits or proceedings pending or
threatened which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xv) To the best knowledge of such counsel, there are no
Existing Instruments required by the Securities Act or by the rules and
regulations thereunder to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto.
A-2
<PAGE>
(xvi) No consent, approval, authorization or other order of,
or registration or filing with, any court or other governmental
authority or agency, is required for the Company's execution, delivery
and performance of the Underwriting Agreement and consummation of the
transactions contemplated thereby and by the Prospectus, except as
required under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting
Agreement by the Company and the performance by the Company of its
obligations thereunder (other than performance by the Company of its
obligations under the indemnification section of the Underwriting
Agreement, as to which no opinion need be rendered) (i) will not result
in any violation of the provisions of the charter or by-laws of the
Company or MPSI; (ii) will not constitute a breach of, or Default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or MPSI pursuant
to any Existing Instruments that have been filed with the Securities
and Exchange Commission as exhibits to the Company's filings under the
Securities Act or Exchange Act; or (iv) to the best knowledge of such
counsel, will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company
or MPSI.
(xviii) The Company is not, and after receipt of payment for
the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(xix) Except as disclosed in the Prospectus, to the best
knowledge of such counsel, there are no persons with registration or
other similar rights to have any equity or debt securities registered
for sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement.
In the course of the preparation of the Registration
Statement and the Prospectus, we have participated in
discussions and conferences with officers of the Company,
representatives of its independent public accountants,
representatives of the Underwriters and their counsel during
which contents of the Registration Statement and the
Prospectus (and any supplements or amendments thereto) were
discussed, and while we have not independently verified, are
not passing upon and assume no responsibility for the
accuracy, completeness or fairness of the Registration
Statement or Prospectus, we advise you that no facts have come
to our attention which have caused us to believe that the
Registration Statement (including all documents incorporated
by reference therein), as of its effective date, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the
Prospectus (including all documents incorporated by reference
therein) as of its date and as of the date hereof, contained
or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made,
not misleading (except for the financial statements, related
schedules, other financial information and statistical
information derived therefrom included in the Registration
Statement and Prospectus, as to which such counsel need
express no view).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law of
the State of California or the federal law of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance
A-3
<PAGE>
to the Underwriters, shall expressly state that the Underwriters may rely on
such opinion as if it were addressed to them and shall be furnished to the
Representatives) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.
A-4
<PAGE>
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
[Date]
Banc of America Securities LLC
FleetBoston Robertson Stephens Inc.
U.S. Bancorp Piper Jaffray
Needham & Company, Inc.
As Representatives of the Several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Re: EXAR CORPORATION (THE "COMPANY")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of
certain shares of Common Stock of the Company ("Common Stock") or securities
convertible into or exchangeable or exercisable for Common Stock. The Company
proposes to carry out a public offering of Common Stock (the "Offering") for
which you will act as the representatives of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters are
relying on the representations and agreements of the undersigned contained in
this letter (this "Lock-Up Letter Agreement") in carrying out the Offering and
in entering into an underwriting agreement (the "Underwriting Agreement") with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby
agrees that the undersigned will not, without the prior written consent of Banc
of America Securities LLC (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including, without limitation, any short sale), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended, or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible into shares
of Common Stock currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by
the undersigned, or publicly announce the undersigned's intention to do any of
the foregoing, for a period commencing on the date hereof and continuing through
the close of trading on the date 90 days after the date of the Prospectus. The
foregoing sentence shall not apply to transactions relating to shares of Common
Stock or other securities convertible or exchangeable for shares of Common Stock
(1) acquired in open market transactions after the completion of the Offering,
or (2) disposed of (i) as a bona fide gift or gifts, or (ii) by will or
intestacy to the undersigned's immediate family or to a trust the beneficiaries
of which are exclusively the undersigned, a member or members of his or her
immediate family and/or a charity, in each case provided that any gift, transfer
or distribution pursuant to clause (i) or (ii) above shall be conditioned upon
such donee, transferee or distributee executing and delivering a copy of a
Lock-Up Letter Agreement to you. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.
B-1
<PAGE>
It is understood that, if the Company notifies you and the
undersigned that it does not intend to proceed with the Offering, if the
Underwriting Agreement is not executed and delivered by you, or if the
Underwriting Agreement (other than the provisions thereof which survive
termination) shall terminate or be terminated prior to payment for and delivery
of the shares of Common Stock to be sold in the Offering, the undersigned will
be released from its obligations under this Lock-Up Letter Agreement. This
Lock-Up Letter Agreement will terminate if the closing date of the Offering has
not occurred prior to June 30, 2000.
With respect to the Offering only, the undersigned waives any
registration rights relating to registration under the Securities Act of 1933,
as amended, of any Common Stock owned either of record or beneficially by the
undersigned, including any rights to receive notice of the Offering.
This Lock-Up Letter Agreement is irrevocable and will be
binding on the undersigned and the respective successors, heirs, personal
representatives, and assigns of the undersigned.
________________________________________
PRINTED NAME OF HOLDER
By:________________________________
SIGNATURE
________________________________________
PRINTED NAME OF PERSON SIGNING*
*(and indicate capacity of person signing
if signing as custodian, trustee, or on
behalf of an entity)
B-2
<PAGE>
EXHIBIT C
INTELLECTUAL PROPERTY OPINION
Opinion of Patent Counsel to the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT B include any
supplements thereto at the Closing Date.
Such counsel shall state that they act as the Company's
intellectual property counsel and in such capacity are familiar with the
technology used by the Company in its business and the manner of its use thereof
and have read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the Prospectus
referring to the Company's patents, patent rights or licenses, trademarks or
trademark rights, service marks, copyrights, maskwork rights, collaborative
research, licenses or royalty arrangements or agreements, trade secrets,
know-how or proprietary techniques, including processes and substances, or other
proprietary information or materials (collectively "Intellectual Property") and
in their opinion:
(i) Such counsel shall have no reason to believe that the statements in
the Prospectus under the captions "Risk Factors - we may not be able to protect
our intellectual property rights adequately," "- we could be harmed by
litigation involving patents and other intellectual property rights" and
"Business - Intellectual Property Rights," insofar as such statements constitute
matters of law, legal conclusions or summaries of legal matters relating to
patents, or descriptions of the Company's patents, at the time it became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made, not misleading;
(ii) Such counsel is not aware of any material action, suit, claim or
proceeding relating to or affecting the Company's Intellectual Property which is
pending or threatened against the Company or any of its officers or directors;
(iii) The Company is listed in the records of the United States Patent
and Trademark Office as the holder of record of the patents listed on Schedule A
to this opinion (the "Patents") and each of the applications listed on such
schedule (the "Applications"). To the best of such counsel's knowledge, there
are no claims of third parties to any ownership interest or lien with respect to
any of the Patents or Applications. Such counsel is not aware of any material
defect in form in the preparation or filing of the Applications on behalf of the
Company. To the best of such counsel's knowledge, the Applications are being
pursued by the Company. To the best of such counsel's knowledge, the Company
owns as its sole property the Patents and pending Applications;
(iv) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on Schedule B
(the "Foreign Patents") and each of the applications listed on such schedule
(the "Foreign Applications"). Such counsel is not aware of any claims of third
parties to any ownership interest or lien with respect to the Foreign Patents or
Foreign Applications. Such counsel is not aware of any material defect of form
in the preparation or filing of the Foreign Applications on behalf of the
Company. To the best of such counsel's knowledge, the Foreign Applications are
being pursued by the Company. To the best of such counsel's knowledge, the
Company owns as its sole property the Foreign Patents and pending Foreign
Applications; and
C-1
<PAGE>
(v) Such counsel is not aware of any reason why the Patents or Foreign
Patents are not valid as issued. Such counsel is not aware of any reason why any
patent to be issued as a result of any Application or Foreign Application would
not be valid.
C-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. Representations and Warranties of the Company....................................................2
(a) Compliance with Registration Requirements.............................................2
(b) Offering Materials Furnished to Underwriters..........................................3
(c) Distribution of Offering Material By the Company......................................3
(d) The Underwriting Agreement............................................................3
(e) Authorization of the Common Shares....................................................3
(f) No Applicable Registration or Other Similar Rights....................................3
(g) No Material Adverse Change............................................................3
(h) Independent Accountants...............................................................4
(i) Preparation of the Financial Statements...............................................4
(j) Incorporation and Good Standing of the Company and its
Subsidiaries..........................................................................4
(k) Capitalization and Other Capital Stock Matters........................................4
(l) Stock Exchange Listing................................................................5
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required..................................................5
(n) No Material Actions or Proceedings....................................................5
(o) Intellectual Property Rights..........................................................6
(p) All Necessary Permits, etc............................................................6
(q) Title to Properties...................................................................6
(r) Tax Law Compliance....................................................................6
(s) Company Not an "Investment Company"...................................................6
(t) Exchange Act Compliance...............................................................7
(u) Insurance.............................................................................7
(v) No Price Stabilization or Manipulation................................................7
(w) Related Party Transactions............................................................7
(x) No Unlawful Contributions or Other Payments...........................................7
(y) Company's Accounting System...........................................................7
(z) Compliance with Environmental Laws....................................................7
(aa) Periodic Review of Costs of Environmental Compliance..................................8
(bb) ERISA Compliance......................................................................8
(cc) Year 2000.............................................................................9
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 2. Purchase, Sale and Delivery of the Common Shares.................................................9
(a) The Firm Common Shares................................................................9
(b) The First Closing Date................................................................9
(c) The Optional Common Shares; the Second Closing Date...................................9
(d) Public Offering of the Common Shares.................................................10
(e) Payment for the Common Shares........................................................10
(f) Delivery of the Common Shares........................................................10
(g) Delivery of Prospectus to the Underwriters...........................................11
Section 3. Additional Covenants of the Company.............................................................11
(a) Representatives' Review of Proposed Amendments and
Supplements..........................................................................11
(b) Securities Act Compliance............................................................11
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters...............................................................11
(d) Copies of any Amendments and Supplements to the Prospectus...........................12
(e) Blue Sky Compliance..................................................................12
(f) Use of Proceeds......................................................................12
(g) Transfer Agent.......................................................................12
(h) Earnings Statement...................................................................12
(i) Periodic Reporting Obligations.......................................................12
(j) Agreement Not To Offer or Sell Additional Securities.................................12
(k) Future Reports to the Representatives................................................13
Section 4. Payment of Expenses.............................................................................13
Section 5. Conditions of the Obligations of the Underwriters...............................................13
(a) Accountants' Comfort Letter..........................................................14
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD..................................................................14
(c) No Material Adverse Change...........................................................14
(d) Opinion of Counsel for the Company...................................................14
(e) Opinion of Patent Counsel for the Company............................................14
(f) Opinion of Counsel for the Underwriters..............................................15
(g) Officers' Certificate................................................................15
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
(h) Bring-down Comfort Letter............................................................15
(i) Lock-Up Agreement from Certain Stockholders of the Company...........................15
(j) Additional Documents.................................................................15
Section 6. Reimbursement of Underwriters' Expenses.........................................................16
Section 7. Effectiveness of this Agreement.................................................................16
Section 8. Indemnification.................................................................................16
(a) Indemnification of the Underwriters..................................................16
(b) Indemnification of the Company, its Directors and Officers...........................17
(c) Notifications and Other Indemnification Procedures...................................18
(d) Settlements..........................................................................18
Section 9. Contribution....................................................................................19
Section 10. Default of One or More of the Several Underwriters..............................................20
Section 11. Termination of this Agreement...................................................................20
Section 12. Representations and Indemnities to Survive Delivery.............................................21
Section 13. Notices.........................................................................................21
Section 14. Successors......................................................................................22
Section 15. Partial Unenforceability........................................................................22
Section 16. Governing Law Provisions........................................................................22
(a) Choice of Law........................................................................22
(b) Consent to Jurisdiction..............................................................22
Section 17. General Provisions..............................................................................23
</TABLE>
iii
<PAGE>
[COOLEY GODWARD LLP LETTERHEAD]
March 6, 2000
Exar Corporation
48720 Kato Road
Fremont, CA 94538
Dear Ladies & Gentleman:
You have requested our opinion with respect to certain matters in connection
with the filing by Exar Corporation (the "Company") of a Registration Statement
on Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission, covering an underwritten public offering of up to 3,450,000 shares
of common stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related prospectus, the Company's Certificate of
Incorporation and Bylaws, as amended, and the originals or copies certified to
our satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below and (ii) assumed that the shares of Common
Stock will be sold by the Underwriters at a price established by the Board of
Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
<TABLE>
<S> <C>
Very truly yours,
COOLEY GODWARD LLP
By: /s/ MATTHEW W. SONSINI
----------------------------------------
Matthew W. Sonsini
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-30398 of Exar Corporation on Form S-3 of our
report dated April 20, 1999 (February 15, 2000 as to the fourth paragraph of
Note 1), included in the Annual Report on Form 10-K of Exar Corporation for the
year ended March 31, 1999, and to the use of our report dated April 20, 1999
(February 15, 2000 as to the fourth paragraph of Note 1), appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE, LLP
San Jose, California
March 6, 2000
