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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended December 31, 1999
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______
Commission File No. 0-14225
EXAR CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware 94-1741481
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
48720 Kato Road, Fremont California 94538
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(Address of principal executive offices) (Zip Code)
REgistrant's Telephone Number, Including Area Code: (510) 668-7000
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 2000
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Common Stock, .0001 par value 9,933,803 shares net of treasury shares
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TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....................3-5
Notes to Condensed Consolidated Financial Statements...........6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................9-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk......23
PART II OTHER INFORMATION
Item 5. Other Information...............................................23
Item 6. Exhibits and Reports on Form 8-K................................23
Signatures......................................................24
EXHIBITS
Exhibit 27.0....................................................25
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
(Unaudited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 84,198 $ 79,154
Short-term investments 19,630 2,000
Accounts receivable, net 10,968 11,450
Inventories 7,714 5,873
Prepaid expenses and other 1,111 939
Deferred income taxes 4,365 4,047
-------------- -----------
Total current assets 127,986 103,463
PROPERTY AND EQUIPMENT, Net 26,968 27,684
GOODWILL, Net 126 504
OTHER ASSETS 912 6,645
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TOTAL ASSETS $155,992 $138,296
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,282 $ 4,265
Accrued compensation and related benefits 6,364 3,560
Other accrued expenses 2,549 2,828
Income taxes payable 3,069 925
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Total current liabilities 16,264 11,578
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LONG-TERM LIABILITIES AND DEFERRED INCOME TAXES 903 961
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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;
11,143,744 and 10,654,244 shares outstanding 97,350 88,908
Accumulated other comprehensive income 171 204
Retained earnings 65,175 57,124
Treasury stock; 1,456,566 and 1,338,266 shares
of common stock at cost (23,871) (20,479)
-------------- -----------
Total stockholders' equity 138,825 125,757
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $155,992 $138,296
============== ===========
See notes to condensed consolidated financial statements
</TABLE>
3
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EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
NET SALES $20,708 $15,808 $55,509 $56,770
COSTS AND EXPENSES:
Cost of sales 8,947 7,292 24,409 26,504
Research and development 3,950 3,360 12,378 10,348
Selling, general and administrative 5,609 4,475 17,268 14,790
Goodwill amortization 126 146 378 515
Restructuring and other charges - 731 - 731
------- ------- ------- -------
Total costs and expenses 18,632 16,004 54,433 52,888
------- ------- ------- -------
OPERATING INCOME (LOSS) 2,076 (196) 1,076 3,882
OTHER INCOME:
Interest income, net 1,485 1,110 3,766 3,152
Gain on sale of investment - - 7,003 -
Other, net (62) 72 (6) 545
------- ------- ------- -------
Total other income, net 1,423 1,182 10,763 3,697
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,499 986 11,839 7,579
INCOME TAXES 1,124 402 3,788 2,874
------- ------- ------- -------
NET INCOME $2,375 $584 $8,051 $4,705
======= ======= ======= =======
NET INCOME PER SHARE:
BASIC $ 0.25 $ 0.06 $ 0.85 $0.50
======= ======= ======= =======
DILUTED $ 0.22 $ 0.06 $ 0.78 $0.49
======= ======= ======= =======
SHARES USED IN COMPUTATION OF
NET INCOME PER SHARE:
BASIC 9,542 9,303 9,419 9,418
======= ======= ======= =======
DILUTED 10,935 9,436 10,371 9,675
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements
4
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EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,051 $ 4,705
Reconciliation of net income to net cash used in operating activities:
Depreciation and amortization 2,999 3,812
Provision for doubtful accounts and sales returns (227) (544)
Deferred income taxes (294) -
Gain on sale of investment (7,003) -
Gain on sale of equipment (474) (289)
Changes in operating assets and liabilities:
Accounts receivable 709 4,559
Inventories (1,841) 245
Prepaid expenses and other (172) (388)
Accounts payable 17 (3,390)
Accrued compensation and related benefits 2,804 (5,700)
Accrued sales commissions 70 67
Other accrued expenses (401) 141
Income taxes payable 2,144 2,633
-------- -------
Net cash provided by operating activities 6,382 5,851
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,905) (4,287)
Proceeds from sale of equipment 548 797
Purchases of short-term investments (21,340) (137)
Sales of short-term investments 3,710 -
Proceeds from sale of investment 13,080 -
Other assets (344) (10)
-------- -------
Net cash used in investing activities (6,251) (3,637)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8,442 2,033
Long-term liabilities (104) (61)
Acquisition of common stock (3,392) (5,575)
-------- -------
Net cash provided by (used in) financing activities 4,946 (3,603)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (33) 97
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,044 (1,292)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 79,154 76,167
-------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 84,198 $74,875
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 920 $ 543
======== =======
Cash paid for interest $ 725 $ -
======== =======
</TABLE>
See notes to condensed consolidated financial statements
5
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
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NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Exar Corporation and its wholly-owned subsidiaries ("Exar" or the
"Company"). Such financial statements have been prepared in conformity with
generally accepted accounting principles consistent with those reflected in the
Company's 1999 annual report on Form 10-K, and include all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows. The
results of operations for the three and nine months ended December 31, 1999 are
not necessarily indicative of the results of operations to be expected for the
full year. These financial statements should be read in conjunction with the
audited financial statements for the fiscal year ended March 31, 1999 included
in the Company's annual report to security holders furnished to the Securities
and Exchange Commission pursuant to Rule 14a-3(b) in connection with the
Company's 1999 Annual Meeting of Stockholders.
Exar designs, develops and markets mixed-signal application specific integrated
circuits for use in communications and video and imaging product areas.
Principal markets include North America, Asia, Europe and other countries.
NOTE 2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
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<S> <C> <C>
Work-in-process $ 5,024 $ 3,262
Finished goods 2,690 2,611
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$ 7,714 $ 5,873
========== ==========
</TABLE>
NOTE 3. GAIN ON SALE OF INVESTMENT
The gain on investment of $7.0 million is related to the Company's minority
equity investment in IC Works, Inc. ("IC Works"), which had a net book value
of $6.1 million. In April 1999, the Company received in excess of 1.1 million
shares of common stock in Cypress Semiconductor, Inc. ("Cypress") in exchange
for the Company's investment in IC Works due to the merger of Cypress and IC
Works. The Company sold this stock at a fair market value of $13.1 million
during the first quarter of fiscal 2000 resulting in a pre-tax gain of $7.0
million in other income and a related employee and compensation benefits
expense of $3.0 million in Costs and Expenses.
6
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NOTE 4. NET INCOME PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128 requires a dual
presentation of basic and diluted earnings per share (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>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
NET INCOME $ 2,375 $ 584 $ 8,051 $ 4,705
======= ======= ======= =======
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding used in
computation of basic net income per share 9,542 9,303 9,419 9,418
Dilutive effect of stock options 1,393 133 952 257
------- ------- ------- -------
Shares used in computation of diluted net income per share 10,935 9,436 10,371 9,675
======= ======= ======= =======
BASIC NET INCOME PER SHARE $ 0.25 $ 0.06 $ 0.85 $ 0.50
======= ======= ======= =======
DILUTED NET INCOME PER SHARE $ 0.22 $ 0.06 $ 0.78 $ 0.49
======= ======= ======= =======
</TABLE>
Options to purchase 13,500 and 1,402,407 shares of common stock at prices
ranging above $48.63 and from $16.09 to $37.25 were outstanding as of December
31, 1999 and 1998, respectively, but not included in the computation of diluted
net income per share because the options' exercise prices were greater than the
average market price of the common shares as of such dates and, therefore, would
be antidilutive under the treasury stock method. The per share calculations do
not give effect to the three-for-two split, to be effected in the form of a
stock dividend, to be distributed on February 15, 2000.
7
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NOTE 5. COMPREHENSIVE INCOME
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner sources.
For the three and nine months ended December 31, 1999 and 1998, comprehensive
income, which was comprised of the Company's net income for the periods and
changes in cumulative translation adjustments was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
NET INCOME $ 2,375 $ 584 $ 8,051 $ 4,705
OTHER COMPREHENSIVE INCOME -
Cumulative translation adjustments 25 112 (33) 97
-------- ------- -------- --------
COMPREHENSIVE INCOME $ 2,400 $ 696 $ 8,018 $ 4,802
======== ====== ======== =======
</TABLE>
NOTE 6. 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. Under 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 application-specific integrated circuits for use in
communications and in video and imaging products. The nature of the Company's
products and production processes as well as type of customers and distribution
methods are consistent among all of the Company's devices. The Company's foreign
operations consist primarily of its wholly owned subsidiaries in Japan, Taiwan,
France and the United Kingdom. The Company's principal markets include North
America, Asia, Europe and other countries.
NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued 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 statement
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.
8
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ITEM 2. - 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 use in the
communications market and video and imaging market. Our primary customers are
large communications equipment 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
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 market At that
time, 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 32.4% and 35.1% of our net sales for the
three months and 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 IC's, 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 from other
manufacturers, the volume of products manufactured and sold, our 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.
9
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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>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 43.2 46.1 44.0 46.7
----- ----- ----- -----
Gross profit....................................... 56.8 53.9 56.0 53.3
Research and development........................... 19.1 21.3 22.3 18.2
Selling, general and administrative................ 27.1 28.3 31.1 26.1
Goodwill amortization.............................. 0.6 0.9 0.7 0.9
Restructuring and other charges.................... -- 4.6 -- 1.3
Acquisition related expenses....................... -- -- -- --
----- ----- ----- -----
Operating income (loss)............................ 10.0 (1.2) 1.9 6.8
Other income, net.................................. 6.9 7.4 19.4 6.5
----- ----- ----- -----
Income (loss) before income taxes.................. 16.9 6.2 21.3 13.3
Income taxes (benefit)............................. 5.4 2.5 6.8 5.0
----- ----- ----- -----
Net income (loss).................................. 11.5% 3.7% 14.5% 8.3%
===== ===== ===== =====
</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 condensed consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Communications..................................... 74.0% 53.9% 74.6% 54.3%
Video and Imaging.................................. 17.3% 16.1% 17.8% 22.7%
Other.............................................. 8.7% 30.0% 7.6% 23.0%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED DECEMBER 31, 1999
NET SALES. Net sales for the three months ended December 31, 1999 were
$20.7 million compared to $15.8 million for the three months ended December
31, 1998, an increase of approximately 31.0%. This increase was primarily due
to increases in sales of the Company's communications products which
increased 79.9% when compared to the corresponding period in fiscal 1999. 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
increased sales of our network and transmission products as both of these
product lines gained market acceptance and design wins.
In the three months ended December 31, 1999 sales to domestic customers
increased by 43.6% to $14.0 million. International sales increased by 10.7%
to $6.7 million. 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 for the three months and the nine months
ended December 31, 1999 decreased to approximately 43.2% and 44.0% of net
sales, compared to 46.1% and 46.7% of net sales for the three and nine months
ended December 31, 1998. 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,
10
<PAGE>
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
three months and nine months ended December 31, 1999 represented 19.1% and
22.3% of net sales, compared to 21.3% and 18.2% of net sales, in the
corresponding periods in fiscal 1999. Research and development spending for
the three months and nine months ended December 31, 1999 increased by 17.6%
and 19.6% compared to the corresponding periods in fiscal 1999, as we
continued to invest in the development of our communications product line.
These spending increases resulted from additional staffing in the
communications product line areas, increases in expenditures for supplies and
equipment for the development of communication 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 three months and nine months ended December 31, 1999
represented 27.1% and 31.1% of net sales, compared to 28.3% and 26.1%, in the
three and nine months ended December 31, 1998. Selling, general and
administrative expenses for the three months and nine months ended December
31, 1999 increased by 25.3% and 16.8% compared to the corresponding periods
in fiscal 1999. 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 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.
11
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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 $104.2 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 118,300
shares of our common stock for $3.4 million and received $8.4 million from
the issuance of 489,500 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 also evaluate potential
acquisitions and equity investments complementary to our design expertise and
market strategy, including investments in 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 additional financing
could be obtained on terms acceptable to us, if at all. The sale of
additional equity or convertible debt could result in dilution to our
stockholders.
YEAR 2000 AND PROXIMATE DATES
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
12
<PAGE>
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 $5.3 million dollars. In addition, the replacement of the remaining
legacy systems is estimated to cost $300,000. $5.3 million dollars has been
capitalized for the acquisition and implementation of the new business system
and the replacement of the remaining legacy systems. 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.
13
<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 MAY FLUCTUATE 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 external foundry capacity and raw materials;
- competitive pressures on selling prices;
- the amounts and timing of costs associated with warranties and product
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, AND OUR SUCCESS THEREFORE
DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
- rapidly changing technologies;
- evolving and competing industry standards;
- 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
14
<PAGE>
maintain close working relationships with key customers in order to develop new
products that meet their changing needs.
In addition, products for communications applications are based on industry
standards that are continually evolving. Our ability to compete in the future
will depend on our ability to identify and ensure compliance with these evolving
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 DESIGN
ENGINEERING, SALES, MARKETING AND EXECUTIVE 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, process 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 personnel and the development
of additional expertise by existing management personnel. Loss of the services
of, or failure to recruit, key design 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 only manufactured by a single foundry. Two foundries manufacture
our products based on CMOS processes, and one foundry manufactures all of our
BiCMOS products. Most of our products are based on CMOS processes. We do not
have long-term wafer supply agreements with our CMOS foundries that guarantee
wafer or product quantities, prices or delivery lead times, and our CMOS
foundries manufacture our products on a purchase order basis. We cannot be
certain that we will be able to maintain strong relationships with our
foundries. 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 outside foundries include:
- the lack of assured semiconductor wafer supply and 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 do not have a guaranteed level of production capacity at either of our
CMOS foundries. 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
15
<PAGE>
deliveries to us on short notice. Accordingly, we cannot be certain that these
foundries will allocate sufficient capacity to satisfy our requirements.
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 an increased amount of semiconductor devices;
- a manufacturing disruption experienced by one or more of our outside
foundries or sudden reduction or elimination of any existing source or
sources of semiconductor devices;
- time required to find or qualify alternative manufacturing sources for
existing or new products; or
- 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 OF THE OWNERSHIP OF OUR STOCKHOLDERS.
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
components over extended periods. While we are not currently a party to any of
these arrangements, we may decide to enter into such 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. The need to commit substantial capital could require us to
obtain additional debt or equity financing, which 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;
- customer support;
16
<PAGE>
- time-to-market;
- product performance;
- price;
- end-user acceptance of our customers' products; 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 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, 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 Corporation and
Vitesse. Competitors in our other markets include Analog Devices, Philips and
Texas Instruments. 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 that are below those at which it would be financially
feasible 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 T1/E1, T3/E3 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 might 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 MAKE UP FOR THIS DECLINE.
We do not intend to increase our funding of development efforts relating to
our serial communications and video and imaging products, and as a result we
expect that revenues from these products will 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 make up for any
revenue shortfall, our business may be harmed.
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
17
<PAGE>
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 experience financial difficulties, or
otherwise become unable or unwilling to promote and sell our products, our
business could be harmed.
OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST OUR PRODUCTS
INCREASES THE RISK THAT WE WILL NOT HAVE AN ADEQUATE SUPPLY OF PRODUCTS TO MEET
DEMAND OR THAT OUR COST OF MATERIALS WILL BE HIGHER THAN EXPECTED.
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 increased costs or delayed product delivery, which
would harm our profitability and customer relationships.
OUR RELIANCE UPON FOREIGN SUBCONTRACTORS EXPOSES US TO RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
We use semiconductor assembly and test subcontractors throughout Asia for
most of our products, and we intend to continue transferring our testing and
shipping operations to offshore 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 increased costs or delayed product delivery, which
would harm our profitability and customer relationships.
OUR FOUNDRIES MAY EXPERIENCE LOW MANUFACTURING YIELDS.
Manufacturing ICs is a highly complex and technologically-demanding process.
Our foundries occasionally experience lower than anticipated manufacturing
yields, particularly in connection with the introduction of new products and the
installation and start-up of new process technologies. Low manufacturing yields
have at times reduced, and may in the future reduce, our operating results.
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.
18
<PAGE>
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.
It usually takes more than 12 months for us to realize volume shipments of
our communications ICs 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 sales
efforts and our realization of revenue, if any, from volume purchasing of our
communications products by our customers.
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 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 ADEQUATELY.
Our ability to compete is affected by our ability to protect our proprietary
information. We rely on a combination of patents, trademarks, copyrights, mask
work registrations, trade secret laws, confidentiality procedures, and
non-disclosure and licensing arrangements to protect our intellectual property.
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, 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, others may independently develop similar products or
processes, duplicate our products or processed or design around any patents that
may be issued to us.
WE COULD BE HARMED BY LITIGATION INVOLVING PATENTS AND PROPRIETARY 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.
19
<PAGE>
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.
OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS BECAUSE WE RELY SUBSTANTIALLY
ON FOREIGN CUSTOMERS.
International sales accounted for 36.5% of revenues for the fiscal year 1999
and 35.1% of revenues for the nine months ended December 31, 1999. International
sales may increase in future periods and may account for an increasing portion
of our revenues. As a result, an increasing portion of our revenues may be
subject 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 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 price of our products so that they become relatively
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 such agreements and to collect damages, if awarded.
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.
20
<PAGE>
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.
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;
- 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.
EARTHQUAKES AND OTHER NATURAL DISASTERS MAY DAMAGE OUR FACILITIES OR THOSE OF
OUR SUPPLIERS.
Our corporate headquarters in California are located near major earthquake
faults which have experienced earthquakes in the past. In addition, some of our
suppliers are located near fault lines. In 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 communication 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.
21
<PAGE>
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.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. - OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 2000 annual meeting of
stockholders must provide specified information to the Company prior to March
15, 2000 (unless such matters are included in the Company's proxy statement
pursuant to rule 14A-3 under the Securities Exchange Act of 1934, as amended).
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) During the quarter for which this report is filed, the Registrant filed no
reports on Form 8-K.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXAR CORPORATION
By /s/ Donald L. Ciffone, Jr. Date: February 14, 2000
- ---------------------------------------------------
Donald L. Ciffone, Jr.
President
Chief Executive Officer
By /s/ Ronald W. Guire Date: February 14, 2000
-------------------------------------------------
Ronald W. Guire
Executive Vice President,
Chief Financial Officer,
Secretary
24
<PAGE>
EXHIBIT INDEX
Exhibit Page
27.0 Financial Data Schedule ...................................... 26
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 84,198
<SECURITIES> 19,630
<RECEIVABLES> 10,968
<ALLOWANCES> 0
<INVENTORY> 7,714
<CURRENT-ASSETS> 127,986
<PP&E> 26,968
<DEPRECIATION> 0
<TOTAL-ASSETS> 155,992
<CURRENT-LIABILITIES> 16,264
<BONDS> 0
0
0
<COMMON> 73,479
<OTHER-SE> 65,346
<TOTAL-LIABILITY-AND-EQUITY> 155,992
<SALES> 55,509
<TOTAL-REVENUES> 55,509
<CGS> 24,409
<TOTAL-COSTS> 54,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,839
<INCOME-TAX> 3,788
<INCOME-CONTINUING> 8,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,051
<EPS-BASIC> .85
<EPS-DILUTED> .78
</TABLE>
