-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qb3Z4fITKIKAb0p/aXeXKLMSMdrwEDnCV8NMEjvHI8YUBh2H+VhaLbM+j2dEc0RM 0sNT8Td4fa611VPAKRc+WQ== 0000912057-96-013593.txt : 19960725 0000912057-96-013593.hdr.sgml : 19960725 ACCESSION NUMBER: 0000912057-96-013593 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXAR CORP CENTRAL INDEX KEY: 0000753568 STANDARD INDUSTRIAL CLASSIFICATION: 3674 IRS NUMBER: 941741481 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14225 FILM NUMBER: 96589540 BUSINESS ADDRESS: STREET 1: 2222 QUME DR STREET 2: PO BOX 49007 CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084346400 MAIL ADDRESS: STREET 2: 2222 QUME DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO______ Commission File No. 0-14225 EXAR CORPORATION (Exact Name of registrant as specified in its charter) Delaware 94-1741481 (State or other jurisdiction of ( I.R.S. Employer incorporation or organization) (Identification No.) 48720 Kato Road, Fremont, CA 94538 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 668-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------- ---------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in any definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of May 31, 1996 was $146,253,120 based on the last sales price reported for such date. The number of shares outstanding of the Registrant's Common Stock was 9,000,192 as of May 31, 1996, net of 927,766 shares of treasury stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Definitive Proxy Statement filed not later than 120 days after the close of the fiscal year are incorporated in Part III of this report. PART I Except for the historical information contained herein, the following discussion contains forward looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the section entitled "Managements' Discussion and Analysis of Financial Condition and Results of Operations". ITEM 1 BUSINESS GENERAL Exar Corporation ("Exar" or the "Company") designs, develops and markets analog and mixed-signal integrated circuits for use in telecommunications, data communications, document imaging, consumer electronics and automotive products and in other selected product areas. The Company's target markets are ones in which the Company believes its design and process expertise, combined with its knowledge of particular system application requirements, enable the Company to deliver products that provide effective solutions to customer needs. Exar is emphasizing the development and sale of analog and mixed-signal application- specific standard products ("ASSPs"). The Company also produces digital integrated circuits used in telecommunications and data communications products, as well as general purpose analog integrated circuits. In May 1994, the Company acquired Origin Technology, Inc. ("Origin") and in June 1994 the Company acquired Micro Power Systems, Inc. ("Micro Power"). In March 1995 the Company acquired Startech Semiconductor, Inc. ("Startech") and in June 1995 the Company acquired Silicon Microstructures, Inc. ("SMI"). (See "Recent Acquisitions".) In May 1995, the Company announced the discontinuance of its mass storage product line. (See "Mass Storage".) Rohm Co., Ltd., a manufacturer of semiconductor devices and other electronic components in Japan, was the majority stockholder of Exar from 1971 until 1990. Working in cooperation with the Company, Rohm reduced its ownership interest in Exar beginning in 1984 and in May 1990, Rohm engaged in a share exchange that reduced its ownership of Exar's common stock to less than 50%. As of January 1994, Rohm was no longer an affiliate of the Company. Exar has in the past and continues to have various significant business relationships with Rohm Co., Ltd. and its subsidiaries ("Rohm"), including the sale of epitaxial and bipolar wafers to Rohm. The arrangement for the sale of epitaxial and bipolar wafers to Rohm was terminated as of April 1, 1994. Rohm continues to be a major foundry supplier of the Company. INDUSTRY BACKGROUND Integrated circuits may be divided into three general categories -- analog (or linear), digital and mixed-signal. Analog circuits typically are used to condition, process, measure or control physical properties such as temperature, pressure, sound or speed. They include devices such as amplifiers, filters, switches and power circuits. Digital circuits perform logic and memory functions, and include devices such as memories and microprocessors. Mixed- signal circuits combine analog circuitry with digital logic or memory in a single integrated circuit or chip set to provide an interface between the analog and digital worlds. 2 The Company believes that the market for analog and mixed-signal integrated circuits, in contrast to the market for digital integrated circuits, is characterized by longer product life cycles, smaller unit volumes and generally lower capital requirements. The analog market is a highly fragmented group of niche markets, serving numerous and widely differing applications. For each application, different users may have unique requirements for circuits with specific characteristics. Integrated circuits are either standard products or custom products (including both full custom and semi-custom). Standard products are available to customers "off-the-shelf." Standard application-specific products that are tailored to address specific applications and to meet the needs of multiple customers are often referred to as ASSPs. Custom products are designed to an individual customer's specifications. Custom products typically involve greater design costs for the customer, compared to standard products, but enable the customer to save space, improve performance, reduce manufacturing costs, or maintain greater confidentiality with respect to the customer's ultimate product design. PRODUCTS AND MARKETS The Company divides its integrated circuit sales into five major market groups: communications, document imaging, consumer electronics, personal computers and other products. These market groups account for most of the Company's sales of integrated circuits, with a small portion being accounted for by the sale of general purpose integrated circuits. In recent years, the Company entered the Japanese market for integrated circuits used in consumer electronics products. These integrated circuits are sold to several of the major Japanese electronics companies through Exar Japan Corporation, a wholly-owned subsidiary of Exar ("Exar Japan"). The Company sells both proprietary products and standard Rohm products in Japan. As of April 1, 1995, the Company no longer recognizes revenue from its sale of standard Rohm products in Japan, but records its net margin from such sales as commission revenue. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations".) Exar's operating results will depend to a significant extent on its ability to continue to introduce new products. The success of Exar's new products will depend on several factors, including the ability to anticipate customer requirements, timely introduction of new products to the market and market acceptance. There can be no assurance that Exar's new products will be successfully developed, or will receive or maintain substantial market acceptance. 3
The following chart shows selected applications and representative products in each of the Company's major market areas: - - ---------------------------------------------------------------------------------------------------------------- MARKET APPLICATION PRODUCT - - ---------------------------------------------------------------------------------------------------------------- Communications high speed communication T/E-Carrier circuits: transmission equipment, central office -repeaters equipment and private branch exchanges -line interface circuits -framers -buffers -transcorders Telephone sets, headsets Speakerphone and other telephonyorieinted componenets Speech Recognition Caller ID Sytems, pagers, cellular Phase-Locked loops, function telephones, two-way radios generators and tone decoders Computer-to-computer links through Modem chips and chip sets telephones Computer serial asynchronous UARTS/DUARTS/QUARTS interfaces Analog-to-digital converter/dual Wireline communication test systems digital-to-analog converter - - --------------------------------------------------------------------------------------------------------------- Document Imaging Scanners Analog-to-digital converters Digital Camera (ADC's) Digital Copiers Digital-to-analog converts (DAC's) - - --------------------------------------------------------------------------------------------------------------- Consumer Electronics(1) Graphic Equalizers Switched capacitor filters Audio Systems Audio enhancement circuits Video Systems Automatic track finding (ATF) circuits; ADC's; DAC's - - ---------------------------------------------------------------------------------------------------------------- Personal Computers(2) Clocks Frequency timing generators Input/Output Super I/O - - ---------------------------------------------------------------------------------------------------------------- Automotive Engine controls Silicon sensors(3) Timing circuits Automatice remote lock controls RF transmitters/receivers - - ---------------------------------------------------------------------------------------------------------------- Other Hearing aids Amplifiers Multi media Audio mixer circutis Proximity sensors Sensor interface circuits - - ----------------------------------------------------------------------------------------------------------------
1 Only Exar designed products are described here. Exar also sells in Japan integrated circuits designed by Rohm for use in consumer electronic products. (See "Consumer Electronics".) 2 This market and applications are a result of the Startech Semiconductor, Inc. acquisition. (See "Recent Acquisitions".) 3 This product is a result of the Silicon Microstructures, Inc. acquisition. (See "Recent Acquisitions".) 4 COMMUNICATIONS Exar markets integrated circuits for a variety of applications in both the telecommunications as well as data communication markets. Exar's transmission telecommunications circuits are used in SONET/SDM multiplexers, private branch exchanges (PBX), central office switches and digital cross connects. Exar's principal products in this market are targeted toward T-carrier and E-carrier equipment. These circuits include line interface units, repeater circuits, framers, buffers, transcoders for pulse code modulation (PCM) systems and T1/E1 and T3/E3/STS/SONET interfaces. The majority of these circuits require bipolar, mixed-signal and CMOS process technology optimized for telecommunications applications and have specialized test and performance criteria. Certain of these products are based upon ANSI, Bellcore and ITU standards. The Company also provides integrated circuits for telephone handsets, including speakerphones, telephone circuitry and caller identification systems. The Company's data communications products include Universal Asynchronous Receiver and Transmitter ("UART") circuits and related products known as DUART (Dual UART) and QUART (Quad UART) circuits for use in computer serial interfaces. Exar supplies a family of V.35 circuits used for high speed data transmission, primarily in networking equipment such as routers and bridges. In addition, the Company manufactures high performance fax/data/voice ("modem") chip sets. These chip sets incorporate proprietary firmware that facilitates integration of the Company's fax/data/voice products into OEM customers' systems. The Company has no additional versions of its modem chip sets currently in development. The Company offers proprietary automatic speech recognition ("ASR") products through its wholly-owned subsidiary Origin. Origin integrates its proprietary ASR technology into a family of voice dialing telephone products which are distributed worldwide. Users of the Company's integrated circuits in the communications market include Cisco Systems, Nokia, Alcatel S.A., British Telecom, Digital Switch Corporation, Northern Telecom, Inc. and Siemens A.G. DOCUMENT IMAGING The Company supplies high-performance data converters, data acquisition subsystems and other sophisticated electronic components to the document imaging, communications, industrial and other markets through its wholly-owned subsidiary, Micro Power. The Company offers analog to digital converters (ADCs) as well as digital to analog converters (DACs), to the document imaging industry for products such as scanners, digital cameras and digital copiers. Using CMOS and BiCMOS process technologies, the Company creates standard and custom products that integrate data conversion and other functions. The Company was first to market a monolithic triple 10-bit ADC, a digitally-controlled gain and offset adjustment device for color scanners. Advanced design techniques and process technologies are used to integrate low-power converter architectures with surrounding analog functions to minimize total system cost. The Company offers both standard and custom solutions. 5 The family of ADCs includes full flash, half flash, pipeline and successive approximation register converter architectures. Current products offer from 6 to 12 bits of resolution and operating ranges from LESS THAN 1 kHz to 30 mHz. Several devices are currently specified for 3.3V operation for battery-operated and hand-held equipment. Innovative circuit topologies and efficient design techniques have allowed the creation of multichannel ADC, DAC and combination architectures. Application- specific products that integrate data conversion and other functions include a family of multiple output DACs for use in high frequency signal conditioning and gain control in CCD and video applications and a family of 16 to 32 channel data acquisition subsystem products with over voltage protection circuitry for control systems. Users of the Company's integrated circuits in the document imaging market include Sony Corporation, Canon, Epson and Logitech. CONSUMER ELECTRONICS With the establishment of Exar Japan in 1989 and related sales assistance from Rohm, Exar began to market integrated circuits to Japanese manufacturers of consumer electronics products. Exar-designed products being sold to or developed for the consumer products market include integrated circuits for use in graphic equalizer systems, telephone answering devices, base band circuits for cellular telephones, filter circuits for use in audio and video systems, BBETM audio chips for sound enhancement, automatic track finding circuits for video systems and timer circuits for various products. A majority of the integrated circuits sold by Exar Japan for use in consumer electronics products are designed by Rohm and, until April 1995, purchased by Exar Japan from Rohm. Effecitve April 1, 1995, the Company no longer purchases and resells the products designed by Rohm, but, as a representative, receives a commission on the sales of these products. Customers of the Company in the consumer products area include Sony Corporation, Zenith, AIWA Co., Ltd. and Matsushita. PERSONAL COMPUTERS Through the acquisition of Startech, the Company supplies frequency timing generators chips to the personal computer and workstation markets.) In a computer system, in order to perform an operation accurately, the computer requires a precise timing of signals that coordinate transfer, storage and execution activities. There are many different timing signals (sometimes called "clocks") needed to make a computer run. Previous generations of computer designs used individual oscillator circuits and their additional crystal components in every system. By using modern phased-locked-loop and voltage controlled oscillator design methods, Startech engineers have developed a family of single chips which can synthesize most of the required timing signals into a single oscillator source, or "frequency timing generator". The output timing signal from Startech's frequency timing generators has low "noise" levels and is within the industry requirements for low frequency "jitter" that computer systems demand. The timing 6 signals generated by Startech's frequency generators are virtually identical to those of individual oscillator circuits and the reduction in the number of required circuits is significant. Most Startech frequency generator applications result in a ten-fold reduction in circuit count, which translates into significant reduction in cost for the customer. The Company is currently designing a super I/O (Input/Output) chip. Super I/O chips integrate certain selected features of standard integrated circuits. By blending functions, a super I/O chip can hold all or most of the common input/output, control and interface functions of more than one dedicated circuit. Startech is developing a line of super I/O chips that integrate selected features found in various standard integrated circuits. Personal computer and workstation manufacturers among Startech's customers include Compaq Computer Corp., Sun Microsystems, Inc. IBM and Matsushita Electric Corporation of America. OTHER PRODUCTS AND MARKETS The Company also serves a variety of other markets, such as hearing aids, industrial controls and automotive controls. At present, most of the Company's integrated circuits sold to these markets are custom and semi-custom products. However, the Company continues to develop ASSP products in certain niche areas where there are opportunities. HEARING AIDS The Company's BiCMOS processes and advanced filtering technology allow the Company to provide a low-noise, low-power single chip solution for hearing aid manufacturers. The Company's design experience with EEPROM memory also enables the Company to add programmability features so that in the future the electronic characteristics of hearing aids may be tailored to fit both an individual user and ambient noise conditions. INDUSTRIAL CONTROL The Company's products in this area include integrated circuits for use in security systems, magnetic card readers and process control. One of the Company's products in this area is an integrated circuit for industrial robotics applications incorporating EEPROM technology. AUTOMOTIVE Exar sells custom and semi-custom integrated circuits for use in automotive applications, including air bags and body control systems, such as keyless entry systems. MULTI MEDIA Multi media combines voice, data, and video on the same medium. The Company's mixed-signal and audio expertise are integrated for custom products in this market. SENSORS The Company's analog to digital techniques and amplifier expertise are incorporated in Exar's offering of sensor interface circuits. The acquisition of SMI expands Exar's product offerings to the motion, pressure and accelerometer markets. (See "Recent Acquisitions".) GENERAL PURPOSE ANALOG STANDARD PRODUCTS The Company also markets a line of general purpose analog standard products such as timers, switching regulators, operational amplifiers and filters. The Company offers current and voltage output DACs which include products ranging from 8 to 16 bits of resolution. Recent product introductions offer unique digital control capabilities and wide bandwidth for the direct control of video and CCD imaging signals. 7 MASS STORAGE In July 1995, the Company discontinued its family of devices for use in the mass storage industry. The termination of this product line was the result of supply disruptions and accompanying low margins. The Company has filed claims against its former supplier of these products, alleging breach of contract and this dispute is currently in arbitration. (See "Legal Proceedings".) WAFER SERVICES Through March 31, 1994, the Company sold epitaxial and bipolar wafers to Rohm. The Company entered into a sale and leaseback of these manufacturing facilities with Rohm in April 1992 in order to shift to Rohm (as the largest customer of the facilities) the benefits and risks associated with capacity utilization. Effective April 1, 1994, Exar no longer operates the manufacturing facilities for Rohm. Accordingly, the revenues associated with the operation of such facilities are no longer included in the financial results of the Company. RECENT ACQUISITIONS STARTECH On March 31, 1995, the Company acquired Startech Semiconductor, Inc. (Startech). Startech designs, develops and markets ASSPs for a variety of markets including the data communications, telecommunications, personal computer, workstation and peripherals markets. ASSPs meet the requirement for fast, error-free, inexpensive data communications essential to today's computer system and software products. Startech designs its ASSPs to meet evolving industry standards and protocols, enabling its customers to react rapidly to the technological changes they face. Startech's principal product offerings include a broad line of UARTs. Startech created a highly integrated Quad UART with FIFO (first in, first out) circuitry which has been established as the de facto industry standard for Quad FIFO UARTs used in multi-channel networking applications designed to work with Intel Corporation's microprocessors. Startech is using its megacell design library, created in connection with its UART operations, to develop a line of super I/O (input/output) chips that integrate selected features found in various standard integrated circuits. In addition to its UART-related activities, Startech offers a range of programmable frequency generators used in computer system graphics applications, hard disk drives and telecommunications. Startech has over 200 customers worldwide including Boca Research, Digiboard and U.S. Robotics, as well as Exar, in the communications and connectivity industry together with the personal computer manufacturers previously discussed. SMI In February 1993, Exar acquired a minority interest in Silicon Microstructures, Inc. (SMI) and in June 1995, the Company acquired all of the remaining outstanding stock of SMI. SMI designs, develops and markets silicon sensors for a variety of markets including medical, automotive and consumer. SMI's current products include precision piezoresistive pressure sensors and accelerometers. The pressure devices are fabricated in silicon using processing similar to that needed for bipolar or MOS transistors coupled with additional silicon etching technologies to allow the formation of thin membranes and force concentrators. SMI produces both moderate and very-low pressure sensors. 8 SMI has achieved a precision capacitive accelerometer structure using "bulk" micromachining of the silicon merged with fusion bonding of several silicon wafers to provide a self-contained sensor. Coupled with an application specific integrated circuit, the accelerometer provides high performance, wide-dynamic range, good stability, good over-shock protection and low cost. Micron sized mechanical parts etched in silicon can incorporate sophisticated intelligence on-board the sensor itself. Other structures possible with the technology include, for instance, precision flow channels, ultra small valve structures, as well as co-integrated devices where mechanical structures and circuitry are fabricated on a common wafer silicon. MICRO POWER AND ORIGIN In fiscal 1995 the Company acquired all of the outstanding stock of Micro Power and Origin. (See Note 9 to Consolidated Financial Statements.) MARKETING AND CUSTOMERS Exar sells its products principally to OEMs for use in a broad range of electronic systems and equipment. The following table provides a geographic breakdown of the Company's sales with sales of wafer services to Rohm set forth separately. For additional geographic financial information, see Note 8 in Notes to Consolidated Financial Statements. YEARS ENDED MARCH 31 -------------------- (IN THOUSANDS) 1996 1995 1994 ---- ---- ---- U.S. Sales $ 56,030 $ 62,344 $ 42,040 International Sales: Sales by Exar Japan 19,061 55,851 64,833 Other Sales 50,675 41,277 32,732 Rohm Wafer Services -- -- 22,054 --------- --------- --------- TOTAL $ 125,766 $ 159,472 $ 161,659 --------- --------- --------- --------- --------- --------- Exar markets its products in the United States principally through 26 independent sales representatives and nine independent non-exclusive distributors, as well as through the Company's direct sales force. Exar currently has sales support offices in or near Boston, Chicago, Dallas, Los Angeles, Philadelphia and Fremont. Exar is represented internationally by approximately 43 sales representatives and distributors. In addition, Exar is represented in Europe by its wholly- owned subsidiary, Exar Ltd. and in Japan by its wholly-owned subsidiary, Exar Japan. The products marketed by Exar Japan are generally not in competition with those marketed in Japan by Exar's independent distributors. Exar's international operations are subject to certain risks common to foreign operations in general, such as governmental regulations and import restrictions. While Exar has acted to minimize its exposure to exchange rate 9 fluctuations, there can be no assurance that the Company will not from time to time experience exchange rate losses on products sold overseas by Exar Ltd. and Exar Japan. During the fiscal year ended March 31, 1996, no single customer accounted for more than 10% of Exar's sales. Exar typically provides a limited warranty against defects in materials and workmanship for a period of ninety days from the date its products are delivered. PROCESS TECHNOLOGIES Exar uses a variety of process technologies in the fabrication of its products, including bipolar, silicon gate and moly gate CMOS, and BiCMOS, which utilizes both bipolar and CMOS technologies. These processes allow Exar to take advantage of different types and characteristics of integrated circuit components with different performance and cost characteristics. The Company believes that its ability to design and deliver integrated circuits using a wide variety of processes enables it to be responsive to customer requirements and optimize the performance of its products for particular applications. Historically, bipolar processes have been used for analog circuits where speed, high voltage, low noise or effective component matching is necessary. CMOS circuitry was originally used for digital applications where lower voltage and greater chip density are necessary. CMOS manufacturing processes have subsequently been adopted and are used for an increasing portion of analog and mixed-signal devices in order to take advantage of that technology's lower power consumption, its cost-effectiveness and foundry availability and ever-increasing speed.. BiCMOS processes permit the combination of bipolar and CMOS on a single device, resulting in the ability to combine selectively the performance characteristics of bipolar circuitry with the advantages of CMOS. In addition, the Company can provide accurately matched thin-film resistors and/or laser trim when needed to meet performance requirements. MANUFACTURING The Company uses outside sources for the supply of its integrated circuits. Rohm is the Company's largest supplier of wafer services. During fiscal 1996, approximately 51% of the Company's sales of integrated circuits were of products made from wafers manufactured for the Company by Rohm. Rohm supplies the Company with bipolar, BiCMOS and CMOS products. These services are provided to the Company pursuant to two separate foundry service agreements which expire in April 1997 and April 2006. The agreement expiring in April 1997 is automatically extended for successive two year terms unless and until it is terminated by either party upon at least six months notice prior to the end of the extension term. The Company is not under any obligation to continue obtaining manufacturing services from Rohm. The Company also obtains CMOS and BiCMOS products from independent manufacturers. Although the Company has qualified second sources for certain of its foundry requirements, there would be significant lead times and initially lower yields associated with the use of such sources. Accordingly, a disruption in supply from one or more of the Company's outside suppliers could have a material adverse effect on operations. 10 The Company experienced long lead times and delays from outside sources of certain products during the first half of fiscal 1996. These delays negatively affected the Company's ability to respond to customers of such products. Due to supply disruptions, the Company decided to terminate its product line of semiconductors used in hard disk drive products. (See "Mass Storage".) In October 1995, the Company entered into an agreement with IC Works Inc. to expand its available manufacturing capacity for sub-micron products. (See "Liquidity and Capital Resources".) Exar conducts electrical testing of integrated circuits in both wafer and packaged form. The combination of various functionalities makes the test process for analog and mixed-signal devices particularly difficult. The Company has purchased and intends to continue to acquire advanced equipment to test its products. Test operations require the programming, maintenance and use of sophisticated computer-based test systems and complex automatic handling systems. Exar has special screening and qualification programs when high reliability quality grades are required by customer specifications. After testing, wafers are usually shipped to the Far East for assembly, where they are cut into individual circuits and packaged. Following assembly, a significant portion of the Company's products are returned to Exar for final testing and quality assurance. Most of Exar's assembly work is performed by independent contractors in Taiwan, Indonesia, the Philippines, Korea and Japan. The raw materials and equipment used in the production of the Company's integrated circuits are available from several suppliers. Although shortages have occurred and on occasion lead times have been extended, the Company has not recently experienced significant difficulty in obtaining raw materials or equipment. ENGINEERING, RESEARCH AND DEVELOPMENT Exar's ability to compete successfully depends in part on its ability to introduce technologically advanced products on a cost-effective and timely basis. Exar is committed to improving its manufacturing and design capabilities and developing new process technologies and products. During the fiscal years ended March 31, 1996, 1995 and 1994, Exar's research and development expenses were $16.1 million, $14.4 million, and $11.5 million, respectively. Exar was one of the first companies to offer its customers the ability to create semi-custom analog integrated circuits, and the Company remains a leading vendor in this area. Exar's analog arrays utilize silicon wafers containing a series of uncommitted components. The wafers are completely fabricated except for the final metalization layer, allowing an engineer to customize the circuit by connecting the uncommitted components to conform to the customer's requirements. Semi-custom design techniques reduce the total time required for new custom designs to reach production, with development costs substantially lower than those associated with full custom design. Exar makes available to its customers its FLEXARTM family of flexible linear arrays, together with its proprietary Flexible Integrated Design System (FIDSTM) software tools to assist customers with the design and layout of array products. Exar utilizes an "N"-well CMOS library of analog, digital and EEPROM standard cells which incorporate analog, digital and memory functions. Standard cells are pre-designed and characterized mini-circuits that adhere to certain design constraints, and that have been prepared for efficient 11 insertion into custom integrated circuits. These mini-circuits include widely used functional blocks, plus primitive circuit elements from which more specialized functions can be built. The technique of designing with standard cells enables the designer to focus on functional aspects of the circuit design, rather than physical aspects. Exar anticipates that market demand for higher performance and more complex circuits will require increasing levels of precision, simulation and testing made available with design automation tools, such as computer-aided engineering ("CAE") and computer-aided design ("CAD") systems. In addition, such design automation systems significantly accelerate the product development cycle, particularly when used with semi-custom products, such as analog and mixed- signal arrays and standard cells. The vast majority of the CAE systems available have been developed for digital design and, consequently, must be adapted for analog design implementation. Exar considers its CAE/CAD capabilities to be important to its future success in all areas of new product development and intends to continue to enhance its CAE/CAD systems. COMPETITION The semiconductor industry is intensely competitive and is characterized by rapid technological change and a history of price reduction as production efficiencies are achieved in successive generations of products. Although the market for analog and mixed-signal integrated circuits is generally characterized by longer product life cycles and less dramatic price reductions than the market for digital integrated circuits, Exar faces substantial competition in each market in which it participates. Competition in Exar's markets is based principally on technical innovation, product features, timely introduction of new products, reliability, price, technical support and service. Exar believes that it competes favorably in all of these areas. Because the analog and mixed-signal integrated circuit markets are highly fragmented, the Company generally encounters different competitors in its various market areas. Competitors with respect to some of the Company's products include, among others, Crystal Semiconductor, Dallas Semiconductor, Hitachi, Level One Communications and Rockwell Communications. As the Company has marketed its products more aggressively in Japan, it has encountered greater competition from Japanese manufacturers. Many of the Company's competitors have substantially greater financial, manufacturing and marketing resources, and some of them have greater technical resources. There can be no assurance that competitive factors will not adversely affect the Company's future business. BACKLOG Exar defines backlog to include OEM orders and distributor orders for which a delivery schedule has been specified for product shipment over the succeeding twelve months. Backlog includes oral orders which are generally subsequently confirmed by written purchase orders. Exar's backlog does not include Rohm designed products sold by Exar Japan which has been a material source of revenue for Exar. At March 31, 1996, Exar's backlog was approximately $32.9 million, compared with $41.9 million at March 31, 1995. 12 Sales are made pursuant to purchase orders for current delivery of standard items or agreements covering purchases over a period of time, which are frequently subject to revision and cancellation. Lead times for the release of purchase orders depend upon the scheduling practices of the individual customer, and the rate of bookings varies from month to month. In addition, Exar's distributor agreements generally permit the return of up to 10% of the purchases annually for purposes of stock rotation and also provide for credits to distributors in the event Exar reduces the price of any product. Because of the possibility of changes in delivery schedules, cancellations of orders, distributor returns or price reductions, Exar's backlog as of any particular date may not be representative of actual sales for any succeeding period. Customer orders for standard products can be canceled prior to shipment without substantial penalty. EMPLOYEES As of April 1, 1996, Exar had 447 employees, including 111 in marketing and sales, 163 in research, development and engineering-related functions, 122 in manufacturing and production and 51 in administration. Many of Exar's employees are highly skilled, and competition in recruiting and retaining such personnel is particularly intense in the labor market in which Exar operates. Exar believes that its continued success depends in part on its ability to continue to attract highly qualified management, marketing and technical personnel. The loss of key employees, none of whom is subject to an employment agreement could have a material and adverse effect on Exar. None of Exar's employees are covered by collective bargaining agreements, and Exar has not experienced any work stoppages. Exar believes that its employee relations are good. 13 EXECUTIVE OFFICERS OF THE COMPANY The name of the Company's executive officers and certain information about them is set forth below. NAME AGE POSITION ---- --- -------- George D. Wells 60 Chief Executive Officer, President and Director Ronald W. Guire 47 Executive Vice President, Chief Financial Officer, Secretary and Director Eric J. Ochiltree 49 Vice President, Exar Products Division Jean-Claude Zambelli 52 Vice President, Worldwide Sales Stephen W. Michael 49 Vice President, Operations Division Thomas R. Melendrez 42 Corporate Vice President, General Counsel Thomas W. Jones 48 Vice President, Reliability and Quality Assurance Suhas "Sid" Bagwe 56 Vice President, Strategic Planning and Long-Range Business Development Mr. Wells joined Exar as CEO and President of the Company in June 1992 and has served as a director since September 1992. Mr. Wells has more than 35 years of semiconductor experience, most recently with LSI Logic Corporation, a manufacturer of HCMOS and BiCMOS application-specific integrated circuits (LSI) where he was President and Chief Operating Officer from 1985 to 1992. From 1983 to 1985, Mr. Wells was President of Intersil and General Manager of Semiconductor, divisions of General Electric. Mr. Wells is also a director of Q Logic, a supplier of adapter cards and disk controller chips. Mr. Wells holds a BS in Physics (cum laude) and completed two years of post-graduate work in Nuclear Physics at the University of Glasgow, Scotland. Mr. Wells has informed the Company of his intention to resign as an officer and employee of the Company. The Board of Directors is currently conducting a search for a successor. Mr. Guire joined the Company in July 1984 and has been a director of the Company since June 1985. He has served in a variety of officer positions, and has been Chief Financial Officer of the Company since May 1985 and Executive Vice President since July 1995. Mr. Guire is also a director of Xetel Corporation, an electronics contract manufacturer. Mr. Guire was a partner in the certified public accounting firm of Graubart & Co. from 1979 until he joined the Company in July 1984. Mr. Ochiltree joined Exar in September 1995 as Vice President, Exar Products Division. A 25-year veteran of the semiconductor industry, prior to joining Exar, Mr. Ochiltree was Vice President, Santa Clara Site General Manager, Standard Linear Products Division of Analog Devices, Inc. Mr. Ochiltree joined Analog Devices with the acquisition of Precision Monolithics, Inc. (PMI) in 1991, where he was Vice President and General Manager of the Industrial/Commercial Division. Mr. Ochiltree has an MBA from the University of Santa Clara, an MSEE from Arizona State University and a BSEE from the Georgia Institute of Technology. Mr. Jean-Claude Zambelli joined the Exar as Group Manager, New Market Development in April 1994. In July 1995 he was promoted to Director, Product groups and in April 1996 he assumed his current position as Vice President, Worldwide Sales. Prior to joining Exar, Mr. Zambelli was President and CEO of MetaDesign Semiconductor from 1986 to 1994. Mr. Zambelli joined Fairchild Semiconductor in 1982 as Marketing/Strategic Planning Manager and was promoted to General Manager of the Power Systems and Discrete Division in 1984. Mr. Zambelli has a Diploma from the Institut Controle de Gestion, Paris, France (U.S. equivalent M.B.A. Finance), a Diploma from the Institut Administration des Enterprises, Paris, France (U.S. equivalent M.B.A. Marketing), and a Diploma, Ecole Nationale Ingenieurs, Belfort, France (U.S. equivalent M.S.E.E.). 14 Mr. Michael joined the Company as Vice President of New Market Development in September 1992 In July 1995 he was promoted to his current position as Vice President, Operations Division. Mr. Michael has over 20 years of semiconductor industry experience, most recently as Vice President, and General Manager, Analog & Custom Products with Catalyst Semiconductor ("Catalyst"). He joined Catalyst in 1987 and served in various senior positions. Mr. Melendrez joined Exar in April of 1986 as Corporate Attorney. He was promoted to Director, Legal Affairs in July 1991, and again to Corporate Vice President, Legal Affairs in March 1993. In March 1996, Mr. Melendrez was promoted to his current position. Mr. Melendrez has over 15 years legal experience in the semiconductor and related industries. He received a B.A. from the University of Notre Dame, and a J.D. from the University of San Francisco. Mr. Jones joined the Company as Director of Total Quality Management in October 1992 and was promoted to Director of Reliability and Quality Assurance in November 1992. He was promoted to his current position in July 1995. Mr. Jones has over thirty years of industry experience, most recently with LSI as Director of Quality Assurance. Mr. Jones joined LSI in September 1990. In December 1989 Mr. Jones joined Elcon Products International, Fremont California as Director of Manufacturing. From 1970 to December 1989, he was with Siliconix, where he held various management positions including Director of Operations, and Director of Quality and Reliability. Mr. Bagwe joined Exar as Director of Data Communications Product Group in March 1993, a position he held until April 1994 when he was promoted to Director of Strategic Planning and Long Range Business Development. In July 1995 he was promoted to his current position. From January 1990 until March 1993, Mr. Bagwe was Vice President of Marketing and Sales at Phylon Communications. From 1987 to December 1990 he served as Director of Business Development for Headland Technology. Mr. Bagwe has also served in a variety of executive management positions with various companies in the electronics industry. Mr. Bagwe holds an MBA with honors from Loyola University in Chicago, a BSEE from the University of Illinois and a BS in physics from the University of Poone, India. TRADEMARKS, PATENTS AND LICENSES The Company seeks to protect its proprietary products through a combination of patent rights, copyrights, mask work registrations and trade secrets. Exar believes that these intellectual property rights are substantially less significant to its business than such factors as technical expertise, marketing ability and customer support. Because of rapid technological developments in the semiconductor industry and the broad and rapidly developing patent, mask-work rights and copyright coverage, certain of Exar's products or processes may, from time to time, give rise to alleged infringement of existing patents, mask-work rights or copyrights. Exar has, on occasion, received notifications of alleged infringements and some allegations remain unresolved. There can be no assurance regarding the outcome of any particular alleged infringements. The Company attempts to protect its trade secrets, mask-work rights and other proprietary information through agreements with customers and suppliers, proprietary information agreements with employees and other security measures. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. ENVIRONMENTAL LAWS 15 Governmental regulations impose various controls on the discharge to the environment of hazardous materials used in semiconductor processing. Failure to comply with present or future regulations could result in the suspension or cessation of the Company's operations. In addition, such regulations could restrict Exar's ability to expand at its present location and incur other substantial expense. Moreover, there can be no assurance that changes in governmental regulations will not result in the imposition of other requirements which could impede operating performance. Any failure by Exar to adequately control hazardous substances could also subject it to future liabilities. The California Regional Water Quality Control Board for the San Francisco Bay Region (the "Regional Board") conducted an investigation of contaminants detected in subsurface groundwater at approximately 50 different sites in Santa Clara County, California, including a location formerly leased by Exar in Sunnyvale, California. The administrative proceeding before the Regional Board was resolved by letter dated March 7, 1996, from the Regional Board to the Company stating that the Regional Board staff had concluded that "pollution in groundwater beneath the subject site... is the result of migration of pollutants in groundwater from upgradient sources [and that] Board staff does not intend to name [the Company] as a discharger nor require further action by [the Company] in defining the migration of pollutants." During 1987, Micro Power became aware of low-level groundwater contamination on its principal manufacturing property. Although the area of contamination appears to have been defined, the source has not been determined. Micro Power has reached an informal agreement with another company to participate in the cost of the remedial investigations and the final clean up, which is expected to continue for approximately 10-15 years. Micro Power has recorded its share of the estimated liability, approximately $1.1 million. ITEM 2 PROPERTIES The Company's corporate headquarters are located in Fremont, California consisting of approximately 151,000 square feet. The land and building are owned by the Company and house Exar's principal administrative, test, engineering, marketing, customer service and sales departments. In addition, the Company leases approximately 60,000 square feet of office space in Santa Clara, California. This lease expires in August 1996 and the space is currently being used for storage of documents. ITEM 3 LEGAL PROCEEDINGS In June 1995 the Company filed a $9 million arbitration claim against SGS- Thompson Microelectronics, Inc. ("SGS-Thompson"), its foundry supplier of wafers used in its mass storage products, alleging inter alia breach of an Agreement between the parties, arising out of SGS-Thompson's refusal to provide Exar with various products called for under the Agreement. In September 1995 SGS-Thompson filed a counter claim for $8 million alleging breach of the Agreement by the Company. The Company believes the counter claim is without merit. This dispute is currently in arbitration. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended March 31, 1996. 16 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Stock of Exar is traded on the National Market under the symbol "EXAR." The following table sets forth the range of high and low sales prices for the Company's common stock for the periods indicated, as reported by NASDAQ. Such prices have been adjusted for the stock dividend effected in the form of a stock split in October 1994. The listed quotations represent inter-dealer prices without retail markup, markdown or commissions. - - -------------------------------------------------------------------------------- COMMON STOCK PRICES HIGH LOW FISCAL 1996 ---- --- - - ------------- Quarter ended March 31, 1996 $18 3/4 $12 Quarter ended December 31, 1995 $35 3/4 $13 3/4 Quarter ended September 30, 1995 $40 1/4 $28 3/4 Quarter ended June 30, 1995 $31 1/4 $21 FISCAL 1995 Quarter ended March 31, 1995 $24 3/4 $19 1/2 Quarter ended December 31, 1994 $24 1/2 $19 1/2 Quarter ended September 30, 1994 $35 $25 1/2 Quarter ended June 30, 1994 $28 1/4 $21 1/2 - - ------------------------------------------------------------------------------ The Company has never paid dividends on its Common Stock and presently intends to continue this policy in order to retain earnings for use in its business. The Company had approximately 367 stockholders of record as of May 31, 1996. The Company believes it has in excess of 2,500 beneficial stockholders. The last sales price for Exar's Common Stock, as reported by NASDAQ on May 31, 1996, was $16.25 per share. 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- - -------------------------------------------------------------------------------------------------------------- YEARS ENDED MARCH 31, --------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Consolidated Statements of Operations Data: Net Sales $125,766 $159,472 $161,659 $146,096 $139,775 Income (Loss) From Operations 18,759 (4,989) 20,999 18,858 13,250 Net Income (Loss) 13,582 (11,084) 15,665 13,687 10,819 Net Income (Loss) Per Share (a) 1.37 (1.25) 1.52 1.33 1.16 Weighted Average Shares Outstanding(a) 9,925 8,835 10,287 10,260 9,354 - - --------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------- MARCH 31, --------- (IN THOUSANDS) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----- Consolidated Balance Sheet Data: Working Capital $ 77,550 $ 81,286 $ 85,842 $ 90,827 $ 73,426 Total Assets 139,074 150,080 132,219 138,898 138,235 Redeemable Preferred Stock -- -- -- -- 13,135 Retained Earnings 53,379 39,797 50,881 35,216 21,529 Stockholders' Equity 117,847 107,696 105,378 108,773 91,623 - - --------------------------------------------------------------------------------------------------------------
(a) All share and per share amounts for 1991 through 1994 have been restated to give effect to the 3 for 2 stock dividend effected in the form of a stock split in October 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the following discussion contains forward looking statement that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the section entitled "Business". GENERAL The Company derives revenue principally from the sale of integrated circuits for use in communications, consumer electronics, document imaging, automotive, personal computers and other selected areas. In addition, until June 1995, the Company also generated revenues from sales of mass storage products. The Company's gross margins from sales of integrated circuits vary depending on competition from other manufacturers, the volume of products manufactured and sold, and the Company's ability to achieve certain manufacturing efficiencies. The Company's newer analog and mixed-signal products tend to have higher gross margins than many of the Company's more mature products and margins of any particular product may erode over time. 18 The Company has wholly-owned subsidiaries in Japan and the United Kingdom to support its sales operations in each of those areas. The Company's business in Japan includes the sale of integrated circuits which are primarily for use in consumer electronics products and such sales are made with sales assistance from Rohm. The sale of integrated circuits for use in consumer electronics products is a high volume business, but generally such products have lower gross margins than the Company's other products. The Company has made a number of changes in its underlying business in an effort to reduce its low-margin businesses. At the same time, to increase its share of revenues from the sale of proprietary products and to acquire additional technology, the Company made significant investments through direct acquisition of companies with related product lines. These actions are summarized below: REDUCTION OF LOW MARGIN BUSINESSES Effective April 1, 1994, the Company transferred its wafer manufacturing operations to Rohm and thereby eliminated sales derived from wafer processing services. In fiscal 1995, the Company continued to provide certain services to Rohm in exchange for an administrative fee, which was not significant, but this activity and the related fees have ceased. However, Rohm continues to be a major supplier of wafers to the Company. Effective April 1, 1995, the Company no longer recognized revenue from the sale of Rohm-designed integrated circuits for the consumer products industry in Japan. However, as of April 1995, the Company recognizes commission revenue from this business. In fiscal 1995 sales of Rohm designed products were approximately $36 million as compared to commission revenue of $1.6 million reported in fiscal 1996. DISCONTINUATION OF MASS STORAGE PRODUCTS In May 1995, the Company was notified by its foundry supplier of wafers used in its mass storage products that no wafers would be delivered in the second and third quarters of fiscal 1996. The Company has made a claim against its foundry supplier for recovery of write-offs and other losses it incurred related to the termination of this product line, and this matter is currently in arbitration. Accordingly, the Company discontinued its mass storage product line, in the second quarter of fiscal 1996. In the year ended March 31, 1995, sales of mass storage products were approximately $20 million and the product line generated a small operating loss. In the year ended March 31, 1996, sales of mass storage products were approximately $3.7 million. RECENT ACQUISITIONS In May 1994, the Company acquired Origin Technology, Inc. (Origin) for $1.4 million in cash and invested an additional $1.0 million in newly issued common stock of Origin. Origin designs, develops and markets proprietary automatic speech recognition (ASR) products for the consumer market. In June 1994, the Company acquired Micro Power Systems, Inc. (Micro Power) for $21.7 million in cash. Micro Power designs, develops, manufactures and markets high-performance data converters, data acquisition subsystems and other sophisticated electronic components for the document imaging, communications, microperipherals, industrial and other markets. 19 On March 31, 1995, the Company acquired Startech Semiconductor, Inc. (Startech) in exchange for a combination of cash and common stock valued at $13.2 million. Startech designs, develops and markets application-specific standard products for a variety of markets, including the data , communications, telecommunications and personal computer workstation and peripheral markets. In June 1995, the Company acquired Silicon Microstructures, Inc. (SMI), in exchange for the conversion to equity of $1.25 million of loans previously granted to SMI and 43,334 shares of common stock. SMI designs, develops and markets silicon sensors for a variety of markets, including medical, automotive and consumer. All of the acquisitions have been accounted for as purchases and the results of operations for fiscal 1995 and 1996 include the operations of the acquired companies subsequent to the dates of acquisition. Accordingly, the operations of these companies, prior to acquisition, are not reflected in the Company's historical operating results. As a result of the acquisitions completed in fiscal 1995 and 1996, the Company recorded approximately $7.1 million of goodwill, which is being amortized over a period of five years. The remaining portion of the excess purchase price (approximately $27.8 million in fiscal 1995 and $.9 million in fiscal 1996) was allocated to acquired research and development and was expensed. (See note 9 to Consolidated Financial Statements.) 20 RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage relationship to net sales of certain cost, expense and income items. The table and subsequent discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto. - - -------------------------------------------------------------------------------- YEARS ENDED MARCH 31, 1996 1995 1994 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 49.5 61.1 67.6 Research and development 12.8 9.0 7.1 Selling, general and administrative 19.8 15.0 12.4 Goodwill amortization 1.1 .5 -- Write-off of in-process R&D and other one-time charges 1.9 17.5 -- ----- ----- ---- Operating income (loss) 14.9 (3.1) 12.9 Other income, net 2.8 1.8 1.9 ----- ----- ---- Income (loss) before income taxes 17.7 (1.3) 14.8 Income taxes 6.9 5.7 5.1 ----- ----- ---- Net income (loss) 10.8% (7.0)% 9.7% ----- ----- ---- ----- ----- ---- - - -------------------------------------------------------------------------------- FISCAL 1996 VS FISCAL 1995 Net sales during fiscal 1996 were approximately $125.8 million compared to $159.5 million in fiscal 1995, a decrease of approximately 21%. The decrease reflects the elimination of sales of second source consumer products revenues and discontinued hard disk drive products totaling approximately $51.8 million. Such decrease was offset, in part by increased sales of integrated circuits for use in data acquisition products. In addition, the Company benefited from the sale of personal computer and pressure sensor products as a result of the Startech and SMI acquisitions. Overall, sales of continuing proprietary products increased by approximately 20%. In fiscal 1996, sales to domestic customers decreased by 10% to $56 million. International sales, excluding second source consumer products, increased by 12% to approximately $68.2 million. The Company's international sales consist of sales from the United States to overseas customers and sales by the Company's wholly-owned subsidiaries in Japan and the United Kingdom. Sales by the Company's foreign subsidiaries are denominated in the currency of the local country, while all other international sales are denominated in U.S. dollars. The fact that the Company operates internationally gives rise to exposures from changes in currency exchange rates. The Company has adopted a set of practices to strictly minimize its foreign currency risk which includes the use of foreign currency exchange contracts to hedge amounts receivable from its foreign subsidiaries. In addition, foreign sales may be subject to tariffs in certain countries or with regard to certain products; however, the Company's profit margin on international sales of integrated circuits, adjusted for differences in product mix, is not significantly different from that realized on its sales to domestic customers. 21 Cost of sales as a percentage of net sales decreased from 61% in fiscal 1995 to 50% in fiscal 1996. The corresponding increase in gross margins is due primarily to changes in product mix, including i) the elimination of sales of second source consumer products in Japan, ii) discontinued sales of hard disk drive products, and iii) the addition of higher margin product lines as a result of the acquisitions discussed above. Expenditures for research and development during fiscal 1996 increased by $1.7 million or 12% compared to fiscal 1995. As a percentage of net sales, expenditures for research and development increased from approximately 9% in fiscal 1995 to 13% in fiscal 1996. The increase in research and development expenses as a percentage of net sales is primarily attributable to the decrease in net sales discussed above as well as additional headcount and additional research and development expenditures of acquired companies. Selling, general and administrative expenses were $24.9 million in fiscal 1996 compared to $24 million in fiscal 1995. As a percentage of net sales, selling general and administrative expenses increased from approximately 15% of net sales in fiscal 1995 to 20% of net sales in fiscal 1996. The increases are due primarily to the decrease in net sales. As a result of the discontinuation of the mass storage product line discussed above, the Company incurred a one-time charge to operations of approximately $1.2 million. Net interest income during fiscal 1996 increased to $3.1 from the $2.4 million reported in fiscal 1995 as higher average investment rates in fiscal 1996 more than offset lower levels of cash and short-term investments. The Company's provision for income taxes is based on income from operations, excluding the write-off of in-process research and development, as there was no tax benefit associated with such write-off. The effective income tax rate for fiscal 1996, before the write-off of in-process research and development, was 37.5% compared to the federal statutory rate of 35%, due primarily to state income taxes and foreign income which is taxed at rates different from U.S. income tax rates offset, in part, by tax advantaged investment income and tax savings generated by use of the Company's foreign sales corporation. Excluding the effects of the write-off of in-process research and development and other acquisition related expenses, the Company reported net income of $15.5 million ($1.56 per share) compared to $16.7 million ($1.82 per share) in fiscal 1995. To date inflation has not had a significant impact on the Company's operating results. FISCAL 1995 VS FISCAL 1994 Net sales during fiscal 1995 were approximately $159.5 million compared to $161.7 million in fiscal 1994 as the addition of the revenues of Origin and Micro Power, offset in part, the revenues previously provided under the wafer processing arrangement with Rohm and a decrease in sales of second source consumer products in Japan. The Company experienced increases in sales of integrated circuits for use in new markets, communications and microperipheral products which were partially offset by decreases in sales 22 of integrated circuits for use in the communications product line. These decreases were due, in part, to increased competition and no new product introductions within the modem market. Overall, sales of proprietary products increased by approximately 29%, while sales of second source consumer products decreased by approximately 21%. In fiscal 1995, sales to domestic customers increased by 48% to $62.3 million. International sales, excluding wafer sales to Rohm, remained relatively constant at approximately $97 million. Cost of sales as a percentage of net sales decreased from 68% in fiscal 1994 to 61% in fiscal 1995. The corresponding increase in gross margins is due primarily to changes in product mix, including i) the termination of the arrangement under which the Company provided wafer processing services to Rohm, ii) the decrease in sales of second source consumer products in Japan, and iii) the addition of higher margin product lines as a result of the acquisitions discussed above. Expenditures for research and development during fiscal 1995 increased by $2.9 million or 25% compared to fiscal 1994. As a percentage of net sales, expenditures for research and development increased from approximately 7% in fiscal 1994 to 9% in fiscal 1995. The increase in research and development expenses is primarily attributable to additional headcount and additional research and development expenditures of acquired companies, as well as changes in product mix as the products of acquired companies displaced the wafer foundry services previously provided to Rohm. Selling, general and administrative expenses were $24 million in fiscal 1995 compared to $20 million in fiscal 1994. As a percentage of net sales, selling general and administrative expenses increased from approximately 12% of net sales in fiscal 1994 to 15% of net sales in fiscal 1995. The increases are primarily due to the additional selling, general and administrative expenses of acquired companies and changes in product mix. Net interest income during fiscal 1995 was consistent with the amounts reported in fiscal 1994 as higher average investment rates in fiscal 1995 were partially offset by lower levels of cash and short-term investments. The Company's provision for income taxes is based on income from operations, excluding the write-off of in-process research and development, as there was no tax benefit associated with such write-off. The effective income tax rate for fiscal 1995, before the write-off of in-process research and development, was consistent with the federal statutory rate of 35% as state income taxes and foreign income which is taxed at rates different from U.S. income tax rates was offset by tax advantaged investment income and tax savings generated from utilization of net operating losses and the Company's foreign sales corporation. Although the Company reported a net loss for fiscal 1995, excluding the effects of the write-off of in-process research and development, the Company reported net income of $16.7 million ($1.82 per share) compared to $15.7 million ($1.52 per share) in fiscal 1994. 23 QUARTERLY RESULTS The following table contains selected unaudited quarterly financial data for the fiscal years ended March 31, 1995 and 1996. In the opinion of management, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein.
- - ----------------------------------------------------------------------------------------------------------------------------- QUARTERLY RESULTS (THREE MONTHS ENDED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - - ------------------------------------------------------------------------------------------------------------------------------ MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, 1996 1995 1995 1995 1995 1994 1994 1994 - - ------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF INCOME DATA Net sales $ 28,938 $ 30,217 $ 31,681 $ 34,930 $ 40,630 $ 40,029 $ 40,752 $ 38,061 Cost of sales 14,868 15,219 14,232 17,898 23,871 24,316 25,110 24,203 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit 14,070 14,998 17,449 17,032 16,759 15,713 15,642 13,858 Research and development 3,937 4,279 4,040 3,860 4,179 3,600 3,385 3,212 Selling, general, and administrative 6,465 6,313 6,025 6,108 5,917 5,944 6,154 5,965 Goodwill amortization 343 343 344 285 234 312 234 78 On-time charges relating to discontinued operations -- -- -- 1,155 -- -- -- -- Write-off of in- process research and development and other acquisition related expenses (1,097) -- -- 2,390 10,951 -- -- 16,875 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss) 4,422 4,063 7,040 3,234 (4,522) 5,857 l5,869 (12,272) Other income, net 497 927 1,170 927 743 871 632 811 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 4,919 4,990 8,210 4,161 (3,779) 6,728 l6,501 (11,461) Income taxes 1,546 1,893 2,832 2,427 2,511 2,372 2,320 1,870 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 3,373 $ 3,097 $ 5,378 $ 1,734 $ (6,290) $ 4,356 $ 4,181 $(13,331) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share (a) $ .37 $ .31 $ .52 $ .17 $ (.70) $ .47 $ .45 $ (1.49) -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computation (a) 9,153 10,107 10,411 10,030 8,938 9,334 9,248 8,924 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- - - ------------------------------------------------------------------------------------------------------------------------------
(a) All share and per share amounts have been restated to give effect to the 3 for 2 stock dividend effected in the form of a stock split in October 1994. The Company's operations have reflected, and may in the future reflect, substantial fluctuations from period to period as a result of the impact of general economic conditions, the timing of orders from major customers, variations in manufacturing efficiencies, exchange rate fluctuations, management decisions to commence or discontinue certain product lines, and the Company's ability to design, introduce and manufacture new products on a cost-effective and timely basis. The semiconductor industry has historically been characterized by business cycles, with economic downturns resulting in 24 diminished product demand and erosion of average selling prices. Exar's future operating results could be adversely affected by a downturn in this market or by the failure of one or more of its customers to compete successfully in such market. The markets for components used in personal computer and consumer electronics products are extremely price competitive. LIQUIDITY AND CAPITAL RESOURCES During the fiscal years ended March 31, 1994, 1995 and 1996, the Company financed its operations primarily from existing cash and short-term investments and cash flows from operations. At March 31, 1996, the Company had $52.3 million in cash and short-term investments. The Company also has short-term, unsecured, informal lines of credit under which it may borrow up to $35.5 million, none of which was being utilized at March 31, 1996. In addition, the Company has a credit facility with certain domestic and foreign banks under which it may borrow up to $35 million in support of its foreign currency transactions. At March 31, 1996, the Company had outstanding Japanese yen forward contracts totaling approximately $500,000 which mature through July 1996. During the first quarter of fiscal 1995, the Company acquired Origin and Micro Power for approximately $24.1 million in cash. On March 31, 1995, the Company completed the acquisition of Startech in exchange for a combination of cash and common stock valued at $13.2 million. In June 1995, the Company acquired SMI in exchange for 43,334 shares of common stock and the conversion to equity of $1.25 million of loans previously granted to SMI. Certain of the purchase agreements include provisions for adjustments to the final purchase price and/or include deferred compensation arrangements which may result in additional payments of up to $9.8 million over the next five years, in some combination of cash and common stock. In October 1995, the Company entered into a wafer production agreement with IC Works, Inc. (IC Works). Under the terms of the agreement, Exar will invest approximately $15 million for the purchase and installation of equipment at IC Works, over the next twelve months, in exchange for a predetermined supply of wafers over the next five years. Under a separate but related agreement, Exar made a minority equity investment in IC Works of approximately $4.5 million. The Company constructed new facilities on its property in Fremont, California which were completed in November 1995. The total cost of the facility, including moving costs, was approximately $14 million all of which had been paid as of March 31, 1996. The Company anticipates that it will finance its operations with cash flows from operations, existing cash and short-term investment balances, borrowings under existing bank credit lines, and some combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capital will be determined by management based on the needs of the Company and prevailing market conditions. 25 ITEM 8. FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Exar Corporation: We have audited the accompanying consolidated balance sheets of Exar Corporation and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule for each of the years in the three-year period ended March 31, 1996. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Exar Corporation and subsidiaries as of March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Palo Alto, California May 2, 1996 26 EXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - - --------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------- 1996 1995 ASSETS CURRENT ASSETS: Cash and equivalents $ 49,302 $ 57,029 Short-term investments 2,981 5,133 Accounts receivable, net of allowances of $2,692 and $2,985 19,319 29,719 Inventories 18,065 18,411 Prepaid expenses and other 582 1,687 Deferred income taxes 5,697 7,277 ---------- ---------- Total current assets 95,946 119,256 PROPERTY, PLANT, AND EQUIPMENT, Net 34,185 22,192 GOODWILL, net of accumulated amortization of $2,095 and $780 5,026 4,866 OTHER ASSETS 3,917 3,766 ---------- ---------- TOTAL ASSETS $ 139,074 $ 150,080 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 12,680 $ 27,326 Accrued compensation and related benefits 4,017 4,925 Other accrued expenses 1,699 1,912 Income taxes payable -- 3,807 ---------- ---------- Total current liabilities 18,396 37,970 ---------- ---------- DEFERRED INCOME TAXES 1,852 1,857 ---------- ---------- LONG-TERM OBLIGATIONS 979 2,557 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred stock; $.0001 par value; 2,250,000 shares authorized; no shares outstanding -- -- Common stock; $.0001 par value; 25,000,000 shares authorized; 9,918,371 and 9,309,066 shares issued 77,688 67,217 Cumulative translation adjustments 200 682 Retained earnings 53,379 39,797 Treasury stock; 927,766 shares of Common stock at cost (13,420) -- ---------- ---------- Total stockholders' equity 117,847 107,696 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,074 $ 150,080 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 27 EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - - -------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 NET SALES $ 125,766 $ 159,472 $ 161,659 COST AND EXPENSES: Cost of sales 62,217 97,500 109,213 Research and development 16,116 14,375 11,473 Selling, general and administrative 24,911 23,980 19,974 Goodwill amortization 1,315 780 -- Write-off of in-process research and development and other acquisition related expenses 1,293 27,826 -- Discontinued product line 1,155 -- ---------- --------- --------- Total costs and expenses 107,007 164,461 140,660 ---------- --------- --------- INCOME (LOSS) FROM OPERATIONS 18,759 (4,989) 20,999 OTHER INCOME (EXPENSE): Interest income 3,266 2,471 2,414 Interest expense (156) (99) (85) Other, net 411 606 675 ---------- --------- --------- Total other income, net 3,521 2,978 3,004 ---------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 22,280 (2,011) 24,003 INCOME TAXES 8,698 9,073 8,538 ---------- --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 13,582 (11,084) 15,465 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- 200 ---------- --------- --------- NET INCOME (LOSS) $ 13,582 ($ 11,084) $ 15,665 ---------- --------- --------- ---------- --------- --------- PER SHARE: Income (loss) before cumulative effect of change in accounting principle $ 1.37 ($ 1.25) $ 1.50 Cumulative effect of change in accounting principle -- -- 0.02 ---------- --------- --------- Net income (loss) $ 1.37 ($ 1.25) $ 1.52 ---------- --------- --------- ---------- --------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING 9,925 8,835 10,287 ---------- --------- --------- ---------- --------- ---------
See notes to consolidated financial statements. 28
EXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Treasury Stock Cumulative Total ----------------------- ----------------------- Translation Retained Stockholders' Shares Amount Shares Amount Adjustments Earnings Equity BALANCES, April 1, 1993 9,990,966 $ 72,988 -- $ -- $ 569 $ 35,216 $ 108,773 Exercise of stock options 324,503 2,855 2,855 Income tax benefit from stock options exercised and sold -- 1,100 1,100 Stock issued under Employee Stock Participation Plan 60,673 849 849 Acquisition of treasury stock (1,727,052) (23,645) (23,645) Translation adjustment (219) (219) Net income 15,665 15,665 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, March 31, 1994 10,376,142 77,792 (1,727,052) (23,645) 350 50,881 105,378 Stock issued in connection with acquisitions 349,587 8,750 8,750 Exercise of stock options 246,661 2,566 2,566 Income tax benefit from stock options exercised and sold 739 739 Stock issued under Employee Stock Participation Plan 63,728 1,015 1,015 Retirement of treasury stock (1,727,052) (23,645) 1,727,052 23,645 -- Translation adjustment 332 332 Net loss (11,084) (11,084) ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, March 31, 1995 9,309,066 67,217 -- -- 682 39,797 107,696 Stock issued in connection with acquisition 43,334 1,150 1,150 Exercise of stock options 488,222 6,110 6,110 Income tax benefit from stock options exercised and sold 1,990 1,990 Stock issued under Employee Stock Participation Plan 77,749 1,221 1,221 Acquisition of treasury stock (927,766) ( 13,420) (13,420) Translation adjustment (482) (482) Net income 13,582 13,582 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, March 31, 1996 9,918,371 $77,688 (927,766) ($13,420) $200 $53,379 117,847 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 29 EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS) - - -------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 13,582 ($11,084) $ 15,665 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,627 5,725 3,795 Provision for doubtful accounts and sales returns 203 626 471 Write-down of investments to estimated net realizable value - - 1,256 Write-off of in process research and development 905 27,826 - Deferred income taxes 1,575 (531) (925) Changes in operating assets and liabilities: Accounts receivable 10,354 (849) (1,650) Inventories 718 (267) (248) Prepaid expenses and other 844 364 (752) Accounts payable (14,841) 5,009 (274) Accrued compensation and related benefits (1,092) (1,165) (716) Other accrued expenses (539) (4,438) (422) Income taxes payable (1,817) 1,671 (1,775) --------- --------- --------- Net cash provided by operating activities 15,519 2,887 14,425 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of building (13,358) - - Purchases of equipment and leasehold improvements (2,518) (6,798) (7,546) Purchases of short-term investments (4,049) (6,450) (23,000) Proceeds from sales of short-term investments 6,202 8,316 28,687 Purchases of long-term investments (4,500) - - Proceeds from sales of long-term investments 2,760 - - Other assets (857) (1,228) (98) Acquisitions, net of cash acquired (355) (26,357) - --------- --------- --------- Net cash used in investing activities (16,675) (32,517) (1,957) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 7,331 3,581 3,704 Long-term obligations - 346 - Acquisition of treasury stock (13,420) - (23,645) --------- --------- --------- Net cash provided by (used in) financing activities (6,089) 3,927 (19,941) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (482) 332 (219) --------- --------- --------- NET DECREASE IN CASH AND EQUIVALENTS (7,727) (5,371) (7,692) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 57,029 62,400 70,092 --------- --------- --------- CASH AND EQUIVALENTS AT END OF YEAR $ 49,302 $ 57,029 $ 62,400 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 7,275 $ 7,857 $ 10,853 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements. 30 EXAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 - - -------------------------------------------------------------------------------- 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - Exar Corporation (Exar or the Company) designs, develops, and markets analog and mixed-signal application-specific integrated circuits for use in communications, document imaging, consumer electronics and other selected products. Principle markets include sales in North America, Asia, Europe and other countries. USE OF MANAGEMENT ESTIMATES - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires the use of management estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from estimates. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Exar and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND EQUIVALENTS - The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. SHORT-TERM INVESTMENTS - The Company's policy is to invest in various short-term instruments with investment grade credit ratings. Generally such investments have contractual maturities of less than one year. At March 31, 1996, short-term investments consisted of auction-rate securities of $2,000,000 and money market and/or mutual fund investments of $981,000. At March 31, 1995, short-term investments consisted of certificates of deposits of $2,000,000, auction-rate securities of $1,260,000, commercial paper of $950,000 and money market and/or mutual fund investments of $923,000. Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company classifies its short-term investments as "available-for-sale" securities and the cost of securities sold is based on the specific identification method. As of March 31, 1996 and 1995, there were no significant differences between the fair market value and the underlying cost of such investments. INVENTORIES - Inventories are stated at the lower of standard cost (first-in, first-out method) or market. PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are stated at cost. Depreciation and amortization on plant and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets. Estimated useful lives are as follows: Computer software and computer equipment 3-5 years Machinery and equipment 5-7 years Buildings and fixtures 5-30 years GOODWILL - Goodwill is amortized on a straight-line basis over a period of five years. 31 LONG LIVED ASSETS - On April 1, 1995 the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial statements. INCOME TAXES - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. REVENUE RECOGNITION - Revenue is recognized at the time of shipment, including sales made to distributors under agreements allowing limited right of return and price protection on merchandise unsold by the distributors. For sales made to distributors, reserves are provided for returns and price allowances at the time of shipment. NET INCOME PER SHARE - Net income per share is calculated based on the weighted average number of common and dilutive common share equivalents outstanding. Common share equivalents reflect the dilutive effect of outstanding stock options. FOREIGN CURRENCY - The functional currency of each of the Company's foreign subsidiaries is the local currency of that country. Material translation adjustments are included in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in other income. The Company enters into foreign currency exchange contracts from time-to- time to hedge certain currency exposures. At March 31, 1996, the Company had Japanese yen forward contracts for the conversion of 50,000,000 yen to U.S. dollars ($477,000 at March 31, 1996) which mature through July 1996. The Company is exposed to credit-related losses in the event of nonperformance by the parties to its foreign currency exchange contracts, but the credit exposure on such contracts was not significant at March 31, 1996. Net foreign currency transaction gains were $347,000, $511,000, and $1,400,000 in 1996, 1995, and 1994, respectively. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of accounts receivable and cash and short-term investments. The majority of the Company's sales are derived from manufacturers in the computer, communications and consumer electronics industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for sales on credit. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. Approximately 24% of net accounts receivable relates to sales to customers in Japan. The Company's policy is to place its cash and short-term investments with high credit quality financial institutions and limit the amounts invested with any one financial institution or in any type of financial instrument. The Company does not hold or issue financial instruments for trading purposes. 32 2. INVENTORIES Inventories at March 31 consisted of the following: 1996 1995 ---- ---- (In thousands) Raw materials $ 762 $ 301 Work in process 11,563 11,746 Finished goods 5,740 6,364 -------- -------- Total $ 18,065 $ 18,411 -------- -------- -------- -------- 3. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at March 31 consisted of the following: 1996 1995 ---- ---- (In thousands) Land $ 6,561 $ 6,561 Building 13,358 -- Machinery and equipment 44,382 40,976 Leasehold improvements 55 1,287 Construction in progress 852 2,747 -------- -------- 65,208 51,571 Accumulated depreciation and amortization (31,023) (29,379) -------- -------- Total $ 34,185 $ 22,192 -------- -------- -------- -------- In November 1995, the Company moved to a new facility constructed on its property in Fremont, California. Construction of the facility was substantially completed during fiscal 1996 at a total cost of approximately $14 million. 4. BORROWING ARRANGEMENTS The Company has two short-term, unsecured, informal bank lines of credit under which it may borrow up to $35,500,000 through January 31, 1997. In addition, the Company has a credit facility with certain domestic and foreign banks under which it may borrow up to $35,000,000 in support of its foreign currency transactions. Interest rates are based on the federal funds rate (5.0% at March 31, 1996) plus .30% to .375%. At March 31, 1996, the Company had outstanding Japanese yen forward contracts totaling approximately $500,000. 33 5. INCOME TAXES The provision for income taxes for the years ended March 31 consisted of the following: 1996 1995 1994 ---- ---- ---- (In thousands) Current: Federal $ 4,063 $ 6,317 $ 6,329 State 736 1,704 1,977 Foreign 334 568 108 -------- -------- -------- 5,133 8,589 8,414 -------- -------- -------- Deferred: Federal 1,167 (172) (598) State 221 (359) (207) Foreign 187 - 80 -------- -------- -------- 1,575 (531) (725) -------- -------- -------- Charge in lieu of taxes attributable to employee stock plans 1,990 1,015 849 -------- -------- -------- Total $ 8,698 $ 9,073 $ 8,538 -------- -------- -------- -------- -------- -------- Consolidated pretax income includes foreign income of approximately $758,000, $1,066,000, and $399,000, in 1996, 1995, and 1994, respectively. The Company adopted SFAS No. 109 effective April 1, 1993. The principal impact to the Company was a change in the recognition criteria for deferred tax assets. The cumulative effect of adopting SFAS No. 109 was to increase 1994 net income by $200,000 ($0.02 per share). Significant components of the Company's net deferred tax asset at March 31, 1996 and 1995 are as follows: 1996 1995 ---- ---- Deferred tax assets: (In thousands) Reserves and accruals not currently deductible $ 3,128 $ 4,571 Net operating loss and tax credit carryforwards 1,947 2,291 State income taxes 567 371 Other 55 44 -------- -------- Total deferred tax assets 5,697 7,277 -------- -------- Deferred tax liabilities: Depreciation (1,473) (1,460) Other (379) (397) -------- -------- Total deferred tax liabilities (1,852) (1,857) -------- -------- Net deferred tax assets $ 3,845 $ 5,420 -------- -------- -------- -------- 34 The Company's net deferred tax assets at March 31, 1995 include $2,535,000 of deferred tax assets arising from the acquisitions of Micro Power Systems, Inc. (MPS), Origin Technology, Inc. and Startech Semiconductor, Inc. (see Note 9). Approximately $1,266,000 of the acquired deferred tax assets relate to net operating loss carryforwards which previously had not been recognized. In accordance with the provisions of SFAS No. 109, the portion of the deferred tax assets relating to net operating loss carryforwards have been recognized as a reduction of the recorded value of goodwill. No valuation allowance for deferred tax assets was required for the years ended March 31, 1996 and 1995 as management believes it is more likely than not that the Company will generate sufficient taxable income to realize its deferred tax assets. Certain of the Company's subsidiaries have net operating loss and tax credit carryforwards of approximately $2,720,000 for state income tax purposes and $4,840,000 for federal income tax purposes, which are available to offset future taxable income through 1997 and 2008, respectively. Current federal and California tax law includes provisions limiting the use of net operating loss and tax credit carryforwards in the event of certain changes in ownership, as defined. The Company's ability to utilize its net operating loss and tax credit carryforwards could be limited according to these provisions. The following summarizes differences between the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes and the provision for income taxes for each of the years ended March 31:
1996 1995 1994 -------- -------- -------- (In thousands) Income taxes at statutory rate $ 7,798 ($ 704) $ 8,401 State income taxes, net of federal income tax benefit 1,091 954 1,217 Write-off of in-process research and development 317 9,739 - Goodwill amortization 460 273 - Benefit of acquired net operating losses not previously recognized - (574) - Benefit from utilization of net operating losses - (70) - Tax-exempt interest income (95) (168) (531) Benefit of foreign sales corporation (533) (541) (648) Foreign income taxed at rates higher than U.S. tax rates 68 175 48 Other, net (408) (11) 51 -------- -------- -------- Total $ 8,698 $ 9,073 $ 8,538 -------- -------- -------- -------- -------- --------
The California income tax authorities may propose to assess income taxes using the unitary taxation method for some or all of the fiscal years 1986 to 1990, which remain open to examination under the statute of limitations. This taxation method has the effect of apportioning taxable income of Rohm Company Ltd. (see Note 10) to Exar and could possibly result in additional state income tax liability if successfully asserted. The California income tax authorities have assessed Exar for income taxes under the unitary taxation method for the years 1980 through 1985. Such assessments have been paid or accrued as of March 31, 1996. However, management believes the unitary taxation method is inappropriate for the Company and has filed refund claims or protests with respect to such amounts. 35 6. EMPLOYEE BENEFIT PLANS EXAR SAVINGS PLAN - The Exar Savings Plan covers substantially all employees of the Company. The Savings Plan provides for voluntary salary reduction contributions in accordance with Section 401(k) of the Internal Revenue Code as well as contributions from the Company based on the achievement of specified operating results. Exar made contributions of $721,000, $385,000, and $311,000, during 1996, 1995 and 1994, respectively. BONUS PLANS - The Company's bonus plans provide for incentive bonuses for substantially all employees of the Company based upon the achievement of specified operating and performance results. Incentive bonuses totaled $478,000, $400,000, and $1,100,000 for 1996, 1995 and 1994, respectively. The Company's bonus plans may be amended or discontinued at the discretion of the Board of Directors. 7. STOCKHOLDERS' EQUITY PREFERRED SHARE PURCHASE RIGHTS PLAN - In December 1995, the Company's Board of Directors (the Board) adopted a Preferred Share Purchase Rights Plan under which the Board declared a dividend of one purchase right for each outstanding share of common stock of Exar held as of January 10, 1996. Each right entitles the registered holder to purchase one one-hundredth of a share of Exar's Series A Junior Participating Preferred Stock at a price of $118.50. The rights become exercisable ten days after the announcement that an entity or person has commenced a tender offer to acquire or has acquired 15% or more of the outstanding Exar common stock ("the Distribution Date"). After the Distribution Date, the Board may exchange the rights at an exchange ratio of one common share or one one-hundredth of a preferred share per right. Otherwise, each holder of a right, other than rights beneficially owned by the acquiring entity or person (which will thereafter by void), will have the right to receive upon exercise that number of common shares having a market value of two times the exercise price of the right. The rights will expire on December 15, 2005. EMPLOYEE STOCK PARTICIPATION PLAN - Exar is authorized to issue 1,000,000 shares of common stock under its Employee Stock Participation Plan. The plan permits employees to purchase common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the common stock at the beginning or end of each offering period. Shares purchased by and distributed to employees were 77,749 in 1996, 63,728 in 1995, and 60,673 in 1994. The Company has reserved 616,766 shares of common stock for future issuance under its Employee Stock Participation plan. 36 STOCK OPTION PLANS - Exar has a Stock Option Plan and a Non-Employee Directors' Stock Option Plan. Under these plans, the Company may grant options to purchase up to 2,655,000 and 262,500 shares of common stock, respectively. Options are granted at fair market value on the date of grant. Options are exercisable in four equal annual installments commencing one year after the date of grant and expire seven years from the grant date. The stock option plans were retroactively amended in 1993 to make canceled stock options available for future grant. The amount of shares presented as available for future grant has been restated to reflect this amendment. Option activity for both plans is summarized as follows:
OUTSTANDING OPTIONS ------------------- Shares Number of Price per Available Shares Share --------- ------ ----- Balances, March 31, 1993 1,152,845 1,212,293 $ 3.67 - $ 18.83 Options granted (664,650) 664,650 14.09 - 17.00 Options exercised - (324,503) 3.67 - 17.17 Options canceled 104,730 (104,730) 4.83 - 17.66 --------- --------- ------------------ Balances March 31, 1994 592,925 1,447,710 3.67 - 18.83 Additional shares reserved 285,000 - - Options granted (519,500) 519,500 16.09 - 22.50 Options exercised - (246,661) 3.67 - 20.25 Options canceled 123,511 (121,644) 4.84 - 18.17 --------- --------- ------------------ Balances March 31, 1995 481,936 1,598,905 3.79 - 22.50 Additional shares reserved 250,000 - - Options granted (758,600) 758,600 12.63 - 37.25 Options exercised - (373,400) 3.79 - 21.50 Options canceled 373,027 (373,027) 4.84 - 37.25 --------- --------- ------------------ Balances March 31, 1996 346,363 1,611,078 $ 4.84 - $ 37.25 --------- --------- ------------------ --------- --------- ------------------
Options to purchase 427,783 shares were exercisable at March 31, 1996. On December 15, 1995, the Board authorized an option repricing program under which certain outstanding options were repriced to $12.63, the fair market value of the Company's common stock on the date of the repricing. 37 OTHER OPTIONS - In connection with the acquisition of Startech Semiconductor Inc. (see Note 9), the Company assumed outstanding Startech options which converted into options to purchase up to 150,373 shares of Exar common stock for $21.50 per share. The options are exercisable at prices ranging from $0.22 to $17.32 and expire in December 1996. Activity for these options is summarized as follows: Outstanding Options ------------------- Number of Price per Shares Share ------ ----- Balances, March 31, 1995 150,373 $ .22 - $ 17.32 Options exercised (117,795) .22 - 17.32 -------- ------------------- Balances March 31, 1996 32,578 $ 2.16 - $ 17.32 -------- ------------------- -------- ------------------- 8. GEOGRAPHIC AREA INFORMATION The Company and its subsidiaries market products in the United States and in foreign countries. The Company's foreign operations consist primarily of its wholly owned subsidiaries in Japan and the United Kingdom. Identifiable assets represent assets used in the Company's operations in each geographic area. Geographic financial information for each year is as follows:
1996 1995 1994 -------- -------- -------- (In thousands) Net sales: United States $ 56,030 $ 62,344 $ 42,040 Export sales to Japan and Asia 34,354 22,674 43,537 Export sales to western Europe 14,280 11,653 10,258 Export sales to rest of world 1,847 1,347 991 Japan 19,061 60,862 64,833 Western Europe 194 592 - -------- -------- -------- $125,766 $159,472 $161,659 -------- -------- -------- -------- -------- -------- Net income (loss): United States $ 13,158 ($ 11,581) $ 15,454 Japan 330 299 211 Western Europe 94 198 - -------- -------- -------- $ 13,582 ($ 11,084) $ 15,665 -------- -------- -------- -------- -------- -------- Identifiable assets: United States $127,735 $121,358 $113,566 Japan 9,884 27,437 18,653 Western Europe 1,455 1,285 - -------- -------- -------- $139,074 $150,080 $132,219 -------- -------- -------- -------- -------- --------
38 9. ACQUIRED COMPANIES In May 1994, the Company acquired all of the outstanding common stock of Origin Technology, Inc., (Origin) for $1.4 million in cash and invested an additional $1.0 million in newly issued common stock of Origin. The purchase agreement includes provisions for additional payments to the selling shareholders of up to $1.5 million through 1999 based on Origin's future operating performance. Such contingent payments were accrued and are included in long-term liabilities at March 31, 1995. In 1996, the Company reversed the $1.5 million accrual as Origin's operating results did not meet performance objectives pursuant to the purchase agreement. Management believes Origin's ability to meet future performance objectives under the agreement is unlikely. 10. TRANSACTIONS WITH RELATED PARTIES Rohm Co., Ltd., a manufacturer of semiconductor devices and other electronic components in Japan, was the majority stockholder of Exar from 1971 until 1990. As of January 1994, Rohm was no longer an affiliate of the Company. For the year ended March 31, 1994, the Company had the following transactions with Rohm and/or its affiliates: i) sales and services $26.1 million, ii) purchases of inventory and other services $64.9 million and iii)rent paid to Rohm $.8 million. In June 1994, the Company acquired all of the outstanding common stock of MPS for $21.7 million in cash. On March 31, 1995, the Company acquired all of the outstanding common stock of Startech Semiconductor, Inc. (Startech) in exchange for 349,587 shares of common stock, the assumption of Startech's outstanding stock options with an aggregate value of $8,750,000, and cash of $4,450,000. The purchase agreement includes provisions for adjustments to the final purchase price, which may result in additional payments of up to $6 million in October 1996 based on Startech's future operating performance. In addition, the Company may be required to pay up to $2,336,000 in deferred compensation to certain key employees of Startech through April 1998. During 1996, the Company paid $388,000 related to Startech's deferred compensation arrangement. In June 1995, the Company acquired Silicon Microstructures, Inc. (SMI) in exchange for 43,334 shares of common stock, the conversion to equity of $1,250,000 of loans previously granted to SMI and acquisition related costs of $355,000. In addition, the Company may be required to issue up to $1,500,000 in additional shares based on SMI's future operating performance. For accounting purposes, the acquisitions have been accounted for as purchases. Accordingly, the results of operations for 1996 and 1995 include the operations of the acquired companies subsequent to the dates of acquisition. As a result of these transactions, the Company recorded approximately $7.1 million of goodwill which is being amortized over a period of five years. The remaining portion of the excess purchase price represented in-process research and development which was charged to operations (approximately $1.3 million in 1996, net of the $1.5 million Origin reversal discussed above, and approximately $27.8 million in 1995). Contingent consideration in connection with the Startech and SMI acquisitions has not been accrued and will be reflected in the Company's consolidated financial statements when issued or paid. Had the acquisitions been effective at the beginning of 1995, the impact would have been to increase revenues by $14.6 million, to increase operating loss by $503,000, and to decrease net loss by $125,000 ($.01 per share). Had the acquisitions been effective at the beginning of 1994, the impact would have been to increase revenues by $27 million, and to increase operating income and net income by $1.6 39 million and $1.4 million ($.14 per share), respectively. The acquisition of SMI in 1996 has not had a significant impact on the Company's consolidated results of operations. 40 11. COMMITMENTS AND CONTINGENCIES Certain of the Company's facilities are leased under lease agreements expiring through August 2001. Rent expense was $1,058,000, $1,200,000, and $650,000 for 1996, 1995, and 1994, respectively. Future minimum lease payments for 1997, 1998, 1999, 2000, and 2001 are $314,000, $56,000, $56,000, $56,000 and $14,000, respectively. In 1987, one of the Company's subsidiaries identified low-level groundwater contamination at its principal manufacturing site. Although the area of contamination appears to have been defined, the source of the contamination has not been identified. The Company has reached an informal agreement with another entity to participate in the cost of ongoing site investigations and the operation of remedial systems to remove subsurface chemicals which is expected to continue for 10 to 15 years. The accompanying consolidated financial statements include the Company's share of estimated remediation costs of approximately $1.1 million. In June 1995 the Company filed a $9 million arbitration claim against SGS-Thompson Microelectronics, Inc. ("SGS-Thompson"), its foundry supplier of wafers used in its mass storage products, alleging inter alia breach of an Agreement between the parties, arising out of SGS-Thompson's refusal to provide Exar with various products called for under the Agreement. In September 1995 SGS-Thompson filed a counter claim for $8 million alleging breach of the Agreement by the Company. The Company believes the counter claim is without merit. This dispute is currently in arbitration. The Company is involved in various claims, legal actions and complaints arising in the normal course of business. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For a listing of executive officers and certain key employees of the Company and certain information about them, see Part I "Executive Officers of the Company." The information required by this item concerning the Company's directors is incorporated by reference from the section captioned "Proposal 1: Election of Directors" contained in the Company's Definitive Proxy Statement filed not later than 120 days following the close of the fiscal year ("Definitive Proxy Statement"). COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the NASD. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that, during the fiscal year ended March 31, 1996, all filing requirements applicable to its officers, directors, and greater than ten-percent beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION The information required under this item is hereby incorporated by reference from the Company's Definitive Proxy Statement under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item is hereby incorporated by reference from the Company's Definitive Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 42 The information required under this item is hereby incorporated by reference from the Company's Definitive Proxy Statement under the captions "Certain Transactions" and "Executive Compensation." 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: (1) Index to Consolidated Financial Statements. The following Consolidated Financial Statements of Exar Corporation and its subsidiaries are filed as part of this Form 10-K: Form 10K Page No. Independent Auditors' Report 26 Consolidated Balance Sheets March 31, 1996 and 1995 27 Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and 1994 28 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1995, and 1994 29 Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994 30 Notes to Consolidated Financial Statements 31-40 (2) Index to Financial Statement Schedules. The following Consolidated Financial Statement Schedules of Exar Corporation and its subsidiaries for each of the years ended March 31, 1996, 1995 and 1994 are filed as part of this Form 10-K: Form 10K Page No. II Valuation and Qualifying Accounts 46 and Reserves Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. 44 Exhibit Exhibit Footnote Number Description (f) 2.1 Agreement and Plan of Reorganization Dated June 3, 1994 (f) 2.2 First Amendment to Agreement and Plan of Reorganization Dated March 31, 1995 (e) 3.1 Restated Certificate of Incorporation of the Company. (e) 3.2 Bylaws of the Company, as amended. 4.1 Reference is made to Exhibits 3.1 and 3.2. (b)* 10.1 1984 Incentive Stock Option Plan of the Company, as amended, and related forms of stock option grant and exercise. (a) 10.2 Cross License and Second Source Agreement between the Company and Rohm Co., Ltd. dated as of July 1, 1985. (b)* 10.3 1986 Directors' Stock Option Plan of the Company, as amended, and related forms of stock option grant and exercise. (d)* 10.4 1989 Employee Stock Participation Plan of the Company and related Offering. (c) 10.5 Foundry Services and Facility Access Agreement, dated April 20, 1988, by and among the Company and Exel. (b) 10.6 Addendum to Cross License and Second Source Agreement between the Company and Rohm Co., Ltd. dated as of March 1, 1991. (e)* 10.7 1991 Stock Option Plan of the Company and related forms of stock option grant and exercise. (e)* 10.8 1991 Non-Employee Directors' Stock Option Plan of the Company and related forms of stock option grant and exercise. (*) 10.9 Key Employee Incentive Compensation Program. (*) 10.10 Description of Fiscal Year 1996 Executive Incentive Program. 45 11.1 Statement Re Computation of Per Share Earnings. 21.1 Subsidiaries of the Company. 23.1 Consent of Independent Auditors' 24.1 Power of Attorney. Reference is made to the signature page. - - ------------------------- (a) Filed as an exhibit to Amendment No. 1 to the Registration Statement, filed with the Commission on July 24, 1985 and incorporated herein by reference. (b) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1991 and incorporated herein by reference. (c) Filed as an exhibit to the Company's Amendment No. 1 on Form 8 to the Current Report on Form 8-K, filed with the Commission on June 2, 1988 and incorporated herein by reference. (d) Filed as an exhibit to the Company's report on Form 8-K, filed with the Commission on January 19, 1990 and incorporated herein by reference. (e) Filed as an exhibit to the Company's Annual report on Form 10-K for the fiscal year ended March 31, 1992 and incorporated herein by reference. (f) Filed as an exhibit to the Company's Annual report on Form 10-K for the fiscal year ended March 31, 1994 and incorporated herein by reference. * Indicates management contracts or compensatory plans and arrangements filed pursuant to Item 601(b)(10) of Regulation S-K. - - ------------------------- (b) Reports on Form 8-K. The Company filed no Current Report on Form 8-K with the Commission during the quarter ended March 31, 1996. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. EXAR CORPORATION By: /s/ George D. Wells --------------------- George D. Wells Chief Executive Officer, President and Director Date: June 28, 1996 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ronald W. Guire and George D. Wells, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ George D. Wells Chief Executive Officer, President June 28, 1996 - - ------------------------- and Director (George D. Wells) /s/ Ronald W. Guire Executive Vice President, Chief June 28, 1996 - - ------------------------- Financial Officer (Ronald W. Guire) Secretary and Director (Principal Financial and Accounting Officer) /s/ Raimon L. Conlisk Director and Chairman of the Board June 28, 1996 - - ------------------------- (Raimon L. Conlisk) /s/ James E. Dykes Director June 28, 1996 - - ------------------------- (James E. Dykes) /s/ George E. Grega Director June 28, 1996 - - ------------------------- (George E. Grega) 47 48 SCHEDULE II - - -------------------------------------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) - - -------------------------------------------------------------------------------- Balance at Balance Beginning Write-offs and at end Classification of Year Additions Recoveries of Year - - -------------------------------------------------------------------------------- Year ended March 31, 1996: Allowance for doubtful accounts and sales returns $ 2,985 $ 203 $ 496 $ 2,692 - - -------------------------------------------------------------------------------- Year ended March 31, 1995: Allowance for doubtful accounts and sales returns $ 2,359 $ 1,169 $ 543 $ 2,985 - - -------------------------------------------------------------------------------- Year ended March 31, 1994: Allowance for doubtful accounts and sales returns $ 1,888 $ 834 $ 363 $ 2,359 - - -------------------------------------------------------------------------------- 49 EX-10.7 2 KEY EMPLOYEE INCENTIVE PROGRAM EXHIBIT 10.7 EXAR CORPORATION PLAN DOCUMENT KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM FISCAL YEAR 1996 (APRIL 1, 1995 - MARCH 31, 1996) 50 PLAN DOCUMENT KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM FISCAL YEAR 1996 CONTENTS: A. PURPOSE B. EFFECTIVE DATES C. PLAN CHANGES D. PLAN ADMINISTRATION E. PARTICIPATION F. OVERALL PLAN CONCEPTS G. PROCEDURE H. METHOD OF CALCULATION I. CHANGES IN STATUS J. INTERPRETATION OF PLAN TERMS ATTACHMENT: LETTER ACKNOWLEDGING PARTICIPATION ADDENDUM "A" - SPECIAL LIMITED INCENTIVE POOL FUNDING FOR FY 1996 51 A. PURPOSE The purpose of the Key Employee Incentive Compensation Program is to encourage and reward performance which contributes to the company's success. Financial incentives which complement base salary will be awarded to participants in the plan for achieving corporate, department, and personal objectives. B. EFFECTIVE DATE This fiscal 1996 Plan was approved by the Board of Directors. The period April 1, 1995 through March 31, 1996 will be used for purposes of determining performance achievement and for payout calculations. C. PLAN CHANGES The company, at its sole discretion through the Board of Directors, may amend, alter, or cancel this Key Employee Incentive Compensation Program at any time. D. PLAN ADMINISTRATION The Key Employee Incentive Compensation Program will be administered by the Plan Committee consisting of the President and the Senior Vice President/CFO with the staff support of the Human Resources Director. The role of the plan committee is to interpret the provisions and intent of the plan, evaluate and determine eligibility and measurement criteria, assess performance results, and amend and modify the plan administration, as necessary. The President will approve the final recommendations to be submitted for Board of Directors' approval. E. PARTICIPATION Eligibility in the annual incentive plan is determined by the recommendations of senior management and the approval of the President and Board of Directors. 1. NEW HIRES (a) New hires after the beginning of the plan year who are approved as participants will have prorated incentive awards. (b) New hires in the final quarter (January 1 - March 31) of the plan year are not eligible to participate for that plan year. 2. Since this is an ANNUAL plan, participation is established annually. Participants in previous year(s) are not automatically included in subsequent years. A number of factors may change from year to year, such as: business conditions, employee individual contribution, criticality of certain positions, etc. 52 3. Inclusion in the plan does not constitute a guarantee of employment or specific earnings. F. OVERALL PLAN CONCEPTS NOTE: ALTHOUGH THE BELOW PLAN CONCEPTS, PROCEDURES AND METHODS OF CALCULATION ARE IN PLACE FOR FISCAL YEAR 1996, THERE IS IN PLACE A SPECIAL LIMITED INCENTIVE POOL FUNDING ARRANGEMENT FOR FISCAL 1996 TO ENABLE SOME PAYOUT TO PARTICIPANTS IN ELIGIBLE DEPARTMENTS IN THE EVENT THE CORPORATE OBJECTIVES FALL SHORT OF THE THRESHOLD. THESE PROVISIONS ARE COVERED IN ADDENDUM "A" TO THIS DOCUMENT. (1) INCENTIVE POOL: The plan is funded when ALL the established corporate objectives are met as determined by the Board of Directors. The minimum threshold for ALL of the corporate objectives must be met before the incentive pool is funded. (2) INCENTIVE PAYOUT: Payout occurs when the pool is funded, when the established major departmental objectives are satisfactorily met as determined by the Plan Committee, and when personal performance is satisfactory. (3) INCENTIVE AMOUNT: Individual payments are expressed as a percent of the participant's annual base pay as of March 31 prior to the plan year. (4) TARGET INCENTIVE AWARD: Participants selected for participation in the plan will be assigned to one of several target incentive award categories. The higher the level of importance of the position of the success of the company, the higher the percentage of target incentive award. For Example: Assume the participant is approved for a target incentive award of 15% and all CORPORATE, DEPARTMENT, and INDIVIDUAL personal targets are met at exactly 100%, then the participant's performance incentive will be 15% of his annual base salary (as of March 31, prior to the beginning of the plan year). If targets are not met at 100%, but within the threshold of the target, the payout will be reduced. If the targets are exceeded to the outstanding level the payout could reach 150% of target award. In the above example that would be 22.5% of annual base salary. (15% x 150%) G. PROCEDURE The employee selected for inclusion in this Key Employee Incentive Compensation Program will be notified in writing. The participant will be provided a copy of the corporate performance measures and the department performance measures. Any changes in the plan or the measurement criteria must be approved in writing by the President and the Board of Directors. Payment will be subject to ordinary deductions, such as FICA, SDI, and income taxes. No other deduction will be made. Payment, when earned, will be made as soon as administratively possible, generally not later than 90 days after the end of the plan year. 53 H. METHOD OF CALCULATION (1) ESSENTIAL ELEMENTS OF CALCULATION (a) INCENTIVE POOL FUNDING: The pool is funded when all corporate objectives are met. If any one of the objectives is below the established threshold the pool will NOT be funded. If the objectives are met just at threshold the pool will be funded at 50%. If the target objectives are met at 100% the pool will be funded at 100%. If the objectives are exceeded to the OUTSTANDING level, the pool will be funded at 150%. (b) DEPARTMENT INCENTIVE POOL: This pool is funded from the corporate incentive pool and is based on the department meeting or exceeding the threshold of performance objectives established by senior executives and approved by the Board of Directors. The sum of the individual payouts in a department cannot exceed the department pool. Further, the sum of the department pools cannot exceed the corporate pool. (c) PERSONAL CONTRIBUTION MODIFIER: Each participant is able to modify the amount of payout, based on individual contribution to Exar's success. The personal objectives are related to the participant's critical job responsibilities which are linked directly to departmental or corporate objectives. The payout can be modified (increased/decreased) based on appraisal by appropriate managers and approved by senior executives and by the Board. (2) ILLUSTRATIVE Corporate Performance Department Performance Personal Contribution - - --------------------- ---------------------- --------------------- determines total size x determines share of x modifier determines of corporate pool corporate pool awarded amount of payout funding to department (3) Examples Example 1 Example 2 --------- --------- Employee's annual base salary (3/31/95): $ 70,000 $ 70,000 Target Incentive Award 20% (14,000) 15% (10,500) Corporate Performance 105% 120% Department Performance 92% 110% Personal Contribution Modifier 85% 95% 54 Example 1: Target Total Individual Incentive Incentive Corp. Dept. Personal Award Modifier Award Payment - - ----- ----- -------- ---------------- --------- --------- 105% x 92% x 85% = 82.11% x $14,000 = $11,495.40 Example 2: 120% x 110% x 95% = 125.4% x $10,500 = $13,167.00 Reference Plan Document (page 4, Paragraph H (1) (a), (b), (c)). The sums of the department pools cannot exceed the corporate pool. Further, the sum of individual payouts in a department cannot exceed the departmental pool. I. CHANGES IN STATUS 1. Participants who give notice of termination or who terminate employment, voluntarily or involuntarily, prior to the date of payout are not eligible for payment. 2. Participants who retire or become totally disabled during the plan year will receive the eligible award payment on a prorated basis. 3. If a participant dies during the plan year the beneficiary will receive the entire eligible payment. 4. Employees who ,during the plan year, are promoted to incentive eligible positions and are approved by the President and the Board of Directors for inclusion in the Plan may receive payments on a prorated basis. Employees promoted in the last quarter of the plan year are not eligible in that year. 5. Rehired employees who were previously eligible as participant in this Plan must be approved as any other new participant. J. INTERPRETATION OF PLAN TERMS The plan committee with the approval of the Board of Directors is responsible for the interpretation of this plan. Any resolution or dispute regarding eligibility, determination of procedures, measurements, or awards is the sole responsibility of the Plan Committee with Board of Directors' approval. 55 I acknowledge receiving a copy of the Plan Document Fiscal 1996 Key Employee Incentive Compensation Program for the period April 1, 1995 through March 31, 1996. I have read and understand the terms of this Plan, and also understand that this plan neither constitutes a contract of employment nor a representation as to my future earnings. The Letter of Notification and the Plan constitute the entire agreement and supersede any prior written and oral agreements. I understand that participants are eligible for payment only when corporate, departmental, and individual performance measures are met. I understand that should I terminate employment or submit notice of termination on or before the date of payout I forfeit all rights to the payout. Further, I understand that the President and the Board of Directors have the sole discretionary authority for interpreting the provisions of the plan, determining eligibility, and approving any bonus payout. ----------------------------- Employee Name ----------------------------- Employee Signature ----------------------------- Date 56 FISCAL YEAR 1996 KEY EMPLOYEE INCENTIVE COMPENSATION PROGRAM ADDENDUM "A" SPECIAL LIMITED INCENTIVE POOL FUNDING FOR FY 1996 PLAN 1. Notwithstanding paragraph H (Method of Calculation) in the 1996 Plan Document, special provisions for the FY1996 Plan will enable a limited payout to certain participants of the Plan when corporate objectives are below threshold, with the following conditions: a. When the Operating Income Corporate Objective is at or above 80% of the Target Threshold, there will be funding of the special incentive pool for participants of qualifying departments. For FY 1996 the Operating Income Threshold is $29.9 Million. 80% of the Threshold is $23.92 Million. Note, this Special Funding Arrangement is not based on achievement of sales objectives. The Special Pool is funded from operating income. b. Only those departments whose overall performance was at or above threshold of the overall department objectives may participate in the Special Limited Incentive Pool Funding. c. When the Operating Income Corporate Objective is below 80% of the Threshold (under $23.9 Million), there will be no funding of the Special Limited Incentive Pool. 2. As with the regular incentive plan, final payout to individuals will be modified to reflect individual performance. 3. Provisions for the Special Funding: Department Performance Special Funding(% of Modified Dept. Pool) ---------------------- ----------------------------------------- 150% Outstanding 50.0% 100% Target 33.3% At Threshold 1.0% Below Threshold 0 4. Example (See attachment) 57 EXAMPLE Attachment to Addendum A FY 1996 Key Employee Incentive Compensation Program Target Award ----- Individual. Modified Dept XYZ Sal % $ Performance Target Award $ - - -------- --- --- --- ----------- -------------- Emp A 60K l5% 9.0K 95% 8.5K Emp B 70K 15% 10.5K 115% 12.1K Emp C 80K 20% 16.0K 125% 20.0K ----- ----- Dept Pool @100% 35.5K Mod Dept Pool 40.6K Assume the Corporation achieved 90% of Threshold for Operating Profit. The Special Limited Pool is now funded. Assume the XYZ Department achieved at 110% overall for department objectives; therefore, the Special Funding for the department participants will be a 36.3% which equates to $12.9K (*) Dept Performance Special Funding ---------------- --------------- % $ --- --- 150% Outstanding 50.0% 17.8K * 110% ACT'L DEPT PERF. 36.3% 12.9K 100% Target 33.3% 11.7K At Threshold 1.0% 0.4K Below Threshold 0 0 The $12.9K is about 31.8% of the department modified pool of $40.6K; therefore each participant within the department will have his/her modified target award reduced, as follows: Mod x 31.8% = Final TA Adjust. Payout --- ------ ------ Emp A 8.5K x .318 = $2.7K Emp B 12.1K x .318 = $3.8K Emp C 20.0K x .318 = $6.4K ----- ----- Total 40.6K x .318 = $12.9K 58 EX-10.10 3 DESCRIPTION OF FY96 PROGRAM EXHIBIT 10.10 DESCRIPTION OF FISCAL YEAR 1996 EXECUTIVE INCENTIVE PROGRAM The FY 1996 Executive Incentive Program is a cash incentive program that rewards eligible members of the company's senior management team for meeting or exceeding Exar's annual corporate objectives, as established by the Compensation Committee and ratified by the Board of Directors. Eligible participants may receive cash bonuses up to 100% of base salary, determined by three factors: the company's return on assets employed (ROAE), sales growth, and the participant's position with the company. Assets taken into account in calculating ROAE are adjusted to exclude cash in excess of certain specified amounts. Generally, only the corporate executive officers are eligible for participation in this program. 59 EX-11.1 4 COMPUTATION OF EARNINGS EXHIBIT 11.1 - - -------------------------------------------------------------------------------- STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - - -------------------------------------------------------------------------------- YEARS ENDED MARCH 31, - - -------------------------------------------------------------------------------- 1996 1995 1994 - - -------------------------------------------------------------------------------- Net Income (Loss) $13,582 ($11,084) $15,665 - - -------------------------------------------------------------------------------- Weighted average common shares outstanding 9,495 8,835 9,940 - - -------------------------------------------------------------------------------- Dilutive effect of stock options 430 -- 347 - - -------------------------------------------------------------------------------- Weighted average shares outstanding 9,925 8,835 10,287 - - -------------------------------------------------------------------------------- Net income (Loss) per share $1.37 ($1.25) $1.52 - - -------------------------------------------------------------------------------- 60 EX-21.1 5 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY 1. Exar International, Inc. (a Virgin Islands corporation). 2. Exar IC Design, Ltd. (a California corporation). 3. Exar Japan Corporation (a Japan corporation). 4. Origin Technology, Inc. (a California corporation). 5. Micro Power Systems, Inc. (a California corporation). 6. Startech Semiconductor, Inc. (a Delaware corporation). 7. Silicon Microstructures, Inc. (a California corporation). 8. Exar, Ltd., (a United Kingdom corporation). 61 EX-23.1 6 KPMG CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Exar Corporation: We consent to the incorporation by reference in registration statements (Nos. 33-58991 and 33-59071) on Form S-8 and S-3 of Exar Corporation of our report dated May 2, 1996 relating to the consolidated balance sheets of Exar Corporation and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996, and the related consolidated financial statement schedule, which report appears in the March 31, 1996, annual report on Form 10-K of Exar Corporation. KPMG PEAT MARWICK LLP Palo Alto, California June 27, 1996 62 EX-27 7 EXHIBIT 27
5 1,000 YEAR MAR-31-1996 MAR-31-1996 49,302 2,981 19,319 0 18,065 95,946 34,185 0 139,074 18,396 0 0 0 77,688 40,159 139,074 125,766 125,766 62,217 107,007 0 0 156 22,280 8,698 13,582 0 0 0 13,582 1.37 0
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