10-K405 1 0001.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-K ---------------- (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-14165 IXYS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 770140882-5 (State or other jurisdiction of (IRS Employer incorporation or organization) identification No.)
3540 BASSETT STREET SANTA CLARA, CALIFORNIA 95054-2704 (Address of principal executive offices and zip code) (408) 982-0700 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: (Title of class) None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common stock, par value $.01 per share 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. Yes [X] No [_] The aggregate market value of the voting stock held by non-affiliates of the registrant as of May 31, 2000, was approximately $41,979,803.* The number of shares of the Registrant's Common Stock outstanding as of May 31, 2000 is 12,160,688. -------- * Based on a closing price of $13.5625 per share of the Registrants' Common Stock on May 31, 2000 held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at May 31, 1999. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2000 TABLE OF CONTENTS
PAGE NO. -------- PART I. ITEM 1. IXYS BUSINESS.......................................... 1 ITEM 2. PROPERTIES............................................. 20 ITEM 3. LEGAL PROCEEDINGS...................................... 20 ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS.... 21 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................... 22 ITEM 6. SELECT FINANCIAL DATA.................................. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 28 ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 48 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 48 ITEM 11. EXECUTIVE COMPENSATION................................. 48 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 48 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 48 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................................. 48
This report contains forward-looking statements. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms and other comparable expressions. These statements involved known and unknown risks and uncertainties that may cause the results, levels of activity, performance or achievements of IXYS Corporation or its industry to be materially different those expressed or implied by the forward-looking statements. Factors that may case or contribute to such differences include, but are not limited to, IXYS' ability compete successfully in its industry, to continue to develop new products on a timely basis, cancellation of customer release and other discussed below and under the caption "Risk Factors" of IXYS disclaims any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments. PART I ITEM 1. IXYS Business Overview General IXYS Corporation, a Delaware corporation ("IXYS") designs, develops and markets power semiconductors used primarily in controlling energy in motor drives, power conversion (including uninterruptible power supplies ("UPS") and switch mode power supplies ("SMPS")) and medical electronics. IXYS' power semiconductors convert electricity at relatively high voltage and current levels to create efficient power as required by a specific application. IXYS' target market includes segments of the power semiconductor market that require medium to high power semiconductors, with a particular emphasis on higher power semiconductors, which IXYS considers to be those capable of processing greater than 500 watts of power. IXYS offers a broad line of power semiconductors, including power MOSFETs, insulated gate bipolar transistors ("IGBTs"), thyristors (silicon controlled rectifiers or "SCRs") and rectifiers, including fast recovery epitaxial diodes ("FREDs"). In addition, IXYS also sells a broad range of static random access memory ("SRAM") products with various density, speed, configuration, temperature range and packaging options for a wide range of commercial, industrial and military applications. IXYS' products range in density from 256 kilobytes to 4 megabytes. IXYS' major customers include Still GmbH, Rockwell International Corporation, Emerson Electric Company, Eurotherm Ltd. (U.K.), ASCOM, Medtronics Inc., ABB, Guidant Corporation, Agilent Technologies Inc. and Siemens AG. IXYS has not declared or paid any cash dividends on any series of its capital stock during any period for which information is provided in this Report on Form 10-K. IXYS Corporation was founded in April 1983. In December 1995, IXYS was reincorporated as a Delaware corporation. On September 23, 1998, IXYS Corporation merged with Paradigm Technology, Inc., a Delaware corporation that designed and marketed fast SRAM products ("Paradigm"), in a transaction accounted for as a reverse merger. In the merger, Paradigm issued 11,513,821 shares of its common stock in exchange for all outstanding shares of IXYS Corporation capital stock. At the conclusion of the merger, IXYS Corporation stockholders held approximately 96% of the combined company, and the historical accounting records of IXYS Corporation became those of the combined company. Accordingly, Paradigm formally changed its name to "IXYS Corporation" (the combined company of which is referred to in this report as "IXYS," the "Company" or the "Registrant"). Industry Background As the world enters the 21st century, demand for electricity is forecasted to increase faster than demand for other forms of energy. Electrical energy is demanded worldwide at an increasing rate due to (i) the introduction 1 of new technologies that require electricity, including computers, telecommunications equipment, industrial machinery and automation and transportation, (ii) the increased use of electrical processes in industry and transportation, (iii) the increasing energy demands of electrical products requiring greater power than more traditional electrical products because of the additional features provided by these products and (iv) the economic development of emerging third world countries. As a result of these and other factors, the U.S. Department of Energy reports that worldwide electrical power consumption is expected to increase from approximately 12 trillion kilowatt hours in 1997 to approximately 22 trillion kilowatt hours in 2020. The increasing demand for electrical energy, government regulation requiring energy efficiency and social and environmental concerns have caused an increased demand for energy efficiency. Government regulations are also imposing efficiency requirements on products and equipment. For example, the European Community has adopted the IEC-555 standard that regulates the efficiency of certain power supplies and has effectively required SMPS manufacturers to incorporate power factor correction ("PFC") circuits, which require power semiconductors, in their higher power supplies. Finally, environmental concerns related to pollution and the depletion of natural resources further support the demand for energy efficiency. In addition to the demand for energy efficiency, electrical products in all markets are becoming increasingly sophisticated, offering "intelligence" through the use of microprocessors and additional components. The integration of microprocessors into such products as home appliances, office equipment and industrial controls will continue as products gain "intelligence." As a result of the introduction of microprocessors and integrated circuits, products require increasingly sophisticated power supplies that are capable of providing precisely regulated power (free of spikes and surges) as required by a specific application. This must be done without adding to the existing size of the product or equipment, thereby putting pressure on power supply designers to improve efficiency in size (i.e., increase the power output of power supplies without increasing their size). Additionally, uninterruptible power operation is a requirement for such applications as intranet and internet servers, telecommunications, hospitals and financial institution equipment. Today, virtually all digital electronic systems, including cellular telephones, workstations, PCs and modems, contain memory devices. Over the past decade, the drive to reduce the size and increase the speed and functionality of electronic systems has required concurrent increases in the density and speed of memory devices used in these systems. The most widely used memory devices are dynamic random access memories ("DRAMs") and SRAMs. Role of Power Semiconductors Power semiconductors address the demand for energy efficiency and are essential for providing the precisely regulated power required by sophisticated electrical products and equipment. Power semiconductors process and control the electrical energy generated by electrical utilities to provide efficient power systems and precisely regulated power as required by a specific application. Most equipment needs to process the voltage level and frequency delivered by the utility to derive the required power at specific voltage, current and frequency levels, and power semiconductors help provide this function. Power semiconductors (i) convert or "rectify" alternating current ("AC") power delivered by electrical utilities to direct current ("DC") power which is useable by most equipment; (ii) convert DC power at a certain voltage level to DC power at a different voltage level to meet the specific voltage requirement for an application; (iii) invert DC power to high frequency alternating current electricity ("AC") power to permit the processing of power using substantially smaller electronic components and (iv) rectify high frequency AC power from SMPS to meet the specific DC voltage required by an application. Energy efficiency is obtained in part through efficient power control designs. As a result, the power semiconductors that perform the task of controlling and regulating the power in equipment are required to perform with a high degree of efficiency, with minimal wasting of energy. Power Semiconductor Applications Power semiconductors are used in controlling energy in motor drives and power conversion systems, including SMPS and UPS. Motor drive controls regulate the voltage, current and frequency of power to a motor 2 to control the speed, torque, position, efficiency and other features of a motor. A SMPS efficiently converts power as provided by electrical utilities to meet the specific voltage requirements of an application. A UPS provides a short term backup of electricity to the power supply in the case of an interruption of power from the primary source of electricity. Power semiconductors can be classified based upon the amount of power that they are capable of handling. Generally, IXYS views lower power semiconductors as those capable of handling less than 500 watts of power. Lower power semiconductors are used in small motor drives, UPS and SMPS for personal computers, telephones, automotive electronics, stereo equipment and battery operated tools and equipment. IXYS views higher power semiconductors as those capable of handling power in excess of 500 watts. Industrial and commercial motor drive control applications for higher power semiconductors include robotics, machine tools, pumps, heating, ventilation and air conditioning systems ("HVAC"), appliances and transportation systems. Applications for higher power semiconductors in SMPS include mainframe and workstation computers, instrumentation and telecommunications. Applications for higher power semiconductors in UPS include power back-up for hospitals, financial institutions, mainframes, workstations, local area networks, communications systems and industrial equipment. Power Semiconductor Market IXYS believes that growth in the power semiconductor market is driven in part by the need for an increased number of power semiconductors for a given application as power control requirements become more sophisticated, the increased number of end-user applications for power semiconductors and the resulting higher dollar value of power semiconductors included in products and equipment. Sales of power MOSFETs and IGBTs are experiencing stronger growth than other segments of the power semiconductor market as these products are used to replace traditional bipolar transistors, such as rectifiers and thyristors. In addition to the relatively fast rate of growth for power MOSFETs and IGBTs, IXYS believes that FREDs will grow at higher growth rates than standard diodes since they are required in the same faster switching circuits in which power MOSFETs and IGBTs are included. In fact, almost all IGBTs included in motor drives require a FRED, and SMPS with PFCs require a FRED as a boost diode or as an output rectifier. IXYS Approach Since its inception, IXYS has focused on the higher power segment of the power semiconductor market and has focused its product development and marketing efforts on the specific needs of customers in this segment of the market. In contrast to most other competitors in the power semiconductor market, including large international companies, IXYS is focused on the design, manufacture and marketing of power semiconductors, with a particular emphasis on higher power semiconductors. Approximately 90% of the IXYS' sales in fiscal 2000 were of higher power products. Through its broad product line and range of packaging options, its ability to mobilize its focused organization (which includes a wide range of technical capabilities) quickly to bring new products to the market and its ability to collaborate with its customers in the development of products designed to meet their needs, IXYS has become a significant company in the higher power semiconductor market. IXYS Strategy IXYS intends to build a significant position within its targeted higher power segment of the power semiconductor market by pursuing the following business strategies: Maintain Technological focus on Higher Power Market IXYS intends to maintain its technological focus on higher power semiconductors by applying its scientific expertise to the development of these semiconductors. This expertise encompasses a wide range of technical capabilities, including physics, mechanical engineering, chemistry, circuit design and material science 3 capabilities. IXYS also intends to use its expertise with respect to semiconductor packaging and assembly to develop technologically advanced packaging of its higher power semiconductors. Target Rapid Growth Applications Within the Higher Power Market IXYS' strategy is to target markets by evaluating the growth of those markets and IXYS' ability to establish an advantage position in them based upon its technological capabilities, the level of competition in the markets and the overall performance of the products offered by competitors. For example, IXYS has targeted the market for power supplies used in servers, which IXYS believes represents an attractive market, and has focused its efforts on providing power semiconductors for this application. IXYS intends to pursue this element of its strategy through the development of new technology and products for high growth markets and the packaging of its existing technology into products tailored to new high growth applications. Offer Broad Range of Higher Power Products IXYS' product line is targeted at the higher power segment of the power semiconductor market across a broad range of functionality and price. IXYS offers a comprehensive range of power semiconductors that allows it to provide an appropriate solution to its customers' power semiconductor needs from its range of standard products. IXYS' product line allows its customers to purchase a substantial portion of their power semiconductor needs from a single supplier. IXYS intends to continue to offer a wide array of products by developing additional products that offer improvements over current products or address new applications. Promote Product Development Collaborations IXYS seeks to enter into collaborative arrangements with significant companies in attractive end-user markets in order to optimize IXYS products for use by these customers in their products. IXYS' strategy is to leverage these collaborative arrangements into sales to other manufacturers of end-user products in these markets. For example, at an early stage in its development, IXYS targeted the defibrillator market and continues to be the leading supply more IGBTs for this application than any other manufacturer. IXYS has leveraged its relationships with the two implantable defibrillator market leaders to include other IXYS products, including power MOSFETs and thyristors, in their products. IXYS believes that its ability to provide technical assistance with respect to the design of hardware and software systems by its customers encourages the incorporation of its devices in products manufactured by its customers. IXYS believes that it has gained a reputation for strong product development collaborations, which has contributed to the inclusion of its semiconductors in products designed by its customers, and intends to expand its efforts in this area. Maintain Balance Between Internal and External Manufacturing IXYS intends to take advantage of its combination of in-house wafer fabrication facilities and its foundry relationships to maximize its manufacturing efficiency and flexibility. IXYS believes that its in-house manufacturing capabilities enable it to lower its manufacturing cost with respect to certain products, bring products to the market more quickly than would be possible if IXYS were required to rely exclusively on outside foundries, retain certain proprietary aspects of its process technology and more quickly introduce new process innovations. In particular, IXYS continues to fabricate its 1,600 volt and greater power MOS devices at its Lampertheim facility to better protect its process technologies with respect to the fabrication of these products. IXYS also believes that its in-house wafer fabrication facilities provide it with a significant competitive advantage because the fabrication facilities permit close collaborations between design and process engineers in the development of new products. In addition to maintaining its own fabrication facilities, IXYS establishes alliances with selected foundries for wafer fabrication. This approach allows IXYS to reduce substantial capital spending and manufacturing overhead expenses, obtain competitive pricing and technologies and optimize production schedules while retaining the flexibility to shift the production of its products to a different or additional foundries for cost or performance reasons. IXYS' product designs enable the production of its devices at multiple foundries using well-established and cost-effective processes. IXYS intends to continue to 4 strategically expand its in-house manufacturing capabilities while continuing its significant reliance on outside foundries which permit IXYS to reduce its exposure to the large capital expenditures required for increasing in-house manufacturing capacity. Products and Applications IXYS' power semiconductor products perform any of the four functions performed by power semiconductors: . Conversion or "rectification" of power delivered by electrical utilities to DC power which is useable by most equipment ("input rectification") . Conversion of DC power at a certain voltage level to DC power at a different voltage level to meet the specific voltage requirement for an application . Inversion of DC power to high frequency AC power to permit the processing of power using substantially smaller electronic components . Rectification of high frequency AC power from SMPS to meet the specific DC voltage required by an application ("output rectification") IXYS designs, develops and markets power semiconductors used primarily in controlling energy in motor drives, power conversion (including UPS and SMPS) and medical devices, sales of which represented 33%, 40% and 10% of IXYS' revenues in fiscal 2000, respectively. An SMPS converts AC power to regulated DC power. AC power is converted to high voltage DC power through input rectifiers and is then switched to a very high frequency AC. The AC power is then stepped down to a different voltage and converted through output rectification to produce the required DC power. A UPS continues to supply AC power to electronic equipment in the event of an electrical utility power failure. A UPS consists of an SMPS, battery chargers, a semiconductor transfer switch to activate the UPS and an inverter to invert DC battery power to AC power. IXYS' principal products are power MOSFETs, IGBTs, thyristors and other rectifiers. During fiscal 2000, power MOS products (including MOSFETs and IGBTs), rectifiers, and thyristors constituted approximately 45%, 27% and 20% of IXYS' revenues, respectively. IXYS also markets DCB substrates for use with power semiconductors and integrated circuits. IXYS' power semiconductors are sold separately and are also packaged in high power modules that frequently consist of multiple semiconductor die. IXYS believes that the packaging of its modules constitutes an important element of IXYS' products, as packaging determines how much power can be controlled and the reliability of the module. 5 The following table summarizes the primary categories of uses for power semiconductors, the IXYS products used in each category, the end-user applications served by these products and representative customers of IXYS for each application.
Category IXYS Products Application Selected Customers --------------------- --------------------- --------------------- ---------------------------- Motor Drive Control Thyristor/diode pumps, hoists, Emerson Electric Company modules HVAC, cranes, machine Siemens AG Diode bridges tools, fork lift Still GmbH Discrete diodes and trucks, electric Rockwell International Corp. thyristors IGBTs vehicles, traction, Eurotherm Ltd. MOSFETs elevators, robotics FREDs industrial and process controls Power Conversion Thyristor/diode communications, General Signal modules SMPS, battery chargers, Alpha Technologies UPS welding, plasma Incorporated Diode bridges cutting, radio HC Power, Incorporated IGBTs frequency generators, Transistor Devices, MOSFETs power generation Incorporated FREDs ABB Power Supplies GmbH Siemens-AG Delta Electronics, Inc. Astec International Medical Electronics IGBTs Implantable and Medtronics Incorporated MOSFETs external Guidant Corporation Thyristors defribillators, laser Agilent Technologies, Inc. power supplies
Power MOS Transistors Power MOS transistors offer significant benefits over traditional bipolar transistors. Power MOS transistors operate at much greater switching speed, which allows the design of smaller and less costly end products, due primarily to the smaller and less expensive additional peripheral components required at higher switching frequencies. Power MOS transistors are activated by voltage rather than current (compared to bipolar transistors), so they require less external circuitry to operate, making them more compatible with IC controls. They also offer more reliable long-term performance and are more rugged, permitting them to better withstand adverse operating conditions. In addition, power MOSFETs and IGBTs compare favorably to bipolar power transistors on a system price/performance basis. Power MOSFETs. A power MOSFET (metal oxide silicon field effect transistor) is a switch controlled by voltage at its gate. Power MOSFETs are used in combination with passive components to vary the amperage and frequency of electricity by switching on and off at high frequency. IXYS' power MOSFETs are focused on higher voltage applications (ranging from 60 to 1,100 volts) and have on-state resistance among the lowest available for a given die size and voltage. Lower on-state resistance results in increased efficiency of a power semiconductor device. IXYS believes that as the power requirements of workstations, servers and other computers increase as the result of larger and more powerful microprocessors, disk drives and CD/ROMs, the designers of power supplies will increasingly demand higher power MOSFETs, particularly to address the greater power requirements of the equipment without increasing the physical size of the power supply incorporated into the equipment. Power MOSFETs have improved the volumetric efficiency of SMPS by allowing faster switching frequencies (in some cases into the megahertz range), dramatically reducing the size of associated components such as power transformers and capacitors. IXYS' power MOSFETs are used primarily in SMPS and UPS. The prices of IXYS' power MOSFETs vary depending on the quantity ordered and the packaging of the semiconductors and generally range for moderate quantities from $3 to $150. 6 IGBTs. IGBTs (insulated gate bipolar transistors) also are used as switches. IGBTs have achieved many of the advantages of power MOSFETs and of traditional bipolar technology by combining the voltage controlled switching features of power MOSFETs with the superior conductivity and energy efficiency of bipolar transistors. IGBTs serve the same functions as power MOSFETs, but have different features, which make their use preferable in certain applications. For a given semiconductor die size, IGBTs can operate at higher currents and voltages, making them a more cost effective device compared to power MOSFETs for high energy applications. The principal tradeoff of IGBTs compared to power MOSFETs is the switching speed of IGBTs, which is slower than that of power MOSFETs. IGBTs are seldom used in applications where very fast switching is required, including SMPS operating at speeds over 150 kilohertz. An IGBT is the most cost-effective technology used in AC variable speed motor drives due to its ability to efficiently switch higher power. IGBTs allow drives to operate at faster frequencies, thereby reducing system cost, simplifying drive electronics, increasing efficiency and reducing noise. IXYS' IGBTs are used principally in AC motor drives and defibrillators. The prices of IXYS' IGBTs vary depending on the quantity ordered and the packaging of the semiconductors and generally range for moderate quantities from $1 to $120. Bipolar Products Rectifiers. Rectifiers convert AC power to DC power and are used primarily in input and output rectification and inverters. IXYS' rectifiers are used in DC and AC motor drives, power supplies, lighting and heating controls and welding. The prices of IXYS' rectifiers vary depending on the quantity ordered and the packaging of the semiconductors and generally range for moderate quantities from $1 to $120. A newer subset of IXYS' rectifier product group is a very fast switching device known as a FRED (fast recovery epitaxial diode). FREDs limit spikes in voltage across the power switch to reduce power dissipation and electromagnetic interference. Because most IGBTs require a FRED to address its output, FRED sales are expected to move in concert with IGBTs. IXYS' FREDs are used principally in AC motor drives and power supplies. The prices of IXYS' FREDs vary depending on the quantity ordered and the packaging of the semiconductors and generally range for moderate quantities from $0.50 to $55. Thyristors. Thyristors are switches that can be turned on by a controlled signal and are turned off only when the output current is reduced to zero, which occurs in the flow of AC power. Thyristors are preferred over power MOSFETs and IGBTs in high-voltage, low-frequency AC applications because their on-state resistance is lower than the on-state resistance of power MOSFETs and IGBTs. Thyristors also represent the most cost-effective solution in many AC motor control and amplifier applications. IXYS' thyristors are used in motor drives, power supplies, lighting and heating controls and welding. The prices of IXYS' thyristors vary depending on the quantity ordered and the packaging of the semiconductors and generally range for moderate quantities from $1 to $250. Other Products IXYS markets its patented DCB (direct copper bond) substrates to a variety of customers, including those in the power semiconductor industry, and uses DCB in the manufacturing of its modules. DCB technology cost-effectively provides excellent thermal transfer while maintaining high electrical isolation. It addresses thermal fatigue and die cracking problems encountered by manufacturers of power semiconductor modules utilizing traditional copper base plates. The prices of IXYS' DCB products vary and generally range for moderate quantities from $1.00 to $5.50. IXYS also markets integrated circuits that have applications associated with power semiconductors, such as high voltage current regulators, motion controllers, digital pulse width modulators and power MOSFET/IGBT drivers. 7 IXYS also sells synchronous and asynchronous SRAM products which include high speed 256 kilobyte, 1 megabyte and 4 megabyte CMOS SRAMs. They are available in a variety of configurations and commercial and industrial temperature range versions, as well as military versions manufactured to comply with the most recent military specifications. IXYS also sells high-voltage pulse generators and modulators, laser diode drivers and pulsed current sources. In addition to benchtop instruments, IXYS has developed integrated, packaged turnkey solutions for material testing, pulsed component characterization and laser diode burn-in and qualification requirements. Sales and Marketing IXYS sells its products by means of a worldwide selling organization that includes direct sales personnel, independent representatives and distributors managed through IXYS' California and Germany offices. IXYS employs 21 people in its sales and marketing efforts, including 4 in marketing, 9 in sales and 8 in customer support and service. IXYS currently uses 18 independent sales representative organizations and 6 distributors in North America. IXYS currently uses 19 independent sales representative organizations and 42 distributors and stocking representatives in the rest of the world. In fiscal 2000, net revenues derived from North American and international sales represented approximately 38% and 62%, respectively, of IXYS' net revenues, with approximately 47% of IXYS' net revenues derived from sales to Europe and the Middle East and 15% of IXYS' net revenues derived from sales to Asia. No single end customer accounted for more than 10% of IXYS' net revenues in fiscal 2000. In addition to new products developed for general use in target markets, IXYS custom designs and manufactures products in which product design efforts are coordinated with manufacturers. Custom products are achieved through IXYS' wide selection of products and packaging options. IXYS provides product samples and works directly with manufacturers in designing end-user products using IXYS' semiconductors. Specific products are then delivered to the manufacturers. IXYS markets its services and programs through advertisements, technical articles and press releases that appear regularly in a variety of trade publications, as well as through the dissemination of brochures, data sheets and technical manuals. Additionally, IXYS participates in industry trade shows on a regular basis. IXYS also has a presence on the Internet with a worldwide web page enabling engineers to access and download technical information and data sheets. The majority of IXYS' revenues are derived from international sales. International sales are subject to certain risks, including unexpected changes in regulatory requirements, fluctuations in exchange rates, tariffs and other barriers, political and economic instability, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. During fiscal 1998, 1999 and 2000, sales to independent distributors and stocking representatives accounted for approximately 46%, 41% and 42% of net revenues, respectively. Some of these distributors and stocking representatives have a limited right to return unsold products to IXYS, and there can be no assurance that such returns will not have a material adverse effect on IXYS. These independent distributors and stocking representatives generally are not subject to any minimum purchase requirements and can discontinue marketing IXYS' products at any time upon proper notice. Accordingly, IXYS must compete for the focus and sales efforts of its distributors and stocking representatives. There can be no assurance that IXYS' distributors and stocking representatives will continue to distribute IXYS' products or do so successfully. Although IXYS believes that other channels of distribution would be available if IXYS were to lose the services of one or more of its independent distributors or stock representatives, there can be no assurance that such loss would not have an adverse effect on its results of operations. 8 Research and Development The ability of IXYS to successfully compete in the power semiconductor market will be substantially dependent on its ability to design, develop and introduce to the market on a timely basis new products offering technological improvements. IXYS is a pioneer in technology with respect to higher power IGBTs, IGBT modules and DCB and introduced the power semiconductor industry's first 800 volt, 50 ampere IGBT and FRED combination high power discrete device (A discrete device is an electrical or electronic component that performs a single function). While the time from sampling to volume production of new power semiconductors products can take up to 18 months, power semiconductors also have a product lifetime exceeding an average of 10 years. During fiscal 1999 and 2000, IXYS' research and development expenses were approximately $4.2 million and $4.7 million, respectively, and, at March 31, 2000, IXYS employed 29 people in engineering and research and development activities. IXYS expects that it will continue to spend substantial funds on research and development activities. IXYS is engaged in ongoing research and development efforts focused on enhancements to existing products and the development of new products. Currently, IXYS is pursuing research and development projects with respect to increasing the voltage operating range of its MOS products beyond 1,800 volts, improving the thermal conductivity of its DCB products, increasing the voltage ratings of its bipolar products beyond 2,200 volts, developing 500 kilowatt IGBT modules, developing a complete range of bipolar MOS products capable of handling 1,400 to 2,000 volts, improving its multiple die module assembly technology and beginning its development of another line of integrated circuit ("IC") products. Research and development activities are conducted in collaboration with manufacturing activities to help expedite new products from the development phase to manufacturing and more quickly implement new process technologies. From time to time, IXYS has entered into agreements with customers to develop specific products for inclusion in the customer's end product. Pursuant to such agreements, the non-recurring engineering cost associated with such development work, which is treated by IXYS as research, development and engineering expense, is generally reimbursed by the customer. IXYS' research and development efforts also include participation in technology joint ventures with universities and research institutions. These joint ventures allow research and development activities that would otherwise require potentially cost prohibitive capital expenditures since the necessary capital equipment is often available at research institutes and universities. Through these joint ventures, IXYS is able to maximize its range of research and development activities without defusing the focus of its in-house research and development work and reduce its research and development costs. Research and development projects currently being pursued through research institutes or universities include MOS process simplification, new starting silicon wafer development and new "higher power" semiconductor packaging and process simplification. There can be no assurance that IXYS will be able to identify new products successfully and develop and bring to market such new products or that IXYS will be able to respond effectively to new technological changes or new product announcements by others. There also can be no assurance that IXYS' new products will be accepted by the market. Moreover, the end markets for IXYS' products are subject to rapid technological change and there can be no assurance that as such markets change IXYS' product offerings will remain current and suitable for them. Patents and Licenses IXYS holds 96 patents, including 59 that have been filed in the U.S. and 37 that have been filed in international jurisdictions. IXYS relies on a combination of patent rights, copyrights and trade secrets to protect the proprietary elements of its products. IXYS' policy is to file patent applications to protect technology, inventions and improvements that are important to its business. There can be no assurance that patents will issue from any of IXYS' pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect IXYS' technology. While IXYS intends to protect its intellectual property rights vigorously, there can be no assurance that any patents held by IXYS will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to IXYS. 9 IXYS also seeks to protect its trade secrets and proprietary technology, in part, through confidentiality agreements with employees, consultants and other parties. There can be no assurance that these agreements will not be breached, that IXYS will have adequate remedies for any breach, or that IXYS' trade secrets will not otherwise become known to or independently developed by others. In addition, the laws of some foreign countries do not protect IXYS' proprietary rights to the same extent as the laws of the United States. While IXYS believes that its intellectual property rights are valuable, IXYS also believes that factors such as innovative skills, technical expertise, the ability to adapt quickly to new technologies and evolving customer requirements, product support and customer relations are of greater competitive significance. Manufacturing The production of IXYS' products is a highly complex and precise process. IXYS manufactures its products in manufacturing facilities which are owned and operated by IXYS and by utilizing outside wafer foundries and subcontract assembly facilities. IXYS divides its manufacturing operations into two key areas: wafer fabrication and assembly. Wafer Fabrication. IXYS owns an approximately 170,000 square foot manufacturing facility in Lampertheim, Germany at which it fabricates rectifiers and thyristors. IXYS has also retained the fabrication of its 1,600 volt and higher power MOS devices at this facility in order to protect its process technologies with respect to the fabrication of these products. In addition to the Lampertheim facility, IXYS has an approximately 20,000 square foot facility in Santa Clara, California. IXYS designs and tests substantially all of its IGBT, power MOSFET wafers and SRAM devices in Santa Clara, California and designs and tests its bipolar and custom MOS modules in Lampertheim, Germany. IXYS believes that its in-house fabrication capabilities enable it to lower its manufacturing cost with respect to certain products, bring products to the market more quickly than would be possible if IXYS were required to rely exclusively on outside foundries, retain certain proprietary aspects of its process technology and more quickly introduce new process innovations. In addition to maintaining its own fabrication facility, IXYS establishes alliances with selected foundries for wafer fabrication. This approach allows IXYS to reduce substantial capital spending and manufacturing overhead expenses, obtain competitive pricing and technologies and optimize production schedules while retaining the flexibility to shift the production of its products to a different or additional foundries for cost or performance reasons. IXYS' product designs enable the production of its devices at multiple foundries using well-established and cost-effective processes. IXYS relied on outside foundries for 50% of its wafer fabrication requirements in fiscal 2000, and dependency on outside foundries is expected to grow. IXYS has arrangements with four wafer foundries, of which two foundries provide approximately 95% of the wafers provided to IXYS by outside foundries. IXYS has a supply agreement with one foundry, Samsung Electronics Co. Other than the commitment with respect to the next two months' demand to be delivered monthly, there are no obligations on the part of IXYS to order any minimum quantities. See "Risk Factors--Risks Relating to the Business of IXYS--Dependence on Third Parties for Wafer Fabrication and Assembly." Wafer fabrication of power semiconductors generally employs process technology and equipment already proven in IC manufacturing. Power semiconductors are manufactured using fabrication equipment that is one or more generations behind the equipment used to fabricate state-of-the-art ICs. Used fabrication equipment can be obtained at prices substantially less than the original cost of such equipment or than the cost of current, state-of-the- art equipment. Consequently, the fabrication of power semiconductors is less capital intensive than the fabrication of ICs. Minute levels of contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer, manufacturing equipment failure, wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be 10 nonfunctional. In the event that IXYS increases its manufacturing output, there can be no assurance that IXYS will not experience a decrease in manufacturing yields. Moreover, there can be no assurance that IXYS in general will be able to maintain acceptable manufacturing yields in the future. To the extent IXYS does not achieve acceptable manufacturing yields or experiences product shipment delays, its business, financial condition and results of operations would be materially and adversely affected. There are significant risks associated with IXYS' reliance on outside foundries, including the lack of assured supply of an adequate quantity of semiconductor devices, control over delivery schedules and limited control over quality assurance, manufacturing yields and production costs. IXYS' foundries may from time to time experience lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. There can be no assurance that IXYS' foundries will not experience lower than expected manufacturing yields in the future, which could materially and adversely affect IXYS' business, financial condition and results of operations. Although from time to time certain materials, including silicon wafers, have been in short supply, to date IXYS has not experienced substantial delays in obtaining raw materials which have materially adversely affected production. There can be no assurance that IXYS will not experience such delays in the future. As is typical in the industry, IXYS must allow for significant lead time in delivery of its materials. See "Risk Factors--Dependence on Suppliers." Assembly. Generally, each die on IXYS' wafers is electrically tested for performance, and most of the wafers are subsequently sent to independent subcontract assembly facilities. Packaging or assembly is the sequence of production steps that divide the wafer into individual chips and enclose the chips in external structures (termed packages) that make them useable in a circuit. Discrete manufacturing involves the assembly and packaging of single die devices. Module manufacturing involves the assembly of multiple devices within a single package. The resulting packages vary in configuration, but all have leads which are used to mount the package through holes in the customer's printed circuit boards. IXYS has equipment at, or manufacturing supply agreements with, assembly subcontractors located in the Philippines, Portugal and Thailand in order to take advantage of low assembly costs. Approximately 60% of IXYS' products are assembled at these assembly facilities. Following assembly, IXYS' products are returned to Santa Clara or Germany for testing and final inspection prior to shipment to customers. IXYS' reliance on independent assemblers may subject IXYS to supply constraints and longer manufacturing cycle times. IXYS from time to time has experienced competition with respect to these contractors from other manufacturers seeking assembly of circuits by independent contractors. Although IXYS currently believes that alternative assembly sources could be obtained, there can be no assurance that such alternative sources could be quickly obtained. Foreign assembly is subject to risks normally associated with foreign operations, including changes in local governmental policies and the imposition of export controls or increased import tariffs. See "Risk Factors". Competition The power semiconductor industry is intensely competitive and is characterized by price competition, technological change, limited fabrication capacity, international competition and manufacturing yield problems. The ability of IXYS to compete successfully in its evolving industry depends on factors both within and outside its control, including success in designing and subcontracting the manufacture of new products that implement new technologies, protection of IXYS products by effective utilization of intellectual property laws, product quality, reliability, price, efficiency of production, the pace at which customers incorporate IXYS' power semiconductors into their products, success of competitors' products and general economic conditions. IXYS encounters differing degrees of competition for its various products, depending upon the type of product and the particular market served. Many of IXYS' competitors are larger companies with greater technical, financial and marketing resources than IXYS. The competitive factors in the market for IXYS' products include overall functional performance of the products, quality, price, reliability, breadth and availability of products, delivery time to the customer and service. 11 IXYS believes that it is able to effectively compete in the power semiconductor market, and in the higher power segment of this market in particular, because of (i) its broad product line in the higher power segment, (ii) its ability to focus its technical resources on the development of higher power semiconductors, (iii) its ability to target new market opportunities and extensions of existing power semiconductor applications more quickly than may be possible by a larger, more diversified organization and (iv) its ability and willingness to collaborate with customers to provide custom products. IXYS believes that it is one of only a few companies focused on the development and marketing of higher power semiconductors capable of performing all of the basic functions of power semiconductors. In the power MOSFET market, IXYS' competitors include Advanced Power Technology, Inc. ("APT"), International Rectifier Corporation ("I.R."), Infineon, On Semiconductor, Semikron International and ST Microelectronics ("STM"). IXYS targets the higher power segment of the MOSFET market rather than the lower voltage, lower current segment of the market dominated by IXYS' larger competitors. Currently, IXYS competes most directly in this market with APT. IXYS believes that it is able to effectively compete against APT by offering a wider range of products, improved body diode performance at voltages over 500 volts and a greater number of high current module packaging options. With respect to the IGBT market, IXYS competes primarily with Toshiba Corporation, I.R., Siemens AG, Fuji Electric Company and Powerex, Inc. ("Powerex"). IXYS believes that its relatively quick time to market and its package and product enhancements provide it with a competitive advantage over most of its competitors. With respect to the FRED market, IXYS competes primarily with I.R., Motorola and STM. IXYS believes that FRED product performance is circuit dependent but that in many chases, competitive products can be virtually interchangeable. FREDs are necessary components of IGBT-based systems, and IXYS' ability to package FREDs with IGBTs in one package without compromising the performance of the IGBT allows it to be competitive with other larger suppliers. IXYS' thyristors, standard diodes and thyristor/diode modules compete primarily with the products of I.R., Eupec GmbH, Semikron International and Powerex. As opposed to the market for IXYS' other products, this market tends to be driven primarily by price and product availability. Therefore, IXYS competes in this market through guaranteed inventory programs, custom products, custom module capability and selective competitive pricing. See "Risk Factors". Backlog As of March 31, 2000, IXYS' backlog of orders was approximately $27.4 million, as compared with $18.2 million as of March 31, 1999. Backlog represents firm orders anticipated to be shipped within the next 12 months. IXYS' business and, to a large extent, that of the entire semiconductor industry is characterized by short-term order and shipment schedules. Since orders constituting IXYS' current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty, backlog is not necessarily an indication of future revenue. Employees As of March 31, 2000, IXYS employed 349 employees, of whom 29 were primarily engaged in engineering and research and development activities, 21 in marketing, sales and customer support, 280 in manufacturing and 19 in administration and finance. A high percentage of the technical employees have advanced degrees, including 14 Ph.D.s. IXYS' future success will be greatly dependent upon its ability to attract, motivate and retain technical, marketing, sales and management personnel who are in great demand in the semiconductor industry. Certain employees at IXYS' Lampertheim facility are subject to collective bargaining agreements. IXYS believes that its employee relations are good. 12 Environmental Matters IXYS is subject to a variety of federal, state and local laws, rules and regulations, and IXYS GmbH is subject to laws, rules and regulations in Germany, related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in IXYS' manufacturing process. Any of those regulations could require IXYS to acquire equipment or to incur substantial other expenses to comply with environmental regulations. If substantial additional expenses were incurred by IXYS, product costs could significantly increase, thus materially adversely affecting IXYS' business, financial condition and results of operations. IXYS believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of semiconductor operations. While IXYS has not experienced any materially adverse effects on its operations from environmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements or restrict IXYS' ability to expand its operations. Any failure by IXYS to comply with present or future environmental laws rules and regulations could result in fines being imposed on IXYS, suspension of production or cessation of operations, any of which could have a material adverse effect on IXYS' business, financial condition and results of operations. IXYS' business, financial condition and results of operations would be subject to similar effects as a result of comparable laws and regulations in Germany. See "Risk Factors--Risks Related to the Business of IXYS." IXYS' Lampertheim facility is located in an industrial area in which there is known environmental contamination. In connection with the purchase of the Lampertheim facility, IXYS conducted an environmental assessment of the site, and no material contamination under German law was found on the Lampertheim facility premises. There can be no assurance that IXYS' business, financial condition and results of operations will not be materially adversely affected by this situation. See "Risk Factors--Risks Related to the Business of IXYS." 13 RISK FACTORS In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating IXYS and its business. This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. IXYS' actual results may differ significantly from the results discussed in the forward- looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below. Factors Affecting Operating Results. IXYS' quarterly and annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability, including IXYS' ability to introduce new products and technologies on a timely basis; the level of orders received which can be shipped in a quarter; availability of foundry capacity and raw materials; the timing of investments in research and development, including tooling expenses associated with product development and pre- production; competitive pressures on selling prices; the timing and cancellation of customer orders; the timing and provision of pricing projections and returns from certain distributors; fluctuations in yields; changes in product mix; introduction of products and technologies by IXYS' competitors; foreign currency fluctuations; cyclicality of the semiconductor industry; seasonality; and whether IXYS' customers buy from a distributor or directly from IXYS. IXYS markets its products to various industries including the computers and peripherals, industrial machinery and equipment, telecommunications, transportation, medical and other industries. A downturn in any of IXYS' markets could materially adversely affect IXYS' business, financial condition and results of operations. Sudden shortages of raw materials or production capacity constraints can lead producers to allocate available supplies or capacity to customers with resources greater than those of IXYS, which could interrupt IXYS' ability to meet its production obligations. Historically, average selling prices in the IC and power semiconductor industries have decreased over the life of a product, and as a result, the average selling prices of IXYS' products may be subject to significant pricing pressures in the future. Customer orders typically can be canceled or rescheduled without significant penalty to the customer. As a result, backlog may not be indicative of sales for any future period. IXYS typically plans its production and inventory levels based on forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Because IXYS is continuing to increase its operating expenses for personnel and new product development and for inventory in anticipation of increasing sales levels, operating results would be adversely affected if increased sales are not achieved. In addition, a large part of IXYS' expenses are fixed and difficult to reduce in response to any revenue shortfalls. From time to time, in response to anticipated long lead times to obtain inventory and materials from its foundries, IXYS may order in advance of anticipated customer demand, which might result in excess inventory levels if expected orders fail to materialize or other factors render the customer's product less marketable. As a result of the foregoing or other factors, IXYS may experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect its business, financial condition and results of operations. Due to the foregoing factors, it is likely that in some period, IXYS' revenues or operating results will be below the expectations of public market analysts and investors. In such event, the price of the IXYS Common Stock would likely be materially adversely affected. Manufacturing. IXYS manufactures its products in manufacturing facilities which are owned and operated by IXYS and by utilizing outside wafer foundries and independent subcontract assembly facilities. The fabrication of discrete and integrated circuits is a highly complex and precise process. Minute levels of contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer, manufacturing equipment failure, wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. In the event that IXYS increases its manufacturing output, there can be no assurance that IXYS will not experience a decrease in manufacturing yields. Moreover, there can be no assurance that IXYS in general will be able to maintain acceptable manufacturing yields in the future. To the extent IXYS does not achieve acceptable manufacturing yields or experiences product shipment delays, its business, financial condition and results of operations would 14 be materially and adversely affected. To achieve adequate production yields, IXYS may need to expand its existing facilities. There can be no assurance that IXYS will be able to cost-effectively expand its existing facilities in a timely manner, if at all, or achieve adequate production yields from such expanded facilities. If IXYS fails to cost-effectively expand its existing facility in a timely manner, its business, financial condition and results of operations may be adversely affected. See "IXYS Business--Manufacturing." Dependence on Third Parties for Wafer Fabrication and Assembly. Fifty percent of the revenue in fiscal year 2000 came from wafers acquired from outside foundries. Dependency on outside foundries is expected to grow. IXYS has arrangements with four wafer foundries, of which two foundries provide 95% of the wafers provided to IXYS by outside foundries. IXYS has a supply agreement with one of these foundries, Samsung Electronics Co. There can be no assurance that this agreement will be extended beyond its current terms. IXYS expects that it will continue to rely significantly on outside foundries in the future. There are significant risks associated with IXYS' reliance on outside foundries, including the lack of assured supply of an adequate quantity of semiconductor devices, control over delivery schedules and limited control over quality assurance, manufacturing yields and production costs. IXYS' foundries may from time to time experience lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. There can be no assurance that IXYS' foundries will not experience lower than expected manufacturing yields in the future which could materially and adversely affect IXYS' business, financial condition and results of operations. The ability of each foundry to provide semiconductor devices to IXYS is limited by the foundry's available capacity. Therefore, IXYS' foundry suppliers could choose to prioritize capacity for other customers or uses or reduce or eliminate deliveries to IXYS on short notice. Accordingly, there is no assurance that IXYS' foundries will allocate sufficient capacity to satisfy IXYS' requirements. In addition, IXYS has been, and expects in the future to be, particularly dependent upon a limited number of foundries for its power MOSFET requirements. To address foundry capacity constraints, other semiconductor suppliers that rely on third-party foundries have utilized various arrangements, including equity investments in or loans to independent wafer manufacturers in exchange for guaranteed production capacity, joint ventures to own and operate foundries or take or pay contracts that commit a company to purchase specified quantities of wafers over extended periods. While IXYS is not currently a party to any such arrangements, it may be required to enter into such arrangements in the future, and there can be no assurance that it will be successful in this regard. Any such arrangements could require IXYS to commit substantial capital and grant licenses to its technology. The need to commit substantial capital may require IXYS to obtain additional debt or equity financing, which could result in dilution to IXYS' stockholders. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be obtained on terms acceptable to IXYS. There can be no assurance that material disruptions in supply will not occur in the future. In such event, IXYS may have to identify and secure additional foundry capacity and may be unable to identify or secure additional foundry capacity from another manufacturer, particularly at the levels that IXYS currently anticipates such foundries to provide. Even if such capacity is available from another manufacturer, the qualification process could take six months or longer. If IXYS were unable to qualify alternative manufacturing sources for existing or new products in a timely manner or if such sources were unable to produce semiconductor devices with acceptable manufacturing yields and at acceptable prices, IXYS' business, financial condition and results of operations would be materially and adversely affected. IXYS relies on independent subcontract assembly facilities for its discrete and IC product requirements. IXYS' reliance on independent assemblers may subject IXYS to supply constraints and longer manufacturing cycle times, which could delay deliveries of IXYS' products to its customers. IXYS has from time to time experienced competition from other manufacturers seeking assembly of circuits by independent contractors, which could further constrain supply. Such constraints or delays might result in the loss of customers, limitations or reductions in IXYS' revenues or other material adverse effects on IXYS' business, financial condition or results of operations. Although IXYS currently believes that alternative assembly sources could be obtained, 15 there can be no assurance that such alternative sources could be quickly obtained or obtained at acceptable prices. Failure to obtain such alternative assembly sources in a timely manner, or at all, would have a material adverse effect on IXYS' business, financial condition and results of operations. IXYS' reliance on independent assemblers involves a number of other risks, including reduced control over quality assurance and costs. The inability of such third parties to deliver products of acceptable quality and at an acceptable cost could have a material adverse effect on IXYS' business, financial condition and results of operations. See "IXYS Business--Manufacturing." Dependence on Suppliers. IXYS purchases silicon wafers from Sumitomo Sitix Silicon, Inc., Epitech and Wacker AG, with whom IXYS does not have long term supply agreements. Any of these suppliers could eliminate or terminate IXYS' supply of wafers at any time. IXYS' reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon wafers and reduced control over the price, timely delivery, reliability and quality of the silicon wafers. There can be no assurance that problems will not occur in the future with suppliers. The silicon wafers used as starting material for power semiconductors are different from the type of silicon wafers used for ICs. Power semiconductors require silicon wafers with thicker layers for higher voltage blocking capability. In addition, the IC industry has been moving toward the use of 8" and larger diameter wafers, which require large capital equipment expenditures from silicon wafer suppliers and IC manufacturers. Currently, the power semiconductor industry generally uses 4" and 5" wafers, although the power semiconductor industry has moved toward 6" wafers for at least some applications. Approximately 40% of the wafers IXYS currently uses are 6" wafers. To the extent the power semiconductor industry moves toward the use of larger wafer sizes, IXYS or its suppliers will be required to invest in the processing equipment necessary for these larger diameter wafers. Power semiconductor manufacturers currently rely on the availability of smaller diameter silicon wafers for their needs, and there is a risk that silicon wafer suppliers will move to larger diameter wafers to cater to the IC industry, thus limiting the supply of the more economical 4" and 5" wafers and forcing IXYS to make the large capital expenditures necessary for processing the larger diameter wafers. The unavailability of 4" and 5" silicon wafers in sufficient quantities to meet IXYS' manufacturing needs, or an increase in the price of such wafers as a result of shortages in their supply, would have a material adverse effect on IXYS' business, financial condition and results of operations. Because of IXYS' limited inventory of raw materials and tight manufacturing cycles, unanticipated interruptions of supply, which have occurred periodically in the past, could have a material adverse effect on IXYS' business, financial condition and results of operations. Competition. The power semiconductor industry is intensely competitive and is characterized by price competition, technological change, limited fabrication capacity, international competition and manufacturing yield problems. The ability of IXYS to compete successfully in this evolving industry depends on factors both within and outside its control, including success in designing and subcontracting the manufacture of new products that implement new technologies, protection of Company products by effective utilization of intellectual property laws, product quality, reliability, price, efficiency of production, the pace at which customers incorporate IXYS' power semiconductors into their products, success of competitors' products and general economic conditions. IXYS encounters differing degrees of competition for its various products, depending upon the type of product and the particular market served. Many of IXYS' competitors are larger companies with greater financial, technical and marketing resources than IXYS. The competitive factors in the market for IXYS' products include overall functional performance of the products, quality, price, reliability, breadth and availability of products, delivery time to the customer and service. IXYS' primary competitors include Advanced Power Technology, Fuji, International Rectifier, Infineon, On Semiconductor, Semikron International, Powerex, Inc., STM, Siemens AG and Toshiba Corporation. Certain of these competitors may benefit from established customer relationships that provide them with a competitive advantage. New entrants could also attempt to obtain a share of the market for IXYS' current and future products. There can be no assurance that IXYS will continue to be able to compete 16 successfully against current or new competitors or new technologies in the future. See "IXYS Business--Competition." Management of International Operations; Fluctuation in Exchange Ratios. IXYS operates a manufacturing facility in Lampertheim, Germany, relies on foundry and assembly facilities in Asia and Europe and conducts a substantial portion of its operations outside the United States. In fiscal 1998, 1999 and 2000, foreign sales accounted for approximately 63%, 65% and 62% respectively, of IXYS' total revenues. IXYS anticipates that foreign sales will continue to account for a significant percentage of its revenues. A significant portion of IXYS' total revenues will therefore be subject to risks associated with foreign operations, including unexpected changes in, and the burden of complying with, a wide variety of legal and regulatory requirements and policy changes, changes in tariffs, exchange rates and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign operations, difficulties in protecting IXYS' intellectual property overseas, seasonality of sales and potentially adverse tax consequences. IXYS is also subject to risks associated with regulations relating to the import and export of high technology products. IXYS cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of IXYS' products in the future will be implemented by the United States or any other country. IXYS' sales of products manufactured in, and salaries of its personnel at, its Lampertheim facility are denominated in German marks. Fluctuations in the German mark against the United States dollar have had, and could in the future have, a significant impact on the IXYS' balance sheet and results of operations. IXYS' net income has in the past and could in the future vary significantly depending on fluctuations in the German mark against the United States dollar. IXYS currently does not enter into foreign currency hedging transactions. Fluctuations in currency exchange rates has caused, and could in the future cause, IXYS' products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. To the extent that IXYS expands its international operations or changes its pricing practices to denominate prices in other foreign currencies, IXYS will be exposed to even greater risks of currency fluctuations. There can be no assurance that any of these factors will not have a material adverse effect on IXYS' business, financial condition and results of operations. See "IXYS Management's Discussion and Analysis of Financial Condition and Results of Operations" and "IXYS Business-- Environmental Matters." Management of Growth. To effectively manage its future growth, if any, IXYS will need to implement a variety of new or expanded business and financial systems, procedures and controls, including the improvement of its accounting, manufacturing and other internal management systems. Currently, IXYS is in the process of implementing a new comprehensive management information system addressing all operational functions, including, sales, inventory, and engineering functions. There can be no assurance that the implementation of such systems, procedures and controls can be completed successfully, or without disruption of IXYS' operations. Expansion of IXYS could significantly strain IXYS' management, financial and other resources. In particular, if IXYS seeks to increase its manufacturing capacity, it may be necessary for IXYS to efficiently allocate any increased capacity among its products and to react to changing market conditions, and the failure to do so would have a material adverse effect on IXYS' business, financial condition and results of operations. See "IXYS Business--Manufacturing." In addition, IXYS has hired and will be required to hire in the future substantial numbers of new employees, particularly additional management personnel. The market for such personnel has become increasingly competitive, and the inability of IXYS to recruit, train and retain adequate numbers of qualified personnel would adversely affect IXYS' ability to manufacture and sell its products. As IXYS may be required to design and manufacture its products in larger volumes, it may become more difficult for IXYS to maintain its standards of quality and reliability, and delivery times for its products may grow longer. Further, if IXYS is unable to expand its manufacturing capacity to meet demand, the placement of a large order requiring the delivery of products during a particular period might deter other customers from placing orders with IXYS that would require development and delivery of products during the same period. 17 There can be no assurance that IXYS' systems, procedures, controls and personnel will be adequate to support IXYS' operations. Failure to manage IXYS' growth effectively could have a material adverse effect on IXYS' business, financial condition and results of operations. See "IXYS Business-- Employees" and "--Management." Dependence on Patents and Proprietary Technology. IXYS relies on a combination of patent rights, copyrights and trade secrets to protect the proprietary elements of its products. However, there can be no assurance that such measures will provide adequate protection for IXYS' trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that IXYS' trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that IXYS can otherwise meaningfully protect its intellectual property rights. IXYS' policy is to file patent applications to protect technology, inventions and improvements that are important to its business. There can be no assurance that patents will issue from any of IXYS' pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect IXYS' technology. While IXYS intends to protect its intellectual property rights vigorously, there can be no assurance that any patents held by IXYS will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to IXYS. Furthermore, there can be no assurance that others will not develop similar products, duplicate IXYS' products or design around the patents owned by IXYS. IXYS also seeks to protect its trade secrets and proprietary technology, in part, through confidentiality agreements with employees, consultants and other parties. There can be no assurance that these agreements will not be breached, that IXYS will have adequate remedies for any breach, or that IXYS' trade secrets will not otherwise become known to or independently developed by others. In addition, there can be no assurance that foreign intellectual property laws will adequately protect IXYS' proprietary rights abroad. The assertion of claims for infringement of intellectual property rights is common in the semiconductor industry. There can be no assurance that any infringement claims (or claims for indemnification resulting from infringement claims against third parties, such as customers) or claims that IXYS' patents are invalid will not be asserted against IXYS. If infringement claims are asserted against IXYS, IXYS may seek to obtain a license of such third party's intellectual property rights, which may not be available under reasonable terms or at all. If an IXYS product is found to infringe a patent, a court may grant an injunction to prevent making, selling or using the product in the applicable country. Litigation may be necessary to defend against claims made by third parties, enforce patents issued to IXYS, protect trade secrets or know-how owned by IXYS. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on IXYS' business, financial condition and results of operations. See "IXYS Business-- Patents and Licenses." Effect of Government Regulations. Power semiconductors with operating voltages above 40 volts are subject, in some applications, to industry regulations intended to address the safety, reliability and quality of the products and to address environmental considerations. These regulations relate to processes, design, materials and assembly. For example, in the United States some high voltage products are required to pass Underwriters Laboratory ("UL") recognition for voltage isolation and fire hazard tests. Sales of power semiconductors outside of the United States are subject to international regulatory requirements that vary from country to country. Products used in Europe may be required to be qualified under the Verband Deutscher Elektrotechniker ("VDE") regulations. The process of obtaining and maintaining required regulatory clearances can be lengthy, expensive and uncertain. The time required to obtain approval for sale internationally may be longer or shorter than that required for U.S. approval, and the requirements may differ. In addition, 10% of IXYS' revenues in fiscal 2000 were derived from the sale of products included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the U.S. Food and Drug Administration (the "FDA"). The FDA and certain foreign regulatory authorities impose numerous requirements with which medical device manufacturers must comply, including adherence to Good Manufacturing Practices ("GMP") regulations and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by 18 comparable agencies in other countries. Failure to comply with applicable regulatory requirements could result in, among other things, the inability to include IXYS' products in approved medical devices. Delays in receipt of or failure to receive required approvals or clearances, the loss of previously obtained approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on IXYS' business, financial condition and results of operations. Technological Change. The power semiconductor industry is subject to technological change and evolving industry standards. To remain competitive, IXYS must continue to devote significant resources to the development of new products and new process technologies. In addition, new product announcements, introductions or enhancements by IXYS' competitors could cause a decline in sales or loss of market acceptance of IXYS' existing products. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate advances in power semiconductor manufacturing. There can be no assurance that IXYS will be able to identify new product opportunities successfully and develop and bring to market such new products, that IXYS will be able to respond effectively to new technological changes or new product announcements by others or that IXYS' new products will be accepted by the market. The markets for products incorporating power semiconductors are subject to technological change, and there can be no assurance that as such markets change IXYS' product offerings will remain current and suitable for them. Certain of IXYS' new products are incorporated into a customer's products or systems in the design stage. The value of any design win largely depends upon the commercial success of the customer's product and on the extent to which the design of the customer's electronic system accommodates incorporation of components manufactured by IXYS' competitors. In addition, products or systems may be subsequently redesigned so that they no longer require IXYS' products. No assurance can be given that IXYS will achieve design wins or that any design win will result in future revenues. The failure of IXYS to achieve design wins could materially and adversely affect IXYS' business, financial condition and results of operations. In addition, there can be no assurance that IXYS' competitors will not develop new technologies that are substantially equivalent or superior to IXYS' technologies or that IXYS will be successful in enhancing existing processes or developing new technologies. See "IXYS Business--Research and Development" and "--Competition." Dependence on Key Personnel. IXYS is dependent upon a limited number of key management, sales and technical personnel. IXYS' future success will depend in part upon its ability to attract and retain highly qualified personnel. IXYS faces competition for such personnel from other companies and other organizations. As a result, there can be no assurance that IXYS will be successful in hiring or retaining qualified personnel. Subject to the terms of certain employment agreements, officers and other key personnel could leave the employ of IXYS with little or no prior notice. Loss of key personnel, such as Dr. Zommer, Chief Executive Officer, and Mr. Agbayani, Vice President of Finance and Administration, especially if such loss is without advance notice, or the inability to hire or retain qualified personnel could have a material adverse effect on IXYS' business, financial condition and results of operations. See "IXYS Business--Employees," "--Management." Environmental Regulations. IXYS is subject to a variety of federal, state and local laws, rules and regulations, and IXYS GmbH is subject to laws, rules and regulations in Germany, related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in IXYS' manufacturing process. Any of those regulations could require IXYS to acquire equipment or to incur substantial other expenses to comply with environmental regulations. If substantial additional expenses were incurred by IXYS, product costs could significantly increase, thus materially adversely affecting IXYS' business, financial condition and results of operations. IXYS believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of semiconductor operations. While IXYS has not experienced any materially adverse effects on its operations from environmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements or restrict IXYS' ability to expand its operations. Although IXYS believes it is currently in compliance with applicable environmental laws, any failure by IXYS to comply with present or future environmental laws rules and regulations could result in fines being imposed on IXYS, suspension of production or cessation of operations, any of which could have a material adverse effect on IXYS' business, financial 19 condition and results of operations. IXYS' business, financial condition and results of operations would be subject to similar effects as a result of comparable laws and regulations in Germany. See "IXYS Business--Environmental Matters." IXYS' Lampertheim facility is located in an industrial area in which there is known environmental contamination. Although IXYS is not aware of any soil or groundwater contamination at its facility, there can be no assurance that IXYS' business, financial condition and results of operations will not be materially adversely affected by this situation. Litigation. IXYS is involved in various litigation and potential claims. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to its litigation matters. However, if unsuccessful in the defense of any of the claims currently made against it, IXYS' business, operating results and cash flows could be materially and adversely affected. However, based on the facts presently known, management believes that the resolution of these matters will not have a material adverse impact on the results of operations or the financial position of IXYS. See "Item 3. Legal Proceedings" for a discussion regarding certain litigation. Financial Exposure to Product Liability Claims. IXYS faces the risk of financial exposure to product liability claims alleging that the use of devices which incorporate IXYS' products resulted in adverse effects. Approximately 10% of IXYS' net revenues in fiscal 2000 were derived from sales of products used in medical devices. Product liability risks may exist with respect to these medical devices even with respect to those medical devices that have received, or in the future may receive, regulatory approval for commercial sale. See "Effect of Regulations." IXYS does not currently carry product liability insurance, and there can be no assurance that IXYS will avoid significant product liability claims. A successful claim brought against IXYS could have a material adverse effect on IXYS' business, financial condition and results of operations. Potential Volatility of Stock Price. The trading price of IXYS' Common Stock is subject to wide fluctuations in response to variations in operating results of IXYS and other companies in the same industry, actual or anticipated announcements of technical innovations or new products by IXYS or its competitors and general market conditions. In addition, in recent years, the stock market in general, and the market for shares of small capitalization and high technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. ITEM 2. Properties IXYS' administrative, marketing, development and manufacturing facilities are located in Santa Clara, California and Lampertheim, Germany. The Santa Clara facility consists of approximately 20,000 square feet under a lease which expires in January 31, 2004. IXYS has an option to extend the lease for five years. The base rent under this lease is approximately $330,000 per year. The Lampertheim facility, which is owned by IXYS, consists of approximately 170,000 square feet. IXYS believes that its current facilities will be adequate through at least fiscal 2001 and that suitable additional space will be available in the future as needed on commercially reasonably terms. ITEM 3. Legal Proceedings On August 12, 1996, IXYS and Robert McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm Defendants") were named (along with others subsequently dismissed from the case) as defendants in a purported class action (entitled Bulwa et al. v. Paradigm Technology, Inc. et al., Santa Clara County Superior Court Case No. CV759991) brought on behalf of stockholders who purchased IXYS' stock between November 20, 1995 and March 22, 1996 (the "Class Period"). The complaint asserted violations of California Corporations Code sections 25400 and 25500 ("Sections 25400 and 25500") along with other causes of action that have been dismissed. 20 Plaintiffs have served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents from various third parties. Plaintiffs have also taken the depositions of four former employees of IXYS including Defendant Richard Veldhouse, former outside director Defendant Chian Lam and the analyst who covered IXYS for Smith Barney. Plaintiffs have noticed the depositions of Robert McCelland, Michael Gulett, IXYS' auditors and another former employee to take place in July and August of 2000. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests, to which plaintiffs have responded and have propounded further discovery requests, to which Plaintiffs have not responded. The Paradigm Defendants also took the depositions of the named plaintiffs. On February 9, 1998 the Court certified a class consisting only of California purchasers of IXYS' stock during the Class Period. Following the California Supreme Court decision in Diamond Multimedia Systems, Inc. v. Superior Court, 19 Cal. 4th 1036 (1999), plaintiffs moved to modify the prior class certification ruling to include also non-California purchasers. The Court granted this motion on April 28, 1999. There can be no assurance that IXYS will be successful in the defense of this action. If unsuccessful in the defense of any such claim, IXYS' business, operating results and cash flows could be materially adversely affected. On May 19, 1998, the law firm that filed the Bulwa, et al. action described above filed an additional securities class action lawsuit against IXYS, Michael Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam, this time in the United States District Court for the Northern District of California. The complaint alleged violations of section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Commission Rule 10b-5 and section 20(a) of the Exchange Act. Plaintiff alleged the same class and the same substantive factual allegations that are contained in the Bulwa, et al. action as amended. Defendants responded to the complaint on July 27, 1998 by filing a motion to dismiss the complaint for failure to state claims upon which relief can be granted and for various pleading inadequacies. In lieu of opposing the motion, plaintiff filed a first amended complaint. Defendants renewed their motion to dismiss, and on January 20, 1999 the Court issued an order granting the motion and dismissing plaintiff's action and entered judgment thereon. On February 3, 1999, the Court entered an amended judgment clarifying that the judgment is with prejudice. On March 12, 1999, plaintiff filed a notice of appeal. Plaintiff then agreed to dismiss the appeal in exchange for defendants' agreement not to seek to recover defendants' costs incurred in responding to the appeal and agreement not to pursue any action against the plaintiff for having filed the action. The appeal was dismissed with prejudice on October 25, 1999. Discussions of additional details relating to the above-described legal proceedings may be found in the prior SEC filings and reports of IXYS. On June 22, 2000, International Rectifier Corporation ("IR") filed but has not served an action for patent infringements against IXYS in the United States District Court for the Central District of California, alleging that certain IXYS products sold in the United States, "including but not necessarily limited to" four IXYS Power MOSFET parts (IXFX55N50; IXFH21N50; IXFH35N30, and IXTH24N50), infringe one or more of the following IR patents U.S. Patent Nos. 4,959,699 (Reexamination Certificates issued October 12, 1993 and January 19, 1999); 5,008,725 (Reexamination Certificates issued January 12, 1993); 5,130,767; 4,642,666; and 4,705,759. IXYS is in the process of evaluating these allegations. ITEM 4. Submission of Matters of a Vote of Security Holders. None. 21 PART II ITEM 5. Market For Registrant's Common Stock and Related Stockholder Matters The Common Stock of IXYS trades publicly on the Nasdaq SmallCap Market. Prior to the merger transaction between Paradigm and IXYS in September 1998, the Common Stock of IXYS traded under the symbol PRDM. In September 1998, following the merger, IXYS commenced trading on the Nasdaq SmallCap Market under the symbol SYXI. IXYS has never paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. As of May 31, 2000, there were approximately 174 holders of record of IXYS' Common Stock. The table below sets forth the range of quarterly high and low closing sales prices for IXYS' Common Stock on the Nasdaq Market.
Fiscal Year ended March 31, 1999 High Low -------------------------------- -------- ------- First Quarter.................................................. $ 2 1/2 $ 1/4 Second Quarter................................................. 10 1/2 3/16 Third Quarter.................................................. 6 1/2 1 1/4 Fourth Quarter................................................. 3 3/4 2 3/4 Fiscal Year ended March 31, 2000 High Low -------------------------------- -------- ------- First Quarter.................................................. $ 4 7/8 $2 1/2 Second Quarter................................................. 8 1/2 4 Third Quarter.................................................. 7 1/4 3 1/16 Fourth Quarter................................................. 21 3/16 5 7/8
ITEM 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. 22 IXYS Selected Financial Data (in thousands, except per share amount)
1996 1997 1998 1999 2000 -------- -------- -------- -------- ------- Statement of Operations Data: Net revenues................. $ 57,436 $ 55,322 $ 56,856 $ 66,523 $76,627 Cost of goods sold........... 35,629 34,158 38,048 44,939 49,290 -------- -------- -------- -------- ------- Gross profit................. 21,807 21,164 18,808 21,584 27,337 -------- -------- -------- -------- ------- Operating expenses: Research, development and engineering............... 3,423 3,015 3,329 4,196 4,668 Selling, general and administrative............ 9,430 8,950 8,384 20,256 11,450 -------- -------- -------- -------- ------- Total operating expenses................ 12,853 11,965 11,713 24,452 16,118 -------- -------- -------- -------- ------- Operating income (loss)...... 8,954 9,199 7,095 (2,868) 11,219 Interest expense............. (78) (116) (431) (993) (417) Gain (loss) on foreign currency transactions....... (32) (246) 183 37 184 Other income (expense), net.. (1,578) (484) 3,466 669 (199) -------- -------- -------- -------- ------- Income (loss) before (provision) benefit for income taxes................ 7,266 8,353 10,313 (3,155) 10,787 (Provision) benefit for income taxes................ 4,327 (3,946) (4,229) (2,083) (3,888) -------- -------- -------- -------- ------- Net income (loss)............ $ 11,593 $ 4,407 $ 6,084 $ (5,238) 6,899 ======== ======== ======== ======== ======= Net income (loss) per share-- basic....................... $ 0.45 $ 0.08 $ 0.09 $ (0.56) $ 0.58 ======== ======== ======== ======== ======= Shares used in per share calculation--basic.......... 25,709 53,478 65,501 9,373 11,985 ======== ======== ======== ======== ======= Net income (loss) per share-- diluted..................... $ 0.09 $ 0.02 $ 0.03 $ (0.56) $ 0.56 ======== ======== ======== ======== ======= Shares used in per share calculation--diluted........ 124,093 208,280 201,866 9,373 12,413 ======== ======== ======== ======== ======= Balance Sheet Data: Cash and cash equivalents.... $ 4,968 $ 6,640 $ 9,644 $ 7,087 9,455 Working capital (2).......... 12,025 19,660 13,834 24,409 29,760 Total assets................. 39,626 39,410 54,340 57,100 63,045 Total debt, capital lease and pension obligations......... 6,767 8,931 17,147 19,265 16,336 Mandatorily redeemable convertible preferred stock (1)................... 37,556 37,556 37,556 -- -- Accumulated deficit.......... (21,850) (17,443) (11,359) (16,597) (9,698) Total stockholders' (deficit), equity........... (21,022) (17,129) (11,956) 25,720 30,897
23 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview IXYS was founded in 1983 to design, develop and market power semiconductors used primarily in controlling energy in motor drives and power conversion. IXYS' target market includes segments of the power semiconductor market that require medium to higher power semiconductors, with a particular emphasis on higher power semiconductors, which are those capable of processing greater than 500 watts of power. IXYS has been an innovator in power MOS semiconductor products and technologies since its inception. IXYS pioneered the high voltage, high current MOSFET and IGBT technologies and was the industry's first developer and manufacturer of a 1,000 volt, 100 amp IGBT, which has proven to be superior in reliability and performance to traditional bipolar Darlington transistors. In 1989, IXYS acquired from ABB AG its semiconductor operation in Lampertheim, Germany. Now called IXYS Semiconductor GmbH, the power semiconductor operation in Lampertheim is recognized for pioneering work in DCB packaging technology. The group also developed a line of FREDs that significantly reduce energy losses in motor control and UPS applications. IXYS Semiconductor GmbH provides IXYS with a strong foothold in the European Union ("EU") and positions IXYS to take advantage of tariff and import incentives to EU-based entities. In January 1993, in answer to continuing operational losses, IXYS underwent a reorganization of its upper level management structure. Subsequent cost cutting in its US operations as well as in its Lampertheim facility allowed IXYS to operate more efficiently and achieve profitability. In 1995, IXYS reincorporated in Delaware. Also in 1995, ABB AG converted approximately $10.5 million in debt owed to it by IXYS into IXYS Series B Preferred Stock. In January 1998, IXYS completed the purchase of the Lampertheim facility previously leased from ABB AG. This facility is approximately 170,000 square feet and houses IXYS' Lampertheim offices and manufacturing operations. ABB AG leases some office space in this facility. IXYS feels that the Lampertheim facility is sufficient to serve its needs in the module and bipolar product lines at least through fiscal 2001. On September 23, 1998, IXYS Corporation merged with Paradigm, a Delaware corporation that designs and markets fast SRAM products, in a transaction accounted for as a reverse merger. In the merger, Paradigm issued 11,513,821 shares of its common stock in exchange for all outstanding shares of IXYS Corporation capital stock. At the conclusion of the merger, IXYS Corporation stockholders held approximately 96% of the combined company, and the historic accounting records of IXYS Corporation became those of the combined company. Accordingly, Paradigm formally changed its name to "IXYS Corporation." Results of Operations--Years Ended March 31, 2000 and March 31, 1999 Net Revenue. IXYS' net revenues for fiscal 2000 were $76.6 million, a 15.2% increase from revenues of $66.5 million in 1999. The increase is primarily related to approximately a 7% increase in units shipped in 2000 as compared to 1999, and approximately 8% increase in average selling prices. International net revenue represents $47.6 million for fiscal 2000 or 62% of total net revenue as compared to $42.8 million for fiscal 1999 or 65% of net revenue. Gross Margin. IXYS' gross margin was 36% in 2000 as compared to 32% in 1999. The increase was primarily due to higher average selling prices and greater revenue earned during the year. International gross margin for fiscal 2000 was 24% as compared to 22% in 1999. Domestic gross margin for fiscal 2000 was 41% as compared to 34% in fiscal 1999. 24 Research, Development and Engineering ("R&D"). For fiscal 2000, R&D was $4.7 million or 6.1% of net revenues as compared to $4.2 million or 6.3% of net revenues, for fiscal 1999. The R&D expenses increase was due to higher engineering headcount in fiscal 2000 and an increase in the number of R&D projects. Selling, General, Administrative Expenses ("SG&A"). For the fiscal year 2000, SG&A was $11.5 million (14.9% of net sales) as compared to $20.3 million (30.4% of net sales) in fiscal year 1999. The decrease reflects $10.4 million, amortization and writeoff of goodwill related to the acquisition of Paradigm in fiscal 1999. Interest Expense. During fiscal 2000, interest expense was $417,000 as compared to $993,000 in fiscal 1999. The decrease in interest expense is due to lower interest rates for the year as well as repayment of loans throughout fiscal 2000. Other Income (Expense), Net. Other income (expense) fiscal in 2000 was $(199,000) as compared to $669,000 in 1999. Provision/Benefit For Income Taxes. The 2000 provision for income taxes reflects an effective tax rate of 36% in 2000, as compared to the 1999 provision for an effective income tax rate of 29% (excluding the effect of non-deductible write-off in connection with the acquisition of Paradigm). Results of Operations--Years Ended March 31, 1999 and March 31, 1998 Net Revenue. IXYS' net revenues for fiscal 1999 were $66.5 million, a 17.0% increase from revenues of $56.9 million in 1998. The increase is primarily related to approximately a 39% increase in units shipped in 1999 as compared to 1998, offset by approximately 16% decrease in average selling prices. International net revenue represents $42.8 million for fiscal 1999 or 65% of total net revenue as compared to $35.8 million for fiscal 1998 or 63% of net revenue. Gross Margin. IXYS' gross margin for 1999 was 32% in 1999 as compared to 33% in 1998. The decrease in gross margin is due to average selling prices which, in response to competition, declined at a somewhat faster rate than IXYS' ability to reduce its cost of goods sold. International gross margin for 1999 was 22% as compared to 25% in 1998. Domestic gross margin for 1999 was 34% as compared to 42% 1998. Research, Development and Engineering ("R&D"). For the fiscal year ended 1999 R&D was $4.2 million or 6.3% of net revenues as compared to $3.3 million or 5.8% of net revenues, for fiscal year 1998. R&D expenses increase was due to higher engineering headcount in 1999. Selling, General, Administrative Expenses ("SG&A"). For the fiscal year 1999, SG&A was $20.3 million (30.4% of net sales) as compared to $8.4 million (14.7% of net sales) in fiscal year 1998. The increase reflects $10.4 million, amortization and writeoff of goodwill related to the acquisition of Paradigm or 15.6% of net sales. SG&A excluding the amortization and writeoff of goodwill related to the acquisition of Paradigm was $9.9 million, or 14.8% of net sales. Interest Expense. During 1999, interest expense was $993,000 as compared to $431,000 compared to in 1998. The increase in interest expense is due to higher average borrowings in 1999 as compared to 1998. Other Income (Expense), Net. Other income (expense) in fiscal 1999 was $669,000 as compared to $3.5 million in fiscal 1998, which included $3.7 million attributable to the settlement of the patent claim made by Harris Corporation. Liquidity and Capital Resources IXYS has financed its operations to date through the private sale of equity, lease financing and bank borrowings. As of March 31, 2000, the cash and cash equivalents were $9.5 million, an increase of $2.4 million from cash and cash equivalents of $7.1 million at March 31, 1999. The increase in cash and cash equivalents was primarily due to net income. 25 Line of credit facilities available to IXYS are as follows: A line of credit with a U.S. bank that as of March 31, 2000 consists of a $5.0 million commitment amount which is available through September 30, 2000. The line bears interest at the bank's prime rate (9% at March 31, 2000). The line is collateralized by certain assets and contains certain general and financial covenants, which include provisions stating that IXYS cannot incur additional debt or pledge assets without the prior approval of such bank. At March 31, 2000, IXYS had drawn $2.1 million against such line of credit. The accounts receivable at March 31, 2000 were $16.9 million, an increase of 43.7% as compared to March 31, 1999. The inventories at March 31, 2000 were $21.4 million, an increase of 6.5% as compared to March 31, 1999. Net plant and equipment at March 31, 2000 were $10.2 million, a decrease of 9.7% as compared to March 31, 1999. IXYS evaluates the acquisition of businesses, products or technologies that complement IXYS' business. Any such transactions, if consummated, may use a portion of IXYS' working capital or require the issuance of equity securities, which may result in further dilution to IXYS' stockholders. IXYS believes that cash generated from operations, if any, and banking facilities will be sufficient to meet its cash requirements through fiscal 2001. To the extent that funds generated from operations, together with bank facilities are insufficient to meet its capital requirements, IXYS will be required to raise additional funds. No assurance can be given that additional financing will be available on acceptable terms. The lack of such financing if needed, would have a material adverse effect on IXYS' business, financial condition and results of operations. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133. "Accounting for Derivative Instruments and Hedging Activities." The Statement will require us to recognize all derivatives on the balance sheet at fair value. SFAS No. 133 requires that derivative instruments used to hedge be identified specifically as to assets, liabilities, firm commitments or anticipated transactions and measured as to effectiveness and ineffectiveness when hedging changes in fair value or cash flows. Derivative instruments that do not qualify as either a fair value or cash flow hedge will be valued at fair value with the resultant gain or loss recognized in current earnings. Changes in the effective portion of fair value hedges will be recognized in current earnings along with the change in fair value of the hedged item. Changes in the effective portion of the fair value of cash flow hedges will be recognized in other comprehensive income until realization of the cash flows of the hedged item through current earnings. Any ineffective portion of hedges will be recognized in current earnings. In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," to defer for one year the effective date of implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, with earlier application encouraged. We are in the process of evaluating the requirements of SFAS Nos. 133, but do not expect this pronouncement to materially impact our financial position or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued SAB No. 101A, to defer for one quarter the effective date of implementation of SAB No. 101 with earlier application encouraged. We do not expect the adoption of SAB 101 to have a material effect on our financial position or results of operations. In March 2000, The Financial Accounting Standards Board ("FAB") issued FASB interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation an interpretation of APB Opinion No. 25." This interpretation has provisions that are effective on staggered dates, some of which began after December 15, 1998 and others that become effective after June 30, 2000. The adoption of this interpretation did not and will not have a material impact on the financial statements. 26 Year 2000 Conversion IXYS has not experienced any known material adverse impacts on our current products, internal information systems, and non-information technology systems (equipment and systems) as a result of the Year 2000 issue. IXYS made capital expenditures and incurred related expenses of approximately $330,000 to prepare ourselves for the Year 2000 conversion. No system projects were deferred in relation to the Year 2000 issue. ITEM. 7(a) Quantitative and Qualitative Disclosures about Market Risk IXYS is exposed to the impact of interest rate changes, foreign currency fluctuations, and change in the market values of its investments. Interest Rate Risk. IXYS' exposure to market rate risk for changes in interest rates relates primarily to IXYS' investment portfolio. IXYS has not used derivative financial instruments in its investment portfolio. IXYS invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issuer. IXYS protects and preserves its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest-earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, IXYS' future investment income may fall short of expectations due to changes in interest rates or IXYS may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. Foreign Currency Risk. International revenues from IXYS' foreign subsidiary were approximately 50% of total revenues. International sales are made mostly from IXYS' German subsidiary and are typically denominated in the local currency of Germany. This subsidiary also incurs most of its expenses in the local currency. Accordingly, IXYS' foreign subsidiary uses the local currency as its functional currency. IXYS' international business is subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, IXYS' future results could be materially adversely impacted by changes in these or other factors. IXYS' exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which costs incurred in the United States are charged to IXYS' foreign subsidiary. These intercompany accounts are typically denominated in the functional currency of its foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. IXYS is also exposed to foreign exchange rate fluctuations as the financial results of its foreign subsidiary are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations on IXYS in 2000 was not material. 27 ITEM 8. Financial Statements IXYS CORPORATION INDEX TO FINANCIAL STATEMENTS CONTENTS
Page ---- Report of PricewaterhouseCoopers LLP, Independent Accountants.............. 29 Audited Financial Statements Consolidated Balance Sheets.............................................. 30 Consolidated Statement of Operations..................................... 31 Consolidated Statement of Stockholders' Equity/(Deficit)................. 32 Consolidated Statements of Cash Flows.................................... 33 Notes to Consolidated Financial Statements............................... 34
28 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors IXYS Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of IXYS Corporation and its subsidiaries at March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of IXYS' management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California May 10, 2000, except for note 15, as to which the date is June 22, 2000. 29 IXYS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 31, ----------------- 1999 2000 -------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 7,087 $ 9,455 Restricted cash........................................... 1,393 304 Accounts receivable, net of allowance for doubtful accounts of $600 in 1999 and $1,427 in 2000.............. 11,731 16,863 Inventories, net.......................................... 20,167 21,477 Deferred income taxes..................................... 1,617 1,627 -------- ------- Total current assets.................................... 41,995 49,726 Plant and equipment, net.................................. 11,323 10,175 Other assets ............................................. 2,743 2,362 Deferred income taxes..................................... 1,039 782 -------- ------- Total assets............................................ $ 57,100 $63,045 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capitalized lease obligations.......... $ 1,102 $ 1,365 Current portion of notes payable to bank.................. 4,369 2,789 Accounts payable.......................................... 5,161 5,467 Accrued expenses and other liabilities.................... 6,954 10,345 -------- ------- Total current liabilities............................... 17,586 19,966 Notes payable to bank, net of current portion............... 6,211 5,544 Capitalized lease obligations, net of current portion....... 2,195 1,783 Pension liabilities......................................... 5,388 4,855 -------- ------- Total liabilities........................................... 31,380 32,148 Commitments and contingencies (Note 8) STOCKHOLDERS' EQUITY Common stock, $.01 par value: Authorized: 40,000,000 shares Issued and outstanding: 11,986,661 shares in 1999 and 12,004,083 shares in 2000................................ 120 120 Additional paid-in capital.................................. 43,297 43,324 Notes receivable from stockholders.......................... (936) (861) Accumulated deficit......................................... (16,597) (9,698) Accumulated other comprehensive loss........................ (164) (1,988) -------- ------- Stockholders' equity.................................... 25,720 30,897 -------- ------- Total liabilities and stockholders' equity............ $ 57,100 $63,045 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 30 IXYS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data)
Year Ended March 31, -------------------------- 1998 1999 2000 -------- ------- ------- Net revenues...................................... $ 56,856 $66,523 $76,627 Cost of goods sold................................ 38,048 44,939 49,290 -------- ------- ------- Gross profit.................................. 18,808 21,584 27,337 -------- ------- ------- Operating expenses: Research, development and engineering........... 3,329 4,196 4,668 Selling, general and administrative............. 8,384 20,256 11,450 -------- ------- ------- Total operating expenses...................... 11,713 24,452 16,118 -------- ------- ------- Operating income (loss)........................... 7,095 (2,868) 11,219 Interest expense.................................. (431) (993) (417) Gain on foreign currency transactions............. 183 37 184 Other income (expense)............................ 3,466 669 (199) -------- ------- ------- Income before income tax provision................ 10,313 (3,155) 10,787 Income tax provision.............................. (4,229) (2,083) (3,888) -------- ------- ------- Net income (loss)................................. $ 6,084 $(5,238) $ 6,899 ======== ======= ======= Net income (loss) per share--basic................ $ 0.09 $ (0.56) $ 0.58 ======== ======= ======= Number of shares used in per share calculation-- basic............................................ 65,501 9,373 11,985 ======== ======= ======= Net income (loss) per share--diluted.............. $ 0.03 $ (0.56) $ 0.56 ======== ======= ======= Number of shares used in per share calculation-- diluted.......................................... 201,866 9,373 12,413 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 31 IXYS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT) FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000 (in thousands)
Notes Additional Receivable Cumulative Total Paid-In from Accumulated Translation Stockhkolders' Shares Amount Capital Stockholders Deficit Adjustment Equity/(Deficit) ------ ------ ---------- ------------ ----------- ----------- ---------------- Balances, March 31, 1997................... 4,196 $ 42 $ 1,027 $(936) $(17,443) $ 181 $(17,129) Exercise of stock options................ 2 2 2 Repurchase of common stock.................. (21) (4) (4) Payment on notes receivable from stockholders........... Exercise of warrants.... Foreign currency translation adjustments............ (915) (915) Net income.............. 6,084 6,084 ------ ---- ------- ----- -------- ------ -------- Balance, March 31, 1998................... 4,177 42 1,025 (936) (11,359) (734) (11,962) Exercise of stock options................ 6 17 17 Exercise of warrants.... 893 9 9 Conversion of preferred stock.................. 6,469 65 37,491 37,556 Issuance of common stock.................. 442 4 4,764 4,768 Foreign currency translation adjustment............. 570 570 Net loss................ (5,238) (5,238) ------ ---- ------- ----- -------- ------ -------- Balances, March 31, 1999................... 11,987 $120 $43,297 $(936) $(16,597) $ (164) $ 25,720 Exercise of stock options................ 25 27 27 Exercise of warrants.... 12 Payment on notes receivable from stockholders........... 75 75 Foreign currency translation adjustment............. (1,824) (1,824) Net income.............. 6,899 6,899 ------ ---- ------- ----- -------- ------ -------- Balances March 31, 2000................... 12,024 120 43,324 (861) (9,698) (1,988) 30,897 ====== ==== ======= ===== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial statements. 32 IXYS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended March 31, ------------------------- 1998 1999 2000 ------- ------- ------- Cash flows from operating activities: Net income (loss).................................. $ 6,084 $(5,238) $ 6,899 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 1,525 2,614 3,352 Provision for doubtful accounts.................... 1,018 851 Other.............................................. -- -- 13 Provision for excess and obsolete inventories...... 708 1,367 -- Writeoff of goodwill and in-process research and development....................................... 10,401 -- Loss (gain) on foreign currency translation........ (317) 297 (929) Deferred income taxes.............................. 4,369 600 247 Changes in operating assets and liabilities: Accounts receivable............................... (3,447) (2,290) (6,779) Inventories....................................... (6,907) (5,657) (2,367) Prepaid expenses and other current assets......... (5) (514) (567) Other assets...................................... (754) (1,213) (73) Accounts payable.................................. 2,446 (178) 566 Accrued expenses and other liabilities............ (1,741) 151 3,915 Pension liabilities............................... 353 275 -- ------- ------- ------- Net cash provided by operating activities........ 3,332 615 5,128 ------- ------- ------- Cash flows used in investing activities: Purchases of plant and equipment................... (9,311) (3,722) (1,775) Proceeds from sale of plant and equipment.......... 42 ------- ------- ------- Net cash used in investing activities............ (9,311) (3,722) (1,733) ------- ------- ------- Cash flows used in financing activities: Proceeds from capital lease obligations............ 350 2,143 402 Restricted cash (increase)......................... 641 (443) 1,089 Principal payments on capital lease obligations.... (209) (303) (214) Repayment of notes payable to bank................. (2,500) -- (1,418) Proceeds from bank Loan............................ 11,148 -- -- Other.............................................. 5 (977) 103 ------- ------- ------- Net cash provided by financing activities........ 9,435 420 (38) ------- ------- ------- Effect of foreign exchange rate fluctuations on cash and cash equivalents............................... (452) 130 (989) ------- ------- ------- Net increase in cash and cash equivalents........... 3,004 (2,557) 2,368 Cash and cash equivalents at beginning of year...... 6,640 9,644 7,087 ------- ------- ------- Cash and cash equivalents at end of year............ $ 9,644 $ 7,087 $ 9,455 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest........... $ 501 $ 979 $ 467 Cash paid during the period for income taxes....... 326 2,739 4,434 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of fixed assets under capital lease....... 129 1,296 Purchase of common stock through issuance of notes receivable........................................ Conversion of mandatorily convertible preferred stock............................................. 37,556 Common stock issued for Paradigm assets............ 4,740
The accompanying notes are an integral part of these consolidated financial statements. 33 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF IXYS: Effective September 23, 1998, IXYS Corporation ("IXYS") merged with Paradigm Technology, Inc. ("Paradigm"), a company that designs and markets fast SRAM products, in a transaction accounted for as a reverse merger. In the merger, Paradigm issued 11,513,821 shares of its common stock in exchange for all outstanding shares of IXYS capital stock. At the conclusion of the merger, IXYS stockholders held approximately 96% of the combined company. After the merger, the historic accounting records of IXYS became those of the combined company and, accordingly, Paradigm changed its name to IXYS (the combined company of which is referred to in this filing as the "Company" or the "Registrant"). IXYS Corporation designs, develops and markets power semiconductors, Digital and Analog Integrated Circuits (IC), and high speed, high density Static Random Access Memory (SRAM). Power semiconductors are used primarily in controlling energy in motor drives, power conversion (including uninterruptible power supplies (UPS) and switch mode power supplies (SMPS)) and medical electronics. IXYS' power semiconductors convert electricity at relatively high voltage and current levels to create efficient power as required by a specific application. IXYS' target market includes segments of the power semiconductor market that require medium to high power semiconductors, with a particular emphasis on higher power semiconductors. IXYS sells power semiconductors, including power MOSFETs, insulated gate bipolar transistors (IGBTs), thyristors (silicon controlled rectifiers or "SCRs") and rectifiers, including fast recovery epitaxial diodes (FREDs). SRAM products are for uses in telecommunication devices, workstations and high performance PCs to OEMs and distributors in the United States, Europe and the Far East. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include the accounts of IXYS and its wholly owned subsidiaries after elimination of all significant intercompany balances and transactions. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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 amounts of revenues and expenses during the reporting period. Actual results could materially differ from IXYS' estimates. Foreign Currency Translation: The local currency is considered to be the functional currency of IXYS' wholly owned subsidiary IXYS Semiconductor GmbH ("IXYS GmbH"). Accordingly, assets and liabilities are translated at the exchange rate in effect at year- end and revenues and expenses are translated at average rates during the year. Adjustments resulting from the translation of the accounts of IXYS GmbH into U.S. dollars are included in cumulative translation adjustment, a separate component of stockholders' equity. Foreign currency transaction gains and losses are included as a component of other income and expense. Cash Equivalents: IXYS considers all highly liquid investments with original or remaining maturities of three months or less at the time of purchase to be cash equivalents. Reclassifications: Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. Such reclassifications had no effect on previously reported results of operations or retained earnings. 34 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventories: Inventories, consisting primarily of bipolar devices, transistors, diodes and integrated circuits, are stated at the lower of cost or market value. Cost is determined on a standard cost basis which approximates actual costs determined on a first-in, first-out (FIFO) method. Plant and Equipment: Plant and equipment, including equipment under capital leases, is stated at cost less accumulated depreciation and amortization. Depreciation or amortization is computed using the straight-line method over estimated useful lives of three to five years for equipment and twenty years for buildings. Upon disposal, the assets and related accumulated depreciation are removed from IXYS' accounts and the resulting gains or losses are reflected in the statements of income. IXYS' policy is to regularly review the carrying value of specialized assets to evaluate the remaining life and recoverability of such equipment in light of current market conditions. Product Warranty: Expected future product warranty expense is recorded when the product is sold. Revenue Recognition: Revenue from power semiconductor product sales is recognized upon shipment and is reflected net of an allowance for estimated returns and discounts. In general, IXYS' sales to distributors are made under agreements allowing certain rights of return and price protection on products unsold by the distributors. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in the financial statements. The Company has reviewed the bulletin and believed that its current revenue recognition policy is consistent with the guidance of SAB No. 101. Advertising: IXYS expenses advertising as the costs are incurred. Advertising expense for the years ended March 31, 1998, 1999 and 2000 was $408,000, $413,000, and $392,000 respectively. Research and Development: Research and development costs are charged to operations as incurred. Income Taxes: IXYS' provision for income taxes is comprised of its current tax liability and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Other Assets--Goodwill and Other Intangible Assets: Goodwill and other intangible assets arose from the Paradigm merger in the amount of approximately $9,908,000. IXYS assesses the recoverability of intangible assets by determining whether the amortization of the asset's net book value over its remaining life can be recovered through projected undiscounted future cash flows. Accordingly, IXYS wrote off approximately $1,463,000 of intangible assets and $7,752,000 of goodwill in the fourth quarter of fiscal year 1999 to reflect an impairment in the value of intangible assets and goodwill associated with the acquisition. The anticipated cash flows related to the related products indicated that the recoverability of those assets was not reasonably assured. 35 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net Income Per Share: Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of other securities into common stock. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133. "Accounting for Derivative Instruments and Hedging Activities." The Statement will require us to recognize all derivatives on the balance sheet at fair value. SFAS No. 133 requires that derivative instruments used to hedge be identified specifically as to assets, liabilities, firm commitments or anticipated transactions and measured as to effectiveness and ineffectiveness when hedging changes in fair value or cash flows. Derivative instruments that do not qualify as either a fair value or cash flow hedge will be valued at fair value with the resultant gain or loss recognized in current earnings. Changes in the effective protion of fair value hedges will be recognized in correct earnings along with the change in the fair value of the hedged item. Changes in the effective portion of the fair value of cash flow hedges will be recognized in other comprehensive income until realization of the cash flows of the hedged item through current earnings. Any ineffective portion of hedges will be recognized in current earnings. In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," to defer for one year the effective date of implementation of SFAS No. 133 SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, with earlier application encouraged. We are in the process of evaluating the requirements of SFAS Nos. 133, but do not expect this pronouncement to materially impact our financial position or results of operations. In March 2000, The Financial Accounting Standards Board ("FASB") issued FASB interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation an interpretation of APB Opinion No. 25". This interpretation has provisions that are effective on staggered dates, some of which began after December 15, 1998 and others that become effective after June 30, 2000. The adoption of this interpretation is not expected to have a material impact on the financial statements. Comprehensive Income: IXYS adopted Statement of Financial Accounting Standards No. 130, or SFAS 130, Accounting for Comprehensive Income, during the fiscal year ended 1998. This statement establishes standards for reporting and display of comprehensive income and its components (including revenues, expenses, gains and losses) in a full set of general-purpose financial statements. IXYS' change in the cumulative translation adjustment represent the only component of comprehensive income which is excluded from net income for 2000 and prior years. IXYS' comprehensive income has been presented in the consolidated financial statements. Business Risks: Dependence on Third Parties for Wafer Fabrication and Assembly: IXYS manufactures approximately 50% of its wafers, an integral component of its products, in its wholly owned facility in Germany. IXYS 36 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) purchases the remaining 50% of its wafers from other suppliers. There can be no assurance that material disruptions in supply will not occur in the future. In such event, IXYS may have to identify and secure additional foundry capacity and may be unable to identify or secure additional foundry capacity from another manufacturer, particularly at the levels that IXYS currently anticipates such foundries to provide. Even if such capacity is available from another manufacturer, the qualification process could take six months or longer. If IXYS were unable to qualify alternative manufacturing sources for existing or new products in a timely manner or if such sources were unable to produce semiconductor devices with acceptable manufacturing yields and at acceptable prices, IXYS' business, financial condition and results of operations would be materially and adversely affected. Dependence on Suppliers: IXYS purchases silicon wafers from three vendors with whom IXYS does not have long term supply agreements. Any of these suppliers could eliminate or terminate IXYS' supply of wafers at any time. IXYS' reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon wafers and reduced control over the price, timely delivery, reliability and quality of the silicon wafers. There can be no assurance that problems will not occur in the future with suppliers. Included in IXYS' consolidated balance sheet at March 31, 2000 are the net assets, at book value, of IXYS' manufacturing operation in Germany, which total approximately $6.13 million. Concentration of Credit Risk: IXYS invests its excess cash primarily in short-term time deposit accounts with a major German bank and money market accounts with a U.S. bank. These securities typically mature within ninety days and bear minimal credit risk. IXYS has not experienced any losses on such investments. IXYS sells its products primarily to distributors and original equipment manufacturers. IXYS performs ongoing credit evaluations of its customers and generally does not require collateral. An allowance for potential credit losses is maintained by IXYS and such losses have not been material. At March 31, 2000, one customer accounted for 11% of accounts receivable. As of March 31, 1998 and 1999, there were no customers who accounted for more than 10% of accounts receivable. Fair Value of Financial Instruments: Carrying amounts of certain of IXYS' financial instruments including cash and cash equivalents, accounts receivable, other assets, accounts payable and other accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to IXYS for loans with similar terms, the carrying value of notes payable to bank and notes receivable from shareholders approximate fair value. The amounts reported for cash equivalents, receivables and other financial instruments are considered to approximate fair values based upon comparable market information available at the respective balance sheet dates. Financial instruments that potentially subject IXYS to concentrations of credit risks comprise principally cash, investments and trade accounts receivable. IXYS invests its excess cash in accordance with its investment policy that has been approved by the Board of Directors and is reviewed periodically to minimize credit risk. The policy authorizes the investment of excess cash in government securities, tax exempt municipal securities, Eurodollar notes and bonds, time deposits, certificates of deposit, commercial paper rated Aa or better and other specific money market accounts and corporate instruments of similar liquidity and credit quality. Stock-Based Compensation Plans IXYS accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, 37 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) compensation cost is measured as the excess, if any, of the quoted market price of IXYS' stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. IXYS' policy is to grant options with an exercise price equal to the quoted market price of IXYS' stock on the grant date. Accordingly, no compensation has been recognized for its stock option plans. IXYS provides additional pro forma disclosures as required under SFAS No. 123, "Accounting for Stock-Based Compensation." 3. INVENTORIES: Inventories consist of the following (in thousands):
Years Ended March 31, ---------------- 1999 2000 ------- ------- Raw materials............................................. $ 3,368 $ 3,299 Work in process........................................... 13,654 13,943 Finished goods............................................ 9,172 9,159 ------- ------- 26,194 26,401 Less inventory reserve.................................... (6,027) (4,924) ------- ------- $20,167 $21,477 ======= =======
4. PLANT AND EQUIPMENT: Plant and equipment consists of the following (in thousands):
March 31, ------------------ 1999 2000 -------- -------- Buildings Equipment--owned..................................... $ 20,055 $ 19,724 Equipment--capital leases............................ 7,400 7,524 Leasehold improvements............................... 38 38 -------- -------- 27,493 27,286 Accumulated depreciation and amortization--owned plant and equipment......................................... (11,662) (12,015) Accumulated amortization--capital leases............... (4,508) (5,096) -------- -------- $ 11,323 $ 10,175 ======== ========
5. ACCRUED EXPENSES AND OTHER LIABILITIES: Accrued expenses and other liabilities consist of the following (in thousands):
March 31, -------------- 1999 2000 ------ ------- Accrued patent and licenses.................................. $ 16 $ -- Personnel accruals........................................... 1,610 1,651 Warranty and other accrual................................... 957 410 Income taxes................................................. 737 4,434 Accrued liabilities.......................................... 2,300 3,418 Other........................................................ 1,334 432 ------ ------- $6,954 $10,345 ====== =======
38 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. BORROWING AND CAPITAL LEASE ARRANGEMENTS: Borrowings and capital lease arrangements consist of the following (in thousands):
March 31, ---------------- 1999 2000 ------- ------- Notes payable to banks..................................... $10,580 $ 8,333 Capitalized lease obligations.............................. 3,297 3,148 ------- ------- 13,877 11,481 Less current portion..................................... (5,471) (4,154) ------- ------- $ 8,406 $ 7,327 ======= =======
IXYS entered into a loan and security agreement with a U.S. bank to borrow up to an aggregate amount not to exceed $5 million. The loan bears interest at the bank's prime rate (9% at March 31, 2000), payable monthly, and matures in September 2000. The loan is collateralized by certain assets and contains certain general and financial covenants, including a requirement that IXYS remain solvent and able to pay its debts as they become due. At March 31, 2000, IXYS has drawn $2.1 million against the loan. IXYS entered into a loan agreement with a German bank to finance the acquisition of the Lampertheim facility (the "Facility") from Asea Brown Boveri Aktiengesellschaft (ABB), a stockholder. The loan was for the total amount of DM 13,250,000 ($7,175,000), payable in monthly installments of DM 125,226 ($65,908 at March 31, 2000) and is due no later than October 31, 2009. The loan, which is collateralized by the Facility, bears interest at the annual rate of 5.40% through August 2001, at which time the interest rate will be adjusted to market rates in accordance with the terms of the loan agreement. The acquisition of the Facility closed in January 1998, at which time the proceeds were drawn against the loan. At March 31, 2000, the amount outstanding under the loan agreement was DM 11, 371,000 ($5,544,000). IXYS leases certain equipment under capital lease arrangements expiring through fiscal 2001 at interest rates of 4.9% to 8.9%. Future minimum payments under capital lease obligations and notes payable are (in thousands):
Capital Notes Leases Payable ------- ------- Fiscal year ending March 31, 2001....................................................... $ 1,365 $2,789 2002....................................................... 1,162 459 2003....................................................... 403 469 2004....................................................... 190 495 2005....................................................... 19 522 Thereafter................................................. 9 3,599 ------- ------ $ 3,148 $8,333 ======= ======
39 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. COMMITMENTS AND CONTINGENCIES: Commitments: IXYS rents certain of its facilities under operating leases which expire in 2004. IXYS is responsible for insurance and property taxes. Future minimum lease payments are as follows (in thousands): Fiscal year ending March 31, 2001............................................................... $ 313 2002............................................................... 325 2003............................................................... 338 2004 and thereafter................................................ 291 ------ $1,267 ======
Rent expense for fiscal years ended March 31, 1998, 1999 and 2000 amounted to $571,000, $358,000, and $388,000 respectively. As of March 31, 1999 and 2000, IXYS had cash deposits with a financial institution of $1,393,000 and $304,000 respectively, which were restricted as to use and represent compensating balances for current or future discounted acceptances and letters of credit. IXYS entered into a guaranty on December 6, 1999, in favor of Commerzbank AG to secure a loan in an amount of $2,500,000, granted by Commerzbank AG to IXYS Semiconductor GmbH. Litigation On August 12, 1996, IXYS and Robert McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm Defendants") were named (along with others subsequently dismissed from the case) as defendants in a purported class action (entitled Bulwa et al. v. Paradigm Technology, Inc. et. al., Santa Clara County Superior Court Case No. CV759991) brought on behalf of stockholders who purchased IXYS' stock between November 20, 1995 and March 22, 1996 (the "Class Period"). The complaint asserted violations of California Corporations Code sections 25400 and 25500 ("Sections 25400 and 25500") along with other causes of action that have been dismissed. Plaintiffs have served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents from various third parties. Plaintiffs have also taken the depositions of four former employees of IXYS including Defendant Richard Veldhouse, former outside director Defendant Chian Lam and the analyst who covered IXYS for Smith Barney. Plaintiffs have noticed the depositions of Robert McClelland, Michael Gulett, IXYS' auditors and another former employee to take place in July and August of 2000. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests, to which plaintiffs have responded and have propounded further discovery requests, to which Plaintiffs have not responded. The Paradigm Defendants also took the depositions of the named plaintiffs. On February 9, 1998 the Court certified a class consisting only of California purchasers of IXYS' stock during the Class Period. Following the California Supreme Court decision in Diamond Multimedia Systems, Inc. v. Superior Court, 19 Cal. 4th 1036 (1999), plaintiffs moved to modify the prior class certification ruling to include also non-California purchasers. The Court granted this motion on April 28, 1999. There can be no assurance that IXYS will be successful in the defense of this action. If unsuccessful in the defense of any such claim, IXYS' business, operating results and cash flows could be materially adversely affected. 40 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On May 19, 1998, the law firm that filed the Bulwa, et al. action described above filed an additional securities class action lawsuit against IXYS, Michael Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam, this time in the United States District Court of the Northern District of California. The complaint alleged violations of section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Commission Rule 10b-5 and section 20(a) of the Exchange Act. Plantiff alleged the same class and the same substantive factual allegations that are contained in the Bulwa, et al. action as amended. Defendants responded to the complaint on July 27, 1998 by filing a motion to dismiss the complaint for failure to state claims upon which relief can be granted and for various pleading inadequacies. In lieu of opposing the motion, plaintiff filed a first amended compalint. Defendants renewed their motion to dismiss and on January 20, 1999 the Court issued an order granting the motion and dismissing plaintiff's action and entered judgment thereon. On February 3, 1999, the Court entered an amended judgment clarifying that the judgment is with prejudice. On March 12, 1999, plaintiff filed a notice of appeal. Plaintiff then agreed to dismiss the appeal in exchange for defendants' agreement not to seek to recover defendants' costs incurred in responding to the appeal and agreement not to pursue any action against the plaintiff for having filed the action. The appeal was dismissed. IXYS is involved in various other litigation and potential claims. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. Although no assurance can be given as to the results of these cases, based on the present status, management does not believe that results of the aforementioned actions will have a material adverse effect on IXYS' financial condition or results of operations. 8. COMMON STOCK: On May 1, 1998, IXYS' stockholders approved a 10-for-1 reverse stock split of IXYS' common stock, such that every 10 shares shall be combined into one share of common stock. Common share and per share data for 1999 have been restated to reflect this stock split. A stock split was effected in September 1998 by IXYS' Board of Directors which approved a 1-for-15 reverse split of IXYS' common stock that was applicable to shareholders of record on June 16, 1998 and effective on September 23, 1998. References to share and per-share data for 1999 have been adjusted to give effect to this stock split. Warrants: IXYS has outstanding warrants as follows:
Number of Shares Under the Expiration Date Warrants Exercise Price --------------- --------- ---------------- None............... Convertible into common stock 8,031 $14.70 per share April 2001......... Convertible into common stock 169,641 $ 0.86 per share
Stock Purchase and Incentive Stock Option Plans: IXYS has a 1994 Stock Option Plan and a 1999 Equity Incentive Plan (the "Plans") under which incentive stock options may be granted not less than 85% of fair market value at the time of grant. The options once granted expire ten years from the date of grant. The Board of Directors has the full power to determine the provisions of each option issued under the Plans. 41 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock option activity under the Plans is summarized below (in thousands, except share data):
Options Outstanding Weighted Shares --------------------------------- Average Available for Number of Exercise Grant Shares Exercise Price Total Price ------------- --------- --------------- ------ -------- Balances, March 31, 1997................... 154 319,742 $ 0.017-$ 7.61 $ 100 $ 0.31 Options exercised....... (2,024) $ 0.86-$ 2.59 -- $ 0.13 Options canceled........ 42,803 (42,803) $ 6.92 (17) $ 0.40 ---------- --------- --------------- ------ ------ Balances, March 31, 1998................... 42,957 274,915 $ 0.017-$ 7.61 83 $ 0.30 New authorized.......... 115,260 1 $ 0.15 Options granted......... (99,900) 106,566 $3.7125-$3.3750 348 $3.481 Options exercised....... -- (25,129) $ 0.017-$ 0.86 (2) $0.075 Options canceled........ 3,905 (3,905) $ 0.017-$ 4.32 (1) $0.157 Options expired......... (46,841) -- $ -- -- -- ---------- --------- --------------- ------ ------ Balances, March 31, 1999................... 15,381 352,447 $ 0.017-$3.7125 429 $ 1.22 New authorized.......... 2,500,000 Options granted......... (1,395,000) 1,395,000 $ 4.25-$ 7.25 8,674 $ 6.22 Options exercised....... -- (25,517) $ 0.02-$ 2.59 (32) $ 1.24 Options canceled........ 75,000 (75,000) $ 4.25 -- -- ---------- --------- --------------- ------ ------ Balances, March 31, 2000................... 1,195,381 1,646,930 $ 0.017-$ 7.25 $8,753 $ 5.31 ========== ========= =============== ====== ======
Expired options in 1999 represents options under the pre-merger IXYS plan established in 1989 which ceased in fiscal year 1999. 42 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Had compensation cost for the Plans been determined based on the fair value at the grant date for awards in fiscal years 1998, 1999 and 2000 consistent with the provisions of SFAS No. 123, IXYS' net income and net income per share for fiscal years 1998, 1999 and 2000 would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
Year Ended March 31, ---------------------- 1998 1999 2000 ------ ------- ------ Net income (loss)--as reported.......................... $6,084 $(5,238) $6,899 ====== ======= ====== Net income (loss)--pro forma............................ $5,996 $(5,285) $6,146 ====== ======= ====== Net income (loss) per share--basic--as reported......... $ 0.09 $ (0.56) $ 0.58 ====== ======= ====== Net income (loss) per share--basic--pro forma........... $ 0.09 $ (0.56) $ 0.51 ====== ======= ====== Net income (loss) per share--diluted--as reported....... $ 0.09 $ (0.56) $ 0.56 ====== ======= ====== Net income (loss) per share--diluted--pro forma......... $ 0.03 $ (0.56) $ 0.49 ====== ======= ======
In future years, annual compensation expense will vary relative to the vesting of options granted in those future years. In accordance with the provisions of SFAS 123, the fair value of each option is estimated using the Black-Scholes model using the following assumptions used for grants for the year ended March 31, 2000; dividend yield of 0%, volatility of 91%, risk-free interest rates of between 5.95% to 6.65% at the date of grant and an expected term of four years. The weighted-average fair value of options granted during 1999 and 2000 was $3.481and $6.678 per share, respectively. IXYS has sold 3,908,095 shares of common stock to certain members of IXYS' management under a restricted stock purchase agreement subject to IXYS' right of repurchase, which lapses ratably over five years. The shares were purchased through recourse promissory notes at a purchase price of $0.22 per share. Interest is due on the notes at a rate of 5.79% per annum, with the balance outstanding due in full November 2000. At March 31, 1999 and 2000, 72,550 shares and zero shares of common stock are subject to IXYS' right of repurchase, respectively. In May 1999, the Company approved an Employee Stock Purchase Plan ("Purchase Plan"). There are 250,000 shares of common stock reserved for issuance under the Purchase Plan. As of March 31, 2000, there were no purchases made under the Purchase Plan. 9. EMPLOYEE SAVINGS AND RETIREMENT PLAN: IXYS has a 401K plan, known as the "IXYS Corporation and Subsidiary Employee Savings and Retirement Plan." Eligibility to participate in the plan is subject to certain minimum service requirements. Employees may voluntarily contribute up to 20% of yearly compensation and IXYS may make matching contributions as determined by the Board of Directors in a resolution on or before the end of the fiscal year. Employees are 100% vested immediately. For the years ended March 31, 1998, 1999 and 2000, IXYS contributed $96,000, $113,000 and $129,000, respectively. 10. PENSION PLANS: Employees of IXYS GmbH participate in a number of employee retirement plans, including a defined benefit pension plan, the benefits for which will be paid out of the general assets of IXYS GmbH, as well as other government sponsored retirement plans to which IXYS GmbH and eligible employees are required to contribute. 43 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition to providing income at retirement, many of these plans also provide survivor, termination and disability benefits. The defined benefits pension plan covers substantially all employees and benefits are based on years of service and the employees' compensation. Pension expense for the defined benefit pension plan was as follows at March 31, (in thousands):
1998 1999 2000 ---- ---- ---- Service cost of the current period........................... $ 94 $111 $107 Interest cost on the projected benefit obligation............ 337 312 314 ---- ---- ---- Pension expense.............................................. $431 $423 $421 ==== ==== ====
In Germany there are no legal requirements to fund the pension obligation by transferring cash to an outside funding agency. Consequently, the defined benefit pension plan is unfunded. The following table sets forth the actuarial present value of benefit obligations and funded status for the defined benefit pension plan (in thousands):
March 31, ------------- 1999 2000 ------ ------ Actuarial present value of benefit obligation: Vested benefit obligation................................... $5,248 $4,726 Nonvested benefit obligation................................ 104 89 ------ ------ 5,352 4,815 Additional benefits related to future compensation levels..... 36 40 ------ ------ Projected benefit obligation.................................. $5,388 $4,855 ====== ======
The actuarial computations calculated at March 31, 1999 and 2000 assume a discount rate used to measure the projected benefit obligation of 3%, and the rate of increase in future compensation levels of 3%. 11. INCOME TAXES: Income (loss) before income tax provision consists of the following (in thousands):
Year Ended March 31, ------------------------ 1998 1999 2000 ------- ------- ------- Domestic............................................ $ 8,250 $(3,260) $ 9,149 International....................................... 2,063 105 1,638 ------- ------- ------- $10,313 $(3,155) $10,787 ======= ======= =======
44 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) IXYS' provision for income taxes consists of the following (in thousands):
Year Ended March 31, ------------------------ 1998 1999 2000 ------- ------- ------ Current: Federal.......................................... $ (175) $ 234 $2,867 State............................................ (398) (40) 643 Foreign.......................................... (904) (44) 672 ------- ------- ------ (1,477) 150 4,182 ------- ------- ------ Deferred: Federal.......................................... (2,590) (2,042) (220) State............................................ (147) (191) (74) Foreign.......................................... (15) ------- ------- ------ (2,752) (2,233) (294) ------- ------- ------ Total income tax provision/(benefit)........... $(4,229) $(2,083) $3,888 ======= ======= ======
IXYS' effective tax rate differs from the statutory federal income tax rate for the years ended March 31, as shown in the following table:
1998 1999 2000 ---- ---- ---- Statutory federal income tax (benefit) rate................. 34% (34)% 34% State taxes, net of federal tax benefit..................... 4 4 4 Foreign taxes at higher rates............................... 2 1 1 Acquired technology......................................... 94 Other items................................................. 1 1 (3) --- --- --- Effective tax rate.......................................... 41% 66% 36% === === ===
The effective tax rate of 66% in fiscal year 1999 includes the one-time non- tax deductible write-off of $10.4 million in connection with the reverse acquisition of Paradigm. Without the write-off, tax rate would approximate 29%. The components of net deferred income tax assets are as follows (in thousands):
March 31, --------------- 1999 2000 ------- ------ Deferred tax assets: Other liabilities and accruals............................ $ 1,117 $1,446 Depreciable assets........................................ 538 1,380 Net operating loss carryforwards.......................... 4,283 -- Research and development tax credit carryforward.......... 504 -- Alternative minimum tax carryforward...................... 342 124 Less valuation on allowance................................. (4,128) -- ------- ------ Net deferred tax asset...................................... $ 2,656 $2,450 ======= ======
At March 31, 2000, IXYS had federal alternative minimum tax credit carryforwards of approximately $125,000. The alternative minimum tax credit carryforwards can be carried forward indefinitely. 45 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) There were no significant export sales from the U.S. during the years ended March 31, 1998, 1999 or 2000. 12. COMPUTATION OF NET INCOME (LOSS) PER SHARE: Basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):
Year Ended March 31, ------------------------- 1998 1999 2000 -------- ------- ------- BASIC: Weighted-average shares........................ 65,501 9,373 11,985 Net income (loss).............................. $ 6,084 $(5,238) $ 6,899 -------- ------- ------- Net income (loss) per share.................... $ 0.09 $ (0.56) $ 0.58 ======== ======= ======= DILUTED: Weighted-average shares........................ 65,501 9,373 11,985 Restricted stock subject to repurchase......... 3,234 -- Common equivalent shares from stock options and warrants...................................... 21,721 428 Common equivalent shares from preferred stock.. 111,410 -- -------- ------- ------- Shares used in per share calculation........... 201,866 9,373 12,413 ======== ======= ======= Net income (loss).............................. $ 6,084 $(5,238) $ 6,899 ======== ======= ======= Net income (loss) per share.................... $ 0.03 $ (0.56) $ 0.56 ======== ======= =======
13. SEGMENT AND GEOGRAPHIC INFORMATION IXYS operates in a single industry segment comprising power semiconductors used primarily in controlling energy in motor drives, power conversion (including uninterruptible power supplies (UPS) and switch mode power supplies (SMPS)) and medical electronics. IXYS' sales by major geographic area (based on destination) were as follows:
Year Ended March 31, ----------------------- 1998 1999 2000 ------- ------- ------- North America: United States...................................... $21,134 $23,734 $28,987 ------- ------- ------- Total North America.............................. $21,134 $23,734 $28,987 Europe............................................... 29,239 36,054 36,463 Japan................................................ 953 480 569 Asia Pacific......................................... 5,530 6,255 10,608 ------- ------- ------- Total............................................ $56,856 $66,523 $76,627 ======= ======= =======
For the financial year ended March 31, 2000, a single customer contributed to 11% of IXYS' sales. There was no single end customer providing more than 10% of IXYS' sales for years ended March 31, 1998 and 1999. 46 IXYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. FOREIGN OPERATIONS: IXYS' foreign operations consist of those of its subsidiary IXYS GmbH in Germany. The following table summarizes the sales, income and total assets of IXYS' U.S. and German operations (in thousands):
Year Ended March 31, ------------------------- 1998 1999 2000 -------- ------- ------- Sales: IXYS GmbH........................................ $ 35,722 $36,534 $38,272 IXYS U.S......................................... 21,134 29,989 38,355 -------- ------- ------- $ 56,856 $66,523 $76,627 ======== ======= ======= Net Income (Loss): IXYS GmbH........................................ $ 2,010 $(1,438) $ 925 IXYS U.S......................................... 4,074 (3,800) 5,974 -------- ------- ------- $ 6,084 $(5,238) $ 6,899 -------- ------- ------- Total Assets: IXYS GmbH........................................ $ 27,008 $26,503 $21,056 IXYS U.S......................................... 27,332 32,229 41,989 -------- ------- ------- $ 54,340 $58,732 $63,045 ======== ======= =======
There were no significant export sales for the U.S. during the years ended March 31, 1998, 1999 and 2000. 15. RECENT LEGAL PROCEEDINGS On June 22, 2000, International Rectifier Corporation ("IR") filed but has not served an action for patent infringement against IXYS in the United States District Court for the Central District of California, alleging that certain IXYS products sold in the United States, "including but not necessarily limited to" four IXYS Power MOSFET parts (IXFX55N50; IXFH21N50; IXFH35N30; and IXTH24N50), infringe one or more of the following IR patents U.S. Patent Nos. 4,959,699 (Reexamination Certificates issued October 12, 1993 and January 19, 1999); 5,008,725 (Reexamination Certificates Issued January 12, 1993); 5,130,767; 4,642,666; and 4,705,759. IXYS is in the process of evaluating these allegations. 47 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not Applicable. PART III ITEM 10. Directors and Executive Officers of the Registrant The information required is hereby incorporated by reference from the information contained in IXYS' definitive Proxy Statement with respect to IXYS' Annual Meeting of Stockholders, filed with the Commission pursuant to Regulation 14A (the "Proxy Statement") under the headings "Nominees" and "Executive Officers". ITEM 11. Executive Compensation The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement under the heading "Executive Compensation." ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is hereby incorporated by reference contained in the Proxy Statement under the heading of "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. Certain Relationships and Related Transactions The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement under the heading "Certain Transactions" and "Executive Compensation". PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports On Form 10-K (a) The following documents are filed as part of this Report on Form 10-K: (1) Financial Statements: Report of PricewaterhouseCoopers LLP, Independent Accountants Consolidated Balance Sheets Consolidated Statement of Operations Consolidated Statement of Stockholders' Equity/(Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (b) Financial Statement Schedules REPORT OF INDEPENDENT ACCOUNTANTS OF FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of IXYS Corporation In connection with our audits of the consolidated financial statements IXYS Corporation of March 31, 2000 and 1999, and for each of the three years in the period ended March 31, 2000, which consolidated financial statements are included in this form 10-K, we have also audited the financial statement schedule listed in Item 14(b) herein. In our opinion this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP San Jose, California May 10, 2000 48 Valuation and Qualifying Accounts and Reserve (in thousands)
Balance Balance at at end beginning Additions/ of of period (Deductions) Write-off period ---------- ------------ --------- ------- Allowance for doubtful accounts: Year ended March 31, 1998... $1,462 $ (904) $ 558 Year ended March 31, 1999... $ 558 $ 42 $ 600 Year ended March 31, 2000... $ 600 $ 827 $1,427 Allowance for inventories: Year ended March 31, 1998... $4,101 $ 409 $4,510 Year ended March 31, 1999... $4,510 $1,517 $6,027 Year ended March 31, 2000... $6,027 $ (303) $(800) $4,924
(2) Financial Statements schedules have been omitted from this report because the information is provided in the Financial Statements or is not applicable. (3) Exhibits
Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger and Reorganization, dated as of March 6, 1998 and amended April 10, 1998 and May 29, 1998, among Paradigm Technology, Inc., Paradigm Enterprises, Inc. and IXYS Corporation. (1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1) 3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation (regarding increased authorization and reverse stock split). (2) 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation (regarding name change). (2) 4.2 Amended and Restated Bylaws of the Registrant. (3) 10.1 First Amended Executive Employment Agreement, dated as of July 1, 1998, by and between IXYS and Nathan Zommer. (1) 10.2 First Amended Executive Employment Agreement, dated as of July 1, 1998, by and between IXYS and Arnold Agbayani. (1) 10.3 Wafer Foundry Agreement, dated as of June 21, 1995, as amended on March 28, 1996 and March 13, 1998, by and between IXYS and Samsung Electronics Co. (1) 10.4 Lampertheim Contractual Purchase Deed and Conveyance, dated as of February 26, 1997. (1) 10.5 Loan Agreement, dated as of February 27, 1997, by and between IXYS and Commerzbank, Aktiengesellschaft, Mannheim Branch. (1) 10.6 Loan and Security Agreement, dated as of December 24, 1997, by and between IXYS and Bank of the West. (1) 10.7 Form of Indemnity Agreement between IXYS and its directors. (3) 10.8 The Paradigm 1994 Stock Option Plan, as amended. (3)
49 10.9 The IXYS 1999 Equity Incentive Plan. (4) 10.10 The IXYS 1999 Employee Stock Purchase Plan. (4) 10.11 The IXYS 1999 Non-Employee Directors' Equity Incentive Plan. (4) 10.12 Amendment of Lease by and between Mission West Properties, L.P. and IXYS Corporation, dated as of September 30, 1998. (4) 10.13 Registration and Stockholder Rights Agreement, by and between IXYS, Asea Brown Boveri AG, and Asea Brown Boveri, Inc., dated September 23, 1998. (2) 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney. (6) 27.1 Financial Data Schedule.
(b) Financial Statement Schedules. (c) IXYS has filed no reports on Form 8-K during the last quarter of this fiscal year. -------- (1) Filed as an Annex or Exhibit to the Joint Proxy Statement/Prospectus forming part of the Registration Statement on Form S-4 of Paradigm Technology, Inc., as amended (333-57003) and incorporated herein by reference. (2) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 1998 and incorporated herein by reference. (3) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended December 31, 1998 and incorporated herein by reference. (4) Filed on an Exhibit to the Annual Report on Form 10-K for year ended March 31, 1999 and incorporated herein by reference. (5) Filed on an Exhibit to Quarterly Report on Form 10-Q for the period ended December 31, 1999 and incorporated herein by reference. (6) Included in the signature page of this Report on Form 10-K. 50 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. Dated: June 28, 2000 IXYS CORPORATION /s/ Nathan Zommer By: _________________________________ Nathan Zommer President, Chief Executive Officer and Chairman POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Nathan Zommer and Arnold P. Agbayani, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective 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 all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, 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/ Nathan Zommer President, Chief Executive June 28, 2000 ______________________________________ Officer and Chairman Nathan Zommer (Principal Executive Officer) and Director /s/ Arnold P. Agbayani Vice President, Finance & June 28, 2000 ______________________________________ Administration and Chief Arnold P. Agbayani Financial Officer (Principal Financial Officer) /s/ Samuel Kory Director June 28, 2000 ______________________________________ Samuel Kory /s/ Andreas Hartmann Director June 28, 2000 ______________________________________ Andreas Hartmann
51 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger and Reorganization, dated as of March 6, 1998 and amended April 10, 1998 and May 29, 1998, among Paradigm Technology, Inc., Paradigm Enterprises, Inc. and IXYS Corporation. (1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1) 3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation (regarding increased authorization and reverse stock split). (2) 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation (regarding name change). (2) 4.2 Amended and Restated Bylaws of the Registrant. (3) 10.1 First Amended Executive Employment Agreement, dated as of July 1, 1998, by and between IXYS and Nathan Zommer. (1) 10.2 First Amended Executive Employment Agreement, dated as of July 1, 1998, by and between IXYS and Arnold Agbayani. (1) 10.3 Wafer Foundry Agreement, dated as of June 21, 1995, as amended on March 28, 1996 and March 13, 1998, by and between IXYS and Samsung Electronics Co. (1) 10.4 Lampertheim Contractual Purchase Deed and Conveyance, dated as of February 26, 1997. (1) 10.5 Loan Agreement, dated as of February 27, 1997, by and between IXYS and Commerzbank, Aktiengesellschaft, Mannheim Branch. (1) 10.6 Loan and Security Agreement, dated as of December 24, 1997, by and between IXYS and Bank of the West. (1) 10.7 Form of Indemnity Agreement between IXYS and its directors. (3) 10.8 The Paradigm 1994 Stock Option Plan, as amended. (3) 10.9 The IXYS 1999 Equity Incentive Plan. (4) 10.10 The IXYS 1999 Employee Stock Purchase Plan. (4) 10.11 The IXYS 1999 Non-Employee Directors' Equity Incentive Plan. (4) 10.12 Amendment of Lease by and between Mission West Properties, L.P. and IXYS Corporation, dated as of September 30, 1998. (4) 10.13 Registration and Stockholder Rights Agreement, by and between IXYS, Asea Brown Boveri AG, and Asea Brown Boveri, Inc., dated September 23, 1998. (2) 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney. (6) 27.1 Financial Data Schedule.
-------- (1) Filed as an Annex or Exhibit to the Joint Proxy Statement/Prospectus forming part of the Registration Statement on Form S-4 of Paradigm Technology, Inc., as amended (333-57003) and incorporated herein by reference. (2) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 1998 and incorporated herein by reference. (3) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended December 31, 1998 and incorporated herein by reference. (4) Filed on an Exhibit to the Annual Report on Form 10-K for year ended March 31, 1999 and incorporated herein by reference. (5) Filed on an Exhibit to Quarterly Report on Form 10-Q for the period ended December 31, 1999 and incorporated herein by reference. (6) Included in the signature page of this Report on Form 10-K.