2008 Annual Report
President, Chief Executive Offi cer and Director Pete Rodriguez
To Our Shareholders
WE HAVE A DEEP ANALOG AND MIXED SIGNAL TECHNOLOGY EXPERTISE, A GROWING PRODUCT PORTFOLIO, ENGAGEMENTS WITH TOP TIER CUSTOMERS IN GROWING MARKETS AND APPLICATIONS, PLUS WORLD-CLASS EMPLOYEES AND A DYNAMIC EXECUTIVE TEAM. WE BELIEVE THIS FOUNDATION, COUPLED WITH A SOLID BALANCE SHEET, WILL DRIVE INITIATIVES TO ACHIEVE OPERATIONAL PROFITABILITY, MAXIMIZE OUR INVESTMENTS, AND INCREASE SHAREHOLDER VALUE.
My vision is to lead the Company to be a dominant provider of analog and mixed-signal solutions for Connectivity and Power. This, I believe, is achievable.
Against this backdrop, and with unpredictable macro-economic conditions impacting semiconductor company valuations, I begin my tenure as your CEO and President. My immediate focus has and will continue to be on building winning products that provide and facilitate our future growth.
During fi scal year 2008, we completed the acquisition of Sipex and organized the product lines into three major areas: Interface, Communications and Power Management. We extended our global reach by expanding and deepening our relationships with our major incumbent distribution partners: Future Electronics and Nu Horizons Electronics, plus adding Rochester Electronics LLC which supports products that are at their fi nal stages of manufacturing viability. In addition, we augmented our technology portfolio through the acquisition of intellectual property rights related to digital predictive algorithms which will accelerate our product initiatives to deliver digital power solutions.
In a relatively short time, we have accomplished a great deal. To be sure, we still have more to do.
Financials
Net sales for fi scal 2008 were $89.7 million, up 31% from the previous fi scal year – this includes Sipex product revenues since the merger date in August 2007. On a non-GAAP basis our gross margin for fi scal 2008 was 54% as compared to 69% for the prior year, and operating expenses were $60 million for fi scal 2008 which was approximately $15 million higher than the previous year. Net income on a non-GAAP basis for fi scal 2008 was $2.1 million, or $0.05 diluted earnings per share, as compared to non-GAAP net income of $13.5 million, or $0.37 diluted earnings per share, for the previous fi scal year. Again this year, Exar was cash fl ow positive and ended the year with approximately $269 million in cash and marketable securities as compared to approximately $356 million
in fi scal 2007. Approximately $93 million was used to repurchase about nine million shares of Exar stock on the open market.
Products
During the year, we announced dynamic and innovative products from our Power Management, Interface and Communications product groups. Approximately 20 new power management solutions (controllers, regulators, and converters) were introduced. The majority was Light Emitting Diode (LED) drivers, plus we added a new regulator to our PowerBlox ™ product family. Exar announced eight new Interface devices. Several were industry-fi rst Universal Asynchronous Receiver Transmitters (UARTs) including 8-bit devices with integrated RS-485 transceivers, two 15 Mbps (fastest in the industry) eight-channel UARTs, and on the fi rst day of FY’09, a wireless UART chipset solution. We also launched a 5V RS-485/RS-422 half duplex interface transceiver. In Communications, we added fi ve new devices, and in our drive to be a system-level provider, we released the Orion™ platform to help customers develop complex communications systems. For Storage, we added three devices to our Serial Advanced Technology Attachment (SATA) Port Multiplier family -- EXstor ™.
I am extremely proud of our employees for not only bringing us to this point, but also for their ongoing dedication to our Company’s progress. I remain focused on improving operations, delivering the right products, and building shareholder value. I am fully committed to leading the Company to the next level, and trust our shareholders will join with me to make this a reality.
CORPORATION
FORM 10-K
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KÈ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934For the fiscal year ended March 30, 2008
OR‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TOCommission File No. 0-14225
EXAR CORPORATION(Exact Name of Registrant as specified in its charter)
Delaware 94-1741481(State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification Number)
48720 Kato Road, Fremont, CA 94538(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (510) 668-7000SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registeredCommon Stock, $0.0001 Par Value The NASDAQ Global MarketSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 theSecurities Act. Yes ‘ No È
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of theAct. Yes ‘ No È
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. È
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘ Accelerated filer ÈNon-accelerated filer ‘ (Do not check if a smaller reporting company) Smaller reporting company ‘
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes ‘ No È
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 28,2007 was $509,245,654 based on the last sales price reported for such date as reported on The NASDAQ GlobalMarket.
The number of shares outstanding of the Registrant’s Common Stock was 42,678,072 as of May 23, 2008,net of 19,835,425 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCEPortions of the Company’s 2008 Definitive Proxy Statement to be filed not later than 120 days after the
close of the 2008 fiscal year are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of thisReport.
EXAR CORPORATION AND SUBSIDIARIES
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 30, 2008
Page
PART IItem 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . 39Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 101Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
PART IIIItem 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . 104Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
PART IVItem 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. Forward-looking statements are generally written in the future tense and/or maygenerally be identified by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,”“anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements contained in this AnnualReport include, among others, statements made in Part II, Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Executive Summary” and elsewhere regarding (1) our revenuegrowth, (2) our future gross profits, (3) our future research and development efforts and related expenses,(4) our future selling, general and administrative expenses, (5) our cash and cash equivalents, short-termmarketable securities and cash flows from operations being sufficient to satisfy working capital requirements andcapital equipment needs for at least the next 12 months, (6) our ability to continue to finance operations withcash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities, (7) the possibility of future acquisitions and investments, (8) ourability to accurately estimate our assumptions used in valuing stock-based compensation, (9) our ability toestimate and reconcile distributors’ reported inventories to their activities, and (10) anticipated results inconnection with the merger with Sipex Corporation. Actual results may differ materially from those projected inthe forward-looking statements as a result of various factors. Factors that could cause actual results to differmaterially from those included herein include, but are not limited to the information contained under thecaptions Part I, Item 1—“Business,” Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” We disclaim any obligation toupdate information in any forward-looking statement.
ITEM 1. BUSINESS
OVERVIEW
Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs,develops, markets and sells connectivity and power management products to the consumer, communications andindustrial markets. Applying both analog and digital technologies, our products are deployed in a wide array ofapplications such as portable electronic devices, set top boxes, digital video recorders, telecommunication systemand industrial automation equipment. Our portfolio spans a wide range of performance solutions from directcurrent to direct current (“DC-DC”) regulators and controllers, voltage references, microprocessor supervisors,charge pump regulators and light-emitting diode (“LED”) drivers, single and multi-channel UniversalAsynchronous Receiver/Transmitter (“UART”) for portable and wireless applications, serial interface, portmultipliers for storage applications, to T/E (T: North America and Asia transmission interface; E: Europeantransmission interface) and Synchronous Optical Network/Synchronous Data Hierarchy (“Sonet/SDH”)communications. The solutions are designed working directly with large original equipment manufacturer(“OEM”) customers who help drive our technology roadmap and system solutions.
We were incorporated in California in 1971 and reincorporated in Delaware in 1991. Our common stocktrades on The NASDAQ Global Market (“NASDAQ”) under the symbol “EXAR”. See the information in PartII, Item 8—“Financial Statements and Supplementary Data” for information on our financial position as ofMarch 30, 2008 and March 31, 2007, and our results of operations and cash flows for the fiscal years endedMarch 30, 2008, March 31, 2007 and March 31, 2006.
In August 2007, we completed our merger with Sipex Corporation (“Sipex”), a company that designed,manufactured and marketed high performance, analog integrated circuits (“IC”) used by OEMs in the computing,consumer electronics, communications and networking infrastructure markets. As a result of the merger, we havecombined product offerings and increased technical expertise, distribution channels, customer base andgeographic reach.
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We believe our broad product offerings provide our customers the following benefits:
• A single source supplier for a broad range of connectivity solutions and power management productswhich include transceivers, mappers, framers, UARTs, PowerBlox regulators and display drivers;
• Unique value-added features and functions;
• Highest power density solutions with lowest power consumption, and at elevated operating temperaturesthrough unique intellectual property and the integration of multiple functions on a single device;
• Reduced system noise jitter and improved data integrity; and
• Accelerated time-to-market by enabling our customers to focus on their core competencies and tooutsource standards-based solutions.
Our key elements of the solutions include:
Commitment to Connectivity. We remain steadfast in our commitment to connectivity—a strategicprinciple that drives our product strategies and serves as a foundation for customer and vendor engagements.Connectivity describes our distinctive approach in creating and providing value to our stockholders, customersand suppliers.
Leading Analog and Mixed-Signal Design Expertise. We have over 35 years of proven technicalcompetency in developing analog and mixed-signal ICs. As a result, we have developed a deep understanding ofthe subtleties of analog and mixed-signal design and a comprehensive library of analog core blocks. For example,our high-speed, low-jitter Phase-Locked-Loop (“PLL”) capability plays a key role in our mixed-signal lineinterface units, transceivers, timing recovery, jitter attenuators and mapper products. In addition, we havedeveloped many digital blocks and engines that are used in framers, mappers, cross connects and aggregationfunctions. For our core analog capability, we have developed the first DC-DC switching solution delivering thehighest power density in the smallest size and operating at the highest temperature levels without a heat-sink. Asa result, we can provide our customers with solutions that typically exceed standard specifications and allowthem flexibility in designing other system elements.
Comprehensive Solutions to Enhance System Integration. The combination of our design expertise,diverse technology and system-level expertise allows us to provide comprehensive solutions that encompasshardware, software and applications support. We believe that by using our solutions, OEMs can develop higherperformance systems, better leverage their development resources and reduce their time-to-market.
Compelling Performance Solutions. We use our systems expertise and our analog, digital and mixed-signal design techniques to architect high-performance products based on standard complementary metal oxidesemiconductor (“CMOS”) process technologies. The diversity of our technology allows us to integrate in order todevelop further unique and differentiated solutions for our customers.
MARKETS AND PRODUCTS
Communications
The communications industry and its underlying technology continue to go through a significanttransformation. This transformation has been largely driven by the continuing adoption of broadband applicationssuch as the internet, voice over internet protocol (“VOIP”) and video-on-demand, resulting in increased demandfor bandwidth, storage capacity and security. This phenomenon has a significant influence on the type andconfiguration of equipment deployed in the communications infrastructure, requiring carriers to invest in multi-service equipment that can aggregate and transport these varying types of network traffic.
For several years, the communications industry has also been experiencing consolidation as survivingcarriers acquire wire-line and wireless networks to compete with expanded coverage and services, while
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demanding significant reductions in the cost of building and maintaining these networks. The combined effect ofthese changes in the telecommunications market continues to drive IC manufacturers to increase the bandwidthsupported by their devices by providing vertical integration (more functionality) and horizontal integration (morechannels). In addition, heat and power have become problematic issues in these applications. Increasingly, thesolution requires the power management portion of the system to work in alignment with the data processingsolution in order to reduce overall system power and heat. This push to providing more cost effective deviceswhile reducing the power and heat is enabling the increased adoption rate of these services in both establishedand emerging markets. We believe that IC companies, such as Exar, with proven analog and digital designexpertise and a deep understanding of system-level applications will have a competitive advantage in thischanging market environment.
Our products for T/E carrier, ATM and SONET/SDH applications include high-speed analog, digital andmixed-signal physical interface and access control ICs. The physical interface IC consists of a transmitter andreceiver that, when integrated, is called a transceiver. Transceivers interface with the physical transmissionmedia. Most of these high-speed, mixed-signal ICs convert digital inputs in a parallel format into a single bitstream that is many times faster than the original signal. Access control circuits are digital circuits that format, orframe, the data, perform error checking, and in some applications, aggregate signals by mapping multiple lower-speed data streams into one single higher-speed stream. The figure below illustrates where our products areemployed within networking equipment.
Our communications products include analog front ends (“AFEs”), transmitters, receivers, transceivers (alsoknown as line interface units or “LIUs” or “PHYs”), jitter attenuators, framers, ATM UNIs and data aggregationmappers. These products are used in networking equipment such as SONET/SDH Add/Drop Multiplexers(“ADMs”), PBX, central office switches, digital cross connects, multi-service provisioning platforms, routers andDigital Subscriber Loop Access Multiplexes (“DSLAMs”).
T/E & SONET/SDH
While the worldwide communications infrastructure market continues to transform into packet basedinfrastructure to support cost and service demands imposed by the deployment of new converged services, manyof the existing networks continue to be powered by T/E and SONET/SDH based infrastructure. Ourcommunications products primarily address equipment markets in two main segments: Metro-Access and Metro-Core. The Metro-Access segment of the communications network covers both wired and wireless accessequipment that aggregates data traffic from homes, wireless base-stations and businesses towards the Metro-Core. The Metro-Core communications network primarily consists of fiber-optics based equipment that
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transports data at rates of 2.4 Gigabits per second or higher within a city center or a larger area. In NorthAmerica, the high-speed data traffic standard is SONET and in most of the rest of the world, it is SDH. Overoptical fiber, the SONET/SDH standard ensures network reliability, data integrity and the interoperability ofequipment deployed across the network from different manufacturers.
We offer a broad range of products in the T1/E1 segment encompassing AFEs, short-haul and long-haulLIUs and LIU/framer combinations that incorporate reconfigurable, relayless, redundancy with integratedtermination resistors and jitter attenuators. Used individually or in chip sets, our T1/E1 devices offer customerskey advantages including design flexibility, enhanced system reliability and standards compliance which arecritical components of high-density, low-power system boards and line-cards. In addition, our T1/E1/J1 LIUcombination products simplify the design process by saving board space and by reducing complexity as a resultof lowering component count. Our T1/E1 portfolio includes products with up to 21 channels of AFEs, up to 14channels LIU/JA, up to 8 channels LIU/framer and up to 28 channel LIU/framer/mapper combinations.
We have developed a diversified portfolio of single/multi-channel T3/E3 physical interface solutions withintegrated transceivers and jitter attenuators that achieve high performance levels while reducing board space andoverall power in multi-port applications. Extending our jitter attenuation capabilities, we incorporatedesynchronization in our transceivers and data aggregation mappers to solve complex timing issues associatedwith mapping/demapping from SONET/SDH (synchronous) to T3/E3 (asynchronous) environments. In addition,we have integrated our LIU and framer functions into our multi-channel DS3/E3 LIU/Framer/JA combinationdevices that offer customers additional design flexibility.
Our strategy is to accelerate the reduction of power consumption and integrate the normally separate powerand communications functions in order to significantly reduce power consumption and overall heat generation.
We also supply a family of V.35 transceiver products used for data transmission, primarily in networkingequipment such as routers and bridges.
Our data aggregation mapper solutions leverage our expertise in T/E carrier with SONET/SDH, enabling usto provide unique solutions to the SONET/SDH marketplace. In addition to integrating SONET PHY capabilityinto our data aggregation mappers, we also offer a family of OC-3/12/48 PHYs and intend to complement thesedevices with additional OC-48 data aggregation solutions. Our access control products include framers, ATMUNIs and data aggregation mappers. Complementing our OC-3 to OC-48 SONET/SDH devices was the additionof a highly integrated OC-3/STM-1 to OC-192/STM-64 multi-rate framer. This product extends our SONET/SDH capabilities to cover all data rates starting from OC-3/STM-1 to OC-192/STM-64. In addition, the deviceenables significant flexibility in line card design coupled with substantial cost and power savings. We extendedour mixed-signal technology leadership into next generation metro core and transport network markets with theintroduction of the first in a family of multi-protocol over SONET/SDH framers. These devices are designed tofacilitate the growing market shift towards the convergence of triple-play services over SONET/SDH.
Consumer/Industrial
In the consumer and industrial space, we provide our storage, interface, and power solutions. For theconsumer markets, we focus on the high performance consumer segment such as digital video recorders, set-topboxes, liquid crystal display (“LCD”) and plasma high-definition TVs and gaming. In the industrial market, wefocus in areas such as system automation, robotics and medical and test devices in both tethered and portableapplications.
Serial Communications
The transition from parallel to serial interfaces for chip-to-chip or system-to-system interconnects has beenrequired to address the needs of the fastest-growing data communications markets. By converting parallel links
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into serial links, UARTs play a vital role in reducing the large number of wires and traces in legacy designs. Inaddition to this conversion, UARTs offer additional benefits by off loading functions such as interrupt processingand data flow control from the CPU, which results in increased bandwidth.
UARTs are used in a wide range of equipment for control and diagnostics functions. UARTs are also usedin system management to monitor Quality of Service (“QoS”) information, or to provide redundancy in faulttolerant systems. Our highly integrated single/multi-channel UARTs have been specifically designed for systemswith high throughput. These include servers, routers, network management equipment, computer telephony,remote access servers, wireless base stations and repeaters.
Multi-channel UARTs are commonly used in industrial applications such as process control and factoryautomation. Point-of-sale host systems often communicate to multiple remote terminals and self-service pumpsat gas/petrol stations. These environments will typically have 8 to 32 (RS-232 or RS-485) ports by using multipleUARTs for communications.
Single and multi-channel UARTs are used in portable consumer applications such as multi-media products,Global Positioning System (“GPS”) and Personal Digital Assistant (“PDA”) devices. Products such as smartphones and PDAs utilize multiple serial interfaces to connect to Bluetooth, compact flash, IrDA, serial dockinginterface and GPS receivers for wireless or wired interface to global positioning systems. When a Bluetooth orGPS receiver is not integrated in the device, an external module can easily be connected via the UARTs interfacein most applications. Our UARTs are well suited for battery-operated applications that require mobility such ashandheld data entry devices, security alarm and point-of-sale terminals.
Transceiver interface products facilitate the transfer of digital signals between or within electronic systemsand ensure reliable connectivity between networks, computers and the rapidly expanding mix of digitalperipherals and consumer portable devices that connect to them. Our single protocol RS-232 and RS-485transceivers comply with international standards in delivering multi-channel digital signals between two systems.Our proprietary multi-protocol transceivers enable network equipment to communicate with a large population ofperipherals that use a diverse set of serial protocol standards without the added burden of multiple add-on boardsand cables.
As a leader of UART solutions, we offer a broad line of industry-proven product families. Our productportfolio consists of single, dual, quad and octal channel devices with enhanced feature sets and a broad range ofpackaging options. These products provide an easy migration path from one product generation to the next.These solutions are highly integrated UARTs that we believe are the defacto industry standard for UART withFirst-In First-Out (“FIFO”) used in multi-port applications. We introduced our first to market wireless UARTsolution in the fiscal year 2008. The wireless UART is a transmitter and receiver chipset which allowsapplications to send and receive data wirelessly over a secure proprietary protocol. The proprietary protocolenables the application to achieve the highest degree of security to protect the data. The wireless UART solutionintegrates the UART and radio frequency (“RF”) function into a simple to use small footprint solution. Coupledwith our proprietary driver software, our customers have an easy turnkey wireless solution which eliminates thedifficult software development activities they currently have.
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Power Management
The power management market has changed considerably over time. The practice of considering powermanagement at the final stages of the system design has given rise to increased difficulties in space, availableenergy and heat dissipation. Power management has now moved from the final design stage to becoming one ofthe primary problems to solve when defining a system. As a result, power solutions today are challenged todevelop solutions which solve a variety of these problems.
Portable and consumer applications such as notebooks, set-top boxes and portable blood analyzers require avariety of power management and power display solutions. These applications are becoming more and morecomplicated as the dimensions continue to reduce, functions continue to grow, and longer battery life is required.The challenge to the power system is an increase in the number of voltages in the system and current required,while the space allowed decreases, operating voltages continue to drop, and higher efficiencies are required. Weprovide a portfolio of LED drivers, linear regulators and DC-DC regulators which are targeted for theseapplications. As a leader in charge pump backlight solutions, we were the first company to achieve 90%efficiency in the flash LED market with the fewest external components.
In the communications and industrial markets, power systems have also seen a significant trend towardmultiple system voltages, increased currents, increased efficiency needs, and smaller spaces, but the challenge ofhigher input voltages has now been added. This additional challenge has caused the introduction of theintermediate bus architecture which is an additional regulation step for the power system prior to regulating tothe final working voltages that the system application needs. This architecture requirement has reduced theoverall system efficiency which then requires the system design to provide more raw energy to the system andalso to dissipate a higher level of heat due to the inefficiencies of the system. Our high voltage controller andDC-DC regulator solutions are designed to eliminate the intermediate bus regulator and simplify the systemdesign, while at the same time, reducing the system losses by as much as 50%.
As our progress deepens in power, our digital power efforts will become a solution which integrates thepower management function within an application into a cohesive power system. The potential is beyond simpleintegration as our digital power solution which we have defined with specific OEM customers will enable ourcustomers to achieve performance results that they were not able to achieve with traditional solutions.
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Utilization of our devices accelerates time-to-market and system performance by reducing developmenttime and addressing the growing need for board space savings, lower power and increased bandwidthrequirements for communications, industrial and consumer applications. For example, our UARTs, BacklightDisplay Drivers, and regulators are well suited for battery-operated applications that require mobility such ashandheld data entry devices, security alarms and point-of-sale terminals.
18V
0.8V
0.8V
1.5V
Non Isolated Point of Load
Non Isolated Point of Load
12V / 24VIntermediate Bus
Point of Load
Point of Load
48VBackplanePower Bus
Telecomand
DatacomServers
Industrialand
TelecomEquipments
AC in
PowerBlox
PowerBlox
AC ~Isolated
DC
AC/DC Isolated Converter
48V
24V
PowerBlox
3.3V/5V/9.6V/12V
Isolated
DC to DC
PowerBlox
FPGA
FPGA
Processor
High VoltageLoad
Storage
Market demand is driving the need for increased storage capacity for a host of consumer, home media andindustrial applications where cost effective, dense storage is a requirement. There are many approaches to datastorage deployment: Storage Area Network (“SAN”), Direct Attached Storage (“DAS”), Network AttachedStorage (“NAS”), Redundant Array of Inexpensive Disks (“RAID”) and Just a Bunch of Disks (“JBOD”). Eachof these will support unique configurations (number of disk drives) and locations (internal to the system, orconnected externally to an enclosure). Connecting to all of these storage environments entails supportingindustry-adopted protocols including Serial Advanced Technology Attachment (“SATA”) and Serial AttachedSCSI (“SAS”), among others. The SATA I/II specifications were recently standardized as a serial interconnecttechnology of choice between advanced host controllers and storage drives. Our SATA port multipliers enabledistribution of data across multiple disk drives from a single host. Our port selectors enable multiple hosts toaccess a single drive. These approaches ensure greater data reliability and security.
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Strategy
We strive to be a leading provider of high performance, system-level mixed-signal solutions for a broadrange of connectivity markets including telecom, industrial, storage and consumer. To achieve our long-termbusiness objectives, we employ the following strategies:
Leverage Analog and Mixed-Signal Design Expertise to Provide Integrated System-LevelSolutions. Utilizing our strong analog and mixed-signal design expertise, we integrate mixed-signal physicalinterface devices for a broad range of interface solutions. In the communications infrastructure market, we offerproducts that integrate transceivers, power management, jitter attenuators and framers/ATM UNIs on a single IC.This enables our OEMs to use less board space and reduce their overall system cost.
Leverage Broad Product Portfolio to Accelerate Development of High Performance ConnectivitySolutions. We have developed a strong presence in the communications market, where we have industryleading customers and proven technological capabilities. Our design expertise has enabled us to offer a diverseportfolio of both industry standard and proprietary communications products. We plan to expand this portfolio bydeveloping integrated solutions that extend the reach of our offerings into new input/output applications.
Focus on Growing Market Share Within the Communications and Storage Markets. We targetcommunications markets, including T/E carrier, ATM, and SONET/SDH. In the storage market, we target DirectAttached Storage (DAS) and Network Attached Storage (NAS) applications. We have built substantial expertisein the areas of analog and digital design, systems architecture and applications support. We believe that theintegration of these capabilities enables us to develop solutions addressing the high-bandwidth physical layerrequirements of communications systems OEMs. Our broad product offerings support differentiated features thatwe believe will enable us to increase our market share. Additionally, we seek to expand our markets byincorporating adjacent functionality into our products.
Leverage Broad Product Portfolio in Serial Communications and Power Management to Increase MarketShare in Industrial, Communications and Consumer Markets. Aside from our comprehensive portfolio of 8-bitand PCI UART devices and DC-DC regulators, we provide higher value to our customers by integrating adjacentfunctionalities. These include UARTs integrated with RS-232 and RS-485 transceivers as well as powermanagement integrated with communications. We also offer expanded low voltage, low power consumptiondevices in small form factors to accelerate our reach into high-volume consumer applications for increasedmarket share.
Strengthen and Expand Strategic OEM Relationships. To promote the early adoption of our solutions, weactively seek collaborative relationships with strategic OEMs during product development. We believe thatOEMs recognize the value of our early involvement because designing their system products in parallel with ourdevelopment can accelerate time-to-market for their end products. In addition, we believe that collaborativerelationships help us to obtain early design wins and to increase the likelihood of market acceptance of our newproducts.
Use Standard CMOS and BCD Process Technologies to Provide Compelling Price/PerformanceSolutions. We design our products to be manufactured using standard CMOS and BCD processes. We believethat these processes are proven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS and BCD processes. In certain specialized cases, we may useother process technologies to take advantage of their performance characteristics.
Leverage Fabless Semiconductor Model. We have long-standing relationships with third-party waferfoundries, assembly and test subcontractors to manufacture our ICs. Our fabless approach allows us to avoidsubstantial capital spending, obtain competitive pricing, minimize the negative effects of industry cycles, reducetime-to-market, reduce technology and product risks, and facilitate the migration of our products to new CMOSand BCD process technologies. By leveraging the fabless model, we can focus on our core competencies in salesand marketing as well as in product design, development and support.
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Leverage our Channel Partners. We have an extensive partnership with our distributors andrepresentatives throughout the world representing a significant portion of our total revenue. Through ourpartners, we have access to large market segments which we cannot directly support. Our activities with ourpartners are to extend our expertise and product exposure by enabling our partners to create new demands for oursolutions as well as aid us in defining our next generation solutions.
Expand our Business Through Acquisition. The markets in which we compete require a wide variety oftechnologies, products and capabilities. The combination of technological complexity and rapid change withinour markets makes it difficult for a single company to develop all the technological solutions that it desires tooffer within its family of products. Through acquisitions, we aim to deliver a broader range of products tocustomers in target markets. We employ the following strategies to address the need for new or enhancedproducts: we develop new technologies and products internally; we acquire field proven third-party intellectualproperty cores to accelerate time to market; and we acquire all or parts of other companies.
Sales and Customers
We market our products globally through both direct and indirect channels. In the Americas, we arerepresented by 17 independent sales representatives and two independent, non-exclusive primary distributors, aswell as our own direct sales organization. We currently have domestic presences in or near Atlanta, Boston,Chicago, Dallas, Philadelphia, Raleigh and Fremont, California.
Internationally, we are represented in Europe and the Asia Pacific region by our wholly-owned foreignsubsidiaries and international support offices in Canada, China, France, Germany, Italy, Japan, South Korea,Taiwan and the United Kingdom. In addition to these offices, 37 independent sales representatives and otherindependent, non-exclusive distributors represent us in Europe, Japan and the Asia-Pacific region. Ourinternational sales represented approximately 69%, 56% and 51% of net sales for the fiscal years endedMarch 30, 2008, March 31, 2007 and March 31, 2006, respectively. Sales to China accounted for 20% of netsales in fiscal year 2008 and 14% in fiscal years 2007 and 2006, respectively. Except for China, United Statesand Italy, no other country accounted for sales in excess of 10% of net sales during fiscal years 2008, 2007 or2006. We expect international sales to continue to increase as a percentage of our net sales in the future. All ofour sales to foreign entities are denominated in U.S. Dollars. For a detailed description of our sales by geographicregions, see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results ofOperations, Net Sales by Geography” and Part II, Item 8—“Notes to Consolidated Financial Statement,Note 18—Segment and Geographic Information.” For a discussion of the risk factors associated with our foreignoperations, see Part I, Item 1A—“Risk Factors—Our engagement with foreign customers could causefluctuations in our operating results, which could materially and adversely impact our business, financialcondition and results of operations.”
We sell our products to distributors and OEMs throughout the world. Alcatel-Lucent accounted for 11%,16% and 12% of our net sales for the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006,respectively. No other OEM customer accounted for 10% or more of our net sales for any of the three fiscal yearsended March 30, 2008, March 31, 2007 and March 31, 2006. Future Electronics Inc. (“Future”), a related party,was and continues to be our largest distributor. Future, on a worldwide basis, represented 24%, 20% and 24% ofnet sales in fiscal years 2008, 2007 and 2006, respectively. Our second largest distributor, Nu HorizonsElectronics Corp. (“Nu Horizons”), accounted for 11%, 18% and 15% of net sales in fiscal years 2008, 2007 and2006, respectively.
A number of key customers we work directly with include, among others, Adtran Inc., Alcatel-Lucent,Apple Inc., Motorola, Inc., Cisco Systems Inc., Digi International Inc., Ericsson Inc., Fujitsu Limited, HuaweiTechnologies Co., Ltd., International Business Machines Corporation, LG Electronics Inc., MitsubishiElectronics America Inc., NEC Corporation, Nokia Siemens Networks, Panasonic Corporation, SamsungElectronics, Tellabs, Inc. and ZTE Corporation.
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Manufacturing
We outsource all of our fabrication and assembly, as well as the majority of our testing operations. Thisfabless manufacturing model allows us to focus on sales and marketing as well as product design, developmentand support.
Our products are manufactured using standard CMOS, bipolar and BiCMOS (bipolar CMOS) processtechnologies. We use wafer foundries located in the United States and Asia to manufacture our semiconductorwafers.
Most of the semiconductor wafers are shipped directly from our foundries to our subcontractors in Asia forwafer test and assembly, where they are cut into individual die and packaged. Independent contractors inMalaysia, China, Indonesia and Taiwan perform most of our assembly work. Final test and quality assurance areperformed either at our subcontractors’ facilities in Asia or our Fremont, California facility. All ourmanufacturing partners have been certified to ISO 9001:2000 and are automotive spec, TL16949 compliant orsoon to be compliant.
Research and Development
We believe that ongoing innovation and introduction of new products in our targeted and adjacent marketsis essential to sustaining growth. Our ability to compete depends on our ability to offer technologicallyinnovative products on a timely basis. As performance demands and complexity of integrated circuits haveincreased, the design and development process has become a multi-disciplinary effort requiring diversecompetencies. Our research and development is focused on developing high-performance analog, digital andmixed-signal solutions addressing the high-bandwidth requirements of communications and storage systemsOEMs and the high-current, high-voltage requirements of interface and power management OEMs. We makeinvestments in advanced design tools, design automation and high-performance intellectual-property librarieswhile taking advantage of readily available specialty intellectual properties through licensing or purchases. Wealso augment our skill sets and intellectual properties through university collaborations, accessing needed skillswith off-campus design centers. We continue to pursue the development of design methodologies that areoptimized for reducing design-cycle time and increasing the likelihood of first-time successes. While wecontinually upgrade our internal technology to develop innovative products, as a fabless company, we continue toseek or work with foundries to procure our wafer manufacturing processes. We spent $30.7 million, $25.8million and $24.7 million on research and development in fiscal years 2008, 2007 and 2006, respectively. For theexplanation of increased expense in R&D, please see Part II, Item 7—“Management’s Discussion and Analysisof Financial Condition and Results of Operations.”
Competition
The semiconductor industry is intensely competitive and is characterized by rapid technological change anda history of price reductions as design improvements and production efficiencies are achieved in successivegenerations of products. Although the market for analog and mixed-signal integrated circuits is generallycharacterized by longer product life cycles and less dramatic price reductions than the market for digitalintegrated circuits, we face substantial competition in each market in which we participate.
We believe that the principal competitive factors for our related semiconductor industry are:
• time-to-market;
• product quality and reliability;
• customer support and services;
• price;
• total system cost;
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• product features;
• new product innovation; and
• compliance with industry standards.
While, we compete favorably with respect to each of these factors, many of our current and potentialcompetitors may have certain advantages over us, for example:
• longer presence in key markets;
• greater name recognition;
• stronger financial position and liquidity;
• more secure supply chain;
• access to larger customer bases; and
• significantly greater sales and marketing, and other resources.
Because IC markets are highly fragmented, we generally encounter different competitors in our varioustarget markets. Competitors with respect to our communications products include Applied Micro CircuitsCorporation, Integrated Device Technology, Inc., Maxim Integrated Products, Inc., Mindspeed Technologies,Inc., PMC-Sierra, Inc., TranSwitch Corporation and Vitesse Semiconductor Corporation. Competitors in storageinclude Silicon Image, Inc. and Marvell Technology Group Ltd. Competitors in serial interface include NXPB.V. (formerly a division of Royal Philips Electronics), Texas Instruments Incorporated, Analog Devices, Inc.,Intersil Corporation, Linear Technology Corporation and Maxim Integrated Products, Inc. Our primarycompetitors in power include Advanced Analogic Technologies Incorporated, Analog Devices, Inc., IntersilCorporation, Linear Technology Corporation, Maxim Integrated Products, Inc., Micrel, Incorporated, NationalSemiconductor Corporation, On Semiconductor Corporation, Pioneer Corporation, Semtech Corporation, SharpElectronics Corporation, Sony Corporation and Texas Instruments Incorporated.
Backlog
Our sales are made pursuant to either purchase orders for current delivery of standard items or agreementscovering purchases over a period of time, which are frequently subject to revisions and to a lesser extent,cancellations with little or no penalties at all. Lead times for the release of purchase orders depend on thescheduling practices of the individual customer, and our rate of bookings varies from month-to-month. Certaindistributors’ agreements allow for stock rotations, scrap allowances and volume discounts. Further, we deferrecognition of revenue on shipments to certain distributors until the product is resold. For all of these reasons, webelieve backlog as of any particular date should not be used as a predictor of future sales.
Intellectual Property Rights
We believe that our intellectual property is critical to our current and future success. However, we do notbelieve that it is materially dependent upon any one patent. To protect our intellectual property, we rely on acombination of patents, mask work registrations, trademarks, copyrights, trade secrets, and employee and third-party nondisclosure agreements. We have 179 patents issued and 43 patent applications pending in the UnitedStates. We have 38 patents issued and 101 patent applications pending in various foreign countries. Our existingpatents will expire between 2009 and 2025, or sooner if we choose not to pay renewal fees. We may also enterinto license agreements or other agreements to gain access to externally developed products or technologies.
We, however, may fail to adequately protect our intellectual property. Others may gain access to our tradesecrets or disclose such trade secrets to third parties without our knowledge. Some or all of our pending andfuture patent applications may not result in issued patents that provide us with a competitive advantage. Even if
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issued, such patents, as well as our existing patents, may be challenged and later determined to be invalid orunenforceable. Others may develop similar or superior products without access to or without infringing upon ourintellectual property, including intellectual property that is protected by trade secret and patent rights. In addition,the laws of certain territories in which our products are or may be developed, manufactured or sold, includingAsia, Europe and Latin America, may not protect our products and intellectual property rights to the same extentas the laws of the United States of America.
We cannot be sure that our products or technologies do not infringe patents that may be granted in the futurepursuant to pending patent applications or that our products do not infringe any patents or proprietary rights ofthird parties. Occasionally, we are informed by third parties of alleged patent infringement. In the event that anyrelevant claims of third-party patents are found to be valid and enforceable, we may be required to:
• stop selling, incorporating or using our products that use the infringed intellectual property;
• obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectualproperty, although, such license may not be available on commercially reasonable terms, if at all; or
• redesign our products so as not to use the infringed intellectual property, which may not be technically orcommercially feasible or meet customer requirements.
If we are required to take any of the actions described above or defend against any claims from third parties,our business, financial condition and results of operations could be harmed. See Part I, Item 1A—“RiskFactors—‘We may be unable to protect our intellectual property rights, which could harm our competitiveposition’ and “We could be required to pay substantial damages or could be subject to various equitableremedies if it were proven that we infringed the intellectual property rights of others’.”
Employees
As of March 30, 2008, we employed 404 full-time employees, with 115 in research and development, 104 inoperations, 120 in marketing and sales and 65 in administration. Of the 404 employees, 87 are located in ourinternational offices. See Part I, Item 1A—“Risk Factors—‘We depend in part on the continued service of ourkey engineering and management personnel and our ability to identify, hire, incentivize and retain qualifiedpersonnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business,financial condition and results of operations could be materially and adversely impacted’.” None of ouremployees are represented by a collective bargaining agreement, and we have never experienced a work stoppagedue to labor issues. We believe our employee relations are good.
Executive Officers of the Registrant
Our executive officers and their ages as of May 30, 2008, are as follows:
Name Age Position
Pedro (Pete) P. Rodriguez . . . 46 Chief Executive Officer, President and DirectorJ. Scott Kamsler . . . . . . . . . . 60 Senior Vice President and Chief Financial OfficerGeorge Apostol . . . . . . . . . . . 43 Chief Technology OfficerEdward M. Lam . . . . . . . . . . 47 Senior Vice President of Product LinesHung P. Le . . . . . . . . . . . . . . 47 Vice President of EngineeringBentley Long . . . . . . . . . . . . . 46 Vice President of Worldwide SalesThomas R. Melendrez . . . . . . 54 General Counsel, Secretary and Executive Vice President of
Business DevelopmentStephen W. Michael . . . . . . . 61 Senior Vice President of Operations and Reliability & Quality Assurance
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Pedro (Pete) P. Rodriguez was appointed to Chief Executive Officer and President of Exar in April 2008.He has served as a director of Exar since October 2005. Mr. Rodriguez has over 24 years of engineering, sales,marketing and executive management experience in the semiconductor industry. Mr. Rodriguez served, mostrecently, from June 2007 to April 2008, as Chief Marketing Officer of Virage Logic Corporation, asemiconductor intellectual property supplier for Systems on a Chip (SoC). Prior to his appointment at VirageLogic, Mr. Rodriguez served as President, Chief Executive Officer and Director of Xpedion Design Systems,Inc., a private, venture-funded developer of design solutions for radio frequency integrated circuits (“RFIC”)from May 2000 to August 2006. Mr. Rodriguez held this role for six years until shortly after Xpedion wasacquired by Agilent Technologies, Inc. in 2006. Prior to Xpedion, he held various senior management positionsin sales and marketing at Escalade Corporation, a provider of software for chip design, and LSI Corporation(formerly LSI Logic Corporation) as well as design engineering, product management and process engineeringpositions at Aerojet Electronics, Teledyne Microwave and Siliconix Incorporated. Mr. Rodriguez holds an MBAfrom Pepperdine University, an MSEE from California Polytechnic University and a BS in ChemicalEngineering from California Institute of Technology.
J. Scott Kamsler joined us in February 2007 as our Senior Vice President and Chief Financial Officer. Priorto joining us, he was Vice President and Chief Financial Officer at Centillium Communications, Inc. from July2004 to February 2007. He also served as Vice President of Operations at Wyse Technology Inc. from 2003 to2004 and as Chief Financial Officer at Tasman Networks, Inc. from 2000 to 2002. Prior to Tasman Networks, heserved as Chief Financial Officer of four public companies: Symmetricom, Inc., DSP Technology Inc., Solitec,Inc. and E-H International, Inc. Earlier in his career, he held various finance positions at Intel Corporation andwas an auditor with Peat Marwick Mitchell. Mr. Kamsler is a CPA and received his BA from WillametteUniversity and his MBA from the University of Washington.
George Apostol joined us as Chief Technology Officer in May 2008. Mr. Apostol has over 20 years ofexperience in the system electronics and semiconductor industries. From May 2005 to May 2008, Mr. Apostolserved as Chief Technology Officer and Vice President of Engineering at PLX Technology, Inc. He was VicePresident of Engineering at Audience, Inc. from May 2004 to May 2005 and Vice President of Engineering atBRECIS Communications Corporation from February 2000 to April 2004. Prior to that, he held various seniorengineering and management positions at TiVo, Inc., LSI Corporation (formerly LSI Logic Corporation), SiliconGraphics, Inc. and Xerox Corporation. With a strong background designing systems on silicon, he holds severalpatents in the areas of system bus interface, clocking and buffer management design, and has written anddeployed multiple application-specification integrated circuit (“ASIC”) design productivity tools. Mr. Apostolperformed his academic research at the Dana Farber Cancer Institute and Massachusetts Institute of TechnologySloan School of Management and holds a BSEE from Massachusetts Institute of Technology.
Edward M. Lam joined us in August 2007 as Senior Vice President of Product Lines in connection withthe Sipex merger. At Sipex, he was Senior Vice President of Marketing and Business Development. Mr. Lamjoined Sipex in September 2005 and has over 20 years of analog semiconductor industry experience withNational Semiconductor Corporation. Mr. Lam earned his BSEE from San Francisco State University and startedhis career as a test engineer. Mr. Lam’s experience covers all aspect of the analog business includingmanufacturing, test and product and strategy development.
Hung P. Le was appointed to Vice President of Engineering in July 2007. He joined us in March 1995 whenwe acquired Startech Semiconductor, Inc., where he served as Director of Technology. Prior to joining Startechin 1994, he was Manager of Technology at Sierra Semiconductor, Inc. Prior to his current position, Mr. Le wasDivision Vice President of Technology since 2004 at Exar. Hung Le has 25 years of experience in semiconductorphysics and design and holds eight patents. He received his MS and BS in Electrical Engineering and ComputerScience from Massachusetts Institute of Technology.
Bentley Long was appointed as Vice President of Worldwide Sales in January 2008. He has over 20 yearsof semiconductor sales and marketing experience including the last 11 years at Exar where he was most recently
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Vice President of the Americas and Global Distribution. He has previously worked at VLSI Technology, Inc. asan Area Sales Manager and Worldwide Strategic Account Manager, as well as held various technical positions atTexas Instruments Incorporated. He holds a Bachelor of Engineering Degree in Electrical Engineering andMathematics from Vanderbilt University and an MBA from the University of Tennessee.
Thomas R. Melendrez joined us in April 1986 as our Corporate Attorney. He was promoted to Director ofLegal Affairs in July 1991, and again to Corporate Vice President of Legal Affairs in March 1993. In March1996, he was promoted to Corporate Vice President, General Counsel and in June 2001, he was appointedSecretary. In April 2003, he was promoted to General Counsel, Secretary and Vice President of BusinessDevelopment and in July 2005, he was promoted to Senior Vice President of Business Development. In April2007, he was promoted to his current position as General Counsel, Secretary and Executive Vice President ofBusiness Development. Mr. Melendrez has over 25 years of legal experience in the semiconductor and relatedindustries and he received a BA from the University of Notre Dame, a JD from University of San Francisco andan MBA from Pepperdine University.
Stephen W. Michael joined us in September 1992 as our Vice President of New Market Development. InJuly 1995, he was appointed to Vice President of Operations, and in May 2001, he was appointed to VicePresident of Operations and Reliability & Quality Assurance and in July 2007, to Senior Vice President ofOperations and Reliability & Quality Assurance. Prior to joining us, he was Vice President and General Managerof Analog and Custom Products with Catalyst Semiconductor. Prior to Catalyst Semiconductor, he served invarious senior positions at GE Semiconductor, Intersil Corporation, Fairchild Camera and InstrumentCorporation and National Semiconductor Corporation. Mr. Michael has over 30 years of semiconductor industryexperience and holds a BS in Electrical Engineering from the University of California at Davis.
Available Information
We file electronically with the SEC our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,current Reports on Form 8-K, and amendments to those Reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934. Those reports and statements: (1) may be read and copied at the SEC’s public referenceroom at 100 F Street, N.E., Washington, DC 20549, (2) are available at the SEC’s Internet site(http://www.sec.gov), which contains reports, proxy and information statements and other information regardingissuers that file electronically with the SEC; and (3) are available free of charge through our website(www.exar.com) as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC.Information regarding the operation of the SEC’s public reference room may be obtained by calling the SEC at1-800-SEC-0330. Copies of such documents may be requested by contacting our Investor Relations Departmentat (510) 668-7201 or by sending an e-mail through the Investor Relations page on our website. Information onour website is not incorporated by reference into this Report.
ITEM 1A. RISK FACTORS
If we are unable to integrate, operate and manage the combined company resulting from our merger with Sipex,we may fail to realize the expected benefits of the merger, which may adversely affect our financial results.
Our merger with Sipex in August 2007 resulted in the combination of two previously independent publiccompanies. Although we have achieved and expect to achieve additional benefits as a result of the merger, wemay still face significant challenges to realize all expected benefits and synergies of the merger and there can beno assurance that we will realize all of the anticipated benefits. The integration of the companies has been and isa complex, time-consuming and expensive process that can and may disrupt our business and divert ourmanagement’s focus and resources from the day-to-day operation of the business. Integration challenges include,but are not limited to:
• integrating the management teams, strategies, cultures and operations of the two companies;
• retaining and assimilating the key personnel of each company;
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• integrating sales, engineering, operations, marketing, information technology and business management;
• retaining and maintaining relationships with existing customers, distributors and other partners of eachcompany;
• achieving expected enterprise synergies of the merger as rapidly as anticipated by us or financial orindustry analysts;
• integrating and managing multiple geographic locations;
• integrating purchasing and procurement and retaining the main sources of supply and/or services of bothcompanies;
• integrating the business process and related information technology applications and infrastructure of thetwo companies;
• developing new products and services that optimize the assets and resources of both companies;
• coordinating research and development activities to enhance the timely development of new products andtechnologies; and
• creating uniform standards, controls (including internal control over financial reporting), procedures,policies and information systems.
Meeting these challenges has involved and will continue to involve considerable risks, such as:
• the potential disruption of each company’s ongoing business and distraction of management;
• the difficulty of fully leveraging acquired technology and intellectual property rights into our products;
• potential unknown liabilities associated with the merger;
• unanticipated expenses related to integration, including technical and operational integration; and
• the impairment of relationships with employees, customers and channel partners such as Future, includingpotential changes in existing agreements or delay or deferral in decisions, as a result of the integrationprocess.
Combining businesses and operations of this magnitude and scope is challenging. We may not ultimatelysucceed in integrating Sipex’s business into ours and we may not realize all the anticipated benefits of themerger. If we do not succeed in addressing these challenges or any other problems encountered in connectionwith the merger, our operating results and financial condition could be adversely affected.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date. In the future, the market price ofour common stock could be subject to significant fluctuations due to:
• loss of or changes to key executives;
• our anticipated or actual operating results;
• announcements or introductions of new products by us or our competitors;
• technological innovations by us or our competitors;
• product delays or setbacks by us, our customers or our competitors;
• potential supply disruptions;
• sales channel interruptions;
• concentration of sales among a small number of customers;
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• conditions in our customers’ markets and the semiconductor markets;
• the commencement and/or results of litigation;
• changes in estimates of our performance by securities analysts;
• decreases in the value of our investments or long-lived assets, thereby requiring an asset impairmentcharge against earnings;
• repurchasing shares of our common stock;
• announcements of merger or acquisition transactions; and/or
• general global economic and market conditions;
In the past, securities and class action litigation has been brought against companies following periods ofvolatility in the market prices of their securities. We may be the target of one or more of these class action suits,which could result in significant costs and divert management’s attention, thereby harming our business, resultsof operations and financial condition.
In addition, at times the stock market has experienced and is currently experiencing extreme price andvolume fluctuations that affect the market prices of many high technology companies, including semiconductorcompanies, and that are unrelated or disproportionate to the operating performance of those companies. Any suchfluctuations may harm the market price of our common stock.
Our financial results may fluctuate significantly because of a number of factors, many of which are beyondour control.
Our financial results may fluctuate significantly. Some of the factors that affect our financial results, manyof which are difficult or impossible to control or predict, are:
• the cyclical nature of the semiconductor industry;
• our difficulty in predicting revenues and ordering the correct mix of products from suppliers due tolimited visibility provided by customers and channel partners;
• fluctuations of our revenue and gross profits due to the mix of product sales that has various margins;
• the effect of the timing of sales by our resellers on our reported results as a result of our sell-throughrevenue recognition policies;
• the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channelpartners due to, among others, the following factors:
• management of customer, subcontractor and/or channel inventory;
• delays in shipments from our subcontractors causing supply shortages;
• inability of our subcontractors to provide quality products timely;
• dependency on a single product with a single customer and/or distributors;
• volatility of demand for equipment sold by our large customers, which in turn, introduces demandvolatility for our products;
• disruption in customer demand as customers change or modify their complex subcontractmanufacturing supply chain;
• disruption in customer demand due to technical or quality issues with our devices or components intheir system;
• the inability of our customers to obtain components from their other suppliers; and
• disruption in sales or distribution channels;
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• our ability to maintain and expand distributor relationships;
• changes in sales and implementation cycles for our products;
• the ability of our suppliers and customers to obtain financing or to fund capital expenditures;
• risks associated with entering new markets;
• the announcement or introduction of products by our existing competitors or potential new competitors;
• loss of market share by our customers;
• competitive pressures on selling prices or product availability;
• pressures on selling prices overseas due to foreign currency exchange fluctuations;
• erosion of average selling prices coupled with the inability to sell newer products with higher averageselling prices, resulting in lower overall revenue and margins;
• delays in product design life cycles;
• market and/or customer acceptance of our products;
• consolidation among our competitors, our customers and/or our customers’ customers;
• changes in our customers’ end user concentration or requirements;
• loss of one or more major customers;
• significant changes in ordering pattern by major customers;
• our or our channel partners’ ability to maintain and manage appropriate inventory levels;
• the availability and cost of materials and services, including foundry, assembly and test capacity, neededby us from our foundries and suppliers;
• disruptions in our or our customers’ supply chain due to natural disasters, fire, outbreak of communicablediseases, labor disputes, civil unrest or other reason;
• delays in successful transfer of manufacturing process to our subcontractors;
• fluctuations in the manufacturing output, yields, and capacity of our suppliers;
• fluctuation in suppliers’ capacity due to reorganization, relocation or shift in business focus;
• problems, costs, or delays that we may face in shifting our products to smaller geometry processtechnologies and in achieving higher levels of design and device integration;
• our ability to successfully introduce and transfer into production new products and/or integrate newtechnologies;
• increase in manufacturing costs;
• higher mask tooling costs associated with advanced technologies;
• the amount and timing of our investment in research and development;
• costs and business disruptions associated with stockholder or regulatory issues;
• the timing and amount of employer payroll tax to be paid on our employees’ gains on stock optionsexercised;
• inability to generate profits to utilize net operating loss;
• increased costs and time associated with compliance with new accounting rules or new regulatoryrequirements;
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• changes in accounting or other regulatory rules, such as the requirement to record assets and liabilities atfair value;
• fluctuations in interest rates and/or market values of our marketable securities;
• litigation costs associated with the defense of suits brought or complaints made against us; and
• changes in or continuation of certain tax provisions.
Our expense levels are based, in part, on expectations of future revenues and are, to a large extent, fixed inthe short-term. Our future revenues are difficult to predict and at times we have failed to achieve revenueexpectations. We may be unable to adjust spending in a timely manner to compensate for any unexpectedrevenue shortfall. If revenue levels are below expectations for any reason, operating results are likely to bematerially adversely affected.
Because a significant portion of our total assets are represented by goodwill and other intangible assets whichare subject to mandatory annual impairment evaluations, we could be required to write off some or all of ourgoodwill and other intangible assets, which may adversely impact our financial condition and results ofoperations.
We accounted for our merger with Sipex using the purchase method of accounting. A portion of thepurchase price for this business is allocated to identifiable tangible and intangible assets and assumed liabilitiesbased on estimated fair values at the date of consummation. The excess purchase price was allocated to goodwill.In accordance with the SFAS 142, Goodwill and Other Intangible Assets, goodwill is not amortized but isreviewed annually or more frequently if impairment indicators arise, for impairment. We conduct our annualanalysis of our goodwill in the fourth quarter of our fiscal year. Intangible assets that are subject to amortizationare reviewed for impairment in accordance with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that its carrying amount may not berecoverable.
In the fourth quarter of 2008, we conducted our annual impairment analysis of our goodwill and animpairment analysis of our long-lived assets, as our market capitalization was below its net book value for anextended period of time. We concluded that our carrying value of our goodwill and other intangible assetsacquired in the Sipex merger exceeded the implied fair value of these assets. As a result, we recorded animpairment charge of $165.2 million. There can be no assurance that when we perform future impairment tests,the carrying value of goodwill and other intangible assets would not exceed the implied fair value and thereforeadditional adjustments may be required. Such adjustment would result in a charge to operating income in thatperiod.
A significant portion of our total assets are represented by goodwill and other intangible assets, which, inaccordance with FAS 142, require an annual impairment review. Unlike other assets, goodwill cannot be definedas a stand-alone asset and must be valued as a residual of all other assets. The assessment of goodwill impairmentis a subjective process. Estimations and assumptions regarding future performance, results of our operations andcomparability of our market capitalization and its net book value will be used. Changes in estimates andassumptions could have adverse impact on our operating results and our effective tax rate.
We have incurred additional costs associated with the Sipex merger and may continue to incur costs relatingto the merger going forward.
We have incurred additional costs associated with the merger. We may incur additional charges tooperations in the quarters following the consummation of the merger associated with the integration. Weanticipate that the combination of the two companies will continue to require future cash outflows for assumedSipex liabilities and integration costs. If the benefits of the merger do not exceed the integration costs, ourfinancial results may be adversely impacted.
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We have made and in the future may make acquisitions and significant strategic equity investments, which mayinvolve a number of risks. If we are unable to address these risks successfully, such acquisitions and investmentscould have a materially adverse effect on our business, financial condition and results of operations.
We have undertaken a number of strategic acquisitions and investments in the past, including our recentmerger with Sipex, and may do so from time to time in the future. The risks involved with these acquisitions andinvestments include:
• the possibility that we may not receive a favorable return on our investment or incur losses from ourinvestment or the original investment may become impaired;
• failure to satisfy or set effective strategic objectives;
• our assumption of known or unknown liabilities or other unanticipated events or circumstances; and
• the diversion of management’s attention from day-to-day operations of the business.
Additional risks involved with acquisitions include:
• difficulties in integrating the operations, technologies, products and personnel of the acquired company orits assets;
• difficulties in supporting acquired products or technologies;
• difficulties or delays in the transfer of manufacturing flows and supply chains of products of acquiredbusinesses;
• failure to retain key personnel;
• failure to retain customers and/or customer programs;
• unexpected capital equipment outlays and related expenses;
• difficulties in entering markets or retaining current markets in which we have limited or no direct priorexperience and where competitors in such markets may have stronger market positions;
• insufficient revenues to offset increased expenses associated with acquisitions;
• under-performance problems with an acquired company;
• issuance of common stock that would dilute our current stockholders’ percentage ownership;
• reduction in liquidity and interest income on lower cash balance;
• recording of goodwill and intangible assets that will be subject to periodic impairment testing andpotential impairment charges against our future earnings;
• incurring amortization expenses related to certain intangible assets;
• the opportunity cost associated with committing capital in such investments;
• incurring large and immediate write-offs; and
• being subject to litigation.
Risks involved with strategic equity investments include:
• the possibility of litigation resulting from these types of investments;
• the possibility that we may not receive a financial return on our investments or incur losses from theseinvestments;
• a changed or poorly executed strategic plan; and
• the opportunity cost associated with committing capital in such investments.
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We may not be able to address these risks successfully without substantial expense, delay or otheroperational or financial problems. Any delays or other such operations or financial problems could adverselyimpact our business, financial condition and results of operations.
We are experiencing, and may continue to experience, unforeseen complications from the transfer ofmanufacturing processes to Hangzhou Silan Microelectronics Co. Ltd. and Hangzhou Silan IntegratedCircuit Co. Ltd. (collectively “Silan”) in China and Episil Technologies Inc. (“Episil”) in Taiwan.
Sipex transferred its manufacturing processes to foundries operated by Silan and Episil in conjunction withthe closure of its Milpitas, California wafer fabrication facility. The transfer has been and continues to be acomplicated and time-consuming process that has been met with significant unforeseen complications which hasdelayed the transfer and is requiring additional allocation of our resources. Additional unforeseen transferring orquality issues may arise in the future that could cause additional delays which could materially adversely impactour ability to timely produce our products to meet customer demand. In addition, the parties may be unable toachieve all or any of the expected benefits of the relationship within the anticipated time-frames. The anticipatedsynergies between us and Silan or Episil may not be as significant as originally expected. The manufacturingprocesses and wafer testing for certain products may not be qualified by us following the transfer from us toSilan or Episil, or the qualification process may take significantly longer than expected. This could result inadditional operating costs, loss of customers and business disruptions.
The complexity of our products may lead to errors, defects and bugs, which could subject us to significantcosts or damages and adversely affect market acceptance of our products.
Although we, our customers and our suppliers rigorously test our products, they may contain undetectederrors, weaknesses, defects or bugs when first introduced or as new versions are released. If any of our productscontain production defects, reliability, quality or compatibility problems that are significant to our customers, ourreputation may be damaged and customers may be reluctant to continue to buy our products, which couldadversely affect our ability to retain and attract new customers. In addition, these defects or bugs could interruptor delay sales of affected products, which could adversely affect our results of operations.
If defects or bugs are discovered after commencement of commercial production, we may be required tomake significant expenditures of capital and other resources to resolve the problems. This could result insignificant additional development costs and the diversion of technical and other resources from our otherdevelopment efforts. We could also incur significant costs to repair or replace defective products or may agree tobe liable for certain damages incurred. These costs or damages could have a material adverse effect on ourfinancial condition and results of operations.
If we fail to develop, introduce or enhance products that meet evolving market needs or which are necessitatedby technological advances, or we are unable to grow revenues, then our business, financial condition andresults of operations could be materially and adversely impacted.
The markets for our products are characterized by a number of factors, some of which are listed below:
• changing technologies;
• evolving and competing industry standards;
• changing customer requirements;
• increasing price pressure;
• increasing product development costs;
• long design-to-production cycles;
• competitive solutions;
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• fluctuations in capital equipment spending levels and/or deployment;
• rapid adjustments in customer demand and inventory;
• increasing functional integration;
• moderate to slow growth;
• frequent product introductions and enhancements;
• changing competitive landscape (consolidation, financial viability);
• finite market windows for product introductions; and
• short end market product life cycles.
Our growth depends in part on our successful development and acceptance of new products for our coremarkets. We must: (i) anticipate customer and market requirements and changes in technology and industrystandards; (ii) properly define and develop new products on a timely basis; (iii) gain access to and usetechnologies in a cost-effective manner; (iv) have suppliers produce quality products; (v) continue to expand ourtechnical and design expertise; (vi) introduce and cost-effectively manufacture new products on a timely basis;(vii) differentiate our products from our competitors’ offerings; and (viii) gain customer acceptance of ourproducts. In addition, we must continue to have our products designed into our customers’ future products andmaintain close working relationships with key customers to define and develop new products that meet theirevolving needs. Moreover, we must respond in a rapid and cost-effective manner to shifts in market demands, thetrend towards increasing functional integration and other changes. Migration from older products to newerproducts may result in volatility of earnings.
Products for our customers’ applications are based on continually evolving industry standards and newtechnologies. Our ability to compete will depend in part on our ability to identify and ensure compliance withthese industry standards. The emergence of new standards could render our products incompatible. We could berequired to invest significant time, effort and expenses to develop and qualify new products to ensure compliancewith industry standards.
The process of developing and supporting new products is complex, expensive and uncertain, and if we failto accurately predict and understand our customers’ changing needs and emerging technological trends, ourbusiness may be harmed. In addition, we may make significant investments to modify new products according toinput from our customers who may choose a competitor’s or an internal solution, or cancel their projects. Wemay not be able to identify new product opportunities successfully, develop and bring to market new products,achieve design wins, ensure when and which design wins actually get released to production, or respondeffectively to technological changes or product announcements by our competitors. In addition, we may not besuccessful in developing or using new technologies or may incorrectly anticipate market demand and developproducts that achieve little or no market acceptance. Our pursuit of technological advances may requiresubstantial time and expense and may ultimately prove unsuccessful. Failure in any of these areas may materiallyand adversely harm our business, financial condition and results of operations.
If we are unable to convert a significant portion of our design wins into revenue, our business, financialcondition and results of operations could be materially and adversely impacted.
We have secured a significant number of design wins for new and existing products. Such design wins arenecessary for revenue growth. However, many of our design wins may never generate revenues if theirend-customer projects are unsuccessful in the market place or the end-customer terminates the project, whichmay occur for a variety of reasons. Mergers and consolidations among our customers may lead to termination ofcertain projects before the associated design win generates revenue. If design wins do generate revenue, the timelag between the design win and meaningful revenue is typically between six months to greater than eighteenmonths. If we fail to convert a significant portion of our design wins into substantial revenue, our business,financial condition and results of operations could be materially and adversely impacted.
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If we are unable to accurately forecast demand for our products, we may be unable to efficiently manage ourinventory.
Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventorylevels based on customer forecasts, internal evaluation of customer demand and current backlog, which canfluctuate substantially. As a consequence of inaccuracies inherent in forecasting, inventory imbalancesperiodically occur that result in surplus amounts of some of our products and shortages of others. Such shortagescan adversely impact customer relations and surpluses can result in larger-than-desired inventory levels, whichcan adversely impact our financial position.
The general state of the U.S. and global economies, as well as our market, may materially and adverselyimpact our business, financial condition and results of operations.
Periodic declines or fluctuations in the U.S. Dollar, corporate profits, lower spending, the impact of conflictsthroughout the world, terrorist acts, natural disasters, volatile energy costs, the outbreak of communicablediseases and other geopolitical factors have had, and may continue to have, a negative impact on the U.S. andglobal economies. Our revenue and profitability have generally followed market fluctuations in our industry,which fluctuations have affected the demand for our own and our customers’ products, thus affecting ourrevenues and profitability. Our customers continue to experience consolidation in their industries which mayresult in project delays or cancellations. We are unable to predict the strength or duration of current marketconditions or effects of consolidation. Uncertainties in anticipated spending levels or further consolidation mayadversely affect our business, financial condition and results of operations.
Our business may be adversely impacted if we fail to effectively utilize and incorporate acquired technology.
We have acquired and may in the future acquire intellectual property to accelerate our time to market fornew products. Acquisitions of intellectual property may involve risks such as successful technical integration intonew products, market acceptance of new products and achievement of planned return on investment. Successfultechnical integration in particular requires a variety of factors which we may not currently have, such as availabletechnical staff with sufficient time to devote to integration, the requisite skill sets to understand the acquiredtechnology and the necessary support tools to effectively utilize the technology. The timely and efficientintegration of acquired technology may be adversely impacted by inherent design deficiencies or applicationrequirements. The potential failure of or delay in product introduction utilizing acquired intellectual propertycould lead to an impairment of capitalized intellectual property acquisition costs.
If we are unable to compete effectively with existing or new competitors, we will experience fewer customerorders, reduced revenues, reduced gross margins and lost market share.
We compete in markets that are intensely competitive, and which are subject to both rapid technologicalchange and continued price erosion. Our competitors include many large domestic and foreign companies thathave substantially greater financial, technical and management resources and leverage than we have.
We have experienced increased competition at the design stage, where customers evaluate alternativesolutions based on a number of factors, including price, performance, product features, technologies, andavailability of long-term product supply and/or roadmap guarantee. Additionally, we experience, in some cases,severe pressure on pricing from some of our competitors or on-going cost reduction expectations from customers.Such circumstances may make some of our products unattractive due to price or performance measures and resultin losing our design opportunities or causing a decrease in our revenue and margins. Also, competition from newcompanies in emerging economy countries with significantly lower costs could affect our selling price and grossmargins. In addition, if competitors in Asia reduce prices on commodity products, it would adversely affect ourability to compete effectively in that region. Specifically, we have licensed rights to Silan to market ourcommodity interface products that could reduce our sales in the future. Loss of competitive position could resultin price reductions, fewer customer orders, reduced revenues, reduced gross margins and loss of market share,
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any of which would affect our operating results and financial condition. To remain competitive, we continue toevaluate our manufacturing operations, looking for additional cost savings and technological improvements. Ifwe are unable to successfully implement new process technologies and to achieve volume production of newproducts at acceptable yields, our operating results and financial condition may be affected. Our futurecompetitive performance depends on a number of factors, including our ability to:
• increase device performance and improve manufacturing yields;
• accurately identify emerging technological trends and demand for product features and performancecharacteristics;
• develop and maintain competitive products;
• enhance our products by adding innovative features that differentiate our products from those of ourcompetitors;
• bring products to market on a timely basis at competitive prices;
• respond effectively to new technological changes or new product announcements by others;
• adapt products and processes to technological changes;
• adopt or set emerging industry standards; and
• meet changing customer requirements.
There can be no assurance that our design, development and introduction schedules for new products orenhancements to our existing and future products will be met. In addition, there can be no assurance that theseproducts or enhancements will achieve market acceptance, or that we will be able to sell these products at pricesthat are favorable.
If our distributors or sales representatives stop selling or fail to successfully promote our products, ourbusiness, financial condition and results of operations could be adversely impacted.
We sell many of our products through sales representatives and distributors, many of which sell directly toOEMs, contract manufacturers and end customers. Our non-exclusive distributors and sales representatives maycarry our competitors’ products, which could adversely impact or limit sales of our products. Additionally, theycould reduce or discontinue sales of our products or may not devote the resources necessary to sell our productsin the volumes and within the time frames that we expect. Our agreements with distributors contain limitedprovisions for return of our products, including stock rotations whereby distributors may return a percentage oftheir purchases from us based upon a percentage of their most recent three months of shipments. In addition, incertain circumstances upon termination of the distributor relationship, distributors may return some portion oftheir prior purchases. The loss of business from any of our significant distributors or the delay of significantorders from any of them, even if only temporary, could materially and adversely harm our business, financialconditions and results of operations.
Moreover, we depend on the continued viability and financial resources of these distributors and salesrepresentatives, some of which are small organizations with limited working capital. In turn, these distributorsand sales representatives are subject to general economic and semiconductor industry conditions. We believe thatour success will continue to depend on these distributors and sales representatives. If some or all of ourdistributors and sales representatives experience financial difficulties, or otherwise become unable or unwillingto promote and sell our products, our business, financial condition and results of operations could be adverselyimpacted.
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We derive a substantial portion of our revenues from our two primary distributors, Future, a related party,and Nu Horizons. Our revenues would likely decline significantly if our primary distributors elected not topromote or sell our products or if they elected to cancel, reduce or defer purchases of our products.
Future and Nu Horizons have historically accounted for a significant portion of our revenues, and they areour two primary distributors worldwide. We anticipate that sales of our products to these distributors willcontinue to account for a significant portion of our revenues. The loss of Future and Nu Horizons as distributors,or a significant reduction in orders from them would materially and adversely affect our operating results,business and financial condition.
Sales to Future and Nu Horizons are made under agreements that provide protection against price reductionfor their inventory of our products. As such, we could be exposed to significant liability if the inventory value ofthe products held by Future and Nu Horizons declined dramatically. Our distributor agreements with Future andNu Horizons do not contain minimum purchase commitments. As a result, Future and Nu Horizons could ceasepurchasing our products with short notice or cease distributing these products. In addition, they may defer orcancel orders without penalty, which would likely cause our revenues to decline and materially and adverselyimpact our business, financial condition and results of operations.
Affiliates of Future, Alonim Investments Inc. and its two affiliates (collectively “Alonim”), own approximately18% of our common stock, and as such, Alonim is our largest stockholder. This ownership position will allowFuture to significantly influence matters requiring stockholders’ approval. Future’s ownership will continue toincrease as a percentage of our outstanding stocks if we continue to repurchase our common stock. In addition,an executive officer of Future is on our board of directors, which could lead to actual or imputed influence fromFuture.
As a result of our merger with Sipex, an affiliate of Future, our largest distributor, owns a significantpercentage of our outstanding shares and Pierre Guilbault, the chief financial officer of Future, is a member ofour board of directors. Due to its affiliate’s ownership of a significant percentage of our common stock, Futuremay be able to exert strong influence over, actions requiring the approval of our stockholders, including theelection of directors, many types of change of control transactions and amendments to our charter documents,although Future is bound by a Lock-Up and Standstill Agreement until August 25, 2009, prohibiting Future fromeither soliciting proxies or seeking to advise anyone with respect to voting our stock. The significant ownershippercentage of Future could have the effect of delaying or preventing a change of control or otherwisediscouraging a potential acquirer from obtaining control of us. Conversely, by virtue of Future’s percentageownership of our stock, Future could facilitate a takeover transaction that our board of directors did not approve,although, by the terms of the same Lock-Up and Standstill Agreement, Future is prohibited from making anypublic announcements with respect to, or proposing, any extraordinary transaction involving us until the firstanniversary of the merger date.
This relationship could also result in actual or imputed attempts to influence management to take actionsbeneficial to Future which may or may not be beneficial to us or in our best interests. Future could attempt toobtain terms and conditions more favorable than those we would typically provide our distributors because of itsrelationship with us. Any such actual or perceived preferential treatment could materially and adversely affectour business, financial condition and results of operations.
We depend on third-party foundries to manufacture our products. Any disruption in or loss of the foundries’capacity to manufacture our products subjects us to a number of risks, which include the potential for aninadequate supply of products and higher materials costs. These risks may lead to delayed product delivery orincreased costs, which could materially and adversely impact our business, financial condition and results ofoperations.
We do not own or operate a semiconductor fabrication facility or a foundry. We utilize various foundries fordifferent processes. Our products are based on complementary metal oxide semiconductor (CMOS), Bipolarprocesses and Bipolar-CMOS (BiCMOS) process. Chartered Semiconductor Manufacturing Ltd., or Chartered,
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located in Singapore, manufactures the majority of the CMOS wafers from which our communications andUART products are produced. Episil, located in Taiwan, and Silan, located in China, manufacture the majority ofwafers from which our power and serial products are produced. High Voltage BiCMOS power products aresupplied by Polar Semiconductor (MN, USA) and Jazz Semiconductor (CA, USA). All of these foundriesproduce semiconductors for many other companies (many of which have greater requirements than us), andtherefore, we may not have access on a timely basis to sufficient capacity or certain process technologies. Inaddition, we rely on our foundries continued financial health and ability to continue to invest in smaller geometrymanufacturing processes and additional wafer processing capacity.
The manufacturing processes for our products are highly complex and are continuously being modified in aneffort to improve yields and product performance. Many of our new products are designed to take advantage ofsmaller geometry manufacturing processes. Due to the complexity and increased cost of migrating to smallergeometries as well as process changes, we could experience interruptions in production or significantly reducedyields causing product introduction or delivery delays. If such delays occur, our products may have delayedmarket acceptance or customers may select our competitors’ products during the design process. In addition,yields can be adversely affected by minute impurities in the environment or other problems that occur in thecomplex manufacturing process. Many of these problems are difficult to diagnose and are time-consuming orexpensive to remedy. In particular, new process technologies or new products can be subject to especially widevariations in manufacturing yields and efficiency. There can be no assurance that our foundries or the foundriesof our suppliers will not experience unfavorable yield variances or other manufacturing problems that result indelayed product introduction or delivery delays. This risk is particularly significant in the near term as we haverecently transferred certain of our manufacturing processes to Silan and Episil.
We do not have long-term wafer supply agreements with Chartered that would guarantee wafer quantities,prices, and delivery or lead times, but we do provide minimum purchase commitments to Silan and Episil inaccordance with our supply agreements. Subject to any such minimum purchase commitments, these foundriesmanufacture our products on a purchase order basis. We provide Chartered and our other foundries with rollingforecasts of our production requirements. However, the ability of our foundries to provide wafers is limited bythe foundries’ available capacity. There can be no assurance that our third-party foundries will allocate sufficientcapacity to satisfy our requirements. Furthermore, any sudden reduction or elimination of any primary source orsources of fully processed wafers could result in a material delay in the shipment of our products. Any delays orshortages will materially and adversely impact our business, financial conditions and operating results.
In addition, we cannot be certain that we will continue to do business with our foundries on terms asfavorable as our current terms. Significant risks associated with our reliance on third-party foundries include:
• the lack of assured process technology and wafer supply;
• limited control over quality assurance, manufacturing yields and production costs;
• financial and operating stability of the foundries;
• limited control over delivery schedules;
• limited manufacturing capacity of the foundries; and
• potential misappropriation of our intellectual property.
We could experience a substantial delay or interruption in the shipment of our products or an increase in ourcosts due to any of the following:
• a manufacturing disruption experienced by foundries utilized by us or sudden reduction or elimination ofany existing source or sources of semiconductor manufacturing materials or processes, which mightinclude the potential closure, change of ownership, change of management or consolidation by one of ourfoundries;
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• extended time required to identify, qualify and transfer to alternative manufacturing sources for existingor new products;
• failure of our foundries to obtain raw materials and equipment;
• financial and operating stability of the foundries or any of their suppliers;
• acts of terrorism or civil unrest or an unanticipated disruption due to communicable diseases, politicalinstability or natural disasters;
• a sudden, sharp increase in demand for semiconductor devices, which could strain the foundries’manufacturing resources and cause delays in manufacturing and shipment of our products; and
• manufacturing quality control or process control issues.
To secure foundry capacity, we may be required to enter into financial and other arrangements withfoundries, which could result in the dilution of our earnings or otherwise harm our operating results.
Allocation of a foundry’s manufacturing capacity may be influenced by a foundry customer’s size, theexistence of a long-term agreement with the foundry or other commitments. To address foundry capacityconstraints, we and other semiconductor companies that rely on third-party foundries have utilized variousarrangements, including equity investments in or loans to foundries in exchange for guaranteed productioncapacity, joint ventures to own and operate foundries or “take or pay” contracts that commit a company topurchase specified quantities of wafers over extended periods. These arrangements may not be available to us onacceptable terms, if at all. Any of these arrangements could require us to commit substantial capital and,accordingly, could require us to reduce our cash holdings, incur additional debt or secure equity financing. Thiscould result in the dilution of our earnings or the ownership of our stockholders or otherwise harm our operatingresults. Furthermore, we may not be able to obtain sufficient foundry capacity in the future pursuant to sucharrangements.
If our foundries discontinue or limit the availability of the manufacturing processes needed to meet ourdemands or are unable to provide the technologies needed to manufacture our products, we may faceproduction delays or be forced to terminate affected products, which could materially and adversely impactour business, financial condition and results of operations.
Our wafer requirements represent a small portion of the total production of the foundries that manufactureour products. As a result, we are subject to the risk that a foundry may cease production of a wafer fabricationprocess required by us. Additionally, we cannot be certain that our foundries will continue to devote resources tothe production of our products or continue to advance the process design technologies on which themanufacturing of our products are based. Each of these events could increase our costs and harm our ability todeliver our products on time, or force us to terminate affected products, thereby materially and adverselyaffecting our business, financial condition and results of operations.
Our dependence on third-party subcontractors to assemble and test our products subjects us to a number ofrisks, including the potential for an inadequate supply of products and higher materials costs. These risks maylead to delayed product delivery or increased costs, which could materially and adversely affect our business,financial condition and results of operations.
We depend on independent subcontractors in Asia for all of the assembly and the majority of the testing andshipping of our products to end customers. Our reliance on these subcontractors involves the following risks:
• our reduced control over manufacturing yields, production schedules and product quality;
• the potential closure, change of ownership, change in business conditions or relationships, change ofmanagement or consolidation by one or more of our subcontractors;
• possible unavailability of qualified assembly or test services;
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• the subcontractors may cease production on a specific package type used to assemble product required byus and the possible inability to obtain an alternate source to supply the package;
• potential increases in assembly and test costs;
• long-term financial stability of our subcontractors and their ability to invest in new capabilities and/orexpand capacity to meet increasing demand;
• disruption of services due to the outbreak of communicable diseases, acts of terrorism, natural disasters,labor disputes or civil unrest;
• disruption of manufacturing or test services due to relocation of subcontractor manufacturing facilities;
• subcontractors imposing higher minimum order quantities for substrates;
• failure of our subcontractors to obtain raw materials and equipment;
• increasing cost of raw materials resulting in higher package costs;
• entry into “take-or-pay” agreements;
• additional costs to qualify new local assembly subcontractors for prototypes;
• difficulties in selecting, qualifying and integrating new subcontractors;
• reallocation or limited manufacturing capacity of the subcontractors;
• a sudden, sharp increase in demand for semiconductor devices, which could strain our subcontractor’smanufacturing resources and cause delays in manufacturing and shipment of our products;
• limited warranties from our subcontractors for products assembled and tested for us; and
• third-party subcontractors’ abilities to transition to smaller package types and to new packagecompositions.
These risks may lead to shipment delays and supply constraints of our products or increased cost for thefinished products, either of which could adversely affect our business, financial condition or results of operations.
Our ability to meet current demand or any increase in demand for our products may be limited by our abilityto test our semiconductor wafers.
As part of our manufacturing process, we must test many of our semiconductor wafers using certain “probetesting” equipment. As such, our ability to meet current demand or any increase in demand for our productsdepends, in part, on our ability to purchase and install sufficient testing equipment. Obtaining and installing thisequipment is a time and capital intensive process and depends on our ability to accurately predict future sales. Ifwe are unable to estimate future sales correctly or we are unable to obtain the necessary testing equipment on atimely basis, we may be unable to meet the current demand or any increased demand for our products.
Our reliance on foreign suppliers exposes us to risks associated with international operations, any of whichcould materially and adversely impact our business, financial condition and results of operations.
We use semiconductor wafer foundries and assembly and test subcontractors throughout Asia tomanufacture a significant portion of our products. Our dependence on these subcontractors involves thefollowing risks:
• disruption of services due to political, civil, labor and economic instability;
• disruption of services due to natural disasters or outbreak of communicable diseases;
• disruption of transportation to and from Asia;
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• embargoes or other regulatory limitations affecting the availability of raw materials, equipment orchanges in tax laws, tariffs, services and freight rates; and
• compliance with local or international regulatory requirements.
These risks may lead to delays in product delivery or increased costs, either of which could harm ourprofitability and customer relationships, thereby materially and adversely impacting our business, financialcondition and results of operations.
We depend in part on the continued service of our key engineering and management personnel and our abilityto identify, hire, incentivize and retain qualified personnel. If we lose key employees or fail to identify, hire,incentivize and retain these individuals, our business, financial condition and results of operations could bematerially and adversely impacted.
Our future success depends, in part, on the continued service of our key design engineering, technical, sales,marketing and executive personnel and our ability to identify, hire, incentivize and retain other qualifiedpersonnel.
The success of the merger will depend in part on the retention of personnel critical to the business andoperations of the combined company due to, for example, their technical skills or management expertise. Currentand prospective employees may experience uncertainty about their future roles with us. In addition, competitorsmay recruit employees during our integration, as is common in high technology mergers. If we are unable toretain personnel that are critical to successful integration and our future operations, we could face disruptions inoperations, loss of existing customers, loss of key information, expertise or know-how, and unanticipatedadditional recruitment and training costs.
In the future, we may not be able to attract and retain qualified personnel, including executive officers andother key management and technical personnel necessary for the management of our business. Competition forskilled employees having specialized technical capabilities and industry-specific expertise is intense andcontinues to be a considerable risk inherent in the markets in which we compete. Volatility or lack of positiveperformance in our stock price and the ability to offer equity compensation to as many key employees or inamounts consistent with past practices, as a result of regulations regarding the expensing of equity awards, mayalso adversely affect our ability to retain key employees, all of whom have been granted equity awards. Ouremployees are employed at-will, which means that they can terminate their employment at any time. The failureto retain and recruit, as necessary, key design engineers, technical, sales, marketing and executive personnelcould harm our business, financial condition and results of operations.
Our results of operations could vary as a result of the methods, estimations and judgments we use in applyingour accounting policies.
The methods, estimates and judgments we use in applying our accounting policies have a significant impacton our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantialrisks, uncertainties, assumptions and changes in rulemaking by the regulatory bodies; and factors may arise overtime that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates andjudgments could significantly impact our results of operations. Our change in the revenue recognition used forsales to our two primary distributors from sell-in to sell-through basis has impacted our financial results asrevenues and costs which had been recognized upon sell-in to these distributors are now deferred until these twodistributors sell-through to their customers. The delay in revenue recognition has unfavorably affected ourcurrent period operating results.
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The final determination of our income tax liability may be materially different from our income tax provision,which could have an adverse effect on our results of operations.
Our future effective tax rates may be adversely affected by a number of factors including:
• the jurisdictions in which profits are determined to be earned and taxed;
• the resolution of issues arising from tax audits with various tax authorities;
• changes in the valuation of our deferred tax assets and liabilities;
• adjustments to estimated taxes upon finalization of various tax returns;
• increases in expenses not deductible for tax purposes, including write-offs of acquired in-process researchand development and impairment of goodwill in connection with mergers;
• changes in available tax credits;
• changes in share-based compensation expense;
• changes in tax laws or the interpretation of such tax laws and changes in generally accepted accountingprinciples; and/or
• the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
Any significant increase in our future effective tax rates could adversely impact net income for futureperiods. In addition, the U.S. Internal Revenue Service (IRS) and other tax authorities regularly examine ourincome tax returns. Our results of operations could be adversely impacted if these assessments or any otherassessments resulting from the examination of our income tax returns by the IRS or other taxing authorities arenot resolved in our favor.
We acquired significant net operating loss (“NOL”) carryforwards as a result of the Sipex merger. Theutilization of acquired NOL carryforwards is subject to IRS’s complex limitation rules that carry significantburdens of proof. The eventual ability to utilize our estimated NOL carryforwards is subject to IRS scrutiny andour future results may not benefit as a result of potential unfavorable IRS rulings.
Our engagement with foreign customers could cause fluctuations in our operating results, which couldmaterially and adversely impact our business, financial condition and results of operations.
International sales have accounted for, and will likely continue to account for a significant portion of ourrevenues, which subjects us to the following risks:
• changes in regulatory requirements;
• tariffs and other barriers;
• timing and availability of export or import licenses;
• disruption of services due to political, civil, labor, and economic instability;
• disruption of services due to natural disasters outside the United States;
• disruptions to customer operations outside the United States due to the outbreak of communicablediseases;
• difficulties in accounts receivable collections;
• difficulties in staffing and managing foreign subsidiary and branch operations;
• difficulties in managing sales channel partners;
• difficulties in obtaining governmental approvals for communications and other products;
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• limited intellectual property protection;
• foreign currency exchange fluctuations;
• the burden of complying with foreign laws and treaties; and
• potentially adverse tax consequences.
In addition, because sales of our products have been denominated primarily in U.S. dollars, increases in thevalue of the U.S. dollar as compared with local currencies could make our products more expensive to customersin the local currency of a particular country resulting in pricing pressures on our products. Increased internationalactivity in the future may result in foreign currency denominated sales. Furthermore, because some of ourcustomers’ purchase orders and agreements are governed by foreign laws, we may be limited in our ability, or itmay be too costly for us, to enforce our rights under these agreements and to collect damages, if awarded.
Because some of our integrated circuits products have lengthy sales cycles, we may experience substantial delaysbetween incurring expenses related to product development and the revenue derived from these products.
A portion of our revenue is derived from selling integrated circuits to communications equipment vendors.Due to their product development cycle, we have typically experienced at least an eighteen-month time lapsebetween our initial contact with a customer and realizing volume shipments. We first work with customers toachieve a design win, which may take nine months or longer. Our customers then complete their design, test andevaluation process and begin to ramp-up production, a period which typically lasts an additional nine months.The customers of communications equipment manufacturers may also require a period of time for testing andevaluation, which may cause further delays. As a result, a significant period of time may elapse between ourresearch and development efforts and our realization of revenue, if any, from volume purchasing of ourcommunications products by our customers. Due to the length of the communications equipment vendors’product development cycle, the risks of project cancellation by our customers, price erosion or volume reductionare present for an extended period of time.
Our backlog may not result in revenue.
Due to the possibility of customer changes in delivery schedules and quantities actually purchased,cancellation of orders, distributor returns or price reductions, our backlog at any particular date is not necessarilyindicative of actual sales for any succeeding period. We may not be able to meet our expected revenue levels orresults of operations if there is a reduction in our order backlog during any particular period and we are unable toreplace those sales during the same period.
Fixed operating expenses and our practice of ordering materials in anticipation of projected customer demandcould make it difficult for us to respond effectively to sudden swings in demand and result in higher thanexpected costs and excess inventory. Such sudden swings in demand could therefore have a material adverseimpact on our business, financial condition and results of operations.
Our operating expenses are relatively fixed in the short to medium term, and therefore, we have limitedability to reduce expenses quickly and sufficiently in response to any revenue shortfall. In addition, we typicallyplan our production and inventory levels based on forecasts of customer demand, which is highly unpredictableand can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventoryand materials from our outside suppliers and foundries, we may order materials in advance of anticipatedcustomer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. This incremental cost could have a materially adverse impact on ourbusiness, financial condition and results of operations.
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We may be unable to protect our intellectual property rights, which could harm our competitive position.
Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on acombination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality proceduresand non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts,we may be unable to protect our proprietary information. Such intellectual property rights may not be recognizedor if recognized, it may not be commercially feasible to enforce. Moreover, we cannot be certain that ourcompetitors will not independently develop technology that is substantially similar or superior to our technology.
More specifically, our pending patent applications or any future applications may not be approved, and anyissued patents may not provide us with competitive advantages or may be challenged by third parties. Ifchallenged, our patents may be found to be invalid or unenforceable, and the patents of others may have anadverse effect on our ability to do business. Furthermore, others may independently develop similar products orprocesses, duplicate our products or processes or design around any patents that may be issued to us.
We could be required to pay substantial damages or could be subject to various equitable remedies if it wereproven that we infringed the intellectual property rights of others.
As a general matter, the semiconductor industry is characterized by substantial litigation regarding patentsand other intellectual property rights. If a third party were to prove that our technology infringed its intellectualproperty rights, we could be required to pay substantial damages for past infringement and could be required topay license fees or royalties on future sales of our products. If we were required to pay such license feeswhenever we sold our products, such fees could exceed our revenue. In addition, if it were proven that wewillfully infringed a third party’s proprietary rights, we could be held liable for three times the amount of thedamages that we would otherwise have to pay. Such intellectual property litigation could also require us to:
• stop selling, incorporating or using our products that use the infringed intellectual property;
• obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectualproperty, which license may not be available on commercially reasonable terms, if at all; and/or
• redesign our products so as not to use the infringed intellectual property, which may not be technically orcommercially feasible.
The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive andcould require a significant portion of management’s time. In addition, rather than litigating an infringementmatter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include thepayment of damages and our agreement to license technology in exchange for a license fee and ongoingroyalties. These fees could be substantial. If we were required to pay damages or otherwise became subject tosuch equitable remedies, our business, financial condition and results of operations would suffer. Similarly, if wewere required to pay license fees to third parties based on a successful infringement claim brought against us,such fees could exceed our revenue.
Occasionally, we enter into agreements that expose us to potential damages that exceed the value of theagreement.
We have given certain customers increased indemnification for product deficiencies that is in excess of thestandard limited warranty indemnification and could possibly result in greater costs, in excess of the originalcontract value. In an attempt to limit this liability, we have also increased our errors and omissions insurancepolicy to partially offset these potential additional costs; however, our insurance coverage could be insufficient toprevent us from suffering material losses if the indemnification amounts are large enough.
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Earthquakes and other natural disasters may damage our facilities or those of our suppliers and customers.
Our corporate headquarters in Fremont, California is located near major earthquake faults that haveexperienced seismic activity. In addition, some of our customers and suppliers are in locations which may besubject to similar natural disasters. In the event of a major earthquake or other natural disaster near ourheadquarters, our operations could be disrupted. Similarly, a major earthquake or other natural disaster affectingone or more of our major customers or suppliers could adversely impact the operations of those affected, whichcould disrupt the supply of our products and harm our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive offices and our marketing and sales, research and development, manufacturing, test andengineering operations are located in Fremont, California in two adjacent buildings that we own, which consist ofapproximately 151,000 square feet. Additionally, we own approximately 4.5 acres of partially developedproperty adjacent to our headquarters, which is presently being held for future office expansion.
We also lease smaller facilities in Belgium, Canada, China, Germany, Japan, Korea, Malaysia, Taiwan andthe United States, which are occupied by administrative offices, sales offices, design centers and field applicationengineers.
Based upon our estimates of future hiring, we believe that our current facilities will be adequate to meet ourrequirements at least through the next fiscal year.
We also lease one additional building in California, totaling approximately 95,700 square feet, which issubleased to a tenant. The sublease began on April 15, 2008 and expires March 31, 2011. For further discussionof this facility and its effect on our financial condition and results of operations, see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Part II,Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements,Note 14—Lease Financing Obligation and Note 20—Subsequent Event.”
ITEM 3. LEGAL PROCEEDINGS
Information required by this item is set forth in Part II, Item 8—“Financial Statements and SupplementaryData” and “Notes to Consolidated Financial Statements, Note 16—Legal Proceedings” of this Annual Report onForm 10-K and is incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth fiscal quarter of 2008.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on The NASDAQ Global Market under the symbol “EXAR.” The followingtable set forth the range of high and low sales prices of our common stock for the periods indicated, as reportedby The NASDAQ Global Market.
Common StockPrices
High Low
FISCAL 2008Fourth quarter ended March 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.50 $ 6.50Third quarter ended December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . $13.51 $ 7.60Second quarter ended September 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . $15.24 $12.57First quarter ended June 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.26 $13.06
FISCAL 2007Fourth quarter ended March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.15 $12.73Third quarter ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . $14.11 $12.45Second quarter ended September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . $14.44 $11.95First quarter ended June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.75 $12.45
The closing sales price for our common stock on May 23, 2008, was $7.50 per share. As of May 23, 2008,the approximate number of record holders of our common stock was 203 (not including beneficial owners ofstock held in street name).
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and we do not currently intend topay any cash dividends on our common stock. We expect to retain future earnings, if any, to fund thedevelopment and growth of our business. Any future determination to pay dividends on our common stock willbe, subject to applicable law, at the discretion of our board of directors and will depend upon, among otherfactors, our results of operations, financial condition, capital requirements and contractual restrictions.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can befound under Part III, Item 12 of this Annual Report on Form 10-K and is incorporated herein by reference.
Issuer Purchases of Equity Securities
From time to time, we acquire outstanding common stock in the open market to partially offset dilutionfrom our stock awards program, to increase our return on our invested capital and to bring our cash to a moreappropriate level for our company. At March 30, 2008, approximately $25.3 million remained available underour previously announced program. We may continue to utilize the stock purchase program, which would reduceour cash, cash equivalents and/or short-term investments available to fund future operations and to meet otherliquidity requirements.
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Our stock repurchase activities for the fourth fiscal quarter of 2008 were as follows:
Fiscal Period
TotalNumber of
SharesPurchased(1)
AveragePrice
Paid perShare(1)
TotalNumber of
SharesPurchasedas Part ofPublicly
AnnouncedPlans or
Programs(2)
MaximumDollar Valueof Shares thatMay Yet BePurchased
Under the Plansor Programs
(in thousands)(2)
Balance as of December 30, 2007 . . . . . 6,281,721 $12.69 6,271,721 $60,25412/31/07—01/27/08 . . . . . . . . . . . . . . . . 1,740,528 7.53 1,740,528 $47,15201/28/08—02/24/08 . . . . . . . . . . . . . . . . 1,577,952 7.83 1,577,952 $34,79402/25/08—03/30/08 . . . . . . . . . . . . . . . . 1,187,820 8.03 1,187,820 $25,260
Total shares purchased . . . . . . . . . . . . . . 4,506,300 $ 7.77 4,506,300
Balance as of March 30, 2008 . . . . . . . . 10,788,021 $10.64 10,778,021
(1) Under publicly announced plan or program.(2) On August 28, 2007, we established a new share repurchase plan (“2007 SRP”) and authorized the
repurchase of up to $100 million of our common stock over the next twelve months. The 2007 SRP was inaddition to a share repurchase plan announced in March 6, 2001 (“2001 SRP”), which covered therepurchase of up to $40 million of our common stock. The shares repurchased under the 2001 SRP fullyutilized the $40 million authorization at December 30, 2007. As of March 30, 2008, the remainingauthorized amount for stock repurchase under the 2007 SRP was $25.3 million with no termination date.
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Stock Price Performance
The following table and graph showed a five-year comparison of cumulative total stockholder returns forExar, The NASDAQ Composite Index, and The NASDAQ Electronic Components Index (SIC code 3670-3679).The table and graph assumed the investment of $100 in stock or index on March 31, 2003 and that all dividends,if any, were reinvested. We have never paid cash dividends on our common stock. The performance shown is notnecessarily indicative of future performance.
3/03 6/03 9/03 12/03 3/04 6/04 9/04 12/04 3/05 6/05 9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08
Exar Corporation
NASDAQ Composite
NASDAQ Electronic Components
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Exar Corporation, The NASDAQ Composite Index
And The NASDAQ Electronic Components Index
$0
$50
$100
$150
$200
$250
* $100 invested on 3/31/03 in stock or index-including reinvestment of dividends.
Cumulative Total Return as of
March 31,2003
March 31,2004
March 31,2005
March 31,2006
March 31,2007
March 30,2008
Exar Corporation Stock . . . . . . . . . . . . . . . . . . 100.00 144.77 105.43 112.35 104.17 64.77NASDAQ Composite Index . . . . . . . . . . . . . . 100.00 151.01 152.38 181.06 189.63 177.49NASDAQ Electronic Components Index . . . . 100.00 172.38 143.55 159.34 147.79 144.65
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ITEM 6. SELECTED FINANCIAL DATA
On August 25, 2007, we acquired Sipex through the merger of Exar and a subsidiary of ours. The mergerwas accounted for as a purchase. Accordingly, the results of operations of Sipex were included in ourconsolidated financial statements beginning August 26, 2007. See Part II, Item 8—“Financial Statements andSupplementary Data” and “Notes to Consolidated Financial Statements, Note 3—Business Combinations.”
The following selected financial data should be read in conjunction with the consolidated financialstatements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included in Part II, Item 7 of this Report.
For Fiscal Years Ended
March 30,2008(5)
March 31,2007(4)
March 31,2006(3)
March 31,2005(2)
March 31,2004(1)
(In thousands except per share amount)
Consolidated Statements of Operations Data:Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,743 $ 68,502 $ 67,024 $ 57,369 $ 67,196Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,112 46,534 45,475 39,156 43,959Income (loss) from operations . . . . . . . . . . . . . . . . . . (202,438) (4,229) (507) (2,321) 2,747Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195,879) 8,024 7,786 5,319 4,636
Net Income (loss) per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4.55) $ 0.22 $ 0.20 $ 0.13 $ 0.11Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4.55) $ 0.22 $ 0.20 $ 0.13 $ 0.11
Shares used in computation of net income (loss)per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,090 36,255 38,152 41,532 40,656Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,090 36,480 38,510 42,423 42,510
Consolidated Balance Sheets Data:Cash, cash equivalents and short-term investments . . $ 268,860 $356,079 $329,528 $446,285 $436,996Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,060 357,068 335,896 447,292 437,881Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,220 421,174 401,397 503,203 495,885Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . 18,091 191 222 265 265Retained earnings (accumulated deficit) . . . . . . . . . . . (97,480) 98,164 90,140 82,354 77,035Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $ 371,077 $406,756 $387,405 $490,047 $480,271
(1) Fiscal 2004 included impairment charges of $6.0 million related to our investment in IMC Semiconductor,Inc. (“IMC”) ($5.0 million) and our non-marketable securities ($1.0 million).
(2) Fiscal 2005 included a gain on legal settlement of $1.2 million.(3) Fiscal 2006 included an impairment charge of $1.2 million related to our investment in non-marketable
securities.(4) Fiscal 2007 included $4.4 million of stock-based compensation expense, an impairment charges of $1.0
million related to our non-marketable securities and separation costs of $1.6 million related to theresignations of two former executives.
(5) Fiscal 2008 included $5.0 million of stock-based compensation expense, $5.4 million of amortization ofintangible assets acquired in connection with the Sipex merger, $8.8 million of IPR&D purchased inconnection with the Sipex merger, $165.2 million impairment charge on goodwill and other intangibleassets, separation expenses of $0.5 million related to our former chief executive officer and $0.6 millionimpairment loss related to our non-marketable securities.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, aswell as information contained in “Risk Factors” above and elsewhere in this Annual Report on Form 10-Kcontains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks anduncertainties. Please see “Forward Looking Statements” in Part I above. Actual results may differ materiallyfrom those projected in the forward-looking statements as a result of various factors, including, among others,those identified above under Part I, Item 1A—“Risk Factors.”
COMPANY OVERVIEW
Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs,develops, markets and sells connectivity and power management products to the consumer, communications andindustrial markets. Applying both analog and digital technologies, our products are deployed in a wide array ofapplications such as portable electronic devices, set top boxes, digital video recorders, telecommunication systemand industrial automation equipment. Our portfolio spans a wide range of performance solutions from directcurrent to direct current (“DC-DC”) regulators and controllers, voltage references, microprocessor supervisors,charge pump regulators and light-emitting diode (“LED”) drivers, single and multi-channel UniversalAsynchronous Receiver/Transmitter (“UART”) for portable and wireless applications, serial interface, portmultipliers for storage applications, to T/E (T: North America and Asia transmission interface; E: Europeantransmission interface) and Synchronous Optical Network/Synchronous Data Hierarchy (“Sonet/SDH”)communications. The solutions are designed working directly with large original equipment manufacturer(“OEM”) customers who help drive our technology roadmap and system solutions.
We market our products worldwide with sales offices and personnel located throughout the Americas,Europe, Asia and Japan. Our products are sold in the United States through a number of manufacturers’representatives and distributors. Internationally, our products are sold through various regional and countryspecific distributors with locations in thirty-three countries around the globe. In addition to our sales offices, wealso employ a worldwide team of field application engineers to work directly with our customers.
Our international sales consist primarily of sales that are denominated in U.S. Dollars. Such internationalrelated operations expenses expose us to fluctuations in currency exchange rates because our foreign operatingexpenses are denominated in foreign currency while our sales are denominated in U.S. Dollars. Although foreignsales within certain countries or foreign sales comprised of certain products may subject us to tariffs, our grossprofit margin on international sales, adjusted for differences in product mix, is not significantly different fromthat realized on our sales to domestic customers. Our operating results are subject to quarterly and annualfluctuations as a result of several factors that could materially and adversely affect our future profitability asdescribed in Part I, Item 1A—“Risk Factors—Our Financial Results May Fluctuate Significantly Because Of ANumber Of Factors, Many Of Which Are Beyond Our Control.”
In December 2007, we changed our fiscal year end from March 31 to a 52-53 week fiscal year ending on theSunday closest to March 31. As part of this change, each fiscal quarter will also end on the Sunday closest to theend of the corresponding calendar quarter. The third fiscal quarter of 2008 included 91 days from October 1,2007 to December 30, 2007. The fourth fiscal quarter of 2008 included 91 days from December 31, 2007 toMarch 30, 2008. Hereinafter, the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006 arealso referred to as “2008,” “2007” and “2006” unless otherwise indicated.
In August 2007, we completed our merger with Sipex Corporation (“Sipex”), a company that designed,manufactured and marketed high performance, analog integrated circuits (“IC”) used by OEMs in the computing,consumer electronics, communications and networking infrastructure markets. As a result of the merger, we havecombined product offerings, increased technical expertise, distribution channels, customer base and geographicreach as well as reduced expenses due to significant cost synergies.
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Prior to our merger with Sipex in August 2007, the functional currency of each of our foreign subsidiarieswas the local currency of that country. In December 2007, in connection with integrating and realigning ourcombined operations with Sipex, we reassessed the economic facts and circumstances of each of our foreignsubsidiaries and changed the functional currencies for our foreign subsidiaries to the U.S. Dollar. Accumulatedother comprehensive loss reported in the consolidated balance sheet before December 1, 2007, related to thecumulative foreign currency translation adjustment of our subsidiaries prior to changing our functional currencywas immaterial.
The accounts of foreign subsidiaries have been remeasured into U.S. Dollars in accordance with theFinancial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 52, ForeignCurrency Translation (“FAS 52”). Accordingly, foreign currency is remeasured to U.S. Dollars for financialpurposes by using the U.S. Dollar as the functional currency and exchange gains and losses are reported inincome and expenses. These currency gains or losses are reported in the “Interest income and other, net” lineitem in the consolidated statements of operations. Monetary balance sheet accounts are remeasured using thecurrent exchange rate in effect at the balance sheet date. For non-monetary items, the accounts are remeasured atthe historical exchange rate. Revenues and expenses are remeasured at the average exchange rates for the period.
EXECUTIVE SUMMARY
During fiscal year 2008, we continued to execute on our strategy of growing the company through newproduct introductions and through acquisitions.
We acquired Sipex in August 2007 for 16.5 million shares of our common stock plus the assumption ofstock options to purchase approximately 2.2 million shares of our common stock and the assumption of warrantsto purchase approximately 280,000 shares of our common stock.
Subsequent to the merger, we grew our geographic reach into the high growth Asia marketplace and benefitedfrom stronger distributor relationships. We made significant progress to integrate the organization and informationsystems and rationalize our sales channels, development projects, business processes, compensation plans andinternal controls. We believe approximately 75% of our integration has been achieved. Through the success of ourrationalization of business processes and efforts to update our internal controls, we are able to assess theeffectiveness of our internal control over financial reporting for the combined company for fiscal year 2008.
We expect the benefit from our synergy savings to increase in the first fiscal quarter of 2009 and expect tosee an increase in revenue through improved access to channel partners and cross-selling new products in futurequarters.
We purchased Fyrestorm Inc.’s (“Fyrestorm”) intellectual property from its secured creditors for $3.2million in cash in February 2008. The purchased intellectual property gave us the rights to thirty patents relatedto digital predictive algorithms. Fyrestorm was a private, venture-funded company that developed an all-digitaladaptive loop control technology designed to enable efficient and extremely fast response switching-mode powersupplies.
Our net sales for fiscal year 2008 were $89.7 million, an increase of $21.2 million or 31% as compared tonet sales for fiscal year 2007. The increase was primarily due to net sales of $28.1 million associated with Sipexproducts acquired in August 2007. The transition of the recognition of revenue through our two primarydistributors from the sell-in to the sell-through method reduced net sales by an estimated $6.9 million.
For fiscal year 2008, sales of our communications products represented 31% of our net sales, as compared to42% in each of the fiscal years ended March 31, 2007 and 2006, respectively. For fiscal year 2008, sales of ourinterface products represented 56% of our net sales, as compared to 58% in each of the fiscal years endedMarch 31, 2007 and 2006, respectively. For fiscal year 2008, sales of our power management products, a newline of products which we acquired from Sipex, represented 13% of our net sales.
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Gross profit as a percentage of net sales in fiscal year 2008 was 45% as compared to 68% for both fiscalyears 2007 and 2006, respectively. The reduction in gross margin was a result of lower gross margins onacquired Sipex products, the amortization of the fair value adjustment for inventories (2%) and the amortizationof intangible assets (5%) associated with the Sipex merger.
Our operating expenses for fiscal year 2008 were $242.6 million, or $191.8 million higher than fiscal year2007, and included a non-cash charge of $165.2 million for the impairment of goodwill and other intangibleassets, an in-process research and development charge of $8.8 million, an amortization of intangible assets of$6.4 million and a $2.4 million of other expenses of related to the Sipex merger.
For fiscal year 2008, our operating loss was $202.4 million. Interest income and other, net was $16.0 millionand interest expense was $0.8 million. We also recorded an impairment charge of $0.6 million associated withour non-marketable securities during the period. The net loss for fiscal year 2008 was $195.9 million, or $4.55loss per share.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements and accompanying disclosures in conformity with GAAP, theaccounting principles generally accepted in the United States, requires estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets andliabilities in the consolidated financial statements and the accompanying notes. The U.S. Securities andExchange Commission (“SEC”) has defined a company’s critical accounting policies as policies that are mostimportant to the portrayal of a company’s financial condition and results of operations, and which require acompany to make its most difficult and subjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified our most critical accountingpolicies and estimates to be as follows: (1) revenue recognition; (2) valuation of inventories; (3) income taxes;(4) stock-based compensation; (5) goodwill; and (6) long-lived assets; each of which is addressed below. We alsohave other key accounting policies that involve the use of estimates, judgments and assumptions that aresignificant to understanding our results. For additional information, see Part II, Item 8—“Financial Statementsand Supplementary Data” and “Notes to Consolidated Financial Statements, Note 2—Accounting Policies.”Although we believe that our estimates, assumptions and judgments are reasonable, they are based uponinformation presently available. Actual results may differ significantly from these estimates if the assumptions,judgments and conditions upon which they are based upon turn out to be inaccurate.
Revenue Recognition
We recognize revenue in accordance with the SEC Staff Accounting Bulletin 104, Revenue Recognition(“SAB 104”). SAB 104 requires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price isfixed or determinable; and (4) collectability is reasonably assured.
We derive revenue principally from the sale of our products to distributors and to OEMs or their contractmanufacturers. Our delivery terms are primarily FOB shipping point, at which time title and all risks ofownership are transferred to the customer. For the fiscal years ended March 30, 2008, March 31, 2007 andMarch 31, 2006, approximately 35%, 38% and 39%, respectively, of our net sales were derived from productsales to our two primary distributors, Future Electronics Inc. (“Future”) and Nu Horizons Electronics Corp. (“NuHorizons”); and approximately 65%, 62% and 61%, respectively, of our net sales were derived from sales toother distributors, OEM customers and other non-distributors.
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Non-distributors:
For non-distributors, revenue is recognized when title to the product is transferred to the customer, whichoccurs upon shipment or delivery, depending upon the terms of the customer order, provided that persuasiveevidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of theresulting receivables is reasonably assured, there are no customer acceptance requirements and there are noremaining significant obligations. Provisions for returns and allowances for non-distributor customers areprovided at the time product sales are recognized. An allowance for sales returns and allowances fornon-distributor customers are recorded based on historical experience or specific identification of an eventnecessitating an allowance.
Distributors:
Our two primary distributors’ agreements permit the return of 3% to 5% of their purchases during thepreceding quarter for purposes of stock rotation. For one of these distributors, a scrap allowance of 2% of thepreceding quarter’s purchases is permitted. We also provide discounts to certain distributors based on volume ofproduct they sell for a specific product with a specific volume range for a given customer over a period not toexceed one year.
We recognize revenue to each of our distributors using either of the methodologies in the following table.Once adopted, the revenue methodology for a distributor will be maintained unless there is a change incircumstances indicating the methodology for that distributor is no longer appropriate.
• Sell-in Basis: Revenue is recognized upon shipment if we conclude we meet the same criteria as fornon-distributors and we can reasonably estimate the credits for returns, pricing allowances and/or otherconcessions. We record an estimated allowance, at the time of shipment, based upon historical patterns ofreturns, pricing allowances and other concessions (i.e., “sell-in” basis).
• Sell-through Basis: Revenue and the related costs of sales are deferred until the resale to the endcustomer if we grant more than limited rights of returns, pricing allowance and/or other concessions or ifwe cannot reasonably estimate the level of returns and credits issuable (i.e., “sell-through” basis). Underthe sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to thedistributor as title to the inventory is transferred upon shipment, at which point we have a legallyenforceable right to collection under normal terms. The associated sales and cost of sales are deferred andis included in deferred income and allowance on sales to distributors in the consolidated balance sheet.When the related product is sold by our distributors to their end customers, at which time the ultimateprice we receive is known, we recognize previously deferred income as sales and cost of sales.
Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from ourdistributors in a timely fashion. Distributors provide us periodic data regarding the product, price,quantity, and end customer when products are resold as well as the quantities of our products they stillhave in stock. We must use estimates and apply judgments to reconcile distributors’ reported inventoriesto their activities. Any error in our judgment could lead to inaccurate reporting of our revenues, grossmargin, deferred income and allowances on sales to distributors and net income.
Our historical patterns of returns, pricing allowances and other concessions with distributors have beenfairly consistent, which has enabled us to reasonably estimate such allowances at the time of shipment.Therefore, we have historically recognized revenue on sales to all distributors on a sell-in basis and recorded anestimated allowance, at the time of shipment, based on authorized and historical patterns of returns and otherconcessions. Concurrent with the merger with Sipex, we reassessed our expected ability to continue to reasonablyestimate such allowances for each of our distributors as well as for Sipex’s distributors. Prior to the merger,Sipex recognized revenue on sales to all distributors on a sell-through basis. Consistent with Sipex’s pastpractice, we have concluded that we are not able to reasonably estimate such allowances at the time of shipmentof products to Sipex’s distributors. Therefore, we have determined that consistent with Sipex’s past practice, we
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will continue to recognize sales to Sipex’s distributors on a sell-through basis. In addition, as a result of themerger, our relationships, marketing and sales practices with our two primary distributors have changed. Further,as disclosed Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to ConsolidatedFinancial Statements, Note 5—Related Party Transaction,” Future is now a related party of Exar. As a result ofthese changes, we have concluded that we can no longer reasonably estimate returns, pricing allowances andother concessions at the time of shipment of products to these distributors. Accordingly, as of August 26, 2007,we determined it was appropriate that revenue on all sales to Future and Nu Horizons be recognized on a sell-through basis.
Inventories
Our policy is to establish a provision for excess inventories, based on the nature of the specific product thatis greater than six or twelve months of forecasted demand unless there are other factors indicating that theinventories will be sold at a profit after such periods. Among other factors, management considers knownbacklog of orders, projected sales and marketing forecasts, shipment activity, inventory-on-hand at our primarydistributors, past and current market conditions, anticipated demand for our products, changing lead times in themanufacturing process and other business conditions when determining if a provision for excess inventory isrequired. Our net inventories at March 30, 2008 were $14.2 million, compared with $4.8 million at March 31,2007. The increase was primarily due to the inventory acquired in connection with the Sipex merger. Should theassumptions used by management in estimating the provision for excess inventory differ from actual futuredemand or should market conditions become less favorable than those projected by management, additionalinventory write-downs may be required, which would have a negative impact on our gross margins. See Part I,Item 1A—“Risk Factors ‘Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors,Many Of Which Are Beyond Our Control’.”
Income Taxes
We account for income taxes under the provisions of Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (“FAS 109”). Under this method, we determine our deferred tax assets andliabilities based upon the difference between the financial statement and tax bases of our assets and liabilities.We make certain estimates and judgments in determining income tax expense for financial statement purposes.These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities, which arisefrom timing differences in the recognition of revenue and expense for tax and financial statement purposes. Suchdeferred income tax assets and liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assets and liabilities and their respectivetax base, operating losses and tax credit carryforwards. Changes in tax rates affect the deferred income tax assetsand liabilities and are recognized in the period in which the tax rates or benefits are enacted. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements,Note 17—Income Taxes” for more details about our deferred tax assets and liabilities.
We acquired significant net operating loss (“NOL”) and tax credit carryforwards as a result of the Sipexmerger. The utilization of these NOL and tax credit carryforwards are subject to a substantial annual limitationdue to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similarstate provisions. Our application of these complex rules is subject to examination by the IRS and state taxingauthorities. An unfavorable outcome could further restrict our ability to utilize the acquired NOL and tax creditcarryovers prior to their expiration.
We must determine the probability that we will be able to utilize our deferred tax assets. If we determinethat recovery is unlikely, then a valuation allowance against our deferred tax assets must be recorded byincreasing our income tax expense. As of March 30, 2008, our net deferred tax assets recorded on ourconsolidated balance sheet is zero.
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Uncertain Income Tax Provisions
Effective April 1, 2007, we adopted Financial Accounting Standards Interpretation No. 48, Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes arecognition threshold and measurement attribute for the financial statement recognition and measurement ofuncertain tax positions taken or expected to be taken in our income tax return, and also provides guidance onderecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The cumulative effect of adopting FIN 48 was a decrease in the liability for uncertain tax positions and anincrease of $0.2 million to the April 1, 2007 opening retained earnings balance. Upon adoption of FIN 48, theliability for uncertain tax positions at April 1, 2007 was $0.8 million. Consistent with the provisions of FIN 48,we reclassified $0.8 million of income tax liabilities from current to non-current liabilities because payment ofcash is not anticipated within one year of the balance sheet date. In addition, we decreased current taxes payableand deferred tax assets by $3.5 million for unrecognized tax benefits which serve to reduce net operating loss andtax credit carryforwards.
The total amount of gross unrecognized tax benefits as of the April 1, 2007 adoption date of FIN 48 was$7.7 million. The unrecognized tax benefits increased by $1.7 million during the fiscal year ended March 30,2008 to $9.4 million. If recognized, all of these unrecognized tax benefits would be recorded as a reduction offuture income tax provision before consideration of any changes in valuation allowance.
Stock-Based Compensation
On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”) by using the modified prospective transition method. In accordance with themodified prospective transition method, we began recognizing compensation expense for all share-based awardsgranted on or after April 1, 2006, plus unvested awards granted prior to April 1, 2006. Under this method ofimplementation, no restatement of prior periods has been made. The cumulative effect of adopting FAS 123Rwas not significant.
We compute the fair value of stock options utilizing the Black-Scholes model. Calculating stock-basedcompensation expense requires the input of highly subjective assumptions. The assumptions used in calculatingthe fair value of stock-based compensation represent our estimates which involve inherent uncertainties and theapplication of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimatethe expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiturerate is materially different from our estimate, the stock-based compensation expense could be significantlydifferent from what we have recorded in the current period. Additionally, a change in the estimated forfeiture ratewill have a significant effect on reported stock-based compensation expense, as the effect of adjusting the rate forall unamortized expense after April 1, 2006 is recognized in the period the forfeiture estimate is changed. SeePart II, Item 8—“Financial Statements and Supplementary Data and “Notes to the Consolidated FinancialStatements, Note 12—Stock-Based Compensation” for more details about our assumptions used in calculating thestock-based compensation expenses and activities of our stock-based compensation.
On March 22, 2006, our board of directors approved the full acceleration of vesting of all employee stockoptions, including options held by our executive officers, with exercise prices in excess of $15.05. Such vestingacceleration did not apply to any options held by our non-employee directors. As a result of the decision to fullyaccelerate the vesting of stock options, as described above, options to purchase approximately 1.1 million sharesof our common stock became fully vested and immediately exercisable effective as of March 22, 2006.
Because the accelerated options’ exercise prices were in excess of the market value of our common stock atthe time of the acceleration, we believe that the incentive value to our employees of the associated unvestedoptions was minimal. The acceleration eliminated future compensation expense we would otherwise have had torecognize in our statements of operations with respect to these options under FAS 123R. As a result of this
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action, approximately $4.9 million of stock-based compensation expense, net of taxes, will be excluded fromstock-based compensation for periods subsequent to fiscal year 2006.
In fiscal year 2007, our stockholders ratified Exar Corporation 2006 Equity Incentive Plan (the “2006Plan”). Within the terms of the 2006 plan, we now grant stock options, restricted stock units (“RSUs) andperformance-based awards. At March 30, 2008, unrecognized stock-based compensation was $5.0 million and$2.5 million for stock-options and RSUs, respectively, with remaining weighted average recognition periods of2.64 year and 1.41 years, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiableintangible assets acquired in a business combination. We follow the provisions of Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”), under which goodwill is nolonger subject to amortization. We evaluate goodwill for impairment on an annual basis or whenever events andchanges in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill istested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to thefair value of the reporting unit. The fair values of the reporting units are estimated using a combination of theincome approach that uses discounted cash flows and the market approach that utilizes comparable companies’data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and asecond step is performed to measure the amount of impairment loss, if any. Because we have one reporting unitunder FAS 142, we utilized an entity-wide approach to assess goodwill for impairment. We performed ourannual goodwill impairment analysis during the fourth fiscal quarter of 2008 pursuant to the steps andrequirements under FAS 142 and recorded a $128.5 million impairment loss which was included in the“Goodwill and other intangible asset impairment” line item in the consolidated statements of operations. SeePart II, Item 8 – “Financial Statements and Supplementary Data” and “Notes to Consolidated FinancialStatements, Note 8—Goodwill and Intangible Assets” for more details about our goodwill.
Long-Lived Assets
Our long-lived assets include land, buildings, equipment, furniture and fixtures, privately held equity investmentsand other intangible assets. Long-lived assets are evaluated for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate the recoverability ofour long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets (“FAS 144”). We compare the carrying value of long-lived assets to ourprojection of future undiscounted cash flows attributable to such assets and, in the event that the carrying value exceedsthe future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carryingvalue over the asset’s fair value. During the fourth fiscal quarter of 2008, we concluded that our market capitalizationwas below our net book value for an extended period of time and, as a result, long-lived assets were tested forrecoverability. We determined that the carrying value of intangible assets acquired in the Sipex merger exceeded thefair value. We used the income approach to determine the fair value of these intangible assets. The evaluation resultedin an impairment charge of $36.7 million against intangible assets which was included in the “Goodwill and otherintangible asset impairment” line item in the consolidated statements of operations. Substantially all of our property,plant and equipment and other long-lived assets are located in the United States.
RESULTS OF OPERATIONS
Net Sales by Product Line
As described above in Critical Accounting Policies and Estimates, we began to recognize revenue onshipments to our two primary distributors on a sell-through basis beginning August 26, 2007.
Certain net sales by product line for prior years have been reclassified to be consistent with the presentationof the fiscal year of 2008.
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The following table shows net sales by product line in absolute dollars and as a percentage of net sales forthe periods indicated (in thousands):
March 30, 2008 March 31, 2007 March 31, 20062008 vs. 2007
Change2007 vs. 2006
Change
Net sales:Communications . . . . . . . $27,946 31% $28,462 42% $27,902 42% (2)% 2%Interface . . . . . . . . . . . . . 49,904 56% 40,040 58% 39,122 58% 25 % 2%Power management . . . . . 11,893 13% — — — — 100 % —
Total . . . . . . . . . . . . $89,743 100% $68,502 100% $67,024 100%
Fiscal Year 2008 versus Fiscal Year 2007
Communications
Communications products include network access and transmission products and storage products as well asoptical products acquired in the Sipex merger.
Net sales of communications products for fiscal year 2008 included $1.6 million of additional sales from themerger. We estimate the change of revenue recognition to a sell-through basis at our two primary distributorsreduced the communication product sales by $1.7 million for the fiscal year of 2008.
Net of these effects, net sales of network access and transmission products for the fiscal year of 2008 were$0.4 million lower as compared to the fiscal year of 2007, primarily due to price erosion on a limited number ofT/E carrier products and reduced sales from last time buy orders partially offset by increased volumes of T/Ecarrier and acquired SONET product sales.
Interface
Interface products include UARTs, video, imaging and other products as well as transceiver productsacquired in the Sipex merger.
Net sales of interface products for the fiscal year of 2008 included $14.6 million of additional sales relatingto sales of products acquired in the Sipex merger. We estimate the change of revenue recognition to a sell-through basis at our primary distributors reduced the UART product sales by $5.3 million for the fiscal year of2008.
Net of these effects, net sales of interface products for the fiscal year of 2008 were $0.6 million higher ascompared to the fiscal year of 2007, primarily due to increased volume of UART sales partially offset by a shiftin mix to lower priced UARTs, price erosion on a limited number of UART products and reduced sales from lasttime buy orders.
Power Management
Power management products, including DC-DC regulators and LED drivers, were acquired in the Sipexmerger and increased net sales for the fiscal year of 2008 by $11.9 million.
Fiscal Year 2007 versus Fiscal Year 2006
Communications
Net sales of network access and transmission products for fiscal year 2007 increased $2.6 million, or 11%,as compared to net sales in fiscal year 2006. T/E carrier product sales grew 7% year over year, primarily due toincreased sales volume attributable to growth in end customer demand. SONET products sales grew 27% yearover year due to increased sales volume of the acquired SONET products partially offset by price erosion on alimited number of products.
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In addition, net sales from last time buy orders for other communications products for fiscal year 2007 were$2.1 million lower as compared to fiscal year 2006.
Interface
Net sales of UART products for fiscal year 2007 increased $2.0 million as compared to net sales in fiscalyear 2006, primarily attributable to increased sales volume partially offset by price erosion on a limited numberof products.
Video, imaging and other net sales for fiscal year 2007 decreased by $1.1 million as compared to fiscal year2006, primarily due to reduced shipments to Hewlett Packard and another customer.
Net Sales by Channel
The following table shows net sales by channel in absolute dollars and as a percentage of net sales for theperiods indicated (in thousands):
March 30, 2008 March 31, 2007 March 31, 20062008 vs. 2007
Change2007 vs. 2006
Change
Net sales:Primary distributors . . . . $31,705 35% $25,956 38% $26,335 39% 22% (1)%Direct customers andother distributors . . . . . 58,038 65% 42,546 62% 40,689 61% 36% 5 %
Total . . . . . . . . . . . . $89,743 100% $68,502 100% $67,024 100%
Fiscal Year 2008 versus Fiscal Year 2007
Net sales to our two primary distributors, Future and Nu Horizons, for fiscal year 2008, included $9.7million in sales of the products acquired in the Sipex merger. Furthermore, as a result of transitioning revenuerecognition used for sales to our two primary distributors from the sell-in to the sell-through method as ofAugust 26, 2007, we estimate net sales for fiscal year 2008 were lower by $6.9 million.
Net sales to direct customers and other distributors for fiscal year 2008 included $18.4 million in sales of theproducts acquired in the Sipex merger.
Fiscal Year 2007 versus Fiscal Year 2006
Net sales for fiscal year 2007 to our two primary distributors, Future and Nu Horizons, decreased 1%compared to fiscal year 2006, was primarily due to price erosion on a limited number of communicationsproducts, partially offset by increased sales volumes. Net sales to our direct customers and other distributors infiscal year 2007 increased 5% compared to fiscal year 2006 primarily due to increased sales volume of networkand transmission products to Alcatel-Lucent partially offset by the completion of another customer’s program.
Net Sales by Geography
The following table shows net sales by geography in absolute dollars and as a percentage of net sales for theperiods indicated (in thousands):
March 30, 2008 March 31, 2007 March 31, 20062008 vs. 2007
Change2007 vs. 2006
Change
Net sales:Americas . . . . . . . . . . . . . $27,626 31% $30,163 44% $32,969 49% (8)% (9)%Asia . . . . . . . . . . . . . . . . . 39,953 44% 20,322 30% 19,649 29% 97 % 3 %Europe . . . . . . . . . . . . . . . 22,164 25% 18,017 26% 14,406 22% 23 % 25 %
Total . . . . . . . . . . . . $89,743 100% $68,502 100% $67,024 100%
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Fiscal Year 2008 versus Fiscal Year 2007
Net sales in the Americas for fiscal year 2008 included $5.6 million in sales of products acquired in theSipex merger. We estimate the change of revenue recognition to a sell-through basis at our two primarydistributors decreased our net sales in the Americas by $6.9 million for fiscal year 2008.
Net sales in Asia and Europe for fiscal year 2008 included $17.2 million and $5.3 million, respectively, ofsales of products acquired in the Sipex merger.
Fiscal Year 2007 versus Fiscal Year 2006
Net sales in the Americas decreased in fiscal year 2007 compared to fiscal year 2006 primarily due to priceerosion on a limited number of communications products and the completion of a customer’s program. Net salesin Europe increased during the same period due in part to sales of network and transmission products to Alcatel-Lucent.
Gross Profit
The following table shows gross profit in absolute dollars and as a percentage of net sales for the periodsindicated (in thousands):
March 30, 2008 March 31, 2007 March 31, 20062008 vs. 2007
Change2007 vs. 2006
Change
Net sales . . . . . . . . . . . . . . . . . . . . $89,743 $68,502 $67,024Gross profit . . . . . . . . . . . . . . . . . . $40,112 45% $46,534 68% $45,475 68% (14)% 2%
Gross profit represents net sales less cost of sales. Cost of sales includes:
• the cost of purchasing finished silicon wafers manufactured by independent foundries;
• the costs associated with assembly, packaging, test, quality assurance and product yields;
• the cost of personnel and equipment associated with manufacturing support and manufacturingengineering;
• the amortization of purchased intangible assets in connection with acquisitions; and
• the provision for excess and obsolete inventory.
Fiscal Year 2008 versus Fiscal Year 2007
The decrease in gross profit for fiscal year 2008 was primarily due to lower gross margins of Sipex’sproducts, an incremental amortization expense of $4.5 million associated with the purchased intangible assets asa result of the Sipex merger, the amortization of the fair value adjustment to acquired inventories of $2.2 millionand charges associated with excess and obsolete inventories. The amortization expense for the purchasedintangible assets for the same period a year ago was $1.0 million.
In fiscal year 2008, we fully amortized the fair value adjustment of acquired Sipex inventories recorded inthe purchase accounting. In addition, we recorded an impairment charge against purchased intangible assets inthe fourth fiscal quarter of 2008. As a result, we expect our future amortization expenses will decrease due to thereduced carrying value of the purchased intangible assets and the exclusion of the fair value adjustment.
Stock-based compensation expense recorded in cost of sales was $0.6 million for fiscal year 2008 ascompared to $0.1 million for the fiscal year of 2007. The increase in stock-based compensation expense whencompared to a year ago, is primarily attributable to assumed unvested stock options in connection with the Sipexmerger.
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Fiscal Year 2007 versus Fiscal Year 2006
The increase in gross profit in the fiscal year 2007 when compared to the fiscal year of 2006, was due toincreased sales volume of network access and transmission products and serial communications products,manufacturing efficiencies and yield improvements, partially offset by price erosion on a limited number ofproducts.
Our gross profit will continue to fluctuate due to, among other factors, future fluctuations in net sales,product mix, manufacturing costs, competitive pricing, manufacturing yields, excess and obsolete inventory,merger related expenses, the recognition of the synergy benefits, the reduction of the amortization of the fairvalue adjustment to acquired inventories and future amortization of any additional licensed technology.
Other Costs and Expenses
March 30, 2008 March 31, 2007 March 31, 20062008 vs. 2007
Change2007 vs. 2006
Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . $ 89,743 $68,502 $67,024Research and development . . . . . . . . 30,660 34% 25,838 38% 24,691 37% 19% 5%Selling, general and administrative . . 37,899 42% 24,925 36% 21,291 32% 52% 17%Goodwill and other intangible assetimpairment . . . . . . . . . . . . . . . . . . . 165,191 184% — — — — 100% —
Acquired in-process research anddevelopment . . . . . . . . . . . . . . . . . . 8,800 10% — — — — 100% —
Research and Development (“R&D”)
Research and development costs consist primarily of:
• the salaries, stock-based compensation, and related expenses of employees engaged in product research,design and development activities;
• costs related to engineering design tools, mask tooling costs, test hardware, engineering supplies andservices, and use of in-house test equipment; and
• facilities expenses.
Fiscal Year 2008 versus Fiscal Year 2007
The $4.8 million, or 19% increase in R&D expenses for fiscal year 2008 as compared to a year ago wasprimarily a result of incremental expense of $4.3 million due to the growth of our company as a result of theSipex merger and $0.4 million in severance costs of our employees, partially offset by lower labor-related costs.
Fiscal Year 2007 versus Fiscal Year 2006
The $1.1 million, or 5% increase in R&D expenses in fiscal year 2007 as compared to fiscal year 2006resulted primarily from stock-based compensation expense from our adoption of FAS 123R of $1.2 million anddepreciation associated with additional upgrades to an advanced tester and licensing of additional engineeringdesign software, partially offset by lower labor-related costs of $1.0 million.
We believe that innovation is critical to our long-term success, and we intend to continue our investments inR&D to enhance our product offerings in order to meet the current and future requirements of our customers andmarkets. Some aspects of our R&D efforts require significant short-term expenditures, such as mask tooling fornew products, the timing of which may cause significant fluctuations in our R&D expenses. In addition, weexpect R&D expenses to fluctuate with the licensing of intellectual property, the recognition of the synergybenefits and potential costs of discontinuing certain product development efforts as we optimize our R&Dprojects.
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Selling, General and Administrative (“SG&A”)
Selling, general and administrative expenses consist primarily of:
• salaries, stock-based compensation and related expenses;
• sales commissions;
• professional and legal fees;
• amortization of purchased intangible assets; and
• facilities expenses.
Fiscal Year 2008 versus Fiscal Year 2007
The $13.0 million, or 52% increase in SG&A expenses for fiscal year 2008, as compared to a year ago, wasprimarily a result of incremental expense of $8.4 million due to the growth of our company as a result of theSipex merger, $1.1 million in severance costs of our employees, the amortization of acquired Sipex intangibleassets of $0.9 million, other merger related costs of $0.6 million and increased legal costs of $0.5 millionpartially offset by lower labor-related expenses.
Stock-based compensation expense recorded in SG&A expenses was $3.4 million for fiscal year 2008 ascompared to $3.1 million a year ago. The increase in stock-based compensation expense when compared to thesame period a year ago is primarily attributable to assumed unvested stock options in connection with the Sipexmerger.
Separation costs for certain executive officers were $0.5 million and $1.6 million in fiscal years 2008 and2007, respectively.
We expect our amortization expenses on the purchased intangible assets will decrease in future periods dueto our impairment charge recorded in fiscal year 2008.
Fiscal Year 2007 versus Fiscal Year 2006
The $3.6 million, or 17% increase in SG&A expenses for fiscal year 2007 as compared to fiscal year 2006was primarily due to stock-based compensation expense from our adoption of FAS 123R of $3.1 million,executive separation costs of $1.6 million, increased sales commission, costs to complete our stock optionbackdating investigation, legal fees for litigation and FAS 123R implementation costs, partially offset by lowerlabor-related costs, and reduced depreciation as our enterprise resource planning or ERP system became fullydepreciated. Additionally, SG&A expenses in fiscal year 2006 included proxy expenses of $0.9 million and areimbursement of $0.4 million for proxy expenses to GWA Investments, LLC and GWA Master Fund, L.P.
Fiscal year 2007 SG&A expenses include stock-based compensation expense of $0.4 million in connectionwith modifications of stock options related to the separations of our former chief executive officer and chieffinancial officer.
We anticipate that SG&A expenses will continue to fluctuate due to sales commissions, costs associatedwith business development, integration costs, amortization of acquired intangible assets, merger related expenses,the recognition of synergy benefits and professional fees. In the short term, many of the SG&A expenses arefixed; however, we expect SG&A expense will continue to fluctuate.
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Goodwill and Other Intangible Asset Impairment
In the fourth fiscal quarter of 2008, we conducted our annual impairment review and determined that, basedon the current market conditions in the semiconductor industry and our stock price over the prior six months, thecarrying amount of our goodwill exceeded its implied fair value under the test for impairment as per FAS 142and recorded a goodwill impairment charge of approximately $128.5 million which was included in the“Goodwill and other intangible asset impairment” line item in the consolidated statements of operations (SeeNote 2—Accounting Policies). Our estimate of the implied fair value of the goodwill was based on the quotedmarket price of our common stock and the discounted value of estimated future cash flows over a seven-yearperiod with residual value and discount rates between 12.5% and 18.8%. See Part II, Item 8—“FinancialStatements and Supplementary Data” and “Notes to consolidated financial statements, Note 8—Goodwill andIntangible Assets” for more details about our goodwill.
During the fourth fiscal quarter of 2008, we concluded that our market capitalization was below our netbook value for an extended period of time and as a result, the long-lived assets were tested for recoverability. Thesales and margin projections for Sipex products have declined due to the impact of the weakening economy,delays in sales ramp up of new high margin proprietary products, and delays in achieving manufacturing costreductions initially projected. As a result, we reduced our projections of our future cash flows and determinedthat the carrying amount of the purchased Sipex intangible assets exceeded the implied fair value under the testfor impairment as per FAS 144 and recorded an impairment charge of approximately $36.7 million which wasincluded in the “Goodwill and other intangible asset impairment” line item in the consolidated statements ofoperations (See Note 2—Accounting Policies). Our estimate of the implied fair value of the intangible assets wasbased on the discounted value of estimated future cash flows over a six-year period with residual value and adiscount rate of 12.5%. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes toconsolidated financial statements, Note 8—Goodwill and Intangible Assets” for more details about our otherintangible assets.
Substantially all of our property, plant and equipment and other long-lived assets are located in the UnitedStates.
Acquired In-Process Research and Development
We recorded a charge of $8.8 million in acquired in-process research and development (“IPR&D”),associated with our merger with Sipex in the three months ended September 30, 2007. We allocated the purchaseprice related to IPR&D through established valuation techniques. IPR&D was expensed upon acquisition becausetechnological feasibility had not been established and no future alternative uses existed. The fair value oftechnology under development is determined using the income approach, which discounts expected future cashflows to present value, taking into account the stage of completion, estimated costs to complete, utilization ofpatents and core technology, the risks related to successful completion, and the markets served. The cash flowsderived from the IPR&D were discounted at discount rates ranging from 25% to 40%. The percentage ofcompletion for these projects ranged from 20% to 87% at the merger date.
The IPR&D projects underway at Sipex at the merger date were in the interface and power managementproduct families. Within interface, specific projects relate to new products in its Multiprotocol and RS485families. Within power management, development activities relate to the commercialization of its digital powertechnology, LED drivers, DC-DC regulators and controllers. All of these projects require further developmentand testing to bring them up to production. IPR&D projects for power management required $2.2 million tocomplete and some product shipments began in late calendar year 2007. IPR&D projects for interface areexpected to require $0.8 million to complete with expected revenue generation beginning in mid calendar year2008. All power management and interface projects are scheduled to complete by the end of fiscal year 2009.
If the projects discussed above are not successfully developed and/or successfully marketed, our sales andprofitability may be adversely affected in future periods.
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Other Income and Expenses
March 30, 2008 March 31, 2007 March 31, 20062008 vs. 2007
Change2007 vs. 2006
Change
Net sales . . . . . . . . . . . . . . . . . . . $89,743 $68,502 $67,024Interest income and other, net . . 16,037 18 % 16,526 24 % 12,297 18 % (3)% 34%Interest expense . . . . . . . . . . . . . (771) (1)% — — — — 100 % —Other-than-temparory loss onlong-term securities . . . . . . . . (591) (1)% (957) (1)% (1,215) (2)% 38 % 21%
Interest Income and Other, Net
Interest income and other, net primarily consists of:
• interest income;
• realized gains (losses) on marketable securities;
• foreign exchange gains or losses; and
• gains or losses on the sale or disposal of equipment.
Fiscal Year 2008 versus Fiscal Year 2007
The $0.5 million or 3% decrease in interest income and other, net during fiscal year 2008 as compared tofiscal year 2007 was primarily attributable to a decrease in interest income as a result of lower invested cashbalances partially offset by market interest rates. Cash and short-term investments balances decreased $87.2million during fiscal year 2008 as compared to fiscal year 2007 primarily as result of stock repurchases of9.3 million shares totaling $93.0 million.
Fiscal Year 2007 versus Fiscal Year 2006
The $4.2 million, or 34% increase in interest income and other, net during fiscal year 2007 as compared tofiscal year 2006 resulted principally from higher interest income of $4.2 million as a result of higher marketinterest rates partially offset by increased investments in tax preferred securities that have a lower pre-tax yield.
We expect that our interest income will continue to fluctuate due to changes in interest rates. Starting in thefirst fiscal quarter of 2009, we are expecting to receive sublease income from our Hillview facility. See Part II,Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements,Note 20—Subsequent Event.”
Interest expense
In connection with our merger with Sipex, we assumed a lease financing obligation related to a facility,located at 233 South Hillview Drive in Milpitas, California (the “Hillview facility”). We have accounted for thissale and leaseback transaction as a financing transaction which was included in the “Long-term lease financingobligation” line item on the consolidated balance sheet. The effective interest rate is 8.2%. The interest expensein fiscal year 2008 is primarily attributable to the Hillview facility financing transaction.
Other-than-Temporary Loss on Long-Term Investments
Our long-term investments consist of the investments in TechFarm Ventures L.P. (Q), L.P. (“TechFarmFund”) and Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”). Both TechFarm Fund and Skypoint Fundare venture capital funds which invest primarily in private companies in the telecommunications and/or
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networking industry. We account for these non-marketable equity securities under the cost method. Inaccordance with EITF 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to CertainInvestments, we periodically review and determine whether the investments are other-than-temporarily impaired,in which case the investments are written down to their impaired value.
TechFarm Fund
In fiscal year 2008, we did not record any impairment charges after our assessment of the valuation of thefund performance.
In fiscal year 2007, we determined that the TechFarm Fund management fees continued to deplete the fundcapital without any appreciation in the valuation of portfolio companies and concluded that a portion of thecarrying value of our investment in the fund was other-than-temporarily impaired. As a result, we recorded a $0.1million impairment charge in September 2006.
In fiscal year 2006, we assessed the value of certain discontinued companies and the remaining portfoliocompanies within the TechFarm Fund and we believed that the carrying value of our investment in the fund waspermanently impaired. As a result, we recorded a $1.2 million impairment charge in December 2005.
Skypoint Fund
In fiscal year 2008, we performed a review of our investments and determined that two of the portfoliocompanies in the Skypoint Fund had limited cash on hand and financing opportunities were minimal. Weconcluded that a portion of the carrying value had been other-than-temporarily impaired and recorded a $0.6million impairment charge during the year.
In fiscal year 2007, we became aware that two Skypoint Fund portfolio companies would be liquidated. Webelieved a portion of the carrying value of our investment in the fund was permanently impaired. As a result, werecorded a $0.8 million impairment charge against our earnings in September 2006.
In fiscal year 2006, as a result of impairment review, we concluded that the carrying value of certainportfolio companies in the fund had declined in value and recorded a $0.6 million impairment charges.
Provision for Income Taxes
Fiscal Year 2008
Our effective tax rate for fiscal year 2008 was (4.3%). The provision for fiscal year 2008 differs from theamount computed by applying the statutory federal rate of 35%. This difference is principally due tonondeductible goodwill impairment charges, the write-down of purchased intangible assets which is not deductedfor tax purposes, and the impact of valuation allowance against our deferred tax assets.
Fiscal Year 2007
Our effective tax rate for fiscal year 2007 was 29.2%. The provision for fiscal year 2007 differs from theamount computed by applying the statutory federal rate of 35%. This difference is principally due to benefitsclaimed for tax-exempt interest and research and development tax credits generated during the fiscal year,partially offset by state income taxes and stock-based compensation not currently deductible.
Fiscal Year 2006
Our effective tax rate for fiscal year 2006 was 26.4%. The provision for income taxes for fiscal year 2006differs from the amount computed by applying the statutory federal rate of 35%. This difference is principally
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due to benefits claimed for research and development tax credits generated during the fiscal year, partially offsetby state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Years Ended
March 30,2008
March 31,2007
March 31,2006
(dollars in thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,016 $119,809 $ 187,610Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,844 236,270 141,918
Total cash, cash equivalents, and short-term investments . . . . . . . . . . . . . . . . 268,860 356,079 329,528
Percentage of total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63% 85% 82%
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,796 22,645 12,500Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . 82,849 (96,740) 29,447Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . (94,312) 6,553 (112,808)Effect of exchange rate change on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126) (259) 93
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 2,207 (67,801) (70,768)
Fiscal Year 2008
Our net loss was $195.9 million. After adjustments for non-cash items and changes in working capital, wegenerated $13.8 million of cash from operating activities.
Significant non-cash charges included:
• Goodwill and other intangible assets impairment charge of $165.2 million;
• Deprecation and amortization expenses of $12.6 million;
• Acquired IPR&D expense of $8.8 million; and
• Stock-based compensation expense of $5.0 million.
Working capital changes included:
• a $6.8 million increase in accounts receivable primarily due to increased net sales;
• a $3.8 million decrease in other accrued expenses as a result of payments of liabilities acquired inconnection with the Sipex merger; and
• a $10.0 million increase in deferred income and allowances on sales to distributors due to our change inrevenue recognition on sales to our two primary distributors.
In fiscal year 2008, net cash provided by investing activities reflects net sales of short-term marketablesecurities of $91.2 million partially offset by $4.9 million in purchases of property, plant and equipment andintellectual property and $2.9 million in net assets acquired in the acquisition of Sipex. The purchases ofproperty, plant and equipment and intellectual property includes $3.2 million associated with the purchase ofFyreStorm Inc.’s intellectual property.
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In fiscal year 2008, net cash used in financing activities reflects the repurchase of $93.0 million, or9.3 million shares of our common stock in fiscal year 2008 and the $5.3 million repayment of bank borrowingspartially offset by $4.3 million of proceeds associated with our employee stock plans.
As of March 30, 2008, we have funded $4.3 million of our $5.0 million committed capital in the SkypointFund. We are obligated to contribute our remaining committed capital of approximately $0.7 million as requiredby the Skypoint Fund’s General Partner and in accordance with the partnership agreement between the SkypointFund and us. To meet our capital commitment to the Skypoint Fund, we may need to use our existing cash, cashequivalents and marketable securities.
From time to time, we acquire outstanding common stock in the open market to partially offset dilutionfrom our stock awards program, to increase our return on our invested capital and to bring our cash to a moreappropriate level for our company. We may continue to utilize the stock purchase program, which would reduceour cash, cash equivalents and/or short-term investments available to fund future operations and to meet otherliquidity requirements.
On August 28, 2007, we established a new share repurchase plan (“2007 SRP”) and authorized therepurchase of up to $100 million of our common stock over the next twelve months. The 2007 SRP was inaddition to a share repurchase plan announced in March 6, 2001 (“2001 SRP”), which covered the repurchase ofup to $40 million of our common stock.
The shares repurchased under the 2001 SRP fully utilized the $40 million authorization in the fiscal year of2007. As of March 30, 2008, the remaining authorized amount for stock repurchase under the 2007 SRP was$25.3 million with no termination date.
Fiscal Year 2007
Net income, adjusted for non-cash related items provided cash of $23.0 million during fiscal year 2007.
In fiscal year 2007, net cash used in investing activities reflects net purchases of $93.0 million of short-temmarketable securities and $3.0 million of purchases of property, plant and equipment and intellectual property.
In fiscal year 2007, net cash provided by financing activities was primarily attributable to $15.8 million ofproceeds associated with our employee stock plans, partially offset by the repurchase of approximately 748,000shares for $9.9 million under the stock repurchase program authorized in March 2001.
Fiscal Year 2006
Net income, adjusted for non-cash related items, provided cash of $19.8 million during fiscal year 2006.Changes in working capital accounts included:
• a $6.8 million increase in accounts primarily due to higher sales in the fourth quarter; and
• a $1.9 million increase in inventories based on higher projected sales.
In fiscal year 2006, net cash provided by investing activities reflects net sales of $46.9 million of short-termmarketable securities partially offset by $11.4 million acquisition for Optical Networking Business Unit ofInfineon Technologies A.G. (“ON”) in April 2005, and purchases of property, plant and equipment andintellectual property of $5.9 million which consisted primarily of purchases for test equipment.
In fiscal year 2006, net cash used in financing activities was primarily due to the repurchase of 7.5 millionshares of our common stock for $120.0 million and associated costs of $0.8 million in connection with our tenderoffer. Additionally, we repurchased 270,000 shares of our common stock for $3.6 million under the stockrepurchase program authorized in March 2001. This was partially offset by the proceeds of $11.6 million fromthe stock option exercised by our employees.
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To date, inflation has not had a significant impact on our operating results.
We anticipate that we will continue to finance our operations with cash flows from operations, existing cashand investment balances, and some combination of long-term debt and/or lease financing and additional sales ofequity securities. The combination and sources of capital will be determined by management based on our needsand prevailing market conditions. We believe that our cash and cash equivalents, short-term marketable securitiesand cash flows from operations will be sufficient to satisfy working capital requirements and capital equipmentneeds for at least the next 12 months. However, should the demand for our products decrease in the future, theavailability of cash flows from operations may be limited, thus having a material adverse effect on our financialcondition or results of operations. From time to time, we evaluate potential acquisitions, strategic arrangementsand equity investments complementary to our design expertise and market strategy, which may includeinvestments in wafer fabrication foundries. To the extent that we pursue or position ourselves to pursue thesetransactions, we could consume a significant portion of our capital resources or choose to seek additional equityor debt financing. There can be no assurance that additional financing could be obtained on terms acceptable tous. The sale of additional equity or convertible debt could result in dilution to our stockholders.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 30, 2008, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’sRegulation S-K.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations and commitments at March 30, 2008 are as follows (in thousands):
Fiscal Year
2009 2010 2011 2012 2013 Total
Contractual ObligationsPurchase commitment (1) . . . . . . . . . . . . . . . . . . . . . . . . . $6,245 $ — $ — $ — $— $ 6,245Long-term lease financing obligation (2) . . . . . . . . . . . . . . 2,058 2,865 2,906 1,087 — 8,916Lease obligations (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 314 205 158 — 1,260Long-term investment commitments(Skypoint Fund) (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737 — — — — 737
Remediation commitment (5) . . . . . . . . . . . . . . . . . . . . . . 53 53 53 33 — 192
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,676 $3,232 $3,164 $1,278 $— $17,350
Note: The table above excludes the liability for uncertain tax positions of approximately $1,023,000 at March 30,2008 since we cannot predict with reasonable reliability the timing of cash settlements with the respectivetaxing authorities.
(1) We place purchase orders with wafer foundries and other vendors as part of our normal course of business.We expect to receive and pay for wafers, capital equipment and various service contract over the next 12 to18 months from our existing cash balances.
(2) Lease payments excluding $12.2 million estimated final obligation settlement with the lessor by returningthe Hillview facility at the end of lease term due on our Hillview facility in Milpitas, California under a5-year Standard Form Lease agreement that we signed with Mission West Properties L.P. on March 9, 2006,as amended on August 25, 2007. It also includes a $4.7 million licensing agreement related to engineeringdesign software.
(3) Includes lease payments related to worldwide offices and buildings.
(4) The commitment related to the Skypoint Fund does not have a set payment schedule and thus will becomepayable upon the request from the Fund's General Partner.
(5) The commitment relates to the environmental remediation activities of Micro Power Systems, Inc.
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RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes toConsolidated Financial Statements, Note 2—Accounting Policies.”
SUBSEQUENT EVENT
Please refer to Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes toConsolidated Financial Statements, Note 20—Subsequent Event.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Fluctuations. We are exposed to foreign currency fluctuations primarily through ourforeign operations. This exposure is the result of foreign operating expenses being denominated in foreigncurrency. Operational currency requirements are typically forecasted for a one-month period. If there is a need tohedge this risk, we may enter into transactions to purchase currency in the open market or enter into forwardcurrency exchange contracts.
If our foreign operations forecasts are overstated or understated during periods of currency volatility, wecould experience unanticipated currency gains or losses. For the fiscal year ended March 30, 2008, we did nothave significant foreign currency denominated net assets or net liabilities positions, and had no foreign currencycontracts outstanding.
Interest Rate Sensitivity. We maintain investment portfolio holdings of various issuers, types, and maturitydates with various banks and investment banking institutions. The market value of these investments on anygiven day during the investment term may vary as a result of market interest rate fluctuations. Our investmentportfolio consisted of cash, money market funds and fixed income securities of $267.7 million as of March 30,2008 and $355.1 million as of March 31, 2007. These securities, like all fixed income instruments, are subject tointerest rate risk and will vary in value as market interest rates fluctuate. If market interest rates were to increaseor decline immediately and uniformly by less than 10% from levels as of March 30, 2008, the increase or declinein the fair value of the portfolio would not be material. At March 30, 2008, the difference between the fair marketvalue and the underlying cost of the investments portfolio was an unrealized gain of $1.9 million.
Our short-term investments are classified as “available-for-sale” securities and the cost of securities sold isbased on the specific identification method. At March 30, 2008, short-term investments consisted of commercialpaper, asset-backed securities, corporate bonds and government securities of $146.8 million.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Exar Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cash flows present fairly, in all materialrespects, the financial position of Exar Corporation and its subsidiaries at March 30, 2008 and March 31, 2007,and the results of their operations and their cash flows for each of the three years in the period ended March 30,2008 in conformity with accounting principles generally accepted in the United States of America. Also in ouropinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofMarch 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management isresponsible for these financial statements, for maintaining effective internal control over financial reporting andfor its assessment of the effectiveness of internal control over financial reporting, included in Management’sReport on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financialstatements and on the Company’s internal control over financial reporting based on our integrated audits. Weconducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audits of the financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, and evaluating the overallfinancial statement presentation. Our audit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considered necessary in the circumstances. Webelieve that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in whichit accounts for uncertain tax positions in fiscal year 2008 and the manner in which it accounts for share-basedcompensation in fiscal year 2007.
A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (iii) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, CaliforniaJune 13, 2008
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts)
March 30,2008
March 31,2007
ASSETSCurrent assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,016 $ 119,809Short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,844 236,270Accounts receivable (net of allowances of $714 and $322) . . . . . . . . . . . . . . . . . . . . 9,943 4,028Accounts receivable, related party (net of allowances of $1,421 and $816) . . . . . . . 3,712 338Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,201 4,779Interest receivable and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,889 5,262Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507 809
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,112 371,295
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,130 25,404Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,626 5,190Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,019 5,451Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697 562Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,636 2,670Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,602
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 424,220 $ 421,174
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,801 $ 2,139Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,744 3,418Deferred income and allowance on sales to distributors . . . . . . . . . . . . . . . . . . . . . . 3,253 —Deferred income and allowance on sales to distributors, related party . . . . . . . . . . . 9,118 —Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,136 3,150Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,520
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,052 14,227Long-term lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,379 —Other non-current obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,712 191
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,143 14,418
Commitments and contingencies (Notes 14, 15 and 16)
Total stockholders’ equityPreferred stock, $.0001 par value; 2,250,000 shares authorized; no sharesoutstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Common stock, $.0001 par value; 100,000,000 shares authorized; 43,928,762 and36,154,815 shares issued and outstanding at March 30, 2008 and March 31,2007, respectively (net of treasury shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702,218 451,084Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,873 76Treasury stock at cost, 18,288,021 and 9,015,257 shares at March 30, 2008 andMarch 31, 2007, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (235,538) (142,572)
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,480) 98,164
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371,077 406,756
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 424,220 $ 421,174
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)
Fiscal Years Ended
March 30,2008
March 31,2007
March 31,2006
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,925 $54,580 $51,041Net sales, related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,818 13,922 15,983
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,743 68,502 67,024
Cost of sales:Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,773 17,041 15,802Cost of sales, related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,406 3,967 4,827Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . 5,452 960 920
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,631 21,968 21,549
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,112 46,534 45,475
Operating expenses:Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,660 25,838 24,691Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,899 24,925 21,291Goodwill and other intangible asset impairment . . . . . . . . . . . . . . . . . . . . 165,191 — —Acquired in-process research and development . . . . . . . . . . . . . . . . . . . . . 8,800 — —
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,550 50,763 45,982Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (202,438) (4,229) (507)Other income and expense:
Interest income and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,037 16,526 12,297Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (771) — —Other-than-temporary loss on long-term investments . . . . . . . . . . . . . . . . (591) (957) (1,215)
Total other income and expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,675 15,569 11,082Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (187,763) 11,340 10,575Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,116 3,316 2,789
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(195,879) $ 8,024 $ 7,786
Earnings (loss) per share:Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4.55) $ 0.22 $ 0.20
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4.55) $ 0.22 $ 0.20
Shares used in the computation of earnings (loss) per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,090 36,255 38,152
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,090 36,480 38,510
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)(In thousands, except share amounts)
Common Stock Treasury Stock AdditionalPaid-in-Capital
RetainedEarnings
(AccumulatedDeficit)
Accum-ulatedOther
Compre-hensiveIncome(Loss)
TotalStockholders’
EquityShares Amount Shares Amount
Balance, March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 42,507,031 $4 (497,110) $ (8,314) $417,073 $ 82,354 $(1,070) $ 490,047Comprehensive income:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,786 7,786Other comprehensive income:Foreign currency translation adjustments, net of taxexpense of $37 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 62
Unrealized gains on marketable securities net of taxbenefit of $254 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591 591
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,439
Issuance of common stock through employee stockplans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,361,524 11,580 11,580
Tax benefit from stock plans . . . . . . . . . . . . . . . . . . . . . . . 1,592 1,592Issuance of common stock for services . . . . . . . . . . . . . . . 30,000Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . (7,770,000) (124,388) (124,388)Amortization of deferred stock based compensation . . . . . 135 135
Balance, March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 43,898,555 $4 (8,267,110) $(132,702) $430,380 $ 90,140 $ (417) $ 387,405Comprehensive income:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,024 8,024Other comprehensive income:Foreign currency translation adjustments, net of taxexpense of $102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (155) (155)
Unrealized gains on marketable securities net of taxbenefit of $426 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 648 648
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,517
Issuance of common stock through employee stockplans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254,817 15,844 15,844
Tax benefit from stock plans . . . . . . . . . . . . . . . . . . . . . . . 510 510Issuance of common stock for services . . . . . . . . . . . . . . . 16,700Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . 4,350 4,350Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . (748,147) (9,870) (9,870)
Balance, March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . 45,170,072 $4 (9,015,257) $(142,572) $451,084 $ 98,164 $ 76 $ 406,756
Comprehensive loss:Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195,879) (195,879)Cumulative effect adjustment to retained earnings relatedto the adoption of FIN 48 . . . . . . . . . . . . . . . . . . . . . . . . 235 235
Other comprehensive income:Foreign currency translation adjustments, net of taxbenefit of $50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77) (77)
Unrealized gains on marketable securities . . . . . . . . . . . . . 1,874 1,874
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(193,847)
Issuance of common stock in connection with the Sipexmerger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,459,076 229,999 229,999
Fair value of vested options assumed in connection withthe Sipex merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,401 10,401
Fair value of warrants assumed in connection with theSipex merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,489 1,489
Issuance of common stock through employee stockplans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518,193 4,288 4,288
Tax deficit from stock plans . . . . . . . . . . . . . . . . . . . . . . . . (55) (55)Issuance of common stock for vested restricted stockunits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,442
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . 5,012 5,012Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . (9,272,764) (92,966) (92,966)
Balance, March 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 62,216,783 $4 (18,288,021) $(235,538) $702,218 $ (97,480) $ 1,873 $ 371,077
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
Fiscal Years Ended
March 30,2008
March 31,2007
March 31,2006
Cash flows from operating activities:Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(195,879) $ 8,024 $ 7,786Reconciliation of net income (loss) to net cash provided by operating activities:
Goodwill and other intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,191 — —Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,615 5,257 5,745Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,895 529 112Acquired in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,800 — —Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,979 4,350 135Provision for sales returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,273 3,964 3,231Fair value adjustment of acquired inventories included in cost of sales . . . . . . . . . . . 2,231 — —Other than temporary loss on long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . 591 957 1,215Tax (deficit) benefits from stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55) 510 1,592Gross tax windfall from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . — (579) —Changes in operating assets and liabilities, net of effect of the Sipex merger:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,842) (902) (6,761)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626 752 (1,872)Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,145 (303) (138)Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 (505) 432Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,798) 575 496Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543 497 702Deferred income and allowance on sales to distributors . . . . . . . . . . . . . . . . . . . 9,956 — —Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,326 (481) (175)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 13,820 22,645 12,500
Cash flows from investing activities:Purchases of property, plant and equipment and intellectual property . . . . . . . . . . . . . . . . (4,923) (2,952) (5,879)Purchases of short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (322,279) (362,585) (64,169)Proceeds from sales and maturities of short-term marketable securities . . . . . . . . . . . . . . . 413,524 269,596 111,044Contributions to long-term investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (557) (799) (129)Acquisition of ON business from Infineon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (11,420)Acquisition of Sipex, net of cash acquired and transaction costs . . . . . . . . . . . . . . . . . . . . (2,916) — —
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . 82,849 (96,740) 29,447
Cash flows from financing activities:Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (92,965) (9,870) (124,388)Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,288 15,844 11,580Repayment of bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,291) — —Repayment of lease financing obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (368) — —Gross tax windfall from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 579 —
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . (94,336) 6,553 (112,808)Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126) (259) 93
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,207 (67,801) (70,768)Cash and cash equivalents at the beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,809 187,610 258,378
Cash and cash equivalents at the end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,016 $ 119,809 $ 187,610
Supplemental disclosure of non-cash investing and financing activities:Issuance of common stock in consideration for acquired assets and liabilities of Sipex . . $ 229,999 $ — $ —Assumption of vested options and warrants of Sipex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,890 $ — $ —Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,088 $ 2,018 $ 351Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 738 $ — $ —Property, plant and equipment acquired under capital lease . . . . . . . . . . . . . . . . . . . . . . . . $ 5,154 $ — $ —
See accompanying notes to consolidated financial statements.
62
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
NOTE 1. DESCRIPTION OF BUSINESS
Exar Corporation and its subsidiaries (“Exar” or “we”) was incorporated in California in 1971 andreincorporated in Delaware in 1991. We are a fabless semiconductor company that designs, develops, marketsand sells power management and connectivity silicon solutions. Applying both analog and digital technologies,our products are deployed in a wide array of applications such as portable electronic devices, set top boxes,digital video recorders, telecommunication systems and industrial automation equipment.
On August 25, 2007, we acquired Sipex Corporation (“Sipex”) through the merger of Sipex and a subsidiary ofExar. Sipex was a company that designed, manufactured and marketed high performance, analog integrated circuits(“IC”) used by original equipment manufacturers (“OEM”), in the computing, consumer electronics, communicationsand networking infrastructure markets. The results of operations of Sipex and estimated fair value of assets acquiredand liabilities assumed were included in our consolidated financial statements beginning August 26, 2007.
NOTE 2. ACCOUNTING POLICIES
Basis of Presentation—In December 2007, we changed our fiscal year end from March 31 to a 52-53 weekfiscal year ending on the Sunday closest to March 31. As part of this change, each fiscal quarter will also end on theSunday closest to the end of the corresponding calendar quarter. The third fiscal quarter of 2008 included 91 daysfrom October 1, 2007 to December 30, 2007. The fourth fiscal quarter of 2008 included 91 days from December 31,2007 to March 30, 2008. Hereinafter, the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006are also referred to as “2008,” “2007” and “2006” unless otherwise indicated.
Certain amounts previously reported have been reclassified to conform to the presentation of the fiscal yearof 2008.
In conjunction with the Sipex merger, we reassessed our ability to estimate returns and allowances andconsequently, on August 26, 2007, changed the revenue recognition used for sales to our two primarydistributors, Future Electronics Inc. (“Future”) and Nu Horizons Electronics Corp. (“Nu Horizons”), from sell-inbasis to sell-through basis (See Note 2 – Accounting Policies, Revenue Recognition).
In December 2007, in connection with integrating and realigning our combined operations with Sipex, wereassessed the economic facts and circumstances of each of our foreign subsidiaries and changed the functionalcurrencies for our foreign subsidiaries to the U.S. Dollar. Accumulated other comprehensive loss reported in theconsolidated balance sheet before December 1, 2007, related to the cumulative foreign currency translationadjustments of our subsidiaries prior to changing our functional currency was immaterial.
The accounts of foreign subsidiaries have been remeasured into U.S. Dollars in accordance with theFinancial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 52, ForeignCurrency Translation (“FAS 52”). Accordingly, foreign currency is remeasured to U.S. Dollars for financialpurposes by using the U.S. Dollar as the functional currency and exchange gains and losses are reported inincome and expenses. These currency gains or losses are reported in interest and other income, net in theconsolidated statements of operations. Monetary balance sheet accounts are remeasured using the currentexchange rate in effect at the balance sheet date. For non-monetary items, the accounts are remeasured at thehistorical exchange rate. Revenues and expenses are remeasured at the average exchange rates for the period.
Principles of Consolidation—The consolidated financial statements include the accounts of Exar and itswholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Thefunctional currency of Exar and its significant subsidiaries is the U.S. Dollar.
63
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
Use of Management Estimates—The preparation of consolidated financial statements in conformity withaccepted accounting principles in the United States requires management to make estimates, judgments andassumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure ofcontingent assets and liabilities. On an on-going basis, we evaluate our estimates, including (1) revenuerecognition; (2) valuation of inventories; (3) income taxes; (4) stock-based compensation; (5) goodwill; and(6) long-lived assets. Actual results could differ from these estimates and material effects on operating resultsand financial position may result.
Business Combinations—The estimated fair value of acquired assets and assumed liabilities and the resultsof operations of acquired businesses are included in our consolidated financial statements from the effective dateof the purchase. The total purchase price is allocated to the estimated fair value of assets acquired and liabilitiesassumed based on management estimates as per Statement of Financial Accounting Standards No. 141, BusinessCombinations (“FAS 141”). The purchase price includes direct transaction costs consisting of investmentbanking, legal and accounting fees.
Cash and Cash Equivalents—We consider all highly liquid debt securities and investments with a maturityfrom the date of purchase of 90 days or less to be classified as cash and cash equivalents. Cash and cashequivalents also consist of cash on deposit with banks and money market funds.
Inventories—Inventories are recorded at the lower of cost or market, determined on a first-in, first-outbasis. Cost is computed using the standard cost, which approximates average actual cost. Inventory is writtendown when conditions indicate that the selling price could be less than cost due to physical deterioration,obsolescence, changes in price levels, or other causes. The write-down of excess inventories is generally basedon inventory levels in excess of either six or twelve months of demand, as judged by management, for eachspecific product.
Our inventories consisted of the following (in thousands):
March 30,2008
March 31,2007
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,775 $2,426Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,426 2,353
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,201 $4,779
Property, Plant and Equipment—Property, plant and equipment, including capital leases and leaseholdimprovements, are stated at cost less accumulated depreciation and amortization. Depreciation for machinery andequipment is computed using the straight-line method over the estimated useful lives of the assets, which rangesfrom three to ten years. Buildings are depreciated using the straight-line method over an estimated useful life of30 years. Assets held under capital leases and leasehold improvements are amortized over the shorter of the termsof the leases or their estimated useful lives. Land is not depreciated.
64
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
Our property, plant and equipment consisted of the following (in thousands):
March 30,2008
March 31,2007
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,960 $ 6,660Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,584 14,350Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,215 52,670
Property, plant and equipment, total . . . . . . . . . . . . . . . . . . . . . . . . . . 99,759 73,680Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . (53,629) (48,276)
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,130 $ 25,404
Depreciation and amortization expense for the fiscal years ended March 30, 2008, March 31, 2007 andMarch 31, 2006 was $5.9 million, $4.6 million, and $5.1 million, respectively.
Non-Marketable Equity Securities—Non-marketable equity securities are presented on our consolidatedbalance sheets as long-term investments. They are accounted for at historical cost and are subject to a periodicimpairment review. This impairment analysis requires significant judgment to identify events or circumstancesthat would likely have a significant adverse effect on the fair value of the investment. The indicators we use toidentify those events and circumstances include the investment manager’s evaluation, the investee’s revenue andearnings trends relative to predefined milestones and overall business prospects; the technological feasibility ofthe investee’s products and technologies; the general market conditions in the investee’s industry; and theinvestee’s liquidity, debt ratios and the rate at which the investee is using cash. Investments identified as havingan indicator of impairment are subject to further analysis to determine if the investment is other than temporarilyimpaired, in which case the investment is written down to its impaired value. When an investee is not consideredviable from a financial or technological point of view, the entire investment is written down. Impairment ofnon-marketable equity securities is recorded in the “Other-than-temporary loss on long-term investments” lineitem in the consolidated statements of operations.
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net tangible andidentifiable intangible assets acquired in a business combination. We follow the provisions of Statement ofFinancial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”), under whichgoodwill is no longer subject to amortization. We evaluate goodwill for impairment on an annual basis orwhenever events and changes in circumstances suggest that the carrying amount may not be recoverable.Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount,including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimatedusing a combination of the income approach that uses discounted cash flows and the market approach thatutilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwillis considered impaired and a second step is performed to measure the amount of impairment loss, if any. Becausewe have one reporting unit under FAS 142, we utilized an entity-wide approach to assess goodwill forimpairment. We performed our annual goodwill impairment analysis during the fourth fiscal quarter of 2008pursuant to the steps and requirements under FAS 142 and recorded a $128.5 million impairment loss which wasincluded in the “Goodwill and other intangible asset impairment” line item in the consolidated statements ofoperations. (See Note 8—Goodwill and Intangible Assets).
Long-Lived Assets—Our long-lived assets include land, buildings, equipment, furniture and fixtures,privately held equity investments and other intangible assets. Long-lived assets are evaluated for impairmentwhenever events or changes in circumstances indicate that the carrying amount of an asset may not be
65
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
recoverable. We evaluate the recoverability of our long-lived assets in accordance with Statement of FinancialAccounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”).We compare the carrying value of long-lived assets to our projection of future undiscounted cash flowsattributable to such assets and, in the event that the carrying value exceeds the future undiscounted cash flows,we record an impairment charge against income equal to the excess of the carrying value over the asset’s fairvalue. During the fourth fiscal quarter of 2008, we concluded that our market capitalization was below its netbook value for an extended period of time and, as a result, long-lived assets were tested for recoverability. Wedetermined that the carrying value of intangible assets acquired in the Sipex merger exceeded the fair value. Weused the income approach to determine the fair value of these intangible assets. The evaluation resulted in animpairment charge of $36.7 million against intangible assets which was included in the “Goodwill and otherintangible asset impairment” line item in the consolidated statements of operations (See Note 8—Goodwill andIntangible Assets). Substantially all of our property, plant and equipment and other long-lived assets are locatedin the United States
Income Taxes—Income taxes are reported under Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (“FAS 109”) and accordingly, deferred taxes are recognized using the asset andliability method, whereby deferred tax assets and liabilities are recognized for the future tax consequenceattributable to differences between the financial statement carrying amounts of existing assets and liabilities andtheir respective tax base, and operating loss and tax credit carryforwards. Valuation allowances are provided if itis more likely than not that some or all of the deferred tax assets will not be realized.
On April 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which provides a financial statementrecognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return.Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than notthat the tax position will be sustained on examination by the taxing authorities, based on the technical merits ofthe position. The tax benefits recognized in the financial statements from such a position should be measuredbased on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current anddeferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, andincome tax disclosures. The cumulative effect of adopting FIN 48 was a decrease in the liability for uncertain taxpositions and an increase of $0.2 million to the April 1, 2007 opening retained earnings balance.
Revenue Recognition—We recognize revenue in accordance with the Securities and Exchange Commission(“SEC”) Staff Accounting Bulletin 104, Revenue Recognition (“SAB 104”). SAB 104 requires that four basiccriteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists;(2) delivery has occurred or services rendered; (3) the price is fixed or determinable; and (4) collectability isreasonably assured.
We derive revenue principally from the sale of our products to distributors and to OEMs or their contractmanufacturers. Our delivery terms are primarily FOB shipping point, at which time title and all risks ofownership are transferred to the customer. For the fiscal years ended March 30, 2008, March 31, 2007 andMarch 31, 2006, approximately 35%, 38% and 39%, respectively, of our net sales were derived from sales to ourtwo primary distributors, Future and Nu Horizons; and approximately 65%, 62% and 61%, respectively, of ournet sales were derived from product sales to other distributors, OEM customers and other non-distributors.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
Non-distributors:
For non-distributors, revenue is recognized when title to the product is transferred to the customer, whichoccurs upon shipment or delivery, depending upon the terms of the customer order, provided that persuasiveevidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of theresulting receivables is reasonably assured, there are no customer acceptance requirements and there are noremaining significant obligations. Provisions for returns and allowances for non-distributor customers areprovided at the time product sales are recognized. An allowance for sales returns and allowances fornon-distributor customers are recorded based on historical experience or specific identification of an eventnecessitating an allowance.
Distributors:
Our two primary distributors’ agreements permit the return of 3% to 5% of their purchases during thepreceding quarter for purposes of stock rotation. For one of these distributors, a scrap allowance of 2% of thepreceding quarter’s purchases is permitted. We also provide discounts to certain distributors based on volume ofproduct they sell for a specific product with a specific volume range for a given customer over a period not toexceed one year.
We recognize revenue to each of our distributors using either of the methodologies in the following table.Once adopted, the revenue methodology for a distributor will be maintained unless there is a change incircumstances indicating the methodology for that distributor is no longer appropriate.
• Sell-in Basis: Revenue is recognized upon shipment if we conclude we can reasonably estimate thecredits for returns, pricing allowances and/or other concessions. We record an estimated allowance, at thetime of shipment, based upon historical patterns of returns, pricing allowances and other concessions (i.e.,“sell-in” basis).
• Sell-through Basis: Revenue and the related costs of sales are deferred until the resale to the endcustomer if we grant more than limited rights of returns, pricing allowance and/or other concessions or ifwe cannot reasonably estimate the level of returns and credits issuable (i.e., “sell-through” basis). Underthe sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to thedistributor as title to the inventory is transferred upon shipment, at which point we have a legallyenforceable right to collection under normal terms. The associated sales and cost of sales are deferred andis included in deferred income and allowance on sales to distributors in the consolidated balance sheet.When the related product is sold by our distributors to their end customers, at which time the ultimateprice we receive is known, we recognize previously deferred income as sales and cost of sales.
Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from ourdistributors in a timely fashion. Distributors provide us periodic data regarding the product, price,quantity, and end customer when products are resold as well as the quantities of our products they stillhave in stock. We must use estimates and apply judgments to reconcile distributors’ reported inventoriesto their activities. Any error in our judgment could lead to inaccurate reporting of our revenues, grossmargin, deferred income and allowances on sales to distributors and net income.
Our historical patterns of returns, pricing allowances and other concessions with distributors have beenfairly consistent, which has enabled us to reasonably estimate such allowances at the time of shipment.Therefore, we have historically recognized revenue on sales to all distributors on a sell-in basis and recorded anestimated allowance, at the time of shipment, based on authorized and historical patterns of returns and other
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
concessions. Concurrent with the merger with Sipex, we reassessed our expected ability to continue to reasonablyestimate such allowances for each of our distributors as well as for Sipex’s distributors. Prior to the merger,Sipex recognized revenue on sales to all distributors on a sell-through basis. Consistent with Sipex’s pastpractice, we have concluded that we are not able to reasonably estimate such allowances at the time of shipmentof products to Sipex’s distributors. Therefore, we have determined that consistent with Sipex’s past practice, wewill continue to recognize sales to Sipex’s distributors on a sell-through basis. In addition, as a result of themerger, our relationships, marketing and sales practices with our two primary distributors have changed. Further,as disclosed Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to ConsolidatedFinancial Statements, Note 5—Related Party Transaction,” Future is now a related party of Exar. As a result ofthese changes, we have concluded that we can no longer reasonably estimate returns, pricing allowances andother concessions at the time of shipment of products to these distributors. Accordingly, as of August 26, 2007,we determined it was appropriate that revenue on all sales to Future and Nu Horizons be recognized on a sell-through basis.
Research and Development Expenses—Research and development expenses consist primarily of thesalaries and related expenses of those employees engaged in research, design and development activities;expenses related to design tools, license expenses related to intellectual property; mask tooling costs; suppliesand services; and facilities expenses. All research and development expenses that have no alternative future useare expensed as incurred.
Comprehensive Income (Loss)—Comprehensive income (loss) includes charges or credits to equity as aresult of foreign currency translation adjustments, net of taxes, and unrealized gains or losses on marketablesecurities, net of taxes. Comprehensive income (loss) for the fiscal years ended March 30, 2008, March 31, 2007and March 31, 2006 has been disclosed within the consolidated statements of stockholders’ equity andcomprehensive income (loss).
Foreign Currency—The accounts of foreign subsidiaries are remeasured into U.S. Dollars in accordancewith the Statement of Financial Accounting Standards No. 52, Foreign Currency Translation (“FAS 52”).Accordingly, foreign currency is remeasured to U.S. Dollars for financial reporting purposes by using theU.S. Dollar as the functional currency and exchange gains and losses are reported in income and expenses. Thesecurrency gains or losses are reported in interest income and other, net in the consolidated statements ofoperations. Monetary balance sheet accounts are remeasured using the current exchange rate in effect at thebalance sheet date. For non-monetary items, the accounts are remeasured at the historical exchange rate.Revenues and expenses are remeasured at the average exchange rates for the period. Foreign currency transactionlosses were approximately $65,000, $20,000 and $34,000 for the fiscal years ended March 30, 2008, March 31,2007 and March 31, 2006, respectively.
Concentration of Credit Risk and Significant Customers—Financial instruments potentially subjecting usto concentrations of credit risk consist primarily of accounts receivable, cash, cash equivalents, short-termmarketable securities and long-term investments. The majority of our sales are derived from distributors andmanufacturers in the communications, industrial and computer industries. We perform ongoing credit evaluationsof our customers and generally do not require collateral for sales on credit. We maintain allowances for potentialcredit losses, and such losses have been within management’s expectations. Charges to bad debt expense wereinsignificant for the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006, respectively. Ourpolicy is to place our cash, cash equivalents and short-term marketable securities with high credit qualityfinancial institutions and limit the amounts invested with any one financial institution or in any type of financialinstrument. We do not hold or issue financial instruments for trading purposes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
We sell our products to distributors and OEMs throughout the world. Alcatel-Lucent accounted for 11%,16% and 12% of our net sales for the fiscal years of 2008, 2007 and 2006, respectively. No other OEM customeraccounted for 10% or more of our net sales for any of the three fiscal years of 2008, 2007 and 2006. Future, arelated party, was and continues to be our largest distributor. Future, on a worldwide basis, represented 24%,20% and 24% of net sales in fiscal years 2008, 2007 and 2006, respectively. Our second largest distributor, NuHorizons, accounted for 11%, 18%, and 15%, of net sales in fiscal years of 2008, 2007 and 2006, respectively.
Concentration of Other Risks—The majorities of our products are currently fabricated at CharteredSemiconductor Manufacturing Ltd. (“Chartered”) in Singapore, Episil Technologies Inc. (“Episil”) in Taiwan,and Hangzhou Silan Microelectronics Co. Ltd. and Hangzhou Silan Integrated Circuit Co. Ltd. (collectively“Silan”) in China, and are assembled and tested by other third-party sub-contractors located in Asia. A significantdisruption in the operations of one or more of these sub-contractors would impact the production of our productsfor a substantial period of time which could have a material adverse effect on our business, financial conditionand results of operations.
Fair Value of Financial Instruments—We estimate the fair value of our financial instruments by usingavailable market information and valuation methodologies considered to be appropriate. However, considerablejudgment is required in interpreting market data to develop the estimates of fair value. The use of differentmarket assumptions and/or estimation methodologies could have a material effect on estimated fair valueamounts. The estimated fair value of our carrying values of cash and cash equivalents, short-term investments,accounts receivable, accounts payable and accrued liabilities at March 30, 2008 and March 31, 2007 was notmaterially different from the carrying values presented in the consolidated balance sheets due to the relativelyshort periods to maturity of the instruments.
Stock-Based Compensation—On April 1, 2006, we adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), Share-Based Payment (“FAS 123R”) by using the modified prospective transitionmethod. In accordance with this transition method, we began recognizing compensation expense for all share-based awards granted after April 1, 2006 plus unvested awards granted prior to April 1, 2006. Under this methodof implementation, no restatement of prior periods has been made. The estimated fair value of the equity-basedawards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis.Determining the fair value of stock-based awards at the grant date requires considerable judgment, includingestimating expected volatility, expected term and risk-free rate. If factors change and we employ differentassumptions, stock-based compensation expense may differ significantly from what we have recorded in theprior years.
Recent Accounting Pronouncements
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy ofGenerally Accepted Accounting Principles (“FAS 162”). The new standard is intended to improve financialreporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used inpreparing financial statements that are presented in conformity with U.S. generally accepted accountingprinciples (“GAAP”) for nongovernmental entities. FAS 162 is effective 60 days following SEC approval of thePublic Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of PresentFairly in Conformity with Generally Accepted Accounting Principles. We are currently evaluating the impact, ifany, of the adopting the FAS 162, on our financial position, results of operations and liquidity.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007)(“FAS 141R”), Business Combinations, which replaces FAS 141. The statement retains the purchase method of
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilitiesare recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilitiesassumed arising from contingencies, requires the capitalization of in-process research and development at fairvalue, and requires the expensing of acquisition-related costs as incurred. FAS 141R is effective for financialstatements issued for fiscal years beginning after December 15, 2008 and will apply prospectively to businesscombinations completed on or after that date. We are currently evaluating the impact of implementing FAS 141Ron our financial position, results of operations and liquidity.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair ValueOption for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits companies to choose tomeasure certain financial instruments and certain other items at fair value. The standard requires that unrealizedgains and losses on items for which the fair value option has been elected be reported in earnings. FAS 159 iseffective for financial statements issued for fiscal years beginning after November 15, 2007, although earlieradoption is permitted. As of March 31, 2008, the first day of our fiscal year 2009, we adopted FAS 159 and theadoption had no material impact on our financial position, results of operations and liquidity.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“FAS 157”),Fair Value Measurements, which defines fair value, establishes a framework and provides guidance regardingthe methods used for measuring fair value, and expands disclosures about fair value measurements. In February2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1, Application of FASB Statement No. 157 toFASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurement forPurpose of Lease Classification or Measurement under Statement 13, which amends FAS 157 to excludeaccounting pronouncements that address fair value measurements for purposes of lease classification ormeasurement under FAS 13, Accounting for Leases. In February 2008, the FASB also issued FSP FAS 157-2,Effective Date of FASB Statement No. 157, which delays the effective date of FAS 157 until the first fiscalquarter of 2010 for all non-financial assets and non-financial liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (at least annually). FAS 157 does notrequire any new fair value measurement but rather eliminates inconsistencies in guidance found in various prioraccounting pronouncements. FAS 157 is effective for financial statements issued for the fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years. As of March 31, 2008, the first day of ourfiscal year 2009, we adopted FAS 157 and the adoption had no material impact on our financial position, resultsof operations and liquidity.
NOTE 3. BUSINESS COMBINATIONS
We periodically evaluate strategic acquisitions that build upon our existing library of intellectual property,human capital and engineering talent, and seek to increase our leadership position in the areas in which weoperate.
Merger with Sipex Corporation
On August 25, 2007, we completed our merger with Sipex, a company that designed, manufactured andmarketed high performance, analog ICs used by OEMs in the computing, consumer electronics, communicationsand networking infrastructure markets. As a result of the merger, we have combined product offerings, increasedtechnical expertise, distribution channels, customer base and geographic reach as well as reduced expenses due tosignificant cost synergies.
Each share of Sipex’s common stock outstanding at the effective time of the merger was converted into0.6679 shares of our common stock. As a result, approximately 16.5 million shares of our common stock were
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
issued. The fair value of the common stock issued was determined using a share price of $13.97, whichrepresented the average closing price of our common stock for two trading days before and two trading days afterMay 8, 2007, the date the merger was announced. We assumed stock options to purchase approximately2.2 million shares of our common stock. The fair value of options assumed was estimated by using the Black-Scholes option pricing model and a share price of $13.97. In addition, in connection with the merger, weassumed warrants to purchase approximately 280,000 shares of our common stock. The warrants are exercisableat any time for shares of our common stock at an initial exercise price of $9.63 per share, subject to adjustmentupon certain events. The warrants expire on May 18, 2011. The fair value of $5.31 for each warrant assumed wasestimated by using the Black-Scholes option pricing model and a share price of $13.97.
The merger was accounted for as a purchase in accordance FAS 141. Accordingly, the results of operationsof Sipex and estimated fair value of assets acquired and liabilities assumed were included in our consolidatedfinancial statements beginning August 26, 2007.
The total estimated purchase price of the merger was as follows (in thousands):
Amounts
Fair value of Exar common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,999Fair value of options and warrants assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,701Direct transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,038
Total estimated purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,738
Purchase Price Allocation
The allocation of the purchase price to Sipex’s tangible and identifiable intangible assets acquired andliabilities assumed was based on their estimated fair values. The excess of the purchase price over the tangibleand identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. Goodwillresulted primarily from our expectations of synergies from integration of Sipex’s product offerings with ourproduct offerings. Goodwill is not deductible for tax purposes. We have up to twelve months from the closingdate of the merger to adjust any pre-acquisition contingencies, if any.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The purchase price has been allocated and adjusted as follows (in thousands):
As ofAugust 25,
2007 Adjustments
As ofMarch 30,
2008
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,122 $ 1,122Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 5,720 5,720Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,025 220 12,245Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,972 84 2,056Property, plant and equipment . . . . . . . . . . . . . . . . . . 19,960 (77) 19,883Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,439) (6,439)Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,490) (40) (10,530)Long-term financing obligations and others . . . . . . . (18,470) (18,470)
Net tangible assets acquired . . . . . . . . . . . . . . . . . . . 5,400 5,587Identifiable intangible assets . . . . . . . . . . . . . . . . . . . 60,600 60,600In-process research and development . . . . . . . . . . . . 8,800 8,800Fair value of unvested options assumed . . . . . . . . . . 4,811 4,811Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,127 (187) 170,940
Total estimated purchase price . . . . . . . . . . . . . $250,738 $250,738
We recorded net adjustments totaling approximately $187,000 to our goodwill during the fiscal year endedMarch 30, 2008. The adjustments were primarily due to an increase in the fair value of acquired inventory from arecovery of approximately $220,000 and a decrease in the fair value of our severance costs accrual of $381,000,which was partially offset by an increase in the fair value of our facility costs accrual by approximately $338,000resulting primarily from our Billerica lease termination.
During the same period, we recorded a goodwill impairment loss of approximately $128.5 millionassociated with the Sipex merger (See Note 8—Goodwill and Intangible Assets).
Identifiable Intangible Assets
The following table set forth the components of the identifiable intangible assets purchased with the merger,which are being amortized over their estimated useful lives on a straight-line basis (in thousands):
Fair ValueUseful Life(in years)
Existing technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,900 6.0Patents/Core technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,900 5.0Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 0.5Distributor relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500 6.0Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 7.0Tradenames/Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 3.0
Total acquired identifiable intangible assets . . . . . . . . . . . . . . . $60,600
During the fiscal year ended March 30, 2008, we recorded an impairment loss of approximately $36.7million related to the purchased Sipex intangible assets of (See Note 8—Goodwill and Intangible Assets).
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
Acquired In-Process Research and Development
We recorded a charge of $8.8 million in acquired in-process research and development (“IPR&D”),associated with our merger with Sipex in the fiscal quarter ended September 30, 2007. We allocated the purchaseprice related to IPR&D through established valuation techniques. IPR&D was expensed upon acquisition becausetechnological feasibility had not been established and no future alternative uses existed. The fair value oftechnology under development is determined using the income approach, which discounts expected future cashflows to present value, taking into account the stage of completion, estimated costs to complete, utilization ofpatents and core technology, the risks related to successful completion, and the markets served. The cash flowsderived from the IPR&D were discounted at discount rates ranging from 25% to 40%. The percentage ofcompletion for these projects ranged from 20% to 87% at the merger date.
The IPR&D projects underway at Sipex at the merger date were in the interface and power managementproduct families. Within interface, specific projects relate to new products in its multiprotocol and RS485families. Within power management, development activities relate to the commercialization of its digital powertechnology, LED drivers, DC-DC regulators and controllers. All of these projects require further developmentand testing to bring them up to production. IPR&D projects for power management required $2.2 million tocomplete and some product shipments began in late calendar year 2007. IPR&D projects for interface required$0.8 million to complete with expected revenue generation beginning in mid calendar year 2008. All powermanagement and interface projects are scheduled to be completed by the end of the fiscal year of 2009.
If the projects discussed above are not successfully developed and/or successfully marketed, our sales andprofitability may be adversely affected in future periods.
Pro Forma Financial Information
The following unaudited pro forma financial information was based on the respective historical financialstatements of Exar and Sipex. The unaudited pro forma financial information reflected the consolidated results ofoperations as if the merger of Sipex occurred at the beginning of each period and included the amortization of theresulting identifiable acquired intangible assets, effects of the estimated write-up of Sipex inventory to fair valueon cost of goods sold, the exclusion of interest expense on Sipex’s senior convertible notes and stock-basedcompensation expenses. These unaudited pro forma financial information adjustments reflect their related taxeffects. The pro forma data for the fiscal years ended March 30, 2008 and March 31, 2007 also included anon-recurring charge of $8.8 million for acquired IPR&D. The unaudited pro forma financial data is provided forillustrative purposes only and is not necessarily indicative of the consolidated results of operations for futureperiods or that actually would have been realized had Exar and Sipex been a consolidated entity during theperiods presented.
The summary included the impact of certain adjustments mentioned in the previous paragraph (in thousandsexcept per share information):
March 30,2008
March 31,2007
Pro forma net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117,825 $146,257Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(215,767) $ (49,828)Pro forma basic and diluted net loss per share . . . . . . . . . . . . . . . . . $ (4.34) $ (0.95)
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
NOTE 4. CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES
Our cash, cash equivalents and short-term marketable securities at March 30, 2008 and March 31, 2007were as follows (in thousands):
March 30,2008
March 31,2007
Cash and cash equivalentsCash in financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,208 $ 963
Cash equivalentsMoney market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,274 4,496Corporate bonds and commercial paper . . . . . . . . . . . . . . . . . . 86,553 114,350U.S. government and agency securities . . . . . . . . . . . . . . . . . . 5,981 —
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,808 118,846
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,016 119,809
Available-for-sale securitiesMunicipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 45,050U.S. government and agency securities . . . . . . . . . . . . . . . . . . 72,358 149,615Corporate bonds and municipal debt securities . . . . . . . . . . . . 45,578 38,641Asset-backed and collateralized-backed securities . . . . . . . . . . 28,908 2,964
Total short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . $146,844 $236,270
Our marketable securities include municipal securities, commercial paper, asset-backed securities, corporatebonds and government securities. We classify investments as available-for-sale at the time of purchase andre-evaluate such designation as of each consolidated balance sheet date. We amortize premiums and accretediscounts to interest income over the life of the investment. Our available-for-sale securities are classified as cashequivalents if the maturity from the date of purchase is ninety days or less, and as short-term investments forthose with maturities, from the date of purchase, in excess of ninety days which we intend to sell as necessary tomeet our liquidity requirements.
All marketable securities are reported at fair value based on the estimated or quoted market prices as of eachconsolidated balance sheet date, with unrealized gains or losses recorded in accumulated other comprehensiveincome (loss) within stockholders’ equity except those unrealized losses that are deemed to be other thantemporary which are reflected in the other income and expense section in the consolidated statement ofoperations.
Realized gains or losses on the sale of marketable securities are determined on the specific identificationmethod and are reflected in “Interest income and other, net” line item on the consolidated statements ofoperation. Net realized gains on marketable securities for the fiscal year ended March 30, 2008 were $174,000.For the fiscal year ended March 31, 2007, there were $52,000 in net realized gains. For the fiscal year endedMarch 31, 2006, there were $7,000 in net realized losses on marketable securities.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The following table summarized our investments in marketable securities as of March 30, 2008 andMarch 31, 2007 (in thousands):
March 30, 2008
AmortizedCost
GrossUnrealized
Gains
GrossUnrealized
Losses Fair Value
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . $ 28,274 $ — $ — $ 28,274Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . — — — —Corporate bonds and commercial paper . . . . . . . . . 158,790 354 (233) 158,911U.S. government and agency obligations . . . . . . . . 50,146 1,413 — 51,559Asset-backed and collateralized obligations . . . . . . 28,543 462 (97) 28,908
Total at March 30, 2008 . . . . . . . . . . . . . . . . . $265,753 $2,229 $(330) $267,652
March 31, 2007
AmortizedCost
GrossUnrealized
Gains
GrossUnrealized
Losses Fair Value
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . $ 4,496 $— $ — $ 4,496Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . 45,041 35 (26) 45,050Corporate bonds and commercial paper . . . . . . . . . 263,963 47 (45) 263,965U.S. government and agency obligations . . . . . . . . 38,606 99 (64) 38,641Asset-backed and collateralized obligations . . . . . . 2,967 5 (8) 2,964
Total at March 31, 2007 . . . . . . . . . . . . . . . . . $355,073 $186 $(143) $355,116
The amortized cost and estimated fair value of cash equivalents and marketable securities classified asavailable-for-sale at March 30, 2008 and March 31, 2007 by expected maturity were as follows (in thousands):
March 30, 2008 March 31, 2007
Amortized Fair Amortized FairCost Value Cost Value
Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,609 $197,734 $270,421 $270,410Due in 1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . 68,144 69,918 84,652 84,706
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265,753 $267,652 $355,073 $355,116
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The following table summarized the gross unrealized losses and fair values of our investments in anunrealized loss position as of March 30, 2008 and March 31, 2007, aggregated by investment category and lengthof time that individual securities have been in a continuous unrealized loss position (in thousands).
March 30, 2008
Less than 12 months 12 months or greater Total
FairValue
GrossUnrealized
LossesFair
Value
GrossUnrealized
LossesFair
Value
GrossUnrealized
Losses
Corporate bonds and commercial paper . . . . . . $10,431 $(169) $3,155 $ (64) $13,586 $(233)U.S. government and agency obligations . . . . . 750 — — — 750 —Asset-backed and collateralized obligations . . . 1,915 (34) 1,268 (63) 3,183 (97)
Total at March 30, 2008 . . . . . . . . . . . . . . . . . . $13,096 $(203) $4,423 $(127) $17,519 $(330)
March 31, 2007
Less than 12 months 12 months or greater Total
FairValue
GrossUnrealized
LossesFair
Value
GrossUnrealized
LossesFair
Value
GrossUnrealized
Losses
Municipal securities . . . . . . . . . . . . . . . . . . . . . $12,201 $ (26) $ — $ — $12,201 $ (26)Corporate bonds and commercial paper . . . . . 8,942 (10) 6,712 (35) 15,654 (45)U.S. government and agency obligations . . . . 6,456 (7) 12,200 (57) 18,656 (64)Asset-backed and collateralizedobligations . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,456 (8) 1,456 (8)
Total at March 31, 2007 . . . . . . . . . . . . . . . . . $27,599 $ (43) $20,368 $(100) $47,967 $(143)
We review our investment portfolio to identify and evaluate investments that have indications of possibleimpairment. Factors considered in determining whether a loss is temporary include the length of time and extentto which fair value has been less than the cost basis, the financial condition and near-term prospects of theinvestee, credit quality and our ability to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value. We determined that such amounts were not “other-than-temporary” asdefined by the Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments inDebt and Equity Securities (“FAS 115”).
NOTE 5. RELATED PARTY TRANSACTION
Affiliates of Future, Alonim Investments Inc. and its two affiliates (collectively “Alonim”), ownapproximately 7.7 million shares or approximately 18% of our outstanding common stock as of March 30, 2008.As such, Alonim is our largest stockholder.
Our sales to Future are made under an agreement that provides protection against price reduction for itsinventory of our products and other sales allowances. We recognize revenue on sales to Future under thedistribution agreement when Future sells the products to end customers. Future has historically accounted for asignificant portion of our net sales. It is our largest distributor worldwide and accounted for 24%, 20% and 24%of our total net sales for the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006,respectively.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
We reimbursed Future for approximately $56,000, $6,000 and $2,000 of expenses for marketingpromotional materials for the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006,respectively.
Upon our merger with Sipex, we appointed an executive vice president and chief financial officer of Futureto our board of directors. Our board of directors has determined that this director is not independent within themeaning of The Marketplace Rule 4200(a)(15) of The NASDAQ Stock Market by virtue of our relationship withFuture.
In the fourth fiscal quarter of 2006, GWA Investments, LLC and GWA Master Fund, L.P. (collectively“GWA”), requested that we reimburse its costs of $0.4 million in connection with our proxy solicitation inOctober 2005 in support of their director candidates, all of whom were elected to our board of directors at the2005 annual meeting of stockholders. GWA was a hedge fund managed by a director of Exar, Guy W. Adams.These costs were included in selling, general and administrative expenses in our consolidated statements ofoperations for the fiscal year ended March 31, 2006.
NOTE 6. RESTRUCTURING
In connection with the Sipex merger in August 2007, our management approved and initiated plans torestructure the operations of the combined company to eliminate certain duplicative activities, reduce coststructure and better align product and operating expenses with existing general economic conditions. The Sipexrestructuring costs were accounted for as liabilities assumed as part of the purchase business combination inaccordance with the Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with aPurchase Business Combination (“EITF 95-3”).
The following table set forth restructuring liabilities which were included in other accrued expenses on thebalance sheet, and the activities affecting the liabilities for the period ended March 30, 2008 (in thousands):
Facilitycosts
Severancecosts
Totalrestructuring
liabilities
Balance at August 25, 2007 . . . . . . . . . . . . . . . . . . . . . $ 1,166 $1,037 $ 2,203Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,173) (456) (1,629)Sublease income received . . . . . . . . . . . . . . . . . . . 160 — 160Adjustment to accrual . . . . . . . . . . . . . . . . . . . . . . 338 (381) (43)
Balance at March 30, 2008 . . . . . . . . . . . . . . . . . . . . . . $ 491 $ 200 $ 691
The liabilities established in connection with the Sipex merger included the following:
• A liability of $1.0 million for severance and termination benefits for employees;
• A liability of $0.5 million for facility lease exit cost primarily in our international sites;
• A liability of $0.3 million for facility relocation and other costs; and
• A liability of $0.4 million assumed in connection with our merger with Sipex.
For fiscal year 2008, we paid cash severance of approximately $456,000 and changed our estimates andreduced our restructuring accrual by approximately $381,000. The remaining balance of $200,000 for severancecosts was expected to be paid out over the next six months.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
For fiscal year 2008, we also utilized approximately $1.2 million of our restructuring accrual, primarilyrelated to moving expenses at our Hillview facility and the lease expenses for the unused portion of the Billericafacility in Massachusetts. During the same period, we recorded an additional liability of $454,000 in connectionwith the Billerica lease termination and reduced approximately $116,000 restructuring accrual primarily relatedto the facility relocation. The remaining balance of approximately $0.5 million was expected to be paid duringthe remaining terms of the lease contracts which extend through 2012.
NOTE 7. LONG-TERM INVESTMENTS
Our long-term investments consist of the investments in TechFarm Ventures L.P. (Q), L.P. (“TechFarmFund”) and Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”). Both TechFarm Fund and Skypoint Fundare venture capital funds which invest primarily in private companies in the telecommunications and/ornetworking industry. We account for these non-marketable equity securities under the cost method. Inaccordance with the EITF 03-1, The Meaning of Other-Than-Temporary Impairment and its Application toCertain Investments, we periodically review and determine whether the investments are other-than-temporarilyimpaired, in which case the investments are written down to their impaired value.
As of March 30, 2008 and March 31, 2007, our long-term investments balances were as follows (inthousands):
March 30,2008
March 31,2007
TechFarm Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 466 $ 466Skypoint Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,170 2,204
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,636 $2,670
TechFarm Fund
We have made a total of approximately $4.0 million in capital contributions to TechFarm Fund since webecame a limited partner in May 2001. We have reached our total commitment to the fund and made no capitalcontribution to the fund during both fiscal years 2008 and 2007. As a result, we have no capital contributionobligation to the TechFarm Fund at March 30, 2008.
The approximate carrying amount of $0.5 million at March 30, 2008 reflected the net of the capitalcontribution and the accumulative impairment charges. We have never received any capital distribution from thefund.
Impairment
In fiscal year 2008, we did not record any impairment charges after our assessment of the valuation of thefund performance.
In fiscal year 2007, we determined that the TechFarm Fund management fees continued to deplete the fundcapital without any appreciation in the valuation of portfolio companies and concluded that a portion of thecarrying value of our investment in the fund was other-than-temporarily impaired. As a result, we recorded a $0.1million impairment charge in September 2006.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
In fiscal year 2006, we assessed the value of certain discontinued companies and the remaining portfoliocompanies within the TechFarm Fund and we believed that the carrying value of our investment in the fund waspermanently impaired. As a result, we recorded a $1.2 million impairment charge in December 2005.
Skypoint Fund
We have made approximately $4.3 million in capital contributions to Skypoint Fund since we became alimited partner in July 2001. Our total capital commitment is $5.0 million. We contributed $0.6 million and $0.9million to the fund during the fiscal year of 2008 and 2007, respectively. As of March 30, 2008, we have aremaining obligation of approximately $0.7 million to the fund upon its request.
The approximate carrying amount of $2.2 million reflected the net of the capital contribution, accumulativeimpairment charges and capital distributions. We received a capital distribution of $0.1 million and $0.6 millionduring the fiscal year of 2007 and 2006, respectively. We did not receive any distribution during the fiscal yearof 2008. The distribution was accounted for in accordance to FASB Accounting Principle Bulletin 19, The EquityMethod of Accounting for Investments in Common Stock (“APB 18”).We recorded the distribution on the costbasis and reduced the carrying value of our investments in the Skypoint Fund.
Impairment
In fiscal year 2008, we performed a review of our investments and determined that two of the portfoliocompanies in the Skypoint Fund had limited cash on hand and financing opportunities were minimal. Weconcluded that a portion of the carrying value had been other-than-temporarily impaired and recorded a $0.6million impairment charge during the year.
In fiscal year 2007, we became aware that two Skypoint Fund portfolio companies would be liquidated. Webelieved a portion of the carrying value of our investment in the fund was permanently impaired. As a result, werecorded a $0.8 million impairment charge against our earnings in September 2006.
In fiscal year 2006, as a result of impairment review, we concluded that the carrying value of certainportfolio companies in the fund had declined in value and recorded a $0.6 million impairment charges.
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill for the years ended March 30, 2008 and March 31, 2007were as follows (in thousands):
Amount
Balance as of March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,190Goodwill acquired in connection with the Sipex merger . . . . . . . . . . . . . . . . . . . 171,127Goodwill adjustment (see Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (187)Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,504)
Balance as of March 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,626
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
In the fourth fiscal quarter of 2008, we conducted our annual impairment review and determined that, basedon the current market conditions in the semiconductor industry and our stock price over the prior six months, thecarrying amount of our goodwill exceeded its implied fair value under the test for impairment as per FAS 142and recorded a goodwill impairment charge of approximately $128.5 million which was included in the“Goodwill and other intangible asset impairment” line item in the consolidated statements of operations (SeeNote 2—Accounting Policies). Our estimate of the implied fair value of the goodwill was based on the quotedmarket price of our common stock and the discounted value of estimated future cash flows over a seven-yearperiod with residual value and discount rates between 12.5% and 18.8%.
Intangible Assets
Our intangible assets are comprised of intangible assets acquired in connection with our merger with Sipexin August 2007, our acquisition of Fyrestorm’s intellectual property in February 2008 for approximately $3.2million in cash, our acquisition of the Optical Networking Business Unit of Infineon Technologies A.G. in April2005 and other individually acquired intellectual properties.
As of March 30, 2008 and March 31, 2007, our purchased intangible assets were as follows (in thousands):
March 30, 2008 March 31, 2007
GrossCarryingAmount
ImpairmentLoss
AccumulatedAmortization
NetCarryingAmount
GrossCarryingAmount
AccumulatedAmortization
NetCarryingAmount
Existing technology . . . . . . . . $51,581 $(24,935) $(6,517) $20,129 $7,328 $(1,877) $5,451Patents/Core technology . . . . . 7,900 (4,741) (781) 2,378 — — —Customer backlog . . . . . . . . . . 400 (60) (340) — — — —Distributor relationships . . . . . 6,500 (3,961) (537) 2,002 — — —Customer relationships . . . . . . 4,300 (2,653) (301) 1,346 — — —Tradenames/Trademarks . . . . . 600 (337) (99) 164 — — —
$71,281 $(36,687) $(8,575) $26,019 $7,328 $(1,877) $5,451
During the fourth fiscal quarter of 2008, we concluded that our market capitalization was below our netbook value for an extended period of time and as a result, the long-lived assets were tested for recoverability. Thesales and margin projections for Sipex products have declined due to the impact of the weakening economy,delays in sales ramp up of new high margin proprietary products, and delays in achieving manufacturing costreductions initially projected. As a result, we reduced our projections of our future cash flows and determinedthat the carrying amount of the purchased Sipex intangible assets exceeded the implied fair value under the testfor impairment as per FAS 144 and recorded an impairment charge of approximately $36.7 million which wasincluded in the “Goodwill and other intangible asset impairment” line item in the consolidated statements ofoperations (See Note 2—Accounting Policies). Our estimate of the implied fair value of the intangible assets wasbased on the discounted value of estimated future cash flows over a six-year period with residual value and adiscount rate of 12.5%.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The aggregate amortization expenses for our purchased intangible assets for the fiscal years endedMarch 30, 2008, March 31, 2007 and March 31, 2006 were as follows (in thousands):
WeightedAverage Lives
March 30,2008
March 31,2007
March 31,2006
(in months) (in thousands)
Existing technology . . . . . . . . . . . . . . . . . . . . . . . . 58 $4,640 $960 $920Patents/Core technology . . . . . . . . . . . . . . . . . . . . 60 781 — —Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . 6 340 — —Distributor relationships . . . . . . . . . . . . . . . . . . . . 72 537 — —Customer relationships . . . . . . . . . . . . . . . . . . . . . 84 301 — —Tradenames/Trademarks . . . . . . . . . . . . . . . . . . . . 36 99 — —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,698 $960 $920
The estimated future amortization expenses for our purchased intangible assets were summarized below (inthousands):
Amortization Expense(by fiscal year)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,1132010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,1132011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,7622012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,4822013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,1292014 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . 1,420
$26,019
NOTE 9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) by theweighted average number of common shares outstanding for the periods in accordance with FASB Statement ofFinancial Accounting Standards No. 128, Earnings Per Share (“FAS 128”). Diluted earnings per share (“EPS”)reflects the potential dilution that would occur if outstanding stock options or warrants to issue common stock,unvested restricted stock units (“RSUs”) and restricted stock awards were exercised or converted into commonstock by using the treasury stock method. A summary of our earnings (loss) per share for the three fiscal years of2008, 2007 and 2006 was as follows (in thousands, except per share amounts):
March 30,2008
March 31,2007
March 31,2006
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(195,879) $ 8,024 $ 7,786
Shares used in computation:Weighted average shares of common stock outstanding used incomputation of basic earnings (loss) per share . . . . . . . . . . . . . 43,090 36,255 38,152
Dilutive effect of stock options and restricted stock units . . . . . . — 225 358
Shares used in computation of diluted earnings (loss) pershare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,090 36,480 38,510
Earnings (loss) per share—basic and diluted . . . . . . . . . . . . . . . . $ (4.55) $ 0.22 $ 0.20
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
For the fiscal year ended March 30, 2008, as we incurred a net loss, the weighted average number ofcommon shares outstanding equals the weighted average number of common and common equivalent sharesassuming dilution. Approximately 405,000 shares of options and RSUs for the period ended March 30, 2008were excluded from our loss per share calculation under the treasury method. If we had income for the period,our diluted shares would have increased by the aforementioned amounts.
For the fiscal year ended March 30, 2008, approximately 5.2 million options to purchase shares of commonstock, at exercise prices ranging from $8.78 to $86.10, were outstanding but were not included in thecomputation of diluted loss per share because they were anti-dilutive under the treasury stock method.Approximately 280,000 warrants outstanding were also excluded from the computation of diluted loss per sharebecause they were anti-dilutive under the treasury stock method for the fiscal year ended March 30, 2008.Unvested restricted stock units of 37,901 with a grant date fair value of $11.39 were outstanding at March 30,2008 and were not included in the computation of diluted net loss per share because they were anti-dilutive underthe treasury stock method.
For the fiscal year ended March 31, 2007, approximately 5.0 million options to purchase shares of commonstock, at exercise prices ranging from $12.09 to $54.75, were outstanding but were not included in thecomputation of diluted earnings per share because they were anti-dilutive under the treasury stock method.Unvested restricted stock units of 1,603 with a grant date fair value of $13.40 were outstanding at March 31,2007 and were not included in the computation of diluted net income per share because they were anti-dilutiveunder the treasury stock method.
For the fiscal year ended March 31, 2006, approximately 5.2 million options to purchase shares of commonstock, at exercise prices ranging from $13.12 to $59.31, were outstanding but were not included in thecomputation of diluted earnings per share because they were anti-dilutive under the treasury stock method. Therewere no outstanding unvested RSUs at March 31, 2006.
Our application of the treasury stock method includes assumed cash proceeds from option exercised, theaverage unamortized stock-based compensation expense for the period, and the estimated deferred tax benefit ordetriment associated with stock-based compensation expense.
NOTE 10. COMMON STOCK REPURCHASES
From time to time, we acquire outstanding common stock in the open market to partially offset dilutionfrom our stock awards program, to increase our return on our invested capital and to bring our cash to a moreappropriate level for our company. We may continue to utilize the stock purchase program, which would reduceour cash, cash equivalents and/or short-term investments available to fund future operations and to meet otherliquidity requirements.
On August 28, 2007, we established a new share repurchase plan (“2007 SRP”) and authorized therepurchase of up to $100 million of our common stock over the next twelve months. The 2007 SRP was inaddition to a share repurchase plan announced in March 6, 2001 (“2001 SRP”), which covered the repurchase ofup to $40 million of our common stock.
During the fiscal year ended March 30, 2008, we repurchased a total of 9.3 million shares of our commonstock at an aggregate cost of $93.0 million under the 2007 SRP and 2001 SRP.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
During the fiscal year ended March 31, 2007, we repurchased a total of 0.8 million shares of our commonstock at an aggregate cost of $9.9 million under the 2001 SRP.
The shares repurchased under the 2001 SRP fully utilized the $40 million authorization in the fiscal year of2007. As of March 30, 2008, the remaining authorized amount for stock repurchase under the 2007 SRP was$25.3 million with no termination date.
In July of fiscal year 2006, we commenced a Modified “Dutch Auction” Self Tender Offer (“tender offer”)to acquire up to 7,058,823 shares of our common stock at a purchase price of no greater than $17.00 or less than$15.00 per share. During the fiscal quarter ended September 30, 2005, we completed the tender offer andrepurchased 7,500,000 shares of our common stock at a purchase price of $16.00 per share, resulting in aggregatepayments of $120.0 million plus costs of approximately $0.8 million.
NOTE 11. EMPLOYEE BENEFIT PLANS
Exar Savings Plans
The Exar Savings Plan, as amended and restated, covers our eligible U.S. employees. The Exar Savings Planprovides for voluntary salary reduction contributions in accordance with Section 401(k) of the Internal RevenueCode as well as matching contributions from the company based on the achievement of specified operatingresults. Our matching contributions to the plan were $0.3 million, $0.3 million and $0.6 million for the fiscalyears ended March 30, 2008, March 31, 2007 and March 31, 2006, respectively.
Executive and Key Employee Incentive Compensation Programs
Our incentive compensation programs provide for incentive awards for substantially all employees based onthe achievement of specified operating and performance results. For the fiscal year ended March 30, 2008, wepaid approximately $699,000 in incentive compensation. Unpaid incentive compensation was approximately$600,000 at March 30, 2008. For the fiscal years ended March 31, 2007 and March 31, 2006, we did not incurexpense related to the Executive and Key Employee Incentive Compensation Programs. Our incentivecompensation programs may be amended or discontinued at the discretion of our board of directors.
NOTE 12. STOCK-BASED COMPENSATION
On April 1, 2006, we adopted the fair value recognition provisions of FAS 123R by using the modifiedprospective transition method. In accordance with the modified prospective transition method, we beganrecognizing compensation expense for all share-based awards granted on or after April 1, 2006, plus unvestedawards granted prior to April 1, 2006. Under this method of implementation, no restatement of prior periods hasbeen made. The cumulative effect of adopting FAS 123R was not significant. Under FAS 123R, we use thestraight-line attribution method for expensing stock-based compensation which is based on awards ultimatelyexpected to vest and reduced for estimated forfeitures.
Employee Stock Participation Plan (“ESPP”)
Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price thatis equal to 95% of our common stock price on the last trading day of each three-calendar-month offering period.Our ESPP is non-compensatory under FAS 123R.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
We are authorized to issue 4.5 million shares of common stock under our ESPP. At March 30, 2008,approximately 1,663,000 shares of common stock were reserved for future issuance under our ESPP. At March 31,2007, approximately 1,697,000 shares of common stock were reserved for future issuance under our ESPP.
For the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006, we issued 33,705, 36,832and 140,620 shares at weighted average prices of $10.07, $12.53 and $11.09, respectively, to the participatingemployees.
Stock Option Plans
On September 7, 2006, our stockholders ratified the Exar Corporation 2006 Equity Incentive Plan (the“2006 Plan”). The 2006 Plan authorizes stock options, stock appreciation rights, restricted stock, stock bonusesand other forms of awards granted or denominated in common stock or units of common stock, as well as cashbonus awards. Individuals eligible to receive awards under the 2006 Plan include our officers, employees,directors, and certain consultants and advisors. The 2006 Plan allows for performance-based vesting and partialvesting based upon level of performance. At March 30, 2008, there were approximately 4.2 million sharesavailable for future grant.
Upon the merger with Sipex, we assumed options to purchase approximately 2.2 million shares of Sipexcommon stock (after the application of the exchange ratio in the merger) that had been granted by Sipex under itsfive option plans: the 1997 Stock Option Plan, 1999 Stock Plan, 2000 Non-Qualified Stock Option Plan,Amended and Restated 2002 Non-Statutory Stock Option Plan and 2006 Equity Incentive Plan. We can grantoptions or issue shares pursuant to the assumed Sipex plans, but only to former Sipex employees or employees ofthe combined company hired after the merger. The 1997 Stock Option Plan expired in 2007. At March 30, 2008,there were approximately 0.7 million shares available for future grant under the Sipex plans.
Generally, options under the 2006 Plan are granted with an exercise price of 100% of the fair value of theunderlying stock on the date of grant and have a term of seven years, although the 2006 Plan provides thatoptions may be granted with a term of up to ten years. Options generally vest at a rate of 25%, on theiranniversary date, over four years. The assumed Sipex plans generally allow for options which vest ratably overfive years from the date of grant for options granted before May 2002 and four years for options granted afterApril 2002. These options expire ten years from the date of grant.
As of March 30, 2008, there were approximately 5.1 million options outstanding under all stock option plans.As of March 31, 2007, there were approximately 5.3 million options outstanding under all stock option plans.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The following table summarized information about our stock options outstanding at March 30, 2008 (inthousands, except number of years and per-share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Range ofExercise Prices
NumberOutstanding
As of03/30/08
WeightedAverage
RemainingContractual
Terms inYears
WeightedAverageExercise
Price
NumberExercisable
As of03/30/08
WeightedAverageExercise
Price
$3.03 $8.42 1,052,002 4.70 $ 5.93 724,019 $ 5.498.63 12.69 1,079,038 4.35 11.72 733,168 11.8812.73 13.66 1,020,484 4.30 13.28 520,125 13.3613.66 15.83 1,018,851 4.32 14.86 759,532 15.1915.88 86.10 915,922 1.32 21.50 908,913 21.53
$3.03 $86.10 5,086,297 3.86 $13.23 3,645,757 $13.92
Valuation Assumptions
The assumptions used in calculating the fair value of stock-based compensation represent our estimates, butthese estimates involve inherent uncertainties and the application of management judgments which include theexpected term of the share-based awards, stock price volatility and forfeiture rates. As a result, if factors change andwe use different assumptions, our stock-based compensation expense could be materially different in the future.
Valuation Method—we compute the fair value of stock options utilizing the Black-Scholes option pricingmodel.
Expected Term—we estimate the expected life of options granted based on historical exercise and post-vestcancellation patterns, which we believe are representative of future behavior.
Volatility—our expected volatility is based on historical data of the market closing price for our common stockas reported by The NASDAQ Global Market under the symbol “EXAR” and the expected term of our stock options.
Risk-Free Interest Rate—the risk-free interest rate assumption is based on the observed interest rate of theU.S. Treasury appropriate for the expected term of the option to be valued.
Dividend Yield—we do not currently pay dividends and have no plans to do so in the future. Therefore, wehave assumed a dividend yield of zero.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
We have used the following weighted average assumptions to calculate the fair values of options grantedduring the years presented:
Stock Option Plans Employee Stock Participation Plan*
March 30,2008
March 31,2007
March 31,2006
March 30,2008
March 31,2007
March 31,2006
Expected term of options (years) . . . . . . . . . 4.5 - 5.0 5.1 - 5.3 4.3 N/A N/A 0.25Risk-free interest rate . . . . . . . . . . . . . . . . . . 2.6 - 4.8% 4.6 - 4.9% 4.9% N/A N/A 4.7%Expected volatility . . . . . . . . . . . . . . . . . . . . 30 - 36% 38 - 51% 38% N/A N/A 22%Expected dividend yield . . . . . . . . . . . . . . . . — — — N/A N/A —Weighted average estimated fair value . . . . $ 4.12 $ 5.66 $5.18 N/A N/A $2.57
* We amended our ESPP on April 1, 2006 to permit employees to purchase common stock at a purchase pricethat is equal to 95% of the fair market value of the common stock on the last trading day of each three-month offering period. The amendment to the employees' discount and the elimination of the look-backperiod resulted in the ESPP being considered non-compensatory under SFAS 123R.
Stock Options Activities
A summary of stock option transactions for all stock option plans was as follows:
Outstanding
WeightedAverageExercisePrice per
Share
WeightedAverage
RemainingContractual
Life (inYears)
AggregateIntrinsic
Value
Balance at March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,221,732 $18.13Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,282,812 12.73Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,220,904) 8.48Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,774,742) 24.63
Balance at March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,508,898 $17.34 2.25 $5,471,874Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607,300 13.02Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,217,985) 12.26Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,409,124) 23.33Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (194,972) 13.18
Balance at March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,294,117 $16.57 3.09 $1,367,158Options assumed from Sipex . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,215,421 6.84Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848,539 11.80Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (484,490) 8.11Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,896,679) 19.82Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (890,611) 11.34
Balance at March 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,086,297 $13.23 3.85 $2,383,110
Vested and expected to vest, March 30, 2008 . . . . . . . . . . . . . . 4,904,088 $13.29 3.75 $2,327,603
Vested and exercisable, March 30, 2008 . . . . . . . . . . . . . . . . . . 3,645,757 $13.92 2.81 $1,957,341
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The aggregate intrinsic values in the table above represented the total pre-tax intrinsic value which wasbased on the fair value of our common stock of $8.19, $13.24 and $14.28 as of March 30, 2008, March 31, 2007and March 31, 2006, respectively. These were the values which would have been received by option holders if alloption holders exercised their options as of that date.
The total number of in-the-money options vested and exercisable was 0.7 million, 0.8 million and2.4 million for the fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006.
Total intrinsic value of options exercised was approximately $1.4 million, $1.7 million and $6.8 million forthe fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006, respectively.
Total cash received related to option exercises was $3.9 million, $14.9 and $10.3 million for the fiscal yearsended March 30, 2008, March 31, 2007 and March 31, 2006, respectively. Upon option exercise, we issue sharesof common stock.
We recorded a tax benefit of $1.4 million, $0.5 million and $1.6 million related to the option exercises forthe fiscal years ended March 30, 2008, March 31, 2007 and March 31, 2006, respectively.
Total unrecognized stock-based compensation cost was $5.0 million at March 30, 2008, which was expectedto be recognized over a weighted average period of 2.64 years. Total unrecognized stock-based compensationcost was $5.5 million at March 31, 2007, which was expected to be recognized over a weighted average period of2.71 years.
Restricted Stock Awards and Units
Restricted Stock Awards (“RSAs”)
During the fiscal year of 2006, we awarded 30,000 shares of restricted stock to our former president andchief executive officer on March 24, 2005 in connection with his employment agreement. The restricted stockvested annually over a period of three years and had a grant date fair value of $13.52. At March 31, 2007, 10,000shares remained unvested with a remaining contractual life of one year. As a result of his termination in February2007, the unvested 10,000 shares were canceled thereafter. At March 30, 2008, there were no unvested shares ofRSAs.
For each of the fiscal years ended March 31, 2007 and March 31, 2006, stock-based compensation expensewas $0.1 million associated with this award. No stock-based compensation expense was recorded for the fiscalyear of 2008 as the award was canceled due to the termination of the officer.
Total unrecognized stock-based compensation cost in connection with this restricted stock wasapproximately $135,000 at March 31, 2007 and there was no unrecognized compensation cost at March 30, 2008associated with this award.
During fiscal year 2007, we did not grant RSAs to any employees or directors.
During fiscal year 2008, we granted the chairman of our board of directors 10,000 shares of fully vestedcommon stock and recorded approximately $134,000 as stock-based compensation expense in December 2007.During the same period, we granted our former chief executive officer 5,000 shares of fully vested common stockafter his three months of service, as per his employment agreement, and recorded approximately $45,000 asstock-based compensation expense.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
Restricted Stock Units (“RSUs”)
In the second fiscal quarter of 2007, we began issuing restricted stock units to employees and non-employeedirectors. Restricted stock units currently granted by us generally vest on the first or third anniversary date fromthe grant date. Restricted stock units granted under the 2006 Plan are counted against authorized shares availablefor future issuance on the basis of two shares for every restricted stock unit issued. Prior to vesting, restrictedstock units do not have dividend equivalent rights, do not have voting rights and the shares underlying therestricted stock units are not considered issued and outstanding. Shares are issued on the date the restricted stockunits vest.
At March 30, 2008, there were 304,933 RSUs outstanding. The unrecognized stock-based compensationcost was $2.5 million at March 30, 2008 and was expected to be recognized as compensation expense over aweighted average period of 1.41 years.
At March 31, 2007, there were approximately 204,918 RSUs outstanding. The unrecognized stock-basedcompensation cost was $2.7 million at March 31, 2007 and was expected to be recognized as compensationexpense over a weighted average period of 2.05 years.
A summary of restricted stock unit transactions was as follows:
Shares
Weighted AverageGrant-Date Fair
Market Value
Weighted AverageRemainingContractualTerm (years)
AggregateIntrinsicValue (1)
Non-vested at March 31, 2006 . . . . . . . . . . . . . . . . . — $ —Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,437 13.18Issued and released . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000) 13.74Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,519) 12.69
Non-vested at March 31, 2007 . . . . . . . . . . . . . . . . . 204,918 $13.18 2.05 $2,713,114
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,650 11.92Issued and released . . . . . . . . . . . . . . . . . . . . . . . . . . (69,442) 11.08Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84,193) 13.25
Non-vested at March 30, 2008 . . . . . . . . . . . . . . . . . 304,933 $12.20 1.41 $2,497,401
Vested and expected to vest at March 30, 2008 . . . . 273,966 $11.59 1.34 $2,243,785
(1) Aggregate intrinsic value for RSUs represents the closing price per share of our stock on March 30, 2008and March 31, 2007, respectively, multiplied by the number of non-vested RSUs expected to vest as ofMarch 30, 2008 and March 31, 2007, respectively.
For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant,multiplied by the number of RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, wasrecorded on a straight-line basis, over the vesting period.
During the fiscal year of 2008, we granted approximately 22,000 shares of performance-based RSUs tocertain executives, issuable on March 31, 2008. Based on our assessment of meeting the performance targetsestablished for each individual and the probability that these targets will be achieved, we recorded approximately
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
$135,000 of compensation expenses related to these grants for the year ended March 30, 2008. No such grantswere made in the fiscal year of 2007.
Total unamortized stock-based compensation expense for our unvested RSUs was $2.4 million at March 30,2008 and was expected to be recognized as compensation expense over a weighted average period of 1.98 years.Total unamortized stock-based compensation expense for our unvested RSUs was $2.2 million at March 31, 2007and was expected to be recognized as compensation expense over a weighted average period of 2.0 years.
Stock-Based Compensation Expenses
The following table summarized stock-based compensation expense related to stock options, RSAs andRSUs under FAS 123R for the fiscal years ended March 30, 2008 and March 31, 2007, and stock-basedcompensation expense related to stock options under APB No. 25 for the fiscal year ended March 31, 2006 (inthousands):
March 30,2008
March 31,2007
March 31,2006*
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 406 $ 92 $—Research and development . . . . . . . . . . . . . . . . . . . . . . . 1,207 1,181 —Selling, general and administrative . . . . . . . . . . . . . . . . . 3,366 3,077 135
Stock-based compensation expense . . . . . . . . . . . . . . . . $4,979 $4,350 $135
* Prior to the adoption of FAS 123R on April 1, 2006, we accounted for stock-based compensation underAccounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”).
At March 30, 2008, there was approximately $33,000 of total unamortized compensation cost capitalized ininventory. At March 31, 2007, there was no unamortized compensation cost capitalized in inventory.
During the fiscal year of 2008, we modified approximately 298,000 stock options held by our former chiefexecutive officer and one other officer upon their departures in December 2007 and February 2008, respectively.The modification provided an extended exercise period from three months as defined by the plan to six months.As a result of the modifications, we recorded additional stock-based compensation expenses of approximately$18,000 during the fiscal year ended March 30, 2008.
During the fiscal year of 2007, we recorded stock-based compensation expense of $0.4 million inconnection with modifications of approximately 0.8 million stock options related to the separations of our formerchief executive officer and chief financial officer.
No modifications were made during the fiscal year ended March 31, 2006.
During the fiscal year of 2006 in March, our board of directors approved the full acceleration of vesting ofall employee stock options, including options held by our executive officers, with exercise prices in excess of$15.05. Such vesting acceleration did not apply to any options held by our non-employee directors. As a result ofthe decision to fully accelerate the vesting of stock options, as described above, options to purchaseapproximately 1.1 million shares of our common stock became fully vested and immediately exercisableeffective as of March 22, 2006.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
Because the accelerated options’ exercise prices were in excess of the market value of our common stock atthe time of the acceleration, we believed that the incentive value to our employees of the associated unvestedoptions was minimal. The acceleration eliminated future compensation expense we would otherwise have had torecognize in our statements of operations with respect to these options under FAS 123R. As a result of thisaction, approximately $4.9 million of stock-based compensation expense, net of taxes, was excluded from stock-based compensation for periods subsequent to fiscal year 2006.
Income Tax
In November 2005, the FASB issued Staff Position No. FAS 123R-3, Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards (“FAS 123R-3”). FAS 123R-3 provides guidancethat establishes the beginning balance of the APIC pool related to the tax effects of employee stock-basedcompensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.We elected to adopt the alternative transition method (“short cut method”) in calculating our historical APIC poolof windfall tax benefits in regards to our stock-based compensation. The alternative transition method provides asimplified method to establish the beginning balance of the APIC Pool related to the tax benefits of stock-basedcompensation expense, and to determine the subsequent impact on the APIC Pool and consolidated statements ofcash flows of the tax effects of stock-based compensation awards that are outstanding upon adoption of FAS123R.
We record our stock-based compensation expense in multiple jurisdictions. In jurisdictions where an incometax deduction is allowed and an income tax benefit is realizable, we have recognized an income tax benefit. Injurisdictions where an income tax deduction is not allowed or where an income tax benefit is not realizable, anincome tax benefit has not been recognized.
Pro Forma Information under FAS 123 for Periods Prior to April 1, 2006
Prior to FAS 123R adoption, we accounted for stock-based compensation under Accounting PrinciplesBoard Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and accordingly, we recognizedcompensation expense related to stock options with intrinsic value and accounted for forfeitures as they occurred.The following table provided pro forma disclosures as if we had recorded compensation costs based on theestimated grant date fair value, as defined by the FAS 123, for awards granted under its stock-basedcompensation plans (in thousands, except per share data):
March 31, 2006
Net income—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,786Add: Stock-based employee compensation expense included in reported netincome, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Deduct : Total stock-based employee compensation determined under thefair value basis, method for all awards, net of tax . . . . . . . . . . . . . . . . . . . . (11,668)
Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,800)
Earnings per share, as reportedBasic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.20
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.20
Pro forma loss per share—basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.10)
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
NOTE 13. WARRANTS
In connection with the Sipex merger, we assumed warrants to purchase a total of approximately 280,000shares of our common stock. The warrants are exercisable at any time for shares of our common stock at aninitial exercise price of $9.63 per share, subject to adjustment upon certain events. The warrants expire onMay 18, 2011. As of March 30, 2008, there were approximately 280,000 warrants outstanding.
NOTE 14. LEASE OBLIGATIONS
In connection with the Sipex merger, we assumed a lease financing obligation related to a facility, located at233 South Hillview Drive in Milpitas, California (the “Hillview facility”). The lease term expires in March 2011with average lease payments of approximately $1.4 million per year.
The fair value of the Hillview facility was estimated at $13.4 million at the time of the merger and wasincluded in the “Property, plant and equipment, net” line item on the consolidated balance sheet. In connectionwith purchase accounting, we have accounted for this sale and leaseback transaction as a financing transactionwhich was included in the “Long-term lease financing obligations” line item on our consolidated balance sheet.The effective interest rate is 8.2%. Depreciation for the Hillview facility was recorded over the straight-linemethod for the remaining useful life and was $205,000 in fiscal year 2008. There was no depreciation expense infiscal years 2007 and 2006.
In addition to the Hillview facility, we also have a four-year lease of $5.2 million of engineering designtools (“design tools”) starting December 2007, which are accounted for as a capital lease and recorded in the“Property, plant and equipment, net” line item on the consolidated balance sheet. The related design toolsobligation were included in the “Long-term lease financing obligations” line on our consolidated balance sheet.The effective interest rate for the design tools is 7.25%. Amortization on the design tools was recorded over thestraight-line method for the remaining useful life and was $322,000 in fiscal year 2008. There was noamortization expense in fiscal years 2007 and 2006.
Future minimum lease payments for our lease financing obligations as of March 30, 2008 were as follows(in thousands):
Fiscal YearsHillviewFacility
DesignTools Subtotal
OperatingLeases
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,374 $ 684 $ 2,058 $ 5832010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,415 1,450 2,865 3142011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,624 1,450 15,074 2052012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,087 1,087 158
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . 16,413 4,671 21,084 1,260Less: amount representing interest . . . . . . . . . . . . . . . . . . (3,152) (672) (3,824) —
Present value of minimum lease payments . . . . . . . . . . . 13,261 3,999 17,260 1,260Less: current portion of lease financing obligation . . . . . 295 586 881 —
Long-term lease financing obligation . . . . . . . . . . . . . . . $12,966 $3,413 $16,379 $1,260
At the end of the lease term, the estimated final lease obligation is approximately $12.2 million, which wewill settle by returning the Hillview facility.
For fiscal year 2008, interest expense totaled approximately $640,000 and $44,000, respectively, for theHillview lease financing obligation and design tools, respectively.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
We have sublet the Hillview facility in April 2008. The sublease expires in March 2011 and we expectannual sublease income of approximately $1.4 million for the duration of the sublease term (See Note 20-Subsequent Event).
NOTE 15. COMMITMENTS AND CONTINGENCIES
In 1986, Micro Power Systems Inc. (“MPSI”), a subsidiary that we acquired in June 1994, identifiedlow-level groundwater contamination at its principal manufacturing site. Although the area and extent of thecontamination appear to have been defined, the source of the contamination has not been identified. MPSIpreviously reached an agreement with a prior tenant to share in the cost of ongoing site investigations and theoperation of remedial systems to remove subsurface chemicals. The frequency and number of wells monitored atthe site was reduced with prior regulatory approval for a plume stability analysis as an initial step towards siteclosure. No significant rebound concentrations have been observed. The groundwater treatment system has beenshut down during calendar year 2008, for a two-year plume stability evaluation.
In February 2006, we entered into a definitive Master Agreement with Silan, a China-based semiconductorfoundry. This transaction was related to the closing of our wafer fabrication operations located in Milpitas,California. Under this agreement, Exar and Silan would work together to enable Silan to manufacturesemiconductor wafers using our process technology. The Master Agreement includes a Process TechnologyTransfer and License Agreement which contemplates the transfer of eight of our processes and related productmanufacturing to Silan. Once we confirm to Silan that the process qualification wafers and product qualificationwafers (under a Wafer Transfer Agreement) conform to its specifications, Silan would commence commercialmanufacturing for us. Subject to our option to suspend in whole or in part, there is a purchase commitment underthe Wafer Supply Agreement obligating us to purchase from Silan an average of at least one thousand equivalentwafers per week, calculated on a quarterly basis, for two years beginning January 1, 2007. As of March 30, 2008,several complementary metal oxide semiconductor (“CMOS”) and all bipolar and BiCMOS (bipolar CMOS)product qualifications have been completed to our specifications. The open purchase orders were approximately$1.8 million at March 30, 2008.
Generally, we warrant all of our products against defects in materials and workmanship for a period rangingfrom ninety days to two years from the delivery date. Reserve requirements are recorded in the period of sale andare based on an assessment of the products sold with warranty and historical warranty costs incurred. Ourliability is generally limited to replacing, repairing or issuing credit, at our option, for the product if it has beenpaid for. The warranty does not cover damage which results from accident, misuse, abuse, improper line voltage,fire, flood, lightning or other damage resulting from modifications, repairs or alterations performed other than byus, or resulting from failure to comply with our written operating and maintenance instructions. Warrantyexpense has historically been immaterial for our products. The warranty liability related to our products wasapproximately $0.3 million at March 30, 2008.
Additionally, our sales agreements indemnify our customers for any expenses or liability resulting fromalleged or claimed infringements of any United States letter patents of third parties. However, we are not liablefor any collateral, incidental or consequential damages arising out of patent infringement. The terms of theseindemnification agreements are perpetual, commencing after execution of the sales agreement or the dateindicated on our order acknowledgement. The maximum amount of potential future indemnification is unlimited.However, to date, we have not paid any claims or been required to defend any lawsuits with respect to any suchindemnity claim.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
NOTE 16. LEGAL PROCEEDINGS
From time to time, we are involved in various claims, legal actions and complaints arising in the normalcourse of business. Although the ultimate outcome of the matters discussed below and other matters is notpresently determinable, management currently believes that the resolution of all such pending matters will nothave a material adverse effect on our financial position, results of operations or liquidity.
Ericsson Wireless Communication, Inc. and Vicor Corporation
On November 16, 2004, Ericsson Wireless Communications, Inc. (now known as Ericsson Inc.)(“Ericsson”) initiated a lawsuit against us in San Diego County Superior Court. In its Third Amended Complaint,Ericsson asserted causes of action against us for negligence, strict product liability, and unfair competition.Ericsson sought monetary damages and unspecified injunctive relief. Based on discovery responses, Ericssonclaimed that its damages exceeded $1 billion. The case is based on Ericsson’s purchase of allegedly defectiveproducts from Vicor Corporation, our former customer to whom we sold untested, semi-custom wafers. Wedisputed the allegations in Ericsson’s Third Amended Complaint, believed that we had meritorious defenses, anddefended the lawsuit vigorously. On December 1, 2006, we entered into a Settlement Agreement with Ericsson,Inc. to resolve the claims asserted by Ericsson. Based on further events in the case, our total liability to Ericssonunder the Settlement Agreement was $500,000, which was paid by our insurance carriers. Following payment,Ericsson dismissed its claims against us with prejudice.
On April 5, 2005, Vicor Corporation (“Vicor”) filed a cross-complaint against us in San Diego CountySuperior Court. Vicor alleged, among other things, that we sold it integrated circuits that were defective andfailed to meet agreed-upon specifications, and that we intentionally concealed material facts regarding thespecifications of the integrated circuits that Vicor alleges it bought from us. Vicor alleged that it is entitled toindemnification from us for the damages that Vicor paid to Ericsson as a result of the causes of action asserted byEricsson against Vicor. In the cross-complaint, Vicor asserted various contract, tort, and indemnity based causesof action against us. On May 9, 2005, we filed a demurrer to all but one of Vicor’s causes of action against us,which the San Diego Superior Court sustained without leave to amend on June 17, 2005, except for the claims forimplied contractual indemnity and equitable indemnity. We answered those causes of action on July 5, 2005. Wedisputed the allegations in Vicor’s cross-complaint, believed that we had meritorious defenses, and defended thelawsuit vigorously.
On December 1, 2006, we entered into a Settlement Agreement with Ericsson, Inc. We filed a motion onDecember 20, 2006 for an order finding the Settlement Agreement that we entered with Ericsson was in goodfaith. On January 22, 2007, the Court entered an order finding that we entered into the Settlement Agreement ingood faith. The result of the finding of good faith was that Vicor’s indemnity claims were subject to dismissal.On February 13, 2007, Vicor filed a petition for writ of mandate with the California Court of Appeal challengingthe good faith finding, which the Court of Appeal summarily denied on February 28, 2007. The San DiegoSuperior Court dismissed Vicor’s indemnity claims and entered judgment in our favor on July 10, 2007. Afterentering judgment, the San Diego Superior Court awarded us costs against Vicor in the amount of $84,405 andmonetary sanctions against Vicor in the amount of $44,266.91. Vicor filed a notice of appeal on September 6,2007, and Vicor filed its opening brief on March 27, 2008. Exar’s responding brief is not yet due, and oralargument has not yet been set.
On March 4, 2005, we filed a complaint in Santa Clara County Superior Court against Vicor. In the complaint,we sought a declaration regarding the respective rights and obligations, including warranty and indemnity rights andobligations, under the written contracts between us and Vicor for the sale of untested, semi-custom wafers. In
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
addition, we sought a declaration that we were not responsible for any damages that Vicor must pay to Ericsson orany other customer of Vicor arising from claims that Vicor sold allegedly defective products.
On March 17, 2005, Vicor filed a cross-complaint against us and Rohm Device USA, LLC and Rohm Co.,Ltd, the owners and operators of the foundry which supplied the untested, semi-custom wafers that we sold toVicor. In the cross-complaint, Vicor asserted allegations similar to those in its cross-complaint in the EricssonSan Diego County action discussed above, and also alleged that it is entitled to indemnification from us for anydamages that Vicor must pay to Ericsson or other Vicor customers that may be make claims against Vicor. In thecross-complaint, Vicor asserted various contract, tort, and indemnity based causes of action against us. OnMay 23, 2005, we filed a demurrer to each cause of action in Vicor’s cross-complaint, and on July 15, 2005, theSanta Clara County Superior Court sustained our demurrer to each of the causes of action. The Court grantedVicor leave to amend the cross-complaint to assert a cause of action for declaratory relief only. On August 1,2005, Vicor filed its amended cross-complaint seeking a declaration of the parties’ respective rights andobligations, including warranty and indemnity rights, under the alleged contracts between us and Vicor for thesale of untested, semi-custom wafers. In addition, Vicor sought a declaration that we were obligated to indemnifyit for any damages resulting from claims brought against Vicor by its customers. Vicor’s amended cross-complaint does not seek damages. We answered Vicor’s amended cross-complaint on September 2, 2005. OnApril 10, 2006, Vicor moved to have the San Diego County action transferred to Santa Clara County andcoordinated with the action in Santa Clara County, but the Santa Clara County Court deferred deciding Vicor’smotion until the Court in the San Diego County action could rule on a similar motion pending in that actionbrought by Ericsson, which was granted. This resulted in the Santa Clara Action being transferred to San Diegofor coordination with the Ericsson San Diego County action. No trial date has been set. We do not believe thatthe litigation will have a material impact on our financial condition, results of operations, or liquidity.
DiPietro v. Sipex
In April 2003, Plaintiff Frank DiPietro (former chief financial officer of Sipex Corp.) brought an action forbreach of contract against Sipex in the Middlesex Superior Court in the state of Massachusetts. Mr. DiPietro wasseeking approximately $800,000 in severance benefits. Sipex counterclaimed for approximately $150,000, which itwas owed under a promissory note signed by Mr. DiPietro. In August 2004, Sipex filed two motions for summaryjudgment (one for Mr. DiPietro’s claims against it and one for its counterclaim against Mr. DiPietro). In June 2005,the Middlesex Superior Court granted both Sipex’s Motions for Summary Judgment. Soon thereafter, Mr. DiPietrofiled a notice of appeal. Sipex then filed motions for costs and pre-judgment interest. Sipex was successful in itsmotion for prejudgment interest and it was successful in requiring Mr. DiPietro to pay over $900 in deposition costs.
On June 21, 2006, Mr. DiPietro served Sipex with his appeal brief. On July 20, 2006, Sipex served itsOpposition and Mr. DiPietro’s Reply Brief was served on August 3, 2006. On December 12, 2006, the AppealsCourt heard arguments in DiPietro v. Sipex and asked for a letter clarifying a legal issue that Sipex provided onDecember 28, 2006. On January 12, 2007, Mr. DiPietro sent a letter responding to Sipex’s letter.
On May 14, 2007, the Appeals Court issued its decision reversing the Superior Court’s grant of summaryjudgment and remanding the case for further proceedings. Sipex immediately filed a motion for enlargement oftime to file a Petition for Rehearing and an Application for Further Appellate Review. Sipex’s Petition forRehearing was filed on June 13, 2007, in the Massachusetts Appeals Court and its Application for FurtherAppellate Review was filed on June 28, 2007, in the Massachusetts Supreme Judicial Court. Thereafter, onJuly 9, 2007, DiPietro filed its Opposition to Sipex’s Application for Further Appellate Review and on July 18,2007, filed his Response to Sipex’s Petition for Rehearing. In early September 2007, the Appeals Court amendedits decision to clarify issues addressed in Sipex’s Petition for Rehearing.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
On October 31, 2007, Sipex’s Application for Further Appellate Review was denied. The case wasremanded to Superior Court and will proceed. A pretrial conference is scheduled for June 16, 2008.
Cypress v. Sipex, Exar and Ralph Schmitt
On October 12, 2007, Cypress Semiconductor Corporation (“Cypress”) filed an action against SipexCorporation (“Sipex”), Exar Corporation (“Exar”), Ralph Schmitt and Does 1 through 50 in the Superior Court ofthe State of California, County of Santa Clara, Cypress Semiconductor Corp. v. Sipex Corp., et al., CaseNo. 1-07-CV096311, alleging claims for: (1) misappropriation of trade secrets; (2) violation of the ComputerFraud and Abuse Act, 18 U.S.C. §1030; (3) unfair competition under Cal. Bus. & Prof. Code §§17200 et seq.;(4) tortious interference with contract; (5) interference with actual and prospective economic advantage;(6) breach of fiduciary duty and breach of the duty of loyalty; (7) inducement of breach of fiduciary duty;(8) breach of written contract; (9) breach of the covenant of good faith and fair dealing; (10) conversion; and(11) unjust enrichment. The second, sixth, eighth and ninth causes of action are alleged against Mr. Schmitt only.Mr. Schmitt was Chief Executive Officer and President and a member of the board of directors of Exar fromAugust 25, 2007 to December 6, 2007. Prior to Exar’s merger with Sipex, he was Chief Executive Officer and amember of the board of directors of Sipex. Exar filed an answer to the complaint on November 13, 2007. Thecase was removed to federal court on November 14, 2007, Cypress Semiconductor Corp. v. Sipex Corp., et al.,United States District Court, Northern District of California, Case No. C 07-05778 JF. The parties exchangedInitial Disclosures pursuant to Federal Rules of Civil Procedure, Rule 26(a)(1) on March 7, 2008. A CaseManagement Conference was held on March 14, 2008 before the Honorable Jeremy Fogel. At the CaseManagement Conference, Judge Fogel ordered that discovery be stayed for 60 days to allow the parties theopportunity to discuss settlement. A Settlement Conference took place before Magistrate Judge Seeborg onMay 13, 2008 which resulted in a settlement of the case. The terms of the settlement are confidential and thesettlement amount was not material to our financial condition, results of operations or liquidity. On May 28,2008, Judge Fogel issued a conditional Order of Dismissal of the case with prejudice.
NOTE 17. INCOME TAXES
The components of the provision for income taxes were as follows (in thousands):
March 30,2008
March 31,2007
March 31,2006
Current:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (458) $2,963 $1,993State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 432 148Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 32 79
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 3,427 2,220
Deferred:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,195 (72) 727State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700 (39) (158)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,895 (111) 569
Total provision for income taxes . . . . . . . . . . . . . . . . . . $8,116 $3,316 $2,789
Consolidated pre-tax income included foreign income of $218,000, $184,000 and $229,000 for the fiscalyears ended March 30, 2008, March 31, 2007 and March 31, 2006, respectively. Undistributed earnings of
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
approximately $4.2 million of our foreign subsidiaries are considered to be indefinitely reinvested andaccordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution ofthose earnings in the form of a dividend or otherwise, we would be subject to both United States income taxes(subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
Significant components of our net deferred tax assets were as follows (in thousands):
March 30,2008
March 31,2007
March 31,2006
Deferred tax assets:Reserves and accruals not currently deductible . . . . . . . . . . . . . . . . . . . . . $ 10,261 $ 3,765 $ 2,579Net operating loss and tax credit carryforwards . . . . . . . . . . . . . . . . . . . . 84,340 141 2,132Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,753 12,244 11,123Losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,319 16,552 17,024Capitalized R&D expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,480 2,790 3,454Deferred margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,743 — —
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,896 35,492 36,312Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,555) (956) (1,189)Non-goodwill intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,142) — —
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,697) (956) (1,189)Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123,199) (23,125) (23,183)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 11,411 $ 11,940
A significant portion of our NOL and tax credit carryforwards were acquired in the Sipex merger and aresubject to a substantial annual limitation due to the ownership change limitations provided by the InternalRevenue Code of 1986, as amended, and similar state provisions. The Company’s NOL and tax creditcarryforwards may also be further restricted by earlier ownership changes, as defined, of Exar or Sipex.
Reconciliations of the income tax provision at the statutory rate to our provision for income tax were asfollows (in thousands):
March 30 March 31, March 31,2008 2007 2006
Income tax provision (benefit) at U.S. statutory rate . . . $(65,717) $ 3,969 $ 3,701State income taxes, net of federal income tax benefit . . (6,566) 638 568Deferred tax assets, not benefited . . . . . . . . . . . . . . . . . . 29,203 379 117Tax-exempt interest income . . . . . . . . . . . . . . . . . . . . . . (150) (473) (4)Tax credits, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (368) (1,465) (1,178)Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . 374 253 —Settlement of tax audit . . . . . . . . . . . . . . . . . . . . . . . . . . (1,934) — —In-process research and development . . . . . . . . . . . . . . . 3,401 — —Goodwill and intangible assets impairment . . . . . . . . . . 49,656 — —Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 15 (415)
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,116 $ 3,316 $ 2,789
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
As of March 30, 2008, our federal and state net operating loss carryforwards for income tax purposes wereapproximately $226.1 million and $88.0 million, respectively. If not utilized, $6.0 million of the federal netoperating loss carryforwards will expire in 2009, and $3.0 million of the state net operating losses will begin toexpire in 2011. Additionally, we have capital loss carryforwards of approximately $39.6 million, which willexpire in 2010 if not utilized.
As of March 30, 2008, our federal and state tax credit carryforwards were $7.5 million and $9.3 million,respectively. The federal and state credits will begin to expire in 2012 and 2009, respectively. Utilization of thesefederal and state net operating loss and tax credit carryforwards may be subject to a substantial annual limitationdue to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similarstate provisions.
We have evaluated our deferred tax assets and concluded that a valuation allowance is required for that portionof the total deferred tax assets that are not considered more likely than not to be realized in future periods. To theextent that the deferred tax assets with a valuation allowance become realizable in future periods, we will have theability, subject to carryforward limitations, to benefit from these amounts. Approximately $7.6 million of thesedeferred tax assets pertain to certain net operating loss and credit carryforwards resulting from the exercise ofemployee stock options. When recognized, the tax benefit of these carryforwards is accounted for as a credit toadditional paid-in capital rather than a reduction of the income tax provision. In addition, we have approximately$70.8 million of acquired entity deferred tax assets that will be adjusted first to the extent of goodwill, then to theextent of identifiable intangible assets and lastly as a reduction in the income tax provision.
Uncertain Income Tax Benefits
Effective April 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48prescribes a recognition threshold and measurement attribute for the financial statement recognition andmeasurement of uncertain tax positions taken or expected to be taken in our income tax return, and also providesguidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure andtransition.
The cumulative effect of adopting FIN 48 was a decrease in the liability for uncertain tax positions and anincrease of $0.2 million to the April 1, 2007 opening retained earnings balance. Upon adoption of FIN 48, theliability for uncertain tax positions at April 1, 2007 was $0.8 million. Consistent with the provisions of FIN 48,we reclassified $0.8 million of income tax liabilities from current to non-current liabilities because payment ofcash is not anticipated within one year of the balance sheet date. In addition, we decreased current taxes payableand deferred tax assets by $3.5 million for unrecognized tax benefits which serve to reduce net operating loss andtax credit carryforwards.
The total amount of gross unrecognized tax benefits as of the April 1, 2007 adoption date of FIN 48 was$7.7 million. The unrecognized tax benefits increased by $1.7 million during the fiscal year ended March 30,2008 to $9.4 million. If recognized, all of these unrecognized tax benefits would be recorded as a reduction offuture income tax provision before consideration of changes in valuation allowance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
A reconciliation of the beginning and ending amount of the unrecognized tax benefits during the tax yearended March 30, 2008 was as follows (in thousands):
Amount
Balance at April 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,584Additions—current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649Additions—prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,079Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,852)Lapses in statute of limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50)
Balance at March 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,410
The reconciliation of the unrecognized gross tax benefit of $9.4 million is as follows: $0.8 million in incometaxes payable, non-current, and $8.6 million as a reduction to deferred tax assets. The total amount ofunrecognized tax benefit (net of federal benefit), if recognized would affect the effective rate is $7.8 million.
Estimated interest and penalties related to the underpayment of income taxes were classified as a componentof the provision for income taxes in the consolidated statement of operations. Accrued interest and penalties were$0.1 million and $0.2 million as of April 1, 2007 and March 30, 2008, respectively.
Our only major tax jurisdictions are the United States federal and various states. The fiscal years 1997through 2007 remain open and subject to examinations by the appropriate governmental agencies in the UnitedStates with fiscal years 2000 through 2007 open to audits in certain of our state jurisdictions.
NOTE 18. SEGMENT AND GEOGRAPHIC INFORMATION
We operate in one reportable segment. We design, develop and market high-performance, analog andmixed-signal silicon solutions for a variety of markets including power management, networking, serialcommunications and storage. The nature of our products and production processes as well as the type ofcustomers and distribution methods are consistent among all of our products.
Our net sales by product lines were as follows (in thousands):
March 30,2008
March 31,2007
March 31,2006
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,946 $28,462 $27,902Interface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,904 40,040 39,122Power management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,893 — —
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $89,743 $68,502 $67,024
Our foreign operations are conducted primarily through our wholly-owned subsidiaries in Canada, China,France, Germany, Italy, Japan, South Korea, Taiwan, Malaysia and the United Kingdom. Our principal marketsinclude North America, Europe and the Asia Pacific region. Net sales by geographic areas represent sales tothird-party, external customers.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
The following table set forth revenue by geographic areas (in thousands):
March 30,2008
March 31,2007
March 31,2006
United States . . . . . . . . . . . . . . . . . . . . . . . . . . $27,471 $30,061 $32,615China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,724 9,511 9,335Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,727 3,219 4,246Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,865 4,859 3,898Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,768 8,265 7,867Europe (excludes Italy) . . . . . . . . . . . . . . . . . . 14,395 9,752 6,538Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . 7,793 2,835 2,525
Total net sales . . . . . . . . . . . . . . . . . . . . . $89,743 $68,502 $67,024
Substantially all of our long-lived assets at March 30, 2008 and March 31, 2007 were located in the UnitedStates.
NOTE 19. ALLOWANCES FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
We had the following activities for the allowance for sales returns and allowances and bad debt reserves (inthousands):
Classification
Balance atBeginning
of Year Additions
Write-offsand
Recoveries(1)
Balanceat Endof Year
Allowance for sales return:
Year ended March 30, 2008 . . . . . . . . . . . . $1,078 $3,190 $2,276 $1,992Year ended March 31, 2007 . . . . . . . . . . . . $ 965 $4,013 $3,900 $1,078Year ended March 31, 2006 . . . . . . . . . . . . $ 787 $3,193 $3,015 $ 965
Allowance for doubtful accounts:
Year ended March 30, 2008 . . . . . . . . . . . . $ 60 $ 83 $ — $ 143Year ended March 31, 2007 . . . . . . . . . . . . $ 109 $ (49) $ — $ 60Year ended March 31, 2006 . . . . . . . . . . . . $ 71 $ 38 $ — $ 109
(1) Write-offs and recoveries reflect credits issued to distributors for stock rotations and volume discounts andwrite-offs of uncollectible accounts receivable.
NOTE 20. SUBSEQUENT EVENT
Our Hillview facility located in Milpitas, California, which we originally leased from Mission WestProperties, L.P. (See Note 14), was subleased to a subtenant in April 2008. The sublease expires on March 31,2011 with average annual rent of approximately $1.4 million. The sublease also requires the subtenant to paycertain operating costs associated with subleasing the facility.
NOTE 21. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited quarterly financial data for the years ended March 30, 2008and March 31, 2007. In the opinion of management, this unaudited information has been prepared on the samebasis as the audited information and includes all adjustments, consisting only of normal and recurring
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 30, 2008, MARCH 31, 2007 AND MARCH 31, 2006
adjustments necessary to state fairly the information set forth therein. Results for a given quarter are notnecessarily indicative of results for any subsequent quarter (in thousands, except per share data).
Fiscal Year 2008 Fiscal Year 2007
March 30,2008(1)
December 30,2007(2)
September 30,2007(3)
June 30,2007
March 31,2007(4)
December 31,2006(5)
September 30,2006
June 30,2006(6)
ConsolidatedStatements ofOperations Data:
Net sales . . . . . . . . . . . . . $ 28,262 $ 25,207 $ 19,173 $17,101 $15,660 $16,108 $18,503 $18,231Gross profit . . . . . . . . . . . 10,705 7,567 10,484 11,357 10,330 10,712 12,733 12,759Income (loss) fromoperations . . . . . . . . . . (174,538) (13,394) (14,271) (232) (2,829) (857) 46 (589)
Net income (loss) . . . . . . (172,398) (11,682) (16,410) 4,611 1,255 2,986 1,779 2,004Net income (loss) pershare:Basic . . . . . . . . . . . . $ (3.77) $ (0.24) $ (0.39) $ 0.13 $ 0.03 $ 0.08 $ 0.05 $ 0.06Diluted . . . . . . . . . . . $ (3.77) $ (0.24) $ (0.39) $ 0.13 $ 0.03 $ 0.08 $ 0.05 $ 0.06
Shares used in thecomputation of netincome (loss) pershare:Basic . . . . . . . . . . . . 45,712 49,301 41,796 35,998 36,254 36,642 36,315 35,807Diluted . . . . . . . . . . . 45,712 49,301 41,796 36,134 36,369 36,790 36,506 36,257
(1) Included $165.2 million impairment charges in goodwill and other intangible assets (See Note 8); $1.5million amortization expenses related to purchased assets in connection with the Sipex merger; $0.4 millionrelated to the fair value adjustment to the acquired inventories in connection with the Sipex merger; $0.8million in merger related costs; and $0.1 million impairment charge against our long-term non-marketablesecurities (see Note 7).
(2) Included $2.8 million amortization expenses related to purchased assets in connection with the Sipexmerger; $1.5 million related to the fair value adjustment to the acquired inventories in connection with theSipex merger; $0.5 million in merger related costs; and $0.5 million in separation cost to our former chiefexecutive officer.
(3) Included $1.1 million amortization expenses related to purchased assets in connection with the Sipexmerger; $0.3 million related to the fair value adjustment to the acquired inventories in connection with theSipex merger; $1.0 million in merger related costs; $8.8 million in acquired in-process research anddevelopment charge in connection with the Sipex merger (see Note 3); and $0.4 million impairment chargeagainst our long-term non-marketable securities (see Note 7).
(4) Included $1.0 million in separation cost to our former chief executive officer.(5) Included $1.0 million impairment charges against our long-term non-marketable securities (see Note 7).(6) Included $0.7 million in separation cost to our former chief financial officer.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures (“Disclosure Controls”). We evaluated theeffectiveness of the design and operation of our Disclosure Controls, as defined by the rules and regulations ofthe SEC (the “Evaluation”), as of the end of the period covered by this Report. This Evaluation was performedunder the supervision and with the participation of management, including our Chief Executive Officer (the“CEO”), as principal executive officer, and Chief Financial Officer (the “CFO”), as principal financial officer.
Attached as Exhibits 31.1 and 31.2 of this Report are the certifications of the CEO and the CFO,respectively, in compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Certifications”). Thissection of the Report provides information concerning the Evaluation referred to in the Certifications and shouldbe read in conjunction with the Certifications.
Disclosure Controls are controls and procedures designed to ensure that information required to be disclosedin the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods as specified in the SEC’s rules and forms. In addition,Disclosure Controls are designed to ensure the accumulation and communications of information required to bedisclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, to ourmanagement, including the CEO and CFO, to allow timely decisions regarding required disclosure.
Based on the Evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective as ofthe end of fiscal year 2008.
Inherent Limitations on the Effectiveness of Disclosure Controls
Our management, including the CEO and CFO, does not expect that the Disclosure Controls will prevent allerrors and all fraud. Disclosure Controls, no matter how well conceived, managed, utilized and monitored, canprovide only reasonable assurance that the objectives of such controls are met. Therefore, because of the inherentlimitation of Disclosure Controls, no evaluation of such controls can provide absolute assurance that all controlissues and instances of fraud, if any, within us have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financialreporting. Management conducted an assessment of our internal control over financial reporting as of March 30,2008 based on the framework established by the Committee of Sponsoring Organizations of the TreadwayCommission in Internal Control—Integrated Framework . Based on this assessment, management concludedthat, as of March 30, 2008, our internal control over financial reporting was effective. The independent registeredpublic accounting firm, PricewaterhouseCoopers LLP, has issued an attestation report on our internal controlover financial reporting. The report on the audit of internal control over financial reporting appears on page 58 ofthis Annual Report on Form 10-K.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reportingobjectives because of its inherent limitations. Internal control over financial reporting is a process that involveshuman diligence and compliance, and is subject to lapses in judgment and breakdowns resulting from humanfailures. Internal control over financial reporting also can be circumvented by collusion or improper management
101
override. Because of such limitations, there is a risk that material misstatements may not be prevented or detectedon a timely basis by internal control over financial reporting. However, these inherent limitations are knownfeatures of the financial reporting process. Therefore it is possible to design into the process safeguards to reduce,though not eliminate, this risk.
Changes in Internal Control over Financial Reporting
In August 2007, we acquired Sipex Corporation. Sipex operated under its own set of systems and internalcontrols. We have completed incorporating Sipex’s processes into our own systems and control environment atMarch 30, 2008.
In addition, in conjunction with the Sipex merger, we reassessed our ability to estimate returns andallowances and consequently, changed the revenue recognition used for sales to our two primary distributors,Future Electronics Inc. and Nu Horizons Electronics Corp., from sell-in basis to sell-through basis. We modifiedand refined our internal control procedures related to our revenue recognition. We believe that we have taken thenecessary steps to monitor and maintain appropriate internal control over financial reporting during this change.
There was no other change in our internal control over financial reporting that occurred during the fourthfiscal quarter of 2008 that has materially affected, or is reasonably likely to materially affect, our internal controlover financial reporting.
ITEM 9B. OTHER INFORMATION
None.
102
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
A listing of Executive Officers of Exar and certain other information required by Item 10 with respect to ourexecutive officers is set forth under the caption “Executive Officers of the Registrant” in Part I, Item 1 of thisReport and is incorporated herein by reference.
Directors
The information required by this item with respect to our directors is incorporated by reference from theinformation set forth under the caption “Election of Directors” in our Definitive Proxy Statement in connectionwith our 2008 Annual Meeting of Stockholders (“2008 Definitive Proxy Statement”) which will be filed with theSecurities and Exchange Commission no later than 120 days after March 30, 2008.
Audit Committee
The information required by this item with respect to our audit committee is set forth under the caption“Audit Committee” in our 2008 Definitive Proxy Statement and is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s Directors and Executive Officers, and personswho own more than ten percent (10%) of a registered class of our equity securities to file with the SEC initialreports of ownership and reports of changes in ownership of Common Stock and other equity securities of theCompany. Executive Officers, Directors and greater than ten percent (10%) Stockholders are required by SECregulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and writtenrepresentations that no other reports were required during the fiscal year ended March 30, 2008, all of ourExecutive Officers, Directors and greater than ten percent (10%) Stockholders complied with applicableSection 16(a) filing requirements.
Code of Ethics
We have adopted a Code of Ethics for Principal Executives, Executive Management and Senior FinancialOfficers, a Code of Business Conduct and Ethics and a Financial Integrity Compliance Policy. These documentscan be found on our website: www.exar.com. We will post any amendments to the codes and policy, as well asany waivers that are required to be disclosed by the rules of either the SEC or the NASDAQ on our website, orby filing a Form 8-K. Hard copy can be obtained free of charge by submit a written request to:
Exar Corporation48720 Kato RoadFremont, California 94538Attn: Investor Relations, M/S 210
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption “Executive Compensation” in our 2008Definitive Proxy Statement and is incorporated herein by reference.
103
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS
The information required by this Item is hereby incorporated by reference from our 2008 Definitive ProxyStatement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE
The information required by this Item is hereby incorporated by reference from our 2008 Definitive ProxyStatement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is hereby incorporated by reference from our 2008 Definitive ProxyStatement.
104
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
(1) Index to consolidated financial statements. The following consolidated financial statements of ExarCorporation and its subsidiaries are filed as part of this Form 10-K:
Form 10-KPage No.
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . 58Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) . . . . 61Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
(2) Schedules.
See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to ConsolidatedFinancial Statements, Note 19—Allowance for Sales Return and Doubtful Accounts.”
(3) Exhibits.
See the Exhibit Index, which follows the signature page to this Report.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXAR CORPORATION
By: /s/ PEDRO (PETE) P. RODRIGUEZ
Pedro (Pete) P. RodriguezChief Executive Officer and President
(Principal Executive Officer)
Date: June 13, 2008
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Pedro (Pete) P. Rodriguez and J. Scott Kamsler, and each of them, as his true and lawfulattorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place, andstead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting untosaid attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every actand thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he mightor could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them ortheir or his substitute or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below bythe following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ PEDRO (PETE) P. RODRIGUEZ
(Pedro (Pete) P. Rodriguez)
Chief Executive Officer, President andDirector (Principal ExecutiveOfficer)
June 13, 2008
/s/ J. SCOTT KAMSLER
(J. Scott Kamsler)
Senior Vice President and ChiefFinancial Officer (Principal Financialand Accounting Officer)
June 13, 2008
/s/ PIERRE G. GUILBAULT
(Pierre G. Guilbault)
Director June 13, 2008
/s/ BRIAN HILTON
(Brian Hilton)
Director June 13, 2008
/s/ RICHARD L. LEZA
(Richard L. Leza)
Chairman of the Board June 13, 2008
/s/ JOHN MCFARLANE
(John McFarlane)
Director June 13, 2008
/s/ GARY MEYERS
(Gary Meyers)
Director June 13, 2008
/s/ J. OSCAR RODRIGUEZ
(J. Oscar Rodriguez)
Director June 13, 2008
106
EXHIBIT INDEX
ExhibitFootnote
ExhibitNumber Description
(b) 2.1++ Purchase Agreement between Exar Corporation and Infineon Technologies NorthAmerica Corp., dated April 6, 2005.
(c) 2.2 Agreement and Plan of Merger by and among Exar Corporation, Sipex Corporation andSide Acquisition Corp., dated as of May 7, 2007.
(d) 3.1 Amended and Restated Certificate of Incorporation of Exar Corporation, as amended.
(e) 3.2 Amended and Restated Bylaws of the Company.
(f) 4.1 Warrant Agent Agreement between Sipex Corporation and Wells Fargo Bank, NationalAssociation, dated May 16, 2006.
(f) 4.2 Amendment, dated August 28, 2007, to Warrant Agent Agreement between SipexCorporation, Exar Corporation and Wells Fargo Bank, National Association, datedMay 16, 2006.
(f) 4.3 Registration Rights Agreement, among Sipex Corporation and the buyers listed on theSchedule of Buyers therein, dated May 16, 2006.
(g) 10.1* 1989 Employee Stock Participation Plan, as amended, and related Offering documents.
(g) 10.2* 1996 Non-Employee Directors’ Stock Option Plan, as amended, and related forms ofstock option grant and exercise.
(b) 10.3* 1997 Equity Incentive Plan, as amended, and related forms of stock option grant andexercise.
(h) 10.4* Executive Officers’ Change of Control Severance Benefit Plan.
(b) 10.5* 2000 Equity Incentive Plan, as amended, and related forms of stock option grant andexercise.
(i) 10.6* Form of Letter Agreement Regarding Change of Control for each of the following:Thomas R. Melendrez and Stephen W. Michael.
(j) 10.7* Form of Indemnity Agreement between the Company and each of the following:Guy W. Adams, J. Scott Kamsler, John S. McFarlane, John W. Herzing,Kevin S. Bauer, Levent Ozcolak, Mir Bahram Ghaderi, Pete Rodriguez,Richard L. Leza, Stephen W. Michael and Thomas R. Melendrez.
(k) 10.8*+ Fiscal 2006 Executive Incentive Compensation Program.
(d) 10.9* Fiscal 2006 Key Employee Incentive Compensation Program.
(l) 10.10* 2006 Equity Incentive Plan.
(m) 10.11* 2006 Equity Incentive Plan related forms of stock option grant and exercise.
(d) 10.12* Separation and General Release Agreement between Exar Corporation and RoubikGregorian, dated February 22, 2007.
(o) 10.13* Separation and General Release Agreement between Exar Corporation and Ronald W.Guire, dated June 29, 2006.
(d) 10.14* Consulting Agreement between Exar Corporation and Richard L. Leza, datedFebruary 22, 2007.
(d) 10.15* Amendment to Consulting Agreement between Exar Corporation and Richard L. Leza,dated May 22, 2007.
(d) 10.16* Employment Agreement between Exar Corporation and J. Scott Kamsler, datedJanuary 18, 2007.
107
ExhibitFootnote
ExhibitNumber Description
(n) 10.17 Amendment No. 3, entered October 29, 2007, to that certain Distributor Agreement, datedJuly 1, 1997, by and between Exar Corporation and Future Electronics Incorporated.
(n) 10.18 Amendment No. 4, entered October 29, 2007, to that certain Domestic DistributorAgreement, dated December 1, 2001, by and between Exar Corporation andNuHorizons, Inc.
(n) 10.19 Amendment No. 8, entered October 21, 2007, to the Worldwide Authorized DistributorMarket Price Agreement, dated July 22, 1993, by and between Sipex and FutureElectronics Inc. (the “Sipex Agreement”), which terminates the Sipex Agreement.
(p) 10.20* Sipex Corporation 2006 Equity Incentive Plan.
(p) 10.21* Sipex Corporation Amended and Restated 2002 Nonstatutory Stock Option Plan.
(p) 10.22* Sipex Corporation 2000 Non-Qualified Stock Option Plan.
(p) 10.23* Sipex Corporation 1999 Stock Plan.
(p) 10.24* Sipex Corporation 1997 Stock Option Plan.
(q) 10.25* Amendment, dated August 24, 2007, to Employment Agreement, dated May 7, 2007,between the Company and Ralph Schmitt.
(q) 10.26* Agreement, dated August 24, 2007, by and among the Company, Guy W. Adams, GWACapital Partners LLC, GWA Master Fund LP and GWA Investments LLC.
(r) 10.27* Separation Agreement between the Company and John Herzing, dated July 30, 2007.
(s) 10.28* Separation Agreement between the Company and Bahram Ghaderi, dated July 12, 2007.
(t) 10.29* 2006 Equity Incentive Plan Form of Performance Stock Unit Award Agreement.
10.30+ Master Agreement between Sipex, Hangzhou Silan Microelectronics Co., Ltd. andHangzhou Silan Integrated Circuit Co., Ltd., dated February 27, 2006 (as previouslyfiled as Exhibit 10.1 to Sipex’s Amendment to a Previously Filed Form 8-K onForm 8-K/A, filed on July 26, 2006, and incorporated herein by reference).
10.31 Worldwide Authorized Distributor Market Price Agreement, dated July 22, 1993, by andbetween Sipex and Future Electronics Inc. (as previously filed as Exhibit 10.27 toSipex’s Annual Report on Form 10-K for the year ended December 31, 2002, andincorporated herein by reference).
10.32 Amendment, dated October 1, 2002 to Worldwide Authorized Distributor Market PriceAgreement, dated July 22, 1993, by and between Sipex and Future Electronics Inc. (aspreviously filed as Exhibit 10.1 to Sipex’s Quarterly Report of Form 10-Q for thequarter ended July 1, 2006, and incorporated herein by reference).
10.33 Addendum “A”, dated February 7, 2003, to Worldwide Authorized Distributor MarketPrice Agreement, dated July 22, 1993, by and between Sipex and Future ElectronicsInc. (as previously filed as Exhibit 10.28 to Sipex’s Annual Report on Form 10-K forthe year ended December 31, 2002, and incorporated herein by reference).
10.34+ Addendum “B”, dated August 26, 2003, to Worldwide Authorized Distributor MarketPrice Agreement, dated July 22, 1993, by and between Sipex and Future ElectronicsInc. (as previously filed as Exhibit 10.2 to Sipex’s Quarterly Report of Form 10-Q forthe quarter ended July 1, 2006, and incorporated herein by reference).
10.35 Amendment #3, dated September 15, 2003, to Worldwide Authorized Distributor MarketPrice Agreement, dated July 22, 1993, by and between Sipex and Future ElectronicsInc. (as previously filed as Exhibit 10.3 to Sipex’s Quarterly Report of Form 10-Q forthe quarter ended July 1, 2006, and incorporated herein by reference).
108
ExhibitFootnote
ExhibitNumber Description
10.36 Amendment #4, dated April 25, 2006, to Worldwide Authorized Distributor Market PriceAgreement, dated July 22, 1993, by and between Sipex and Future Electronics Inc. (aspreviously filed as Exhibit 10.4 to Sipex’s Quarterly Report of Form 10-Q for thequarter ended July 1, 2006, and incorporated herein by reference).
10.37 Amendment #7, dated November 1, 2006, to Worldwide Authorized Distributor MarketPrice Agreement, dated July 22, 1993, by and between Sipex and Future ElectronicsInc. (as previously filed as Exhibit 10.1 to Sipex’s Current Report on Form 8-K filed onNovember 7, 2006, and incorporated herein by reference).
10.38* Letter agreement as of August 24, 2005 with Mr. Edward Lam joining Sipex as the newSenior Vice President of Marketing and Business Development (as previously filed asExhibit 10.1 to Sipex’s Form 8-K filed on September 23, 2005, and incorporated hereinby reference.
10.39* Letter agreement as of October 7, 2005 with Mr. Joel Camarda joining Sipex as SeniorVice President of Operations (as previously filed as Exhibit 10.1 to Sipex’s Form 8-Kfiled on October 12, 2005, and incorporated herein by reference).
10.40 Agreement for Purchase and Sale of Real Property, dated March 9, 2006, by and betweenSipex and Mission West Properties, L.P. (as previously filed as Exhibit 10.1 to Sipex’sCurrent Report on Form 8-K filed on March 13, 2006, and incorporated herein byreference).
(t) 10.41 First Amendment, dated August 23, 2007, to Agreement for Purchase and Sale of RealProperty, dated March 9, 2006, by and between Exar and Mission West Properties, L.P.
10.42 Standard Form Lease, dated March 9, 2006, by and between Sipex and Mission WestProperties, L.P. (as previously filed as Exhibit 10.2 to Sipex’s Current Report onForm 8-K filed on March 13, 2006, and incorporated herein by reference).
10.43 Securities Purchase Agreement, dated May 16, 2006, by and among Sipex and the Buyerslisted on the Schedule of Buyers (as previously filed as Exhibit 10.1 to Sipex’s CurrentReport on Form 8-K filed on May 22, 2006, and incorporated herein by reference).
10.44 Amendment No. 1, dated May 24, 2006 to Securities Purchase Agreement, dated May 16,2006, by and among Sipex and the Buyers listed on the Schedule of Buyers (aspreviously filed as Exhibit 10.1 to Sipex’s Current Report on Form 8-K filed onMay 30, 2006, and incorporated herein by reference).
10.45 Securities Purchase Agreement, dated March 29, 2007, by and between Sipex and RodfreHoldings LLC (as previously filed as Exhibit 10.36 to Sipex’s Annual Report onForm 10-K for the year ended December 30, 2006, and incorporated herein byreference).
(e) 10.46* Fiscal 2008 Executive Incentive Compensation Program, as amended.
(c) 10.47 Form of Sipex Voting Agreement.
(c) 10.48 Form of Exar Voting Agreement.
(c) 10.49 Lock-up and Standstill Agreement between Exar Corporation and Rodfre Holdings LLC,dated May 7, 2007.
(c) 10.50* Employment Agreement by and between Exar Corporation and Ralph Schmitt, datedMay 7, 2007.
(u) 10.51 Form of Affiliate Agreement.
(v) 10.52* Fiscal 2009 Senior Executive Incentive Compensation Program.
(w) 10.53* Agreement between Exar Corporation and John S. McFarlane, dated December 19, 2007.
109
ExhibitFootnote
ExhibitNumber Description
(x) 10.54* Separation and General Release Agreement between Exar Corporation and Ralph Schmitt,dated December 29, 2007.
10.55 Amendment #6, dated September 27, 2006, to Worldwide Authorized Distributor MarketPrice Agreement, dated July 22, 1993, by and between Sipex and Future ElectronicsInc. (as previously filed as Exhibit 10.1 to Sipex’s Current Report on Form 8-K filed onOctober 3, 2006, and incorporated herein by reference).
(y) 10.56 Sublease Agreement, dated January 16, 2008, by and between Exar Corporation andKovio, Inc., under that certain Standard Form Lease entered into with Mission WestProperties, L.P., dated March 9, 2006.
(z) 10.57 Agreement for Public Sale of Assets of FyreStorm, Inc. by Horizon Technology FundingCompany LLC and Sand Hill Venture Debt III, LLC to Exar Corporation, datedJanuary 31, 2008.
(a) 21.1 Subsidiaries of the Company.
(a) 23.1 Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopersLLP.
(a) 24.1 Power of Attorney. Reference is made to the signature page 106.
(a) 31.1 Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.
(a) 31.2 Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.
(a) 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(a) 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(a) Filed herewith.
(b) Filed as an exhibit to Exar’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, andincorporated herein by reference.
(c) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on May 8, 2007 and incorporated herein byreference.
(d) Filed as an exhibit to Exar’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, andincorporated herein by reference.
(e) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on December 10, 2007, and incorporatedherein by reference.
(f) Filed as an exhibit to Exar’s Registration Statement on Form S-3 (333-147154) filed on November 5, 2007,and incorporated herein by reference.
(g) Filed as an exhibit to Exar’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, andincorporated herein by reference. Related Forms of Stock Option Grant and Exercise filed as part of anexhibit to Exar’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, and incorporatedherein by reference.
(h) Filed as an exhibit to Exar’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000, andincorporated herein by reference.
(i) Filed as an exhibit to Exar’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, andincorporated herein by reference.
110
(j) Filed as an exhibit to Exar’s Quarterly Report on Form 10-Q for the three months ended September 30,2002, and incorporated herein by reference.
(k) Filed as an exhibit to Exar’s Quarterly Report on Form 10-Q for the three months ended June 30, 2005, andincorporated herein by reference.
(l) Filed as an addendum to Exar’s definitive proxy statement filed on August 9, 2006, and incorporated hereinby reference.
(m) Filed as an exhibit to Exar’s Current Report on Form 8-K, filed on September 13, 2006, and incorporatedherein by reference.
(n) Filed as an exhibit to Exar’s Quarterly Report on Form 10-Q for the three months ended December 30,2007, and incorporated herein by reference.
(o) Filed as an exhibit to Exar’s Current Report on Form 8-K, filed on July 6, 2006, and incorporated herein byreference.
(p) Filed as an exhibit to Exar’s Registration Statement on Form S-8 (333-145741) filed on August 28, 2007,and incorporated herein by reference.
(q) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on August 30, 2007, and incorporated hereinby reference.
(r) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on August 1, 2007, and incorporated hereinby reference.
(s) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on July 17, 2007, and incorporated herein byreference.
(t) Filed as an exhibit to Exar’s Quarterly Report on Form 10-Q for the three months ended September 30,2007, and incorporated herein by reference.
(u) Filed as an exhibit to Exar’s Registration Statement on Form S-4 (333-143243) filed on May 24, 2007, andincorporated herein by reference.
(v) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on March 10, 2008 and incorporated hereinby reference.
(w) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on December 20, 2007, and incorporatedherein by reference.
(x) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on January 10, 2008, and incorporated hereinby reference.
(y) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on January 23, 2008, and incorporated hereinby reference.
(z) Filed as an exhibit to Exar’s Current Report on Form 8-K filed on February 12, 2008, and incorporatedherein by reference.
* Indicates management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10) ofRegulation S-K.
+ Portions of this agreement have been omitted pursuant to a request for confidential treatment and theomitted portions have been filed separately with the Securities and Exchange Commission.
++ Portions of this agreement have been omitted pursuant to a request for confidential treatment and theomitted portions have been filed separately with the Securities and Exchange Commission. Schedules,exhibits and similar attachments have also been excluded, copies of which will be furnished supplemental tothe Securities and Exchange Commission upon request.
111
CORPORATION
FORM 10-K /A
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A(Amendment No. 1)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGEACT OF 1934
For the fiscal year ended March 30, 2008OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File No. 0-14225
EXAR CORPORATION(Exact Name of Registrant as specified in its charter)
Delaware 94-1741481(State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification Number)
48720 Kato Road, Fremont, CA 94538(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (510) 668-7000SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registeredCommon Stock, $0.0001 Par Value The NASDAQ Global MarketSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 theSecurities Act. Yes ‘ No È
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of theAct. Yes ‘ No È
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘ Accelerated filer È
Non-accelerated filer ‘ (Do not check if a smaller reporting company) Smaller reporting company ‘
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes ‘ No È
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 28,2007 was $509,245,654 based on the last sales price reported for such date as reported on The NASDAQ GlobalMarket.
The number of shares outstanding of the Registrant’s Common Stock was 42,678,155 as of June 27, 2008,net of 19,835,425 treasury shares.
INDEX
Page
PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . 3ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERMATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the Registrant’s Annual Report onForm 10-K for the fiscal year ended March 30, 2008, originally filed on June 13, 2008 (the “Original Filing”).The Registrant is refiling Part III to include the information required by Items 10, 11, 12, 13 and 14 to Part IIIwithin the period required by General Instruction G(3) to Form 10-K. In addition, in connection with the filing ofthis Amendment and pursuant to the rules of the Securities and Exchange Commission (the “SEC”), theRegistrant is including with this Amendment certain currently dated certifications.
Except as described above, no other changes have been made to the Original Filing.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Certain information regarding our current Directors is set forth below. The term of office for each of ourDirectors expires at the 2008 Annual Meeting of Stockholders. There is no family relationship between any ofour Directors or executive officers and there are no arrangements or understandings between any of our Directorsand any other person pursuant to which such Director was or is to be selected as a Director (other than sucharrangements or understandings with such Directors acting solely in their capacities as such).
Name Age Position
Pierre Guilbault . . . . . . . . . . . . . . . . . . . 54 DirectorBrian Hilton(1),(2) . . . . . . . . . . . . . . . . 65 DirectorRichard L. Leza(2),(3) . . . . . . . . . . . . . 61 Director, ChairmanJohn S. McFarlane(1) . . . . . . . . . . . . . . 59 DirectorGary Meyers(1),(3) . . . . . . . . . . . . . . . . 43 DirectorJuan (Oscar) Rodriguez(2),(3) . . . . . . . 48 DirectorPedro (Pete) P. Rodriguez . . . . . . . . . . . 46 Chief Executive Officer, President and Director
(1) Member of the Audit Committee.(2) Member of the Corporate Governance and Nominating Committee.(3) Member of the Compensation Committee.
PIERRE GUILBAULT
Pierre Guilbault, age 54, joined the Company as a Director upon the acquisition of Sipex Corporation by theCompany on August 25, 2007. Mr. Guilbault served as a member of Sipex’s Board of Directors fromSeptember 2006 to August 2007. He has been with Future Electronics Inc., the Company’s largest distributor andan affiliate of the Company’s largest stockholder, since October 2002 as Executive Vice President and ChiefFinancial Officer. Prior to joining Future, Mr. Guilbault was Executive Vice President and Chief FinancialOfficer of My Virtual Model, Motion International Inc. and Steinberg, Inc. Mr. Guilbault became a CharteredAccountant in 1981 and earned a bachelor’s degree in Business Administration from UQUAM.
BRIAN HILTON
Brian Hilton, age 65, joined the Company as a Director upon the acquisition of Sipex Corporation by theCompany on August 25, 2007. Mr. Hilton served as a member of Sipex’s Board of Directors from July 2004, andas the Chairman of the Board of Directors of Sipex from October 2006 to August 2007. He has over 35 years ofexperience in the semiconductor industry. From 1997 to 2002, Mr. Hilton was President of Avnet ElectronicsMarketing, a global electronics distributor. In this role, Mr. Hilton was responsible for building Avnet’s Asianbusiness and expanding its presence in Europe, the Middle East and Africa. Prior to Avnet, Mr. Hilton spent 30years at Motorola, Inc., reaching the position of Corporate Vice President and Director of worldwide sales andmarketing for Motorola Semiconductor Products Sector (SPS). From 1979 to 1981, Mr. Hilton served as VPFinance & Administration for Motorola SPS. From 1976 to 1978, Mr. Hilton served as the VP and CorporateController for Motorola Canada Limited. From 1969 to 1971, Mr. Hilton served as Division Controller for theMotorola Automotive Products Division. From 1964 to 1967, Mr. Hilton participated in the General Motorsfinancial management program. Mr. Hilton graduated with a BA at the University of Manitoba.
RICHARD L. LEZA
Richard L. Leza, age 61, joined the Company as a Director in October 2005 and was elected Chairman inSeptember 2006. He was appointed as the acting Chief Executive Officer and President (Interim) of the Company
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in February 2007, and he served in that position until August 2007. Mr. Leza was the founder, Chairman andChief Executive Officer of AI Research Corporation, an early stage venture capital firm specializing in the areasof business-to-business software, information technology, medical devices and medical analytical softwareapplications. Mr. Leza served in such position, which was his principal occupation and employment, from 1988to 2007. He was also the co-founder, past Chairman and past President of Hispanic-Net, a non-profitorganization. From 1998 to 2001, Mr. Leza was the co-founder, Chairman and Chief Executive Officer ofCastaLink, Inc., a provider of a web-based supply chain collaboration solution. From 1997 to 1999, Mr. Lezaserved as co-founder, Chairman and Chief Executive Officer of NucleoTech Corporation, an application softwarecompany focused on digital image-driven analytical DNA software solutions. From 1982 to 1988, he wasco-founder, Chairman and Chief Executive Officer of RMC Group, Inc., which provided management andresearch services for public and private technology companies. Mr. Leza was a Board member of the StanfordGraduate School of Business Advisory Council from 2001 to 2008 and is Emeriti Director of New Mexico StateUniversity Foundation Board. He is a three time member of Hispanic Business Magazines’ top 100 influentialHispanics in the United States. He is the author of various publications, writing on topics such as exporting,venture capital and developing business plans. Mr. Leza earned an MBA from Stanford University GraduateSchool of Business and a B.S. in Civil Engineering from New Mexico State University.
JOHN S. MCFARLANE
John S. McFarlane, age 59, joined the Company as a Director in January 2004. He was appointed as theacting Chief Executive Officer and President (Interim) of the Company in December 2007, and he served in thatposition until April 2008. He is currently self-employed as a private investor and has served as a Director ofPitney Bowes Inc., a supplier of global mailing solutions and document management systems, sinceOctober 2000. From February 2004 to February 2005, Mr. McFarlane was the Chairman and Chief ExecutiveOfficer of Ascendent Systems, a private communications software company. From 2003 to 2005, Mr. McFarlaneserved as a member of the Board of Directors for Creo Inc., a supplier of digital pre-press equipment andworkflow software for the graphic design and printing industry that was acquired by Eastman Kodak Company inJune of 2005. From March 2001 to April 2002, Mr. McFarlane was President and Chief Executive Officer ofNexsi Systems, a provider of high-performance Internet security and traffic management systems. FromMay 1997 to March 2001, Mr. McFarlane held senior executive positions, including President of the ServiceProvider business and President of the Software Division, at Sun Microsystems, Inc., a network computingcompany. Prior to Sun Microsystems, he spent over 17 years at Northern Telecom and Bell Northern Research.Mr. McFarlane holds a BSc and an MBA from the University of Toronto.
GARY MEYERS
Gary Meyers, age 43, joined the Company as a Director in May 2008. Mr. Meyers is a Vice President andGeneral Manager of Synopsys, Inc., a leading supplier of electronic design automation (“EDA”) software. Priorto its acquisition by Synopsys in May 2008, Mr. Meyers served as President and Chief Executive Officer ofSynplicity, Inc., a public supplier of EDA tools serving the programmable logic market since October 2004, andas a member of the Board of Directors of Synplicity since January 2005. From August 2004 to October 2004, heserved as Synplicity’s President and Chief Operating Officer, and from November 1999 to August 2004,Mr. Meyers served as Synplicity’s Vice President of Worldwide Sales. Mr. Meyers served on the Board ofDirectors of SpiraTech Limited prior to its acquisition by Mentor Graphics Corporation. He also held a numberof different executive management positions at LSI Corporation. Mr. Meyers has an MBA from UCLA and hereceived his BSEE from the University of Maryland.
JUAN (OSCAR) RODRIGUEZ
Juan (Oscar) Rodriguez, age 48, joined the Company as a Director in September 2005. Beginning inApril 2007, Mr. Rodriguez became a Director as well as the Chief Executive Officer and President of MoviusInteractive Corporation (formerly IPUNITY Glenayre), a private technology firm. Beginning in April 2006,
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Mr. Rodriguez served as Vice President for the carrier ethernet solutions business at Lucent Technologies Inc.,which designs and delivers the systems, services and software that drive communications networks. After LucentTechnologies was acquired by Alcatel, Mr. Rodriguez served as its Chief Marketing Officer in the EnterpriseBusiness Group until April 2007. From August 2003 until April 2006, Mr. Rodriguez served as Chief ExecutiveOfficer, President and a Director of Riverstone Networks, Inc., a provider of carrier ethernet infrastructuresolutions for business and residential communications services. Mr. Rodriguez also held various positions atNortel Networks Corporation, a telecommunications systems company, including as Divisional President,Enterprise Solutions business, from October 2002 to August 2003; Divisional President, Intelligent Internetbusiness from August 2001 to October 2002; and Vice President, Portfolio & Operations from October 2000 toJuly 2001. Prior to that, Mr. Rodriguez served as President and Chief Operating Officer of Arris Interactive, aprovider of cable MSO (Multiple Service Operator) voice and data products. He has also served in severalmanagement positions in privately-held and venture-backed companies in the communications and networkingindustry. Mr. Rodriguez holds a BS in Computer Engineering from the University of Central Florida, an MBAfrom the Kenan-Flagler Business School at the University of North Carolina, Chapel Hill, and a certificate inStrategic Marketing from Harvard Business School.
PEDRO (PETE) P. RODRIGUEZ
Pedro (Pete) P. Rodriguez, age 46, joined the Company as a Director in October 2005. He was appointedChief Executive Officer and President of the Company in April 2008. Mr. Rodriguez has over 24 years ofengineering, sales, marketing and executive management experience in the semiconductor industry.Mr. Rodriguez served, most recently, from June 2007 to April 2008, as Chief Marketing Officer of Virage LogicCorporation, a semiconductor intellectual property supplier for Systems on a Chip (SoC). Prior to hisappointment at Virage Logic, Mr. Rodriguez served as President, Chief Executive Officer and Director ofXpedion Design Systems, Inc., a private, venture-funded developer of design solutions for radio frequencyintegrated circuits (“RFIC”) from May 2000 to August 2006. Mr. Rodriguez held this role for six years untilshortly after Xpedion was acquired by Agilent Technologies, Inc. in August 2006. Prior to Xpedion, he heldvarious senior management positions in sales and marketing at Escalade Corporation, a provider of software forchip design, and LSI Corporation as well as design engineering, product management and process engineeringpositions at Aerojet Electronics, Teledyne Microwave and Siliconix incorporated. Mr. Rodriguez holds an MBAfrom Pepperdine University, an MSEE from California Polytechnic University and a BS in ChemicalEngineering from California Institute of Technology.
Executive Officers
Certain information regarding our current executive officers is set forth below.
Name Age Position
Pedro (Pete) P. Rodriguez . . . . . . . 46 Chief Executive Officer, President and DirectorJ. Scott Kamsler . . . . . . . . . . . . . . 60 Senior Vice President and Chief Financial OfficerGeorge Apostol . . . . . . . . . . . . . . . 43 Chief Technology OfficerHung P. Le . . . . . . . . . . . . . . . . . . 47 Vice President of EngineeringBentley Long . . . . . . . . . . . . . . . . . 46 Vice President of Worldwide SalesThomas R. Melendrez . . . . . . . . . . 54 General Counsel, Secretary and Executive Vice President of Business
DevelopmentStephen W. Michael . . . . . . . . . . . 61 Senior Vice President of Operations and Reliability & Quality
AssurancePaul Pickering . . . . . . . . . . . . . . . . 48 Senior Vice President of Marketing
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PEDRO (PETE) P. RODRIGUEZ
See above.
J. SCOTT KAMSLER
J. Scott Kamsler joined us in February 2007 as our Senior Vice President and Chief Financial Officer. Priorto joining us, he was Vice President and Chief Financial Officer at Centillium Communications, Inc. fromJuly 2004 to February 2007. He also served as Vice President of Operations at Wyse Technology Inc. from 2003to 2004 and as Chief Financial Officer at Tasman Networks, Inc. from 2000 to 2002. Prior to Tasman Networks,he served as Chief Financial Officer of four public companies: Symmetricom, Inc., DSP Technology Inc.,Solitec, Inc. and E-H International, Inc. In addition, Mr. Kamsler served as a member of the Board of Directorsof DSP Technology from 1988 to 1999. Earlier in his career, he held various finance positions at IntelCorporation and was an auditor with Peat Marwick Mitchell. Mr. Kamsler is a CPA and received his BA fromWillamette University and his MBA from the University of Washington.
GEORGE APOSTOL
George Apostol joined us as Chief Technology Officer in May 2008. Mr. Apostol has over 20 years ofexperience in the system electronics and semiconductor industries. From May 2005 to May 2008, Mr. Apostolserved as Chief Technology Officer and Vice President of Engineering at PLX Technology, Inc. He was VicePresident of Engineering at Audience, Inc. from May 2004 to May 2005 and Vice President of Engineering atBRECIS Communications Corporation from February 2000 to April 2004. Prior to that, he held various seniorengineering and management positions at TiVo, Inc., LSI Corporation, Silicon Graphics, Inc. and XeroxCorporation. With a strong background designing systems on silicon, he holds several patents in the areas ofsystem bus interface, clocking and buffer management design, and has written and deployed multipleapplication-specification integrated circuit (“ASIC”) design productivity tools. Mr. Apostol performed hisacademic research at the Dana Farber Cancer Institute and Massachusetts Institute of Technology Sloan Schoolof Management and holds a BSEE from Massachusetts Institute of Technology.
HUNG P. LE
Hung P. Le was appointed to Vice President of Engineering in July 2007. He joined us in March 1995 whenwe acquired Startech Semiconductor, Inc., where he served as Director of Technology. Prior to joining Startechin 1994, he was Manager of Technology at Sierra Semiconductor, Inc. Prior to his current position, Mr. Le wasour Division Vice President of Technology from 2004 to July 2007. Hung Le has 25 years of experience insemiconductor physics and design and holds eight patents. He received his MS and BS in Electrical Engineeringand Computer Science from Massachusetts Institute of Technology.
BENTLEY LONG
Bentley Long was appointed as Vice President of Worldwide Sales in January 2008. He has over 20 years ofsemiconductor sales and marketing experience including the last 11 years at Exar where he was most recentlyVice President of the Americas and Global Distribution. He has previously worked at VLSI Technology, Inc. asan Area Sales Manager and Worldwide Strategic Account Manager, as well as held various technical positions atTexas Instruments Incorporated. He holds a Bachelor of Engineering Degree in Electrical Engineering andMathematics from Vanderbilt University and an MBA from the University of Tennessee.
THOMAS R. MELENDREZ
Thomas R. Melendrez joined us in April 1986 as our Corporate Attorney. He was promoted to Director ofLegal Affairs in July 1991, and again to Corporate Vice President of Legal Affairs in March 1993. InMarch 1996, he was promoted to Corporate Vice President, General Counsel and in June 2001, he was appointed
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Secretary. In April 2003, he was promoted to General Counsel, Secretary and Vice President of BusinessDevelopment and in July 2005, he was promoted to Senior Vice President of Business Development. InApril 2007, he was promoted to his current position as General Counsel, Secretary and Executive Vice Presidentof Business Development. Mr. Melendrez has over 25 years of legal experience in the semiconductor and relatedindustries and he received a BA from the University of Notre Dame, a JD from University of San Francisco andan MBA from Pepperdine University.
STEPHEN W. MICHAEL
Stephen W. Michael joined us in September 1992 as our Vice President of New Market Development. InJuly 1995, he was appointed to Vice President of Operations, and in May 2001, he was appointed to VicePresident of Operations and Reliability & Quality Assurance and in July 2007, to Senior Vice President ofOperations and Reliability & Quality Assurance. Prior to joining us, he was Vice President and General Managerof Analog and Custom Products with Catalyst Semiconductor. Prior to Catalyst Semiconductor, he served invarious senior positions at GE Semiconductor, Intersil Corporation, Fairchild Camera and InstrumentCorporation and National Semiconductor Corporation. Mr. Michael has over 30 years of semiconductor industryexperience and holds a BS in Electrical Engineering from the University of California at Davis.
PAUL PICKERING
Paul Pickering joined us in June 2008 as our Senior Vice President of Marketing. Mr. Pickering has over 26years of semiconductor marketing and sales experience. From March 2007 to June 2008, Mr. Pickering served asVice President of Field Operations for Innovative Silicon, Inc., a venture-capital funded company. He wasExecutive Vice President of Sales and Marketing for Xpedion Design Systems, Inc., from May 2003 toMarch 2007, a company that was acquired by Agilent Technologies, Inc. Prior to Agilent Technologies,Mr. Pickering worked in senior management sales and marketing roles at Fairchild, Toshiba, LSI Corporation,and PMC-Sierra, Inc. Mr. Pickering is a graduate of West Chester University of Pennsylvania with a BS in SocialScience.
Audit Committee
The Audit Committee currently consists of three (3) Directors: Messrs. Hilton (Chair), McFarlane andMeyers. The Audit Committee, serving under a written charter adopted by our Board of Directors, which isposted on the our website at www.exar.com, reviews financial reports, information and other disclosuressubmitted by us to any regulatory agency or disclosed to the public, reviews our system of internal controlsregarding finance and accounting and our auditing, accounting and financial reporting processes. The AuditCommittee’s primary duties and responsibilities as described in its charter are to: (i) appoint the independentregistered public accounting firm and evaluate the independent registered public accounting firm’s qualifications,independence and performance, (ii) review and discuss with management and the independent registered publicaccounting firm our audited financial statements and the effectiveness of our internal controls and procedures forfinancial reporting; and (iii) review and pre-approve any proposed related-party transactions and/or affiliatedtransactions. Our Board of Directors has determined that Mr. Hilton is an “audit committee financial expert” asdefined by Item 407 of SEC Regulation S-K and that each member of the Audit Committee is an “independentdirector” as currently defined under the listing standards of The NASDAQ Global Market and is “independent”as that term is defined in SEC Rule 10A-3.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s Directors andexecutive officers, and persons who own more than ten percent (10%) of a registered class of our equitysecurities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stockand other equity securities of the Company. Executive officers, Directors and greater than ten percent (10%)stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
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To our knowledge, based solely on a review of the copies of such reports furnished to us and writtenrepresentations that no other reports were required during the fiscal year ended March 30, 2008, all of ourexecutive officers, Directors and greater than ten percent (10%) stockholders complied with applicableSection 16(a) filing requirements.
Code of Ethics
We have adopted a Code of Ethics for Principal Executives, Executive Management and Senior FinancialOfficers, a Code of Business Conduct and Ethics and a Financial Integrity Compliance Policy. These documentscan be found on our website: www.exar.com. We will post any amendments to the codes and policy, as well asany waivers that are required to be disclosed by the rules of either the SEC or The NASDAQ Global Market onour website, or by filing a Form 8-K. Hard copy can be obtained free of charge by submitting a written requestto:
Exar Corporation48720 Kato RoadFremont, California 94538Attn: Investor Relations, M/S 210
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This section describes the material elements of compensation awarded to, earned by or paid to theindividuals who served as our principal executive officer or our principal financial officer during fiscal 2008, aswell as our three other most highly compensated executive officers during fiscal 2008. These individuals arelisted in the Summary Compensation Table below and are referred to herein as the “Named Executive Officers.”As noted below, Richard L. Leza, our Chairman of the Board, served as our Chief Executive Officer andPresident on an interim basis from February 22, 2007 until Ralph Schmitt became our Chief Executive Officerand President on August 25, 2007. Mr. Schmitt resigned as our Chief Executive Officer and President onDecember 6, 2007 and was replaced by John S. McFarlane, one of our Directors, on an interim basis until Pedro(Pete) P. Rodriguez became our Chief Executive Officer and President on April 28, 2008. References to NamedExecutive Officers in this Compensation Discussion and Analysis section generally do not include Messrs. Lezaand McFarlane, unless otherwise noted, as they each served as Chief Executive Officer and President on aninterim basis only.
Our executive compensation programs are determined and approved by our Compensation Committee. TheCompensation Committee currently consists of three Directors: Messrs. O. Rodriguez (Chair), Leza and Meyers.Mr. Leza was appointed to our Compensation Committee in August 2007 following his service as our interimChief Executive Officer and President. None of the other Named Executive Officers are members of theCompensation Committee or otherwise had any role in determining the compensation of other Named ExecutiveOfficers, although the Compensation Committee does consider the recommendations of our Chief ExecutiveOfficer and President in setting compensation levels for our other executive officers.
Executive Compensation Program Objectives and Overview
The Compensation Committee conducts an annual review of our executive compensation programs to helpensure that:
• the program is designed to achieve our goals of promoting financial and operational success by attracting,motivating and facilitating the retention of key employees with outstanding talent and ability; and
• the program adequately rewards performance which is tied to creating stockholder value.
The Compensation Committee also reviews compensation levels to help ensure they are reasonable afterconsideration of the executive compensation programs of similar companies.
Our current executive compensation program is based on three components, which are designed to beconsistent with our compensation philosophy: (1) base salary; (2) annual incentive bonuses; and (3) long-termincentive equity awards, including stock options and awards of restricted stock units that are subject to time-based and/or performance-based vesting requirements. We also provide severance benefits to our NamedExecutive Officers if their employment terminates under certain circumstances.
In structuring executive compensation packages, the Compensation Committee considers how each componentpromotes retention and/or motivates performance by the executive. Base salaries and severance and othertermination benefits are primarily intended to attract and retain highly qualified executives. These are the elementsof our executive compensation program where the value of the benefit in any given year is not dependent onperformance (although base salary amounts and benefits determined by reference to base salary may increase fromyear to year depending on performance, among other things). We believe that in order to attract and retain topexecutives, we need to provide them with predictable compensation levels that reward their continued productiveservice. Annual incentive bonuses are primarily intended to motivate our Named Executive Officers to achievespecific strategies and operating objectives, although we believe they also help us to attract and retain topexecutives. Our long-term equity incentives are primarily intended to align Named Executive Officers’ long-term
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interests with stockholders’ long-term interests, although we believe they also play a role in helping us to attract andretain top executives. Annual bonuses and long-term equity awards are the elements of our executive compensationprogram that are designed to reward performance and thus the creation of stockholder value.
The Compensation Committee believes that performance-based compensation such as annual bonuses andlong-term equity incentives play a significant role in aligning management’s interests with those of ourstockholders. For this reason, these forms of compensation constitute a substantial portion of each of our NamedExecutive Officers’ compensation. For fiscal 2008, the Compensation Committee approved executivecompensation arrangements for our Named Executive Officers (other than Mr. Schmitt), that were intended toresult in up to 50% of each executive’s total direct compensation being incentive compensation tied directly tostockholder value creation, with base salary constituting the balance of their fiscal 2008 total directcompensation. (As used in this discussion, the term “total direct compensation” means the aggregate amount ofthe executive’s base salary, annual incentive bonus, and long-term equity incentive awards based on the grant-date fair value of such awards as determined under the accounting principles used in the Company’s financialreporting.) The terms of Mr. Schmitt’s compensation for fiscal 2008 were set forth in his employment agreementwith the Company, which was approved by the Compensation Committee. Our compensation packages aredesigned to promote teamwork, initiative and resourcefulness by key employees whose performance andresponsibilities directly affect our results of operations.
From time to time as the Compensation Committee deems appropriate, it retains independent compensationconsultants to help identify appropriate peer group companies and to obtain and evaluate current executivecompensation data. Most recently, the Compensation Committee retained the consulting firm of Mercer HumanResource Consulting during fiscal 2007 to provide comprehensive compensation data for our peer companies. Inmaking its compensation decisions for fiscal 2008, the Compensation Committee referred to compensation datafor companies in the semiconductor industry similar in size and geographic location to the Company and alsoreviewed compensation data provided by Mercer for fiscal 2007. The Compensation Committee did not retaincompensation consultants for fiscal 2008.
We view our current executive compensation program as one in which the individual components combinetogether to create a total compensation package for each Named Executive Officer that we believe achieves ourcompensation objectives. In general, the Compensation Committee targets the 50th percentile for the similarlysituated companies described above, but the Compensation Committee does not specifically “benchmark”compensation at that level and retains discretion to set compensation at higher or lower levels as it deemsappropriate in the circumstances.
Current Executive Compensation Program Elements
Base Salaries
Salaries for our Named Executive Officers are reviewed by the Compensation Committee on an annual basis.In general, the Compensation Committee targets base salary levels between the 50th and 75th percentiles amongsimilarly situated companies as noted above. The Company has not entered into employment agreements with anyof its current Named Executive Officers that provide for minimum levels of base salary. In setting specific salarylevels for the Company’s executive officers, the Compensation Committee assesses the executive’s pastperformance and expected future contributions to the Company, the executive’s salary and responsibilities relativeto the other executive officers, and the salaries of similarly situated executives with our peer companies.
From time to time the base salary levels of our Named Executive Officers and the other executive officersare adjusted to address market conditions. The Compensation Committee believes that the base salary levels ofthe Named Executive Officers and the other executive officers generally are reasonable in view of competitivepractices, the Company’s performance and the contribution of those officers to that performance. For fiscal 2008,the Company eliminated the auto allowance perquisite, and the base salary of certain executive officers wasincreased in a similar amount.
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Annual Incentive Bonuses
Historically, annual incentive bonuses have been awarded to executive officers based upon multipleperformance criteria, including evaluations of personal job performance and performance measured againstobjective business criteria. Other than Mr. Kamsler’s offer letter described below, the Company does not haveemployment agreements with the Named Executive Officers currently employed by the Company that providecontractual rights to receive a fixed actual or target bonus for any given year. Instead, the CompensationCommittee generally has discretion to establish the target bonus for each executive for each fiscal year, with theamount of the executive’s actual bonus being determined based on the performance factors specified for thatyear.
For fiscal 2008, Messrs. Kamsler, Melendrez, Michael and Lam, along with selected other executives andkey employees, participated in our Fiscal Year 2008 Executive Incentive Compensation Program (the “bonusprogram”). Mr. Schmitt’s incentive bonus opportunity for fiscal 2008 was provided under the terms of hisemployment agreement with the Company as described below under “Potential Payments upon Termination orChange in Control.” He was not eligible to participate in the bonus program for fiscal 2008. As members of ourBoard of Directors who served as Chief Executive Officer and President on an interim basis only, Messrs. Lezaand McFarlane were also not eligible to participate in the program.
The bonus program provides that bonuses are to be determined 70% based on the Company’s financialperformance as measured against pre-established revenue and operating profit goals for the fiscal year and 30%based on the individual employee’s achievement of pre-established objectives for the fiscal year. The Companyfinancial performance goals are established by our Board of Directors. The Compensation Committee establishesthe individual performance goals and determines the executive’s performance with respect to those goals, in eachcase after taking into account the recommendations of our Chief Executive Officer and President (with respect toeach participant in the program other than himself). In establishing the performance goals, the CompensationCommittee believed that the goals were attainable if the executive performed at a satisfactory level.
To determine the bonuses to be awarded under the program, each executive is assigned a target bonusamount, which is expressed as a percentage of the executive’s base salary. Mr. Kamsler’s offer letter providesthat his target bonus under the program each year will be 50% of his base salary and that his maximum bonuswill be 100% of his base salary. For fiscal 2008, the Compensation Committee determined that forMr. Melendrez and Mr. Michael, the target bonus would be 40% of the executive’s base salary and that themaximum bonus would be 60% of the executive’s base salary. Mr. Lam’s bonus opportunity related to thesecond half of fiscal 2008 only. His target bonus was 40% of his base salary for that six-month period, and hismaximum bonus was 60% of his base salary for that six-month period.
Under the program as originally adopted by the Compensation Committee in April 2007, the specificpercentage of the Company-performance component to be awarded for fiscal 2008 was to be determined basedon the Company’s actual operating profit and revenue in relation to the pre-established goals. If the Companyachieved 183% of the operating profit goal and 109% of the revenue goal, the executive would receive the entire70% of his target bonus opportunity determined based on Company performance. If the Company’s actualoperating profit was less than 83% of the goal and actual revenue was less than 97% of the goal, no bonus wouldbe paid with respect to the Company performance component. In establishing the performance goals, theCompensation Committee believed that the goals were attainable if the Company performed at a satisfactorylevel. To provide executives with an incentive to exceed the goals, the Compensation Committee provided that ifthe Company achieved 100% of the operating profit goal and 100% of the revenue goal, the executive wouldreceive only 20% of his target bonus opportunity under the Company performance component and a higherpercentage for performance in excess of those goals.
In December 2007, the Compensation Committee revised the bonus program so that 50% of the Company-performance component would be based on performance during the first half of fiscal 2008 as described aboveand 50% of the Company-performance component would be based on performance during the second half of
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fiscal 2008. The Compensation Committee determined that this amendment was appropriate to take into accountthe changes in the Company’s operations following its acquisition of Sipex Corporation during fiscal 2008.Under the amended program, new performance goals were established for the second half of fiscal 2008, and thelevels of performance that would result in a 70% payout were revised to 174% of the operating profit goal and117% of the revenue goal. The threshold levels of performance described above were not changed, andachievement by the Company of 100% of the two performance goals would still result in the executive receiving20% of his target bonus opportunity under the Company performance component.
Based on the Company’s financial performance during fiscal 2008 and its assessment of each executive’sindividual performance, the Compensation Committee determined the percentage of the Company performancecomponent and the individual performance component that would be awarded to each executive. Thesedeterminations are reflected in the following table:
NameBase
SalaryTargetBonus
CompanyPerformanceComponent
Awarded(Weighted 70%)
IndividualPerformanceComponent
Awarded(Weighted 30%)
First-HalfBonus(Paid)
Second-HalfBonus
(Estimated)(1)TotalBonus
J. Scott Kamsler . . . . . . . . $288,000 $144,000 8.5% 30.00% $33,623 $21,750 $55,373Thomas R. Melendrez . . . . $255,000 $102,000 8.5% 29.40% $23,674 $15,170 $38,844Stephen W. Michael . . . . . $226,700 $ 90,700 8.5% 26.25% $20,112 $11,316 $31,428Edward M. Lam(2) . . . . . . $143,500 $ 57,400 0% 0% $ 0 $ 0 $ 0
(1) —These amounts are pending final approval by the Compensation Committee.(2) —Mr. Lam’s bonus opportunity was for the second half of fiscal 2008 only.
Long-Term Incentive Equity Awards
Our policy is that the long-term compensation of its Named Executive Officers and other executive officersshould be directly linked to the value provided to stockholders. Therefore, we have historically made annualgrants of stock options and restricted stock unit awards to provide further incentives to our executives to increasestockholder value. The Compensation Committee bases its award grants to executives each year on a number offactors, including:
• the executive’s position with us and total compensation package;
• the executive’s performance of his or her individual responsibilities;
• the equity participation levels of comparable executives at comparable companies; and
• the executive’s contribution to the success of our financial performance.
In addition, the size, frequency and type of long-term incentive grants may be determined on the basis of taxconsequences of the grants to the individual and us, the accounting impact of the grants to us and the potentialdilution effects of the grants to our stockholders.
Annual award grants are generally made at the meeting of the Compensation Committee held each fiscalyear in conjunction with our annual meeting of stockholders. This meeting is scheduled well in advance andtypically held in September. Other than grants made in connection with the hiring or promotion of employees orother special circumstances, the Compensation Committee generally does not grant equity awards at any othertime during the year. The Compensation Committee has delegated to the Chief Executive Officer the authority tomake any applicable option grants to new employees (other than executive officers) using grant levels previouslyapproved by the Compensation Committee. In each case, grants approved by the Compensation Committee or theChief Executive Officer do not become effective until the first trading day of the month following the month inwhich the grant was approved. The Compensation Committee has implemented this process to help ensure thatoption grants are done on a regular and consistent basis without regard to stock price performance or our releaseof material information.
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Stock Options. We make a portion of our long-term incentive grants to Named Executive Officers in theform of stock options with an exercise price that is equal to the closing price of our Common Stock on the grantdate. Thus, the Named Executive Officers will only realize value on their stock options if our stockholdersrealize value on their shares. The stock options also function as a retention incentive for our executives as theytypically vest ratably on each annual anniversary over the four-year period after the date of grant.
Restricted Stock Units. We also grant long-term incentive awards to Named Executive Officers in the formof restricted stock units. In general, the restricted stock units vest over the three-year period following the date ofgrant and, upon vesting, are paid in shares of our Common Stock. Thus, the units are designed both to linkexecutives’ interests with those of our stockholders as the units’ value is based on the value of our CommonStock and to provide a long-term retention incentive for the vesting period as they generally have valueregardless of stock price volatility.
Performance Stock Units. In fiscal 2008, we also began granting long-term incentive awards to NamedExecutive Officers in the form of performance stock units. These performance stock units will generally vestonly if we achieve certain pre-established financial goals during the fiscal year. Thus, the units provideexecutives an additional incentive to help us achieve specific financial objectives for the fiscal year that areintended to promote long-term growth of the Company and create value for our stockholders.
Fiscal 2008 Equity Grants. In July 2007, the Compensation Committee approved grants of stock options toMessrs. Kamsler and Melendrez and a grant of restricted stock units to Mr. Michael. These grants were made forretention purposes in order to help ensure the continuity of our management team and because the CompensationCommittee believed that the grants were appropriate to supplement grant levels for these executives in prioryears.
In conjunction with our 2007 Annual Meeting of Stockholders in October 2007, we made grants of stockoptions and restricted stock units to Messrs. Kamsler, Melendrez, Michael and Lam. These grants were at levelsconsistent with management’s recommendation and market data for the executives’ respective positions andconsistent with their responsibilities and performance. In January 2008, the Compensation Committee approvedan additional longevity award of 200 fully vested shares of our Common Stock to Mr. Michael.
As noted above, we also granted awards of performance stock units in August 2007 to Messrs. Kamsler,Melendrez, Michael and Lam, with vesting of the units to be determined based on the Company’s and theexecutive’s achievement of pre-established goals for the last six months of fiscal 2008. These awards wereintended to provide incentives for executives to help the Company achieve specific goals for the period followingthe merger with Sipex Corporation. In the case of the awards granted to Messrs. Kamsler, Melendrez andMichael, 35% of the performance stock units were eligible to vest based on the Company’s gross revenue duringthe performance period, 35% of the performance stock units were eligible to vest based on the achievement ofcost reduction targets during the performance period, and 30% of the performance stock units were eligible tovest based on the executive’s achievement of individual goals established for purposes of the award by theCompensation Committee. In establishing the performance goals, the Compensation Committee believed in eachcase that the goals were attainable if the Company and the executive performed at satisfactory levels. Afterreviewing the performance of the Company and the individual executive for the performance period, theCompensation Committee determined that the units subject to cost reduction and individual performance goalswould fully vest and that the units subject to gross revenue goals would not vest.
In the case of the award granted to Mr. Lam, 20% of the performance stock units were eligible to vest basedon the Company’s gross revenue during the performance period, 20% of the performance stock units wereeligible to vest based on the achievement of cost reduction targets during the performance period, 30% of theperformance stock units were eligible to vest based on the achievement of target levels of gross operating marginand gross revenue for Sipex Corporation during the performance period, and 30% of the performance stock unitswere eligible to vest based on the executive’s achievement of individual goals established for purposes of the
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award by the Compensation Committee. In establishing the performance goals, the Compensation Committeebelieved that the goals were attainable if the Company and Mr. Lam performed at a satisfactory level. Afterreviewing the performance of the Company and Mr. Lam for the performance period, the CompensationCommittee determined that the units subject to Company cost reduction and individual performance goals wouldfully vest and that the units subject to Company gross revenue goals and Sipex financial goals would not vest.
As described below, we also granted Mr. Schmitt awards of stock options and shares of our Common Stockunder his employment agreement in connection with his commencing employment with us. In October 2007, wealso granted Messrs. Leza and McFarlane awards of restricted stock units pursuant to our Non-EmployeeDirector (as such term is defined below) compensation program at our 2007 Annual Meeting of Stockholders. InAugust 2007, we also granted Mr. Leza an award of 10,000 shares of fully vested stock in recognition of hisservice as our interim Chief Executive Officer and President.
For more information regarding the grants described above, please see “Grants of Plan-Based Awards”below.
Severance and Other Benefits Upon Termination of Employment
Messrs. Michael and Melendrez participate in our Change in Control Severance Plan. Under his offer letterwith the Company, Mr. Kamsler would also be entitled to severance benefits if his employment terminated underthe circumstances described below. We provide severance benefits under these arrangements because we believethat the occurrence, or potential occurrence, of a change in control transaction will create uncertainty regardingthe continued employment of our Named Executive Officers and other executive officers as many change incontrol transactions result in significant organizational changes, particularly at the senior executive level. In orderto encourage our executive officers to remain employed with the Company during an important time when theirprospects for continued employment following the transaction may be uncertain, we provide these officers withseverance benefits if their employment is actually or constructively terminated by us without cause in connectionwith a change in control. The severance benefits for the Named Executive Officers are generally determined as ifthey continued to remain employed for one to two years following their actual termination date, depending on thelength of their service with the Company.
We believe that our executive officers should receive this change in control severance benefit if theiremployment is constructively terminated in connection with a change in control. Otherwise, potential acquirerscould constructively terminate a Named Executive Officer’s employment (i.e., by a material reduction in theexecutive’s compensation or duties) and avoid paying any severance benefits at all without this protection.Because we believe that constructive terminations in connection with a change in control are conceptually thesame as actual terminations, the Change in Control Severance Plan provides that the executive may terminateemployment in connection with a change in control under circumstances that we believe would constitute aconstructive termination of the Named Executive Officer’s employment.
We do not believe that Named Executive Officers should be entitled to receive cash severance benefitsmerely because a change in control transaction occurs. The payment of cash severance benefits is only triggeredby an actual or constructive termination of employment. However, as described below under “Grants of Plan-Based Awards,” outstanding options and other equity-based awards granted under our 2006 Equity IncentivePlan (the “Exar 2006 Plan”), including those awards held by our Named Executive Officers, may accelerate on achange in control of the Company unless otherwise provided by our Board of Directors.
Under the Change in Control Severance Plan, participating Named Executive Officers are reimbursed forthe full amount of any excise taxes imposed on their severance payments and any other payments underSection 4999 of the Internal Revenue Code. We provide these Named Executive Officers with a “gross-up” forany parachute payment excise taxes that may be imposed because we determined the appropriate level of changein control severance protections for each Named Executive Officer without factoring in the adverse effects that
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may result from imposition of these excise taxes. The excise tax gross-up is intended to make the NamedExecutive Officer whole for any adverse tax consequences they may become subject to under Section 4999 of theInternal Revenue Code, and to preserve the level of change in control severance protections that we havedetermined to be appropriate.
For more information regarding these severance arrangements, please see “Potential Payments uponTermination or Change in Control” below.
Subsequent Compensation Actions
On March 4, 2008, the Compensation Committee approved our Fiscal Year 2009 Senior Executive IncentiveCompensation Program. The program is similar in structure to the fiscal 2008 bonus program described above,with the criteria used to measure the Company’s performance being revenue and operating margin for the fiscalyear. For more information on the program, see the Company’s Form 8-K filed with the SEC on March 10, 2008.
The Company also entered into an employment agreement with Mr. P. Rodriguez in connection with hisappointment as the Company’s Chief Executive Officer and President in April 2008. Under his employmentagreement, Mr. P. Rodriguez receives base salary at an annualized rate of $400,000 a year and is eligible to receivean annual incentive bonus of up to 87.5% of that base salary. Mr. P. Rodriguez also receives a one-time signingbonus of $100,000, less applicable withholdings and deductions, which is subject to repayment under certaincircumstances. In addition, pursuant to the terms of his employment agreement, Mr. P. Rodriguez has been grantedan option to purchase 560,000 shares of our Common Stock, which in accordance with the Company’s standardoption grant practices is effective as of, and will have an exercise price per share equal to the fair market value pershare of our Common Stock on, the first trading day of the month immediately following Mr. P. Rodriguez’scommencement of employment with us. The option vests with respect to 25% of the option shares uponMr. P. Rodriguez’s completion of 12 months of service (measured from his employment commencement date) andwith respect to the balance in 36 successive equal monthly installments upon completion of each additional monthof service thereafter. Mr. P. Rodriguez is entitled to full acceleration of vesting of the option shares if he isterminated without Cause or resigns for Good Reason within 12 months after a Change of Control (all such terms asdefined in the option agreement). The option grant is being made under the Exar 2006 Plan and has a term of sevenyears. Since his commencement of employment, Mr. P. Rodriguez has no longer been eligible to receive cash orequity compensation paid to our Non-Employee Directors; however, the equity previously granted toMr. P. Rodriguez in his capacity as a Non-Employee Director will continue to vest in accordance with the relatedgrant agreements. In addition to the equity acceleration benefits described above, Mr. P. Rodriguez is entitled undercertain conditions to certain cash severance benefits upon termination of employment. The terms ofMr. P. Rodriguez’s employment agreement described above and a copy of Mr. P. Rodriguez’s employmentagreement are provided in the Form 8-K filed by the Company with the SEC on April 23, 2008.
Policy with Respect to Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows public companies a tax deduction forcompensation in excess of $1,000,000 paid to their chief executive officers and certain other executive officersunless certain performance and other requirements are met. Our intent generally is to design and administerexecutive compensation programs in a manner that will preserve the deductibility of compensation paid to ourexecutive officers, and we believe that a substantial portion of our current executive compensation program(including the stock options granted to our Named Executive Officers as described above) satisfies the requirementsfor exemption from the $1,000,000 deduction limitation. However, we reserve the right to design programs thatrecognize a full range of performance criteria important to our success, even where the compensation paid undersuch programs may not be deductible. The Compensation Committee believes that no part of our tax deduction forcompensation paid to the Named Executive Officers for fiscal 2008 will be disallowed under Section 162(m). TheCompensation Committee will monitor the tax and other consequences of our executive compensation program aspart of its primary objective of ensuring that compensation paid to our executive officers is reasonable,performance-based and consistent with our goals and the goals of our stockholders.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)
The Compensation Committee has certain duties and powers as described in its charter. The CompensationCommittee is currently composed of the three non-employee Directors named at the end of this report, each ofwhom is independent as defined by the listing standards of The NASDAQ Global Market.
The Compensation Committee has reviewed and discussed with management the disclosures contained inthe Compensation Discussion and Analysis section of this Annual Report. Based upon this review anddiscussion, the Compensation Committee recommended to our Board of Directors that the CompensationDiscussion and Analysis section be included in this Annual Report.
Compensation Committee of the Board of Directors
Richard L. LezaGary MeyersJuan (Oscar) Rodriguez (Chairman)
(1) SEC filings sometimes “incorporate information by reference.” This means we are referring you toinformation that has previously been filed with the SEC, and that this information should be considered aspart of the filing you are reading. Unless we specifically state otherwise, this report shall not be deemed tobe incorporated by reference and shall not constitute soliciting material or otherwise be considered filedunder the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee, Mr. O. Rodriguez, was a member of the CompensationCommittee during all of fiscal 2008. Mr. P. Rodriguez served on the Compensation Committee during all offiscal 2008 and resigned from the Compensation Committee in connection with his appointment as theCompany’s Chief Executive Officer and President effective as of April 28, 2008. Mr. Leza was appointed to theCompensation Committee on August 27, 2007 following his service as our interim Chief Executive Officer andPresident. Other than Mr. Leza, no Director who served on the Compensation Committee during fiscal 2008 is orhas been an executive officer of the Company or had any relationships requiring disclosure by us under theSEC’s rules requiring disclosure of certain relationships and related-party transactions. None of our executiveofficers served as a Director or a member of a compensation committee (or other committee serving anequivalent function) of any other entity, the executive officers of which served as a Director or member of theCompensation Committee during the fiscal year ended March 30, 2008.
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SUMMARY COMPENSATION TABLE—FISCAL 2007 AND 2008
The following table presents information regarding the compensation of each of our Named ExecutiveOfficers for services rendered during fiscal 2008 and fiscal 2007.
Name andPrincipal Position
FiscalYear
Salary($)
Bonus($)
StockAwards
($)(1)
OptionAwards
($)(1)
Non-EquityIncentive
Plan ($)(2)
Change inPension Value
andCompensation
($)
All OtherCompensation
on NonqualifiedDeferred
CompensationEarnings ($)
Total($)(3)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)Richard L. Leza(4) . . . . . . . . . 2008 170,485 — 214,675 124,605 — — 29,704 539,469Chairman of the Board,Former Chief ExecutiveOfficer and President(Interim)
2007 44,100 — 51,559 124,605 — — 39,750 260,014
John S. McFarlane(5) . . . . . . 2008 133,210 — 54,117 — — — 23,872 211,199Director, Former ChiefExecutive Officer andPresident (Interim)
Ralph Schmitt(6) . . . . . . . . . . 2008 259,076 — 44,850 345,264 — — 110,376 759,566Former Chief ExecutiveOfficer and President andDirector
J. Scott Kamsler . . . . . . . . . . . 2008 287,885 — 173,350 181,053 55,373 — 5,751 703,412Senior Vice President andChief Financial Officer
2007 21,923 — 47,531 10,087 — — 512 80,053
Thomas R. Melendrez . . . . . . 2008 254,615 — 133,263 58,686 38,844 — 4,369 489,777General Counsel, Secretaryand Executive VicePresident of BusinessDevelopment
2007 250,000 26,480 15,350 60,056 — — 4,128 356,014
Stephen W. Michael . . . . . . . . 2008 226,279 — 112,891 8,606 31,428 — 5,751 384,955Senior Vice President ofOperations and Reliability &Quality Assurance
2007 214,843 — 9,467 16,864 — — 5,675 246,849
Edward M. Lam(7) . . . . . . . . 2008 162,265 — 31,016 188,318 — — 2,296 383,895Former Senior VicePresident of Product Lines
(1) The amounts reported in Columns (e) and (f) of the table above reflect the aggregate dollar amounts recognized for stockawards and option awards, respectively, for financial statement reporting purposes with respect to fiscal 2008 and fiscal2007 (disregarding any estimate of forfeitures related to service-based vesting conditions). Mr. Schmitt forfeited 332,189stock options in connection with the termination of his employment with us in December 2007. No other stock awards oroption awards granted to any of the Named Executive Officers were forfeited during fiscal 2008. For a discussion of theassumptions and methodologies used to value the awards reported in Columns (e) and (f), please see the discussion ofstock awards and option awards contained in “Note 12–Stock-Based Compensation” of the Notes to ConsolidatedFinancial Statements, included as part of our Annual Report for fiscal 2008 filed on Form 10-K with the SEC (or, forawards granted prior to fiscal 2008, the corresponding note in the our Form 10-K for the applicable fiscal year) andincorporated herein by reference. For information about the stock awards and option awards granted to our NamedExecutive Officers for fiscal 2008, please see the discussion under “Grants of Plan-Based Awards” below.
(2) For a description of the bonus arrangements in effect for fiscal 2008, please see the discussion in the “CompensationDiscussion and Analysis” above. As noted in that discussion, the amounts reported in this column are pending finalapproval by the Compensation Committee.
(3) The amounts reported in this column include our contributions to individual Named Executive Officers’ accounts underour 401(k) plan and term life insurance policy. We are not the beneficiary of the life insurance policies, and thepremiums that we pay in excess of amounts excluded under Section 79 of the Internal Revenue Code are taxable as
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income to the applicable officer. This insurance is not split-dollar life insurance. The fiscal 2008 401(k) matchingcontributions and term life insurance premiums reported in the table above was as follows:
Name
401(k)Matching
Contribution($)
Life InsurancePremium ($)
Richard L. Leza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —John S. McFarlane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Ralph Schmitt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 145J. Scott Kamsler . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,375 2,376Thomas R. Melendrez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,375 994Stephen W. Michael . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,375 2,376Edward M. Lam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,028 268
(4) On February 22, 2007, Mr. Leza, our Chairman of the Board, was appointed as interim Chief Executive Officer andPresident of the Company. Mr. Leza served in such capacity until Mr. Schmitt’s appointment as Chief Executive Officerand President of the Company effective as of August 25, 2007. The amounts reported in column (c) above represent hisconsulting fee for service as our interim Chief Executive Officer and President during fiscal 2007 and 2008, and theamounts reported in column (i) represent his annual retainer for service on our Board of Directors during fiscal 2007 andfiscal 2008. Mr. Leza did not receive any annual retainer for the period in which he served as interim Chief ExecutiveOfficer and President.
(5) On December 6, 2007, Mr. McFarlane, one of our Directors, was appointed as interim Chief Executive Officer andPresident of the Company. Mr. McFarlane served in such capacity until Mr. P. Rodriguez’s appointment as ChiefExecutive Officer and President of the Company effective as of April 28, 2008. The amount reported in column(c) above represents his consulting fee for service as our Chief Executive Officer and President during fiscal 2008, andthe amount reported in column (i) above represents his annual retainer for service on our Board of Directors during fiscal2008. Mr. McFarlane did not receive any annual retainer for the period in which he served as interim Chief ExecutiveOfficer and President.
(6) Mr. Schmitt became our Chief Executive Officer and President and a member of our Board of Directors on August 25,2007 upon the closing of our merger with Sipex Corporation. On December 6, 2007, Mr. Schmitt resigned as our ChiefExecutive Officer and President and as a member of our Board of Directors. In connection with the termination of hisservice with us, Mr. Schmitt entered into a separation agreement as described below under “Potential Payments uponTermination or Change in Control.” The amount reported in column (i) reflects severance benefits of $110,231 paid orprovided to Mr. Schmitt during fiscal 2008.
(7) On June 9, 2008, Mr. Lam resigned as our Senior Vice President of Product Lines.
Compensation of Named Executive Officers
The Summary Compensation Table above quantifies the value of the different forms of compensationearned by or awarded to our Named Executive Officers in fiscal 2008 and fiscal 2007. The primary elements ofeach Named Executive Officer’s total compensation reported in the table are base salary, an annual bonus, andlong-term equity incentives consisting of stock options and restricted stock units. Named Executive Officers alsoearned the other benefits listed in column (i) of the Summary Compensation Table, as further described in thefootnotes to the table.
The Summary Compensation Table should be read in conjunction with the tables and narrative descriptionsthat follow. The Grants of Plan-Based Awards table, and the accompanying description of the material terms ofthe stock options and restricted stock unit awards granted in fiscal 2008, provides information regarding the long-term equity incentives awarded to Named Executive Officers in fiscal 2008. The Outstanding Equity Awards atFiscal Year-End and Option Exercises and Stock Vested tables provide further information on the NamedExecutive Officers’ potential realizable value and actual value realized with respect to their equity awards.
Description of Employment Agreements—Cash Compensation
On January 18, 2007, we entered into an offer letter with Mr. Kamsler, our Senior Vice President and ChiefFinancial Officer. The agreement provides that Mr. Kamsler will receive an annualized base salary of $285,000.The agreement also provides for Mr. Kamsler to participate in our annual incentive plan for fiscal 2008 with atarget award of 50% of his base salary and a maximum award of 100% of his base salary. Provisions of thisagreement relating to post-termination of employment benefits are discussed below under “Potential Paymentsupon Termination or Change in Control.”
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On May 7, 2007, we entered into an employment agreement with Mr. Schmitt, which was subsequentlyamended on August 24, 2007. The material terms of Mr. Schmitt’s employment agreement and the separationagreement entered into by the Company and Mr. Schmitt in connection with the termination of his employmentin December 2007 are described below under “Potential Payments upon Termination or Change in Control.” InAugust 2007, in connection with our acquisition of Sipex Corporation, we assumed Sipex’s obligations under aJuly 2005 letter agreement with Mr. Lam. Provisions of this agreement relating to post-termination ofemployment benefits are discussed below under “Potential Payments upon Termination or Change in Control.”
On February 22, 2007, we entered into a consulting agreement with Mr. Leza for the period in which heserved as our interim Chief Executive Officer and President. The agreement provided for Mr. Leza to receive$35,000 per month for his services as interim Chief Executive Officer and President. The agreement terminatedon August 25, 2007 when Mr. Leza ceased to act as interim Chief Executive Officer and President.
On December 19, 2007, we entered into a consulting agreement with Mr. McFarlane for the period in whichhe served as our interim Chief Executive Officer and President. The agreement provided for Mr. McFarlane toreceive $35,000 per month for his services as interim Chief Executive Officer and President. The agreementterminated on April 28, 2008 when Mr. McFarlane ceased to act as interim Chief Executive Officer andPresident.
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GRANTS OF PLAN-BASED AWARDS—FISCAL 2008
The following table presents information regarding the incentive awards granted to the Named Executive Officers in fiscal2008 or held by the Named Executive Officers and modified in fiscal 2008.
NameGrantDate
Estimated FuturePayouts Under
Non- EquityIncentive
Plan Awards
Estimated FuturePayouts Under
Equity IncentivePlan Awards
All OtherStock
Awards:Number ofShares ofStock or
Units(#)
All OtherOption
Awards:Number ofSecurities
UnderlyingOptions
(#)
Exercise orBase Priceof OptionAwards($/Sh)
Grant DateFair Value
of Stockand Option
Awards($)(1)
Threshold($)
Target($)
Maximum($)
Threshold(#)
Target(#)
Maximum(#)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)Richard L. Leza . . . . . . . . . 8/23/07 10,000 — — 133,500
10/11/07 6,750 87,615
John S. McFarlane . . . . . . . 10/11/07 4,500 — — 58,410
Ralph Schmitt(2) . . . . . . . . 8/27/07 — 200,000 12.92 984,18011/26/07 5,000 — — 44,85012/06/07 — 201,761 5.10 9,048
J. Scott Kamsler . . . . . . . . . N/A — 144,000 216,100 — — — — — — —7/11/07 — — — — — — — 50,000 13.75 261,8508/31/07 — — — — 2,500 — — — — 33,35010/1/07 — — — — — — — 19,500 13.36 90,30310/1/07 — — — — — — 6,500 — — 86,840
Thomas R. Melendrez . . . . N/A — 102,000 153,000 — — — — — — —7/11/07 — — — — — — — 50,000 13.75 261,8508/31/07 — — — — 2,500 — — — — 33,35010/1/07 — — — — — — — 19,500 13.36 90,30310/1/07 — — — — — — 6,500 — — 86,840
Stephen W. Michael . . . . . . N/A — 90,700 136,000 — — — — — — —7/11/07 — — — — — — 12,000 — — 165,0008/31/07 — — — — 2,000 — — — — 26,68010/1/07 — — — — — — — 15,000 13.36 69,46410/1/07 — — — — — — 5,000 — — 66,8001/02/08 — — — — — — 200 — — 1,552
Edward M. Lam . . . . . . . . . N/A — 57,400 86,100 — — — — — — —8/31/07 — — — — 2,500 — — — — 33,35010/1/07 — — — — — — — 19,500 13.36 90,30310/1/07 — — — — — — 6,500 — — 86,840
(1) The amounts reported in Column (l) reflect the fair value of these awards on the grant date as determined under the principles used to calculate the value ofequity awards for purposes of the Company’s financial statements. For a discussion of the assumptions and methodologies used to value the awardsreported in Column (l), please see footnote (1) to the Summary Compensation Table.
(2) The awards granted to Mr. Schmitt during fiscal 2008, to the extent unvested at the time his employment with the Company terminated in December 2007,were canceled on the termination of his employment. The table above reflects the modification, on December 6, 2007, of certain of Mr. Schmitt’soutstanding options in connection with the termination of his employment. See “Potential Payments upon Termination or Change in Control” below foradditional information on this modification.
Description of Plan-Based Awards
The terms of the “non-equity incentive plan” awards reflected in columns (c) through (e) of the Grants of Plan-BasedAwards Table are described in the “Compensation Discussion and Analysis” above.
Except as noted below with respect to Mr. Schmitt’s grants, each of the equity-based awards granted during fiscal 2008 andreported in the Grants of Plan-Based Awards Table was granted under, and is subject to, the terms of the Exar 2006 Plan. TheExar 2006 Plan is administered by the Compensation Committee. The Compensation Committee has authority to interpret theplan provisions and make all required determinations under the plan. This authority includes making required proportionateadjustments to outstanding awards upon the occurrence of certain corporate events such as reorganizations, mergers and stocksplits, and making provision to ensure that any tax withholding obligations incurred in respect of awards are satisfied. Awards
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granted under the plan are generally only transferable to a beneficiary of a Named Executive Officer upon hisdeath. However, the Compensation Committee may establish procedures for the transfer of awards to otherpersons or entities, provided that such transfers comply with applicable securities laws and, with limitedexceptions set forth in the plan document, are not made for value.
Under the terms of the Exar 2006 Plan, if there is a change in control of the Company, each NamedExecutive Officer’s outstanding awards granted under the plan will generally become fully vested and, in thecase of options, exercisable, unless the Compensation Committee provides for the substitution, assumption,exchange or other continuation or settlement (in cash, securities or property) of the outstanding awards. Anyoptions that become vested in connection with a change in control generally must be exercised prior to thechange in control, or they may terminate or be terminated in such circumstances.
The equity-based awards granted to Mr. Schmitt in August 2007 and November 2007 were granted under,and were subject to the terms of, the Sipex Corporation 2006 Equity Incentive Plan (the “Sipex 2006 Plan”),which was assumed by the Company pursuant to its merger with Sipex Corporation. The Sipex 2006 Plan isadministered by the Compensation Committee and has provisions similar to those of the Exar 2006 Plan asdescribed above.
Options
Each option granted during fiscal 2008 and reported in Column (j) of the table above was granted with aper-share exercise price equal to the fair market value of a share of our Common Stock on the grant date. Forthese purposes, and in accordance with the terms of the Exar 2006 Plan and our option grant practices, the fairmarket value is equal to the closing price of a share of our Common Stock on the applicable grant date.
Each option granted to our Named Executive Officers in fiscal 2008 is subject to a four-year vestingschedule, with 25% of the option vesting on each of the first four anniversaries of the grant date, except that theoption granted to Mr. Schmitt was scheduled to vest 25% on the first anniversary of the grant date and monthlyover the three-year period thereafter. Once vested, each option will generally remain exercisable until its normalexpiration date. Each of the options granted to our Named Executive Officers in fiscal 2008 has a term of sevenyears. However, vested options may terminate earlier in connection with a change in control transaction or atermination of the Named Executive Officer’s employment. Subject to any accelerated vesting that may apply inthe circumstances, the unvested portion of the option will immediately terminate upon a termination of theNamed Executive Officer’s employment. The Named Executive Officer will generally have three months toexercise the vested portion of the option following a termination of employment. This period is extended totwelve months if the termination is a result of the Named Executive Officer’s death or disability. The option(whether or not vested) will immediately terminate if the Named Executive Officer is terminated by us for cause.
The options granted to Named Executive Officers during fiscal 2008 do not include any dividend rights.
Restricted Stock Units
The awards reported in column (i) of the table reflect awards of restricted stock units, except that Mr. Leza’saward in August 2007 and Mr. Schmitt’s award in November 2007 were grants of fully vested stock. Eachrestricted stock unit represents a contractual right to receive one share of our Common Stock. The awards ofrestricted stock units granted to our Named Executive Officers (other than Messrs. Leza and McFarlane) duringfiscal 2008 are generally subject to a three-year vesting schedule subject to such Named Executive Officer’scontinued employment with us through the vesting date. The grants to Messrs. Leza and McFarlane inOctober 2007 were made under our Non-Employee Director compensation program as described below under“Director Compensation.”
The Named Executive Officer does not have the right to vote or dispose of the restricted stock units, butdoes have the right to receive cash payments as dividend equivalents based on the amount of dividends (if any)
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paid by the Company during the term of the award on a number of shares equal to the number of outstanding andunpaid restricted stock units then subject to the award. Such payments are made at the same time the relateddividends are paid to our stockholders generally.
Performance Stock Units
The “equity incentive plan” awards reported in column (g) of the table above reflect grants of stock unitsthat are subject to performance-based vesting requirements. The performance requirements applicable to awardsgranted to our Named Executive Officers during fiscal 2008 are described in the “Compensation Discussion andAnalysis” above. Other than the vesting requirements, the terms and conditions of the performance stock unitsare generally the same as described above for restricted stock units.
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OUTSTANDING EQUITY AWARDS AT FISCAL 2008 YEAR-END
The following tables present information regarding the outstanding equity awards held by each of ourNamed Executive Officers as of March 30, 2008, including the vesting dates for the portions of these awards thathad not vested as of that date.
Option Awards Stock Awards
Name
Number ofSecurities
UnderlyingUnexercised
Options(#)
Number ofSecurities
UnderlyingUnexercised
Options(#)
OptionExercise
Price($)
OptionExpiration
Date
Numberof Sharesor Units
That HaveNot Vested
(#)
MarketValue
of Sharesor Units of
StockThat HaveNot Vested
($)(1)
EquityIncentive
Plan Awards:Number ofUnearned
Shares,Units or
Other RightsThat HaveNot Vested
(#)
EquityIncentive Plan
Awards:Market or
Payout Valueof UnearnedShares, Units
or OtherRights That
HaveNot Vested
($)Exercisable Unexercisable
(a) (b) (c) (d) (e) (f) (g) (h) (i)Richard L. Leza . . . . . . . . . . 36,000 18,000(2) 12.18 12/16/12 6,750(3) 55,283 — —
John S. McFarlane . . . . . . . . 54,000 — 20.66 1/23/11 4,500(3) 36,855 — —1,325 — 4.99 5/3/11 — — — —22,500 — 12.18 12/16/12 — — — —
Ralph Schmitt . . . . . . . . . . . . 201,761 — 5.10 6/27/15 — — — —
J. Scott Kamsler . . . . . . . . . . 21,875 65,625(4) 13.39 3/1/14 21,875(4) 179,15650,000(5) 13.75 7/11/14 6,500(7) 53,23519,500(6) 13.36 10/1/14
Thomas R. Melendrez . . . . . 44,000 — 27.15 4/23/08 7,000(8) 57,33012,000 — 22.93 12/5/08 10,000(9) 81,90028,000 — 13.52 9/5/09 6,500(7) 53,2356,000 — 12.32 12/5/0915,000 — 13.38 4/4/1025,000 — 15.83 9/4/1040,000 — 15.35 10/4/1122,000 — 15.96 7/12/1224,000 — 12.30 10/27/12
— 50,000(5) 13.75 7/11/14— 19,500(6) 13.36 10/1/14
Stephen W. Michael . . . . . . . 44,000 — 27.15 4/23/08 4,500(8) 36,85512,000 — 22.93 12/5/08 4,000(9) 32,76030,000 — 13.52 9/5/09 5,000(7) 40,9506,000 — 12.32 12/5/09 12,000(10) 98,28020,000 — 15.83 9/4/1035,000 — 15.35 10/4/1115,000 — 12.30 10/27/12
— 15,000(6) 13.36 10/1/14
Edward M. Lam . . . . . . . . . . 88,705 53,223(11) 5.99 9/19/15 6,500(7) 53,2355,218 11,479(12) 12.73 12/4/16— 19,500(6) 13.36 10/1/14
(1) The dollar amounts shown in Column (g) are determined by multiplying (x) the number of shares or units reported in Column (f) by(y) $8.19 (the closing price of our Common Stock on the last trading day of fiscal 2008).
(2) The unvested portion of this award is scheduled to vest upon the earlier of the 2008 Annual Meeting of Stockholders and December 16, 2008.(3) The unvested portion of these awards is scheduled to vest upon the earlier of the 2008 Annual Meeting of Stockholders and October 11, 2008.(4) The unvested portions of these awards are scheduled to vest in three installments on each of March 1, 2009, March 1, 2010 and March 1, 2011.(5) The unvested portions of these awards are scheduled to vest in four installments on each of July 11, 2008, July 11, 2009, July 11, 2010
and July 11, 2011.(6) The unvested portions of these awards are scheduled to vest in four installments on each of October 1, 2008, October 1, 2009, October 1,
2010 and October 1, 2011.
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(7) The unvested portions of these awards are scheduled to vest in three installments on each of October 1, 2008, October 1, 2009 andOctober 1, 2010.
(8) The unvested portions of these awards are scheduled to vest in one installment on October 17, 2009.(9) The unvested portions of these awards are scheduled to vest in two installments on each of March 22, 2009 and March 22, 2010.(10) The unvested portion of this award is scheduled to vest in three installments on each of July 11, 2008, July 11, 2009 and July 11, 2010.(11) The unvested portion of this award is scheduled to vest in monthly installments through September 9, 2009.(12) The unvested portion of this award is scheduled to vest in monthly installments through December 4, 2010.
OPTION EXERCISES AND STOCK VESTED—FISCAL 2008
The following table presents information regarding the exercise of stock options by Named ExecutiveOfficers during fiscal 2008, and on the vesting during fiscal 2008 of other stock awards granted to the NamedExecutive Officers.
Option Awards Stock Awards
Name
Number of SharesAcquired on Exercise
(#)
Value Realizedon Exercise
($)(1)
Number of SharesAcquired on Vesting
(#)
Value Realizedon Vesting
($)(1)
(a) (b) (c) (d) (e)
Richard L. Leza . . . . . . . . . . . . . . . . . . . . — — 16,750 221,453John S. McFarlane . . . . . . . . . . . . . . . . . . — — 4,500 58,635Ralph Schmitt . . . . . . . . . . . . . . . . . . . . . . — — 5,000(2) 44,850J. Scott Kamsler . . . . . . . . . . . . . . . . . . . . — — 14,837(3) 149,674Thomas R. Melendrez . . . . . . . . . . . . . . . — — 6,625(3) 55,009Stephen W. Michael . . . . . . . . . . . . . . . . . — — 3,400(3) 28,060Edward M. Lam . . . . . . . . . . . . . . . . . . . . — — 1,250(3) 10,238
(1) The dollar amounts shown in Column (c) above for option awards are determined by multiplying (i) thenumber of shares of our Common Stock to which the exercise of the option related, by (ii) the differencebetween the per-share closing price of our Common Stock on the date of exercise and the exercise price ofthe options. The dollar amounts shown in Column (e) above for stock awards are determined by multiplyingthe number of shares or units, as applicable, that vested by the per-share closing price of our Common Stockon the vesting date.
(2) This represents a grant of 5,000 shares of fully-vested stock to Mr. Schmitt in November 2007.(3) These amounts include shares acquired pursuant to the vesting of performance-based restricted stock units
granted to these executives for fiscal 2008. Although the award was drafted to cover a performance periodending March 31, 2008, the intent was that the performance period would be the Company’s 2008 fiscalyear. Accordingly, performance for purposes of the award was measured based on the period endingMarch 30, 2008, and the award was considered to no longer be outstanding as of that date.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The following section describes the benefits that may become payable to certain Named Executive Officersin connection with a termination of their employment with us and/or a change in control of the Company. Inaddition to the benefits described below, outstanding equity-based awards held by our Named Executive Officersmay also be subject to accelerated vesting in connection with a change in control of the Company under the termsof the Exar 2006 Plan as noted under “Grants of Plan-Based Awards” above.
Change in Control Severance Benefit Plan
Messrs. Michael and Melendrez participate in the Company’s Change in Control Severance Benefit Plan(the “Severance Plan”). Under the Severance Plan, executive officers of the Company selected to participate inthe plan may become entitled to receive cash severance benefits if their employment is terminated by the
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Company without cause or by the executive for good reason (as such terms are defined in the Severance Plan), ineither case within thirteen months following the date of a change in control (as defined in the Severance Plan) ofthe Company. The severance benefit amount is payable in a lump sum and equals the greater of (i) theexecutive’s base salary for one year at the rate in effect at the time of the change in control, or (ii) the executive’sbase salary per month at the rate in effect at the time of the change in control, multiplied by the number of theexecutive’s complete years of service with us (up to a maximum of 24 years of service). In addition, in the eventthat the executive’s benefits under the Severance Plan are subject to the excise tax imposed under Section 280Gof the U.S. Internal Revenue Code (“Section 280G”), we will make an additional payment to the executive sothat the net amount of such payment (after taxes) he or she receives is sufficient to pay the excise tax due (a“gross-up payment”). The executive is required to execute a release of claims in favor of us and our affiliates as acondition to receiving any benefits under the Severance Plan. As noted above, the equity-based awards held byour Named Executive Officers are also subject to accelerated vesting in connection with a change in control ofthe Company in accordance with the terms of the applicable plan under which the award was granted.
Under the terms of his offer letter with us, Mr. Kamsler would be entitled to accelerated vesting of hisoutstanding options and restricted stock unit awards and the same cash severance benefit as provided under theSeverance Plan if a change in control of the Company were to occur and his position were either eliminated orsubstantially reduced in responsibility. Mr. Kamsler would not be entitled to a Section 280G gross-up paymentunder the terms of his offer letter.
In July 2005, Sipex Corporation entered into a letter agreement with Mr. Lam that provides that ifMr. Lam’s employment is terminated within 12 months after a change of control (which would include theacquisition of Sipex by the Company) other than by the Company for cause or due to his voluntary resignation,death or disability, Mr. Lam will be entitled to receive 12 months salary continuation and one-half of any then-unvested portion of his stock options will become fully vested and will remain exercisable for 12 monthsfollowing the termination of his employment. Mr. Lam would not be entitled to a Section 280G gross-uppayment under the terms of this letter agreement.
If the Named Executive Officers covered under these severance arrangements had terminated employmentwith us under the circumstances described above on March 30, 2008, they would have been entitled to thefollowing amounts:
NameCash Severance
($)(1)
J. Scott Kamsler(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,000Stephen W. Michael . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,582Thomas R. Melendrez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472,470Edward M. Lam(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,000
(1) These amounts represent the greater of (a) 12 months of the executive’s base salary or (b) one month of theexecutive’s base salary for each complete year of service with us, up to a maximum of 24 months of thebase salary, except that the amount for Mr. Lam represents 12 months of his base salary.
(2) As noted above, Mr. Kamsler may be entitled to accelerated vesting of his outstanding options and restrictedstock unit awards under his offer letter on certain changes of his position in connection with a change incontrol of the Company. If such circumstances had occurred on March 30, 2008, Mr. Kamsler would havebeen entitled to accelerated vesting of restricted stock unit awards with an intrinsic value of $232,391 (basedon the closing stock price of $8.19 on March 28, 2008, the last trading day of the Company’s fiscal year).Mr. Kamsler’s outstanding and unvested stock options as of March 30, 2008 did not then have any intrinsicvalue as the exercise price of the options exceeded the $8.19 closing price.
(3) As noted above, Mr. Lam resigned from his position with the Company on June 9, 2008. In connection withhis resignation, the Company agreed to provide him with severance in the amount of $33,115, whichrepresents six weeks of his base salary.
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We estimate that the payment of the foregoing amounts to each of Messrs. Melendrez and Michael(including any acceleration of the executive’s equity-based awards that may apply in the circumstances) wouldnot trigger excise taxes under Section 280G. (For purposes of this calculation, we have assumed that theexecutive’s outstanding equity awards would be accelerated and terminated in exchange for a cash payment uponthe change in control.)
Separation Arrangement
Ralph Schmitt
As noted above, Mr. Schmitt resigned as our Chief Executive Officer and President on December 6, 2007.On December 29, 2007, the Company entered into a separation agreement with Mr. Schmitt that provided forhim to receive severance benefits of (i) $440,000, payable in equal installments for the 12 months after hisseverance date (subject to any delay required under applicable tax law), and (ii) payment of Mr. Schmitt’spremiums to continue health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act, referredto as COBRA, until the earlier of six months after his severance date or the date he became eligible for healthcoverage with another employer. The Company’s total cost for payment of Mr. Schmitt’s COBRA premiumsunder the separation agreement was $11,619. The severance benefits were contingent on Mr. Schmitt’s providinga general release of claims in favor of the Company and continued compliance with certain non-disclosure andother restrictive covenants referred to in the agreement. As reflected in the Grants of Plan-Based Awards tableabove, the separation agreement also modified one of Mr. Schmitt’s outstanding stock options to extend theperiod in which he could exercise the vested portion of the option from 90 days to 180 days.
Mr. Schmitt’s employment agreement with the Company, entered into in May 2007 and subsequentlyamended in August 2007 became effective on the closing of the merger with Sipex Corporation and had a term oftwo years, with one-year automatic renewal periods unless either party gives the other 60 days notice prior to theexpiration of the initial term or any renewal period. The agreement provided for Mr. Schmitt to receive an annualbase salary of $440,000, subject to annual review, and an annual bonus, with his target bonus being at least 60%of his base salary. The agreement also provided for Mr. Schmitt to receive the stock options and restricted stockunits disclosed in the Grants of Plan-Based Awards table above and the opportunity to receive an additional20,000 shares of our Common Stock based on the attainment of certain cost savings and revenue targets set forthin the agreement during the six-month and one-year periods following the merger with Sipex Corporation. Inaddition, the agreement provided that if Mr. Schmitt’s employment with the Company terminated as a result ofan involuntary termination (as defined in the agreement) or as a result of a notice of non-renewal of employmentby the Company, he would have been entitled to receive (i) 100% of his base salary in effect on the severancedate payable in equal installments for the 12 months after his severance date, and (ii) payment of his COBRApremiums for up to six months following the severance date. If Mr. Schmitt’s employment had terminated as aresult of an involuntary termination within 12 months following a change of control (as defined in theagreement), he would also have been entitled to receive a prorated portion of his target incentive bonus for thefiscal year in which termination occurs and full acceleration of his stock options granted pursuant to theemployment agreement.
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DIRECTOR COMPENSATION—FISCAL 2008
The following table presents information regarding the compensation paid for fiscal 2008 to members of ourBoard of Directors who are not also our employees (referred to herein as “Non-Employee Directors”). Thecompensation paid to Messrs. Leza, McFarlane and Schmitt, each of whom served as our Chief Executive Officerand President during fiscal 2008, is presented above in the Summary Compensation Table and the relatedexplanatory tables.
Name
FeesEarnedor Paidin Cash
($)
StockAwards
($)(1)(2)(3)
OptionAwards
($)(1)(2)(3)
Non-EquityIncentive PlanCompensation
($)
Change inPension Value
andNonqualified
DeferredCompensationEarnings ($)
All OtherCompensation
($)Total
($)
(a) (b) (c) (d) (e) (f) (g) (h)
Guy W. Adams(4) . . . . . . . . . . . . . . 22,500 26,827 213,705 — — — 263,032Pierre Guilbault(5) . . . . . . . . . . . . . 15,000 34,501 38,210 — — — 87,711Brian Hilton(5) . . . . . . . . . . . . . . . . 22,500 34,501 30,717 — — — 87,718Juan (Oscar) Rodriguez . . . . . . . . . . 36,000 54,117 153,517 — — — 243,634Pedro (Pete) P. Rodriguez(6) . . . . . 35,250 54,117 124,605 — — — 213,972
(1) The amounts reported in Columns (c) and (d) of the table above reflect the aggregate dollar amountsrecognized for stock awards and option awards, respectively, for financial statement reporting purposes withrespect to fiscal 2008 (disregarding any estimate of forfeitures related to service-based vesting conditions).None of our Non-Employee Directors forfeited any stock awards or option awards during fiscal 2008. For adiscussion of the assumptions and methodologies used to calculate the amounts referred to above, please seethe discussion of stock awards and option awards contained in “Note 12–Stock-Based Compensation” of theNotes to Consolidated Financial Statements, included as part of our Annual Report for fiscal 2008 filed onForm 10-K (or, for awards granted prior to fiscal 2008, the corresponding note in the our Form 10-K for theapplicable fiscal year) and incorporated herein by reference.
(2) The following table presents the number of outstanding and unexercised option awards and the number ofunvested stock awards held by each of our Non-Employee Directors as of March 30, 2008.
Director
Number of SharesSubject to Outstanding Options
as of 3/30/08
Number of UnvestedRestricted Stock Units
as of 3/30/08
Guy W. Adams . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000 —Pierre Guilbault . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,852 4,500Brian Hilton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,200 4,500Juan (Oscar) Rodriguez . . . . . . . . . . . . . . . . . . . . . 54,000 4,500Pedro (Pete) P. Rodriguez . . . . . . . . . . . . . . . . . . . 54,000 4,500
(3) As described below, we granted Messrs. O. Rodriguez and P. Rodriguez awards of 4,500 restricted stockunits at our 2007 Annual Meeting of Stockholders on October 11, 2007. Each of these awards had a value of$58,410 on the grant date. On August 27, 2007, we granted Messrs. Guilbault and Hilton awards of 4,500restricted stock units in connection with their appointment to our Board of Directors. Each of these awardshad a value of $58,140 on the grant date. We also granted Messrs. Guilbault and Hilton options to purchase24,000 shares of our Common Stock on that date. Each of these awards had a value of $118,102 on the grantdate. See footnote (1) for the assumptions used to value these awards.
(4) Mr. Adams resigned as a member of our Board of Directors effective as of September 20, 2007. Inconnection with his resignation, our Board of Directors determined that Mr. Adams would vest inoutstanding options to purchase 54,000 shares of our Common Stock and 4,500 restricted stock units. Theamount reported for Mr. Adams in column (d) of the table above includes an expense of $190,833recognized for financial statement reporting purposes for fiscal 2008 in connection with the acceleratedvesting of the stock options.
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(5) Messrs. Guilbault and Hilton were each appointed as a member of our Board of Directors upon theacquisition of Sipex Corporation by the Company effective as of August 25, 2007.
(6) Mr. P. Rodriguez was appointed as the Company’s Chief Executive Officer and President effective as ofApril 28, 2008.
Summary of Director Compensation
Compensation for Non-Employee Directors during fiscal 2008 generally consisted of an annual retainer,chairperson fees, and an annual equity award.
Annual Retainers and Chairperson Fees. We pay each Non-Employee Director an annual retainer of$30,000. The Chairperson of the Board receives an additional $20,000 annual retainer; the Chairperson of theAudit Committee receives an additional $15,000 annual retainer; the Chairperson of the CompensationCommittee receives an additional $10,000 annual retainer; and the Chairperson of the Corporate Governance andNominating Committee receives an additional $5,000 annual retainer.
We also reimburse Non-Employee Directors for documented expenses for travel and professional educationincurred in connection with their duties as Directors of the Company.
Annual Equity Awards. Each of our Non-Employee Directors is granted an option to purchase 24,000 sharesof our Common Stock upon being initially elected or appointed to our Board of Directors. These options have anexercise price equal to the closing price of our Common Stock on the grant date and will generally vest in threeequal annual installments over the three-year period following the grant date. In addition, each Non-EmployeeDirector is granted 4,500 restricted stock units upon being initially elected or appointed to our Board ofDirectors, and each Non-Employee Director continuing in office after an annual meeting of stockholders isgranted 4,500 restricted stock units as of the annual meeting date (subject to proration if the Director was initiallyelected or appointed to our Board of Directors within the 12-month period preceding the grant date). TheDirector serving as Chairperson of the Board is granted an additional 2,250 restricted stock units at each annualmeeting. These restricted stock unit awards will vest upon the earlier of the first anniversary of the grant date orthe next annual meeting of stockholders and will be paid in shares of our Common Stock on a one-for-one basisupon vesting. Non-Employee Directors do not have the right to vote or dispose of the restricted stock units but dohave the right to receive cash payments as dividend equivalents based on the amount of dividends (if any) paid toour stockholders. In addition to the grants described above, each of our Non-Employee Directors is eligible foradditional discretionary award grants under the Exar 2006 Plan.
On October 11, 2007, each of our then serving Non-Employee Directors other than Messrs. Guilbault andHilton (i.e., Messrs. McFarlane, O. Rodriguez and P. Rodriguez) was granted 4,500 restricted stock units.Mr. Leza, who was also a Non-Employee Director at the time of the grant, received 4,500 restricted stock unitsand an additional 2,250 restricted stock units for serving as Chairperson of the Board. On August 27, 2007,Messrs. Guilbault and Hilton each received grants of 4,500 restricted stock units and 24,000 options to purchaseshares of our Common Stock upon their appointment to our Board of Directors in connection with our acquisitionof Sipex Corporation.
Each of the awards described above was granted under, and is subject to the terms of, the Exar 2006 Plan.Our Board of Directors administers the Exar 2006 Plan as to Non-Employee Director awards and has the abilityto interpret and make all required determinations under the Exar 2006 Plan, subject to plan limits. This authorityincludes making required proportionate adjustments to outstanding awards to reflect any impact resulting fromvarious corporate events such as reorganizations, mergers and stock splits.
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Director Stock Ownership Guidelines
The Company has adopted the following stock ownership guidelines for its Directors:
Director candidates, who have agreed to stand for election by the stockholders, or for election by our Boardof Directors to fill a vacancy, are asked to purchase a nominal number of shares of our Common Stock (at least1,000 shares). The shares should normally be acquired as follows:
1. In the case of election by our Board of Directors to fill a vacancy on our Board of Directors, eitherbefore or within 30 days following such election; or
2. In the case where a new candidate is to stand for election by the stockholders, the stock should bepurchased upon nomination by our Board of Directors to stand for election by the stockholders.
Within three years of becoming a Director, each Director is expected to accumulate and thereafter continueto hold, a minimum of 14,500 shares of our Common Stock. Restricted stock grants from the Company areapplied toward this goal. The shares must be held by the Director as an individual, or as part of a Family Trust.
It is intended that the guidelines be flexible where needed to avoid foreclosing viable candidates inappropriate circumstances.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of the Company’sCommon Stock as of June 27, 2008:
• each stockholder who is known by the Company to own beneficially more than 5% of the Company’sCommon Stock;
• each of our Named Executive Officers;
• each of our Directors; and
• all of our Directors and executive officers as a group.
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Unless otherwise indicated, to the Company’s knowledge, all persons listed below have sole voting andinvestment power with respect to their shares of Common Stock, except to the extent authority is shared byspouses under applicable law. Beneficial ownership is determined in accordance with the rules of the SEC.Applicable percentage ownership is based on 42,678,155 shares of Common Stock outstanding as of June 27,2008. In computing the number and percentage of shares beneficially owned by a particular person, shares ofCommon Stock subject to options currently exercisable or exercisable within sixty (60) days after June 27, 2008and restricted stock units for shares of Common Stock which are scheduled to vest and be distributed within sixty(60) days after June 27, 2008 are counted as outstanding, while these shares are not counted as outstanding forcomputing the percentage ownership of any other person. Unless otherwise indicated, the address for each personlisted in the table below is c/o Exar Corporation, 48720 Kato Road, Fremont, California 94538.
Beneficial Ownership(1)
Beneficial OwnerNumber of
Shares Percent of Total
Alonim Investments Inc.(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,591,607 17.79%1501 McGill College Avenue, 26th FloorMontreal, Quebec, H3A 3N9
Dimensional Fund Advisors LP(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,809,664 8.93%1299 Ocean AvenueSanta Monica, CA 90401
Royce & Associates, LLC(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,426,839 8.03%1414 Avenue of the AmericasNew York, NY 10019
Renaissance Technologies LLC(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,293,268 7.72%800 Third AvenueNew York, NY 10022
T. Rowe Price Associates, Inc.(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,264,150 7.65%100 E. Pratt StreetBaltimore, Maryland 21202
Artis Capital Management, L.P.(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,069,629 7.19%One Market Plaza, Spear Street Tower, Suite 1700San Francisco, CA 94105
Barclays Global Investors, NA(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,419,467 5.67%45 Fremont StreetSan Francisco, CA 94105
Brian Hilton(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,700 *
Richard L. Leza(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,750 *
John S. McFarlane(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,825 *
Juan (Oscar) Rodriguez(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,500 *
Pedro (Pete) P. Rodriguez(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,500 *
Gary Meyers(14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 *
Pierre Guilbault(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,718 *
Ralph Schmitt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,353 *
J. Scott Kamsler(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,212 *
Thomas R. Melendrez(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,440 *
Stephen W. Michael(18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,518 *
Edward Lam(19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,916 *
All current Directors and executive officers as a group (14 persons)(20) . . . . . . . . . . 873,546 2.01%
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* Represents beneficial ownership of less than one percent of the Common Stock.(1) This table is based on information supplied by the executive officers, Directors, and principal stockholders
and on Schedules 13D, 13G and 13G/A filed with the SEC.(2) Based on a Schedule 13D filed with the SEC on September 4, 2007, Alonim Investments Inc. (“Alonim”)
owned beneficially and of record, as of August 25, 2007, 7,591,607 shares of Common Stock through itswholly owned affiliate, Rodfre Holdings LLC. Each of Alonim, Robmilco Holdings Ltd. (“Robmilco”) andRobert G. Miller reported sole voting power and sole dispositive power with respect to such shares. As ofAugust 25, 2007, Robmilco, a shareholder of Alonim, had no direct beneficial ownership and its onlyindirect beneficial ownership is as reported by Alonim; Robert G. Miller is the majority shareholder ofRobmilco. Robert G. Miller, the sole director and president of Alonim, may be deemed to share the power tovote or direct the voting of and to dispose or direct the disposition of such shares as a result of hismanagement position with Alonim. Alonim and its affiliates disclaim beneficial ownership of 150,277shares held by Joie Investment Holding LLC (“Joie”). Rodney H. Miller, one of the beneficiaries of a trustthat is a shareholder of Alonim, and MJM Publicity Ltd. beneficially own, respectively, 77.77% and22.227% of the voting stock of the parent company of Joie. Rodney H. Miller shares with MJM PublicityLtd. the power to vote and to dispose of the 150,277 shares of Common Stock held through Joie. In addition,Alonim and its affiliates disclaim beneficial ownership of 13,218 shares subject to outstanding optionsgranted to Pierre Guilbault, which were exercisable on June 27, 2008, or within 60 days after that date, andrestricted stock units for 4,500 shares which are scheduled to vest and be distributed within 60 days afterJune 27, 2008. Mr. Guilbault is an executive officer of Future Electronics Inc., an affiliate of Alonim. Theaddress provided in the filing for Robmilco is the same as the address provided in the filing for Alonim andsuch address is noted in the table above. The residential address provided in the filing for Robert G. Milleris 78 Summit Crescent, in Montreal (Westmount), Quebec, Canada.
(3) Based on a Schedule 13G/A filed with the SEC on February 6, 2008, Dimensional Fund Advisors LP(formerly, Dimensional Fund Advisors Inc.) (“Dimensional”) reported sole voting power and soledispositive power with respect to 3,809,664 shares of Common Stock. Dimensional disclaims beneficialownership of such shares.
(4) Based on a Schedule 13G/A filed with the SEC on January 28, 2008, Royce & Associates, LLC (“Royce”)reported sole voting power and sole dispositive power with respect to 3,426,839 shares of Common Stock.
(5) Based on a Schedule 13G filed with the SEC on February 13, 2008, Renaissance Technologies LLC(“Renaissance”) and James H. Simons each reported sole voting power and sole dispositive power withrespect to 3,293,268 shares of Common Stock beneficially owned by Renaissance. Mr. Simons is a controlperson of Renaissance.
(6) Based on a Schedule 13G filed with the SEC on February 13, 2008, T. Rowe Price Associates, Inc.(“T. Rowe”) reported sole voting power with respect to 781,100 shares of Common Stock and soledispositive power with respect to 3,264,150 shares of Common Stock.
(7) Based on a Schedule 13G filed with the SEC on February 14, 2008, Artis Capital Management, L.P.(“Artis”), Artis Capital Management, Inc. (“Artis Inc.”) and Stuart L. Peterson each reported shared votingpower and shared dispositive power with respect to 3,069,629 shares of Common Stock. Artis, Artis Inc.and Mr. Peterson each expressly disclaims membership in a group. Artis is a registered investment adviserand is the investment adviser of investment funds that hold such shares for the benefit of the investors inthose funds. Artis Inc. is the general partner of Artis. Mr. Peterson is the president of Artis Inc. and thecontrolling owner of Artis and Artis Inc. Each of Artis, Artis Inc. and Mr. Peterson disclaims beneficialownership of such shares, except to the extent of that person’s pecuniary interest therein.
(8) Based on a Schedule 13G/A filed with the SEC on January 22, 2008, Barclays Global Investors, NA(“BGIN”) reported sole voting power with respect to 849,863 shares of Common Stock and sole dispositivepower with respect to 986,734 shares of Common Stock, Barclays Global Fund Advisors (“BGFA”)reported sole voting power with respect to 971,634 shares of Common Stock and sole dispositive powerwith respect to 1,376,492 shares of Common Stock and Barclays Global Investors, Ltd (“BGIL”) reportedsole voting power with respect to 6,600 shares of Common Stock and sole dispositive power with respect to56,241 shares of Common Stock. The address provided in the filing for BGFA is the same as the address
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provided in the filing for BGIN and such address is noted in the table above. The address provided in thefiling for BGIL is Murray House, 1 Royal Mint Court, London EC3N 4HH.
(9) Includes 27,200 shares subject to outstanding options granted to Mr. Hilton, which were exercisable onJune 27, 2008, or within 60 days after that date, and restricted stock units for 4,500 shares which arescheduled to vest and be distributed within 60 days after June 27, 2008.
(10) Includes 36,000 shares subject to outstanding options granted to Mr. Leza, which were exercisable onJune 27, 2008, or within 60 days after that date. Excludes 6,750 unvested restricted stock units.
(11) Includes 77,825 shares subject to outstanding options granted to Mr. McFarlane, which were exercisable onJune 27, 2008, or within 60 days after that date. Excludes 4,500 unvested restricted stock units.
(12) Includes 36,000 shares subject to outstanding options granted to Mr. O. Rodriguez, which were exercisableon June 27, 2008, or within 60 days after that date. Excludes 4,500 unvested restricted stock units.
(13) Includes 36,000 shares subject to outstanding options granted to Mr. P. Rodriguez, which were exercisableon June 27, 2008, or within 60 days after that date. Excludes 4,500 unvested restricted stock units.
(14) Excludes 1,125 unvested restricted stock units.(15) Includes 13,218 shares subject to outstanding options granted to Mr. Guilbault, which were exercisable on
June 27, 2008, or within 60 days after that date, and restricted stock units for 4,500 shares which arescheduled to vest and be distributed within 60 days after June 27, 2008. Mr. Guilbault is an executive officerof Future Electronics Inc., an affiliate of Alonim Investments Inc., and therefore may be deemed tobeneficially own the shares listed in the table for Alonim Investments Inc. Mr. Guilbault disclaimsbeneficial ownership of those shares and of the 150,277 shares owned by Joie Investment Holding LLCdescribed in footnote (2) above.
(16) Includes 34,375 shares subject to outstanding options granted to Mr. Kamsler, which were exercisable onJune 27, 2008, or within 60 days after that date. Excludes 31,709 unvested restricted stock units.
(17) Includes 184,500 shares subject to outstanding options granted to Mr. Melendrez, which were exercisable onJune 27, 2008, or within 60 days after that date. Excludes 26,834 unvested restricted stock units.
(18) Includes 118,000 shares subject to outstanding options granted to Mr. Michael, which were exercisable onJune 27, 2008, or within 60 days after that date, and restricted stock units for 4,000 shares which arescheduled to vest and be distributed within 60 days after June 27, 2008. Excludes 24,834 unvested restrictedstock units.
(19) Includes 100,880 shares subject to outstanding options granted to Mr. Lam, which were exercisable onJune 27, 2008, or within 60 days after that date.
(20) Includes 695,881 shares subject to outstanding options exercisable on June 27, 2008, or within 60 days afterthat date, and restricted stock units for 15,000 shares scheduled to vest and be distributed within 60 daysafter June 27, 2008, including those identified in footnotes (9), (10), (11), (12), (13), (15), (16), (17), and(18). Excludes 164,086 unvested restricted stock units, including those identified in footnotes (10), (11),(12), (13), (14), (16), (17) and (18).
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Equity Compensation Plan Information
The following table sets forth information, as of March 30, 2008, concerning shares of our Common Stockauthorized for issuance under all of the Company’s equity compensation plans. The Company maintains thefollowing plans: the Exar Corporation 1996 Non-Employee Directors’ Stock Option Plan (the “Exar DirectorPlan”), the Exar Corporation 1997 Equity Incentive Plan (the “Exar 1997 Plan”), the Exar Corporation 2000Equity Incentive Plan (the “Exar 2000 Plan”) and the Exar 2006 Plan. Other than the Exar 2000 Plan, each ofthese plans has been approved by the Company’s stockholders. In addition, pursuant to its merger with SipexCorporation, the Company assumed the following plans: the Sipex Corporation 1997 Stock Option Plan (the“Sipex 1997 Plan”), the Sipex Corporation 1999 Stock Plan (the “Sipex 1999 Plan”), the Sipex Corporation 2000Non-Qualified Stock Option Plan (the “Sipex 2000 Plan”), the Sipex Corporation Amended and Restated 2002Nonstatutory Stock Option Plan (the “Sipex 2002 Plan”) and the Sipex 2006 Plan. Other than the Sipex 2000Plan and the Sipex 2002 Plan, each of these plans was approved by the stockholders of Sipex Corporation.
Plan category
Number of securities to beissued upon exercise of
outstanding options,warrants and rights
(a)
Weighted-average exerciseprice of outstanding
options, warrants andrights
(b)
Number of securitiesremaining available forfuture issuance under
equity compensation plans(excluding securities
reflected in column(a))
Equity compensation plans approved byStockholders . . . . . . . . . . . . . . . . . . . . . 2,071,874(1) $13.42(2) 4,766,809(3)
Equity compensation plans not approvedby Stockholders . . . . . . . . . . . . . . . . . . 2,375,767(4) $15.53 153,479(5)Total . . . . . . . . . . . . . . . . . . . . . . . . . 4,447,641 $14.63 4,920,288
(1) Of these shares, 301,539 were subject to stock options granted under the Exar Director Plan (with aweighted average exercise price per share of $13.90), 390,742 were subject to stock options granted underthe Exar 1997 Plan (with a weighted average exercise price per share of $13.18), 796,212 were subject tostock options granted under the Exar 2006 Plan (with a weighted average exercise price per share of$11.83), 131,944 were subject to stock options granted under the Sipex 1999 Plan (with a weighted averageexercise price per share of $22.89), and 146,504 were subject to stock options granted under the Sipex 2006Plan (with a weighted average exercise price per share of $13.18). In addition, this number includes 304,933shares that were subject to outstanding stock unit awards granted under the Exar 2006 Plan. Our authority togrant new awards under the Exar Director Plan and the Exar 1997 Plan terminated on September 7, 2006.This number and the number reflected in column (b) do not include 943,589 shares that were subject tostock options assumed by the Company that were outstanding under the Sipex 1997 Plan or that weresubject to grants not made under a plan at the time of the Company’s merger with Sipex Corporation (with aweighted average exercise price per share of $7.08).
(2) This dollar number does not reflect the outstanding stock unit awards granted under the Exar 2006 Plan.(3) Of these shares, 4,201,926 were available for award grants under the Exar 2006 Plan, 213,473 were
available for award grants under the Sipex 1999 Plan, and 351,410 were available for award grants under theSipex 2006 Plan. The shares available for awards under these plans are, subject to certain other limits underthe applicable plan, generally available for any type of award authorized under that plan, including stockoptions, stock appreciation rights, restricted stock awards, stock bonuses and other stock-based awards.
(4) Of these shares, 2,142,866 were subject to stock options granted under the Exar 2000 Plan (with a weightedaverage exercise price per share of $16.33), 49,117 were subject to stock options granted under the Sipex2000 Plan (with a weighted average exercise price per share of $6.61), and 183,784 were subject to stockoptions granted under the Sipex 2002 Plan (with a weighted average exercise price per share of $8.54). Ourauthority to grant new awards under the Exar 2000 Plan terminated on September 7, 2006.
(5) Of these shares, 51,672 were available for award grants under the Sipex 2000 Plan, and 101,807 wereavailable for award grants under the Sipex 2002 Plan.
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Equity Compensation Plans Not Approved by Stockholders
Exar 2000 Plan. In September 2000, our Board of Directors approved the Exar 2000 Plan. The Exar 2000Plan is administered by our Board of Directors or a committee of our Board of Directors (“Committee”) andprovides for the grant of non-statutory options, stock bonuses, rights to purchase restricted stock, or acombination of the foregoing (collectively “Stock Awards”) to employees and consultants in our service or in theservice of our affiliates. Options granted under the Exar 2000 Plan have an exercise price that is not less than thefair market value of our Common Stock on the date of grant. The Exar 2000 Plan provides that vested optionsmay generally be exercised for (a) three months after termination of service other than due to death or disability,(b) twelve months after termination of service as a result of disability, or (c) eighteen months after termination ofservice as a result of death. The Exar 2000 Plan permits options to be exercised with cash, other shares of ourCommon Stock, or any other form of legal consideration acceptable to our Board of Directors or Committee. Inthe event of (i) a dissolution or liquidation, (ii) a merger or consolidation in which we are not the survivingcorporation, (iii) a reverse merger in which we are the surviving corporation, but the shares of our CommonStock outstanding immediately preceding the merger are converted into other property, or (iv) any other capitalreorganization in which more than 50% of our shares entitled to vote are exchanged, excluding in each case acapital reorganization in which the purpose is to change the state of our incorporation, the Exar 2000 Planprovides that each outstanding stock award will fully vest and become exercisable for a period of at least ten(10) days. Outstanding stock awards that are not exercised prior to the occurrence of any of the listed events willterminate on the date of such event, unless the successor corporation assumes such awards.
Sipex 2000 Plan and Sipex 2002 Plan. The Sipex 2000 Plan was adopted by the Sipex board of directors onOctober 31, 2000, and the Sipex 2002 Plan was adopted by the Sipex board of directors on September 21, 2001.Pursuant to the merger, we assumed the options that were outstanding under these plans at the time of the mergerand have the authority to make grants under these plans after the merger. Under the terms of these plans and asprovided under the applicable listing exchange rules, our Board of Directors or Committee may grantnonqualified stock options to individuals employed by Sipex or its subsidiaries on or after the merger date andother eligible persons not employed by us or our subsidiaries at the time of the merger. Our Board of Directors orCommittee determines the purchase price for any shares of our Common Stock subject to an option granted underthese plans, the vesting schedule (if any) applicable to each grant, the term of each grant, and the other terms andconditions of each grant, in each case subject to the limitations of the applicable plan. Generally, options grantedunder these plans may not be for a term of more than ten years and, subject to limited exceptions, the exerciseprice of those options may not be less than the fair market value of the stock subject to the award at the time ofthe grant.
The Sipex 2000 Plan provides that vested options may generally be exercised for (a) three months aftertermination of service other than as a result of death or disability, or (b) 180 days after termination of service as aresult of death or disability. The Sipex 2002 Plan provides that vested options may generally be exercised for(a) three months after termination of service other than due to death or disability, or (b) six months aftertermination of service as a result of disability or death. Each of these plans permits options to be exercised withcash, other shares of our Common Stock, or any other form of legal consideration acceptable to our Board ofDirectors or Committee. Our Board of Directors or Committee has the authority to accelerate the vesting of anyoption under these plans. In the event of a consolidation, merger, or asset sale, the board of directors of any entityassuming these plans shall, as to any outstanding options, either (i) make appropriate provision for thecontinuation of such options, (ii) provide that such options must be exercised within a specified period time, atthe conclusion of which any unexercised options will terminate, or (iii) terminate all options in exchange for acash payment.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE
We have entered into arrangements with some of our executive officers and Directors, all of which arediscussed under Part III, Item 11 above and are incorporated herein by reference.
We have entered into indemnity agreements with certain of our executive officers and Directors whichprovide, among other things, that we will indemnify such executive officer or Director, under the circumstancesand to the extent provided for therein, for expenses, damages, judgments, fines and settlements he/she may berequired to pay in actions or proceedings to which he/she is or may be made a party by reason of his/her positionas a Director, executive officer or other agent of the Company, and otherwise to the full extent permitted underDelaware law and the Company’s Bylaws.
Mr. Pierre Guilbault, one of the Company’s Directors, is an executive officer of Future Electronics Inc.(“Future Electronics”), the Company’s largest distributor. Mr. Guilbault joined the Company’s Board ofDirectors on August 25, 2007 in connection with the Company’s acquisition of Sipex Corporation. During fiscal2008, $21.8 million, or approximately 24%, of the Company’s revenue was derived from Future Electronics. TheCompany’s Audit Committee has reviewed the Company’s business relationship with Future Electronics andconsidered it in light of Mr. Guilbault’s membership on the Company’s Board of Directors, and has approvedsuch business relationship and authorized the Company to continue to do business with Future Electronics. TheAudit Committee will continue to monitor this business relationship. Mr. Guilbault is not an “independentdirector” under the listing standards of The NASDAQ Global Market as a result of the business relationshipbetween the Company and Future Electronics. Future Electronics is also an affiliate of the Company’s largeststockholder, Alonim Investments Inc., which beneficially owns shares of our Common Stock through its whollyowned affiliate, Rodfre Holdings LLC as described in Part III, Item 12 above under “Security Ownership ofCertain Beneficial Owners and Management.”
Under our related party transaction policies and procedures, information about transactions involving relatedpersons is assessed by the Audit Committee. Related persons include (i) any of our Directors, executive officersand nominees for Director, (ii) any beneficial owner of more than 5% of any class of our voting securities,(iii) any immediate family member of the foregoing persons, or (iv) any firm, corporation or other entity in whichany of the foregoing persons is employed or in which all the related persons, in the aggregate, have a 10% orgreater beneficial ownership interest. If the determination were made that a related person has a material interestin any Company transaction (a “related party transaction”), then the Audit Committee would review, approve,ratify or, at its discretion, take other action with respect to the transaction. Any related party transaction would bedisclosed to the extent required by SEC rules.
The Board has determined that each of Messrs. Hilton, Meyers and O. Rodriguez is an “independentdirector” under applicable SEC rules and the listing standards of The NASDAQ Global Market. The Board hasalso determined that with Messrs. Leza and McFarlane ceasing to be acting Chief Executive Officer andPresident (Interim) upon the appointment of Mr. Schmitt and Mr. P. Rodriguez, respectively, as Chief ExecutiveOfficer and President, that Messrs. Leza and McFarlane are now each independent under the listing standards ofThe NASDAQ Global Market in accordance with IM-4200 issued under Rule 4200 of its Marketplace Rules inthat Mr. Leza’s and Mr. McFarlane’s respective interim employment as an executive officer did not extendbeyond one year and that such interim employment and compensation received would not interfere withMr. Leza’s or Mr. McFarlane’s exercise of independent judgment in carrying out the responsibilities of aDirector. In addition, all Directors serving on the Audit Committee, Corporate Governance and NominatingCommittee, and the Compensation Committee are independent under applicable SEC rules, the listing standardsof The NASDAQ Global Market and any other relevant independence standards with independence requirementsfor committees of our Board of Directors.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees Paid to Principal Accountant
The following table shows the fees paid or accrued by us for audit and other services provided byPricewaterhouseCoopers LLP for fiscal years 2007 and 2008:
Description of Services 2008 2007
Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,966,300 $894,893Audit-Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 1,500
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,966,300 $896,393
Audit Fees. Audit Fees relate to professional services rendered in connection with the audit of our annualfinancial statements and the audit of internal control over financial reporting for fiscal years 2007 and 2008 andthe management’s assessment of internal control over financial reporting for fiscal year 2007, quarterly review offinancial statements included in our Form 10-Q, and audit services provided in connection with other regulatoryfilings with the SEC. The increase in audit fees for fiscal year 2008 as compared to fiscal year 2007 was relatedto additional work surrounding the Company’s merger with Sipex Corporation in August 2007.
Audit-Related Fees. Audit-Related Fees include professional services reasonably related to the audit orreview of our financial statements, including but not limited to, consultation on accounting standards ortransactions and audits of employee benefit plans.
Tax Fees. Tax Fees include professional services related to tax compliance, tax advice and tax planning,including but not limited to, the preparation of federal and state tax returns.
All Other Fees. All Other Fees for fiscal year 2007 include professional services related to non-audit relatedconsulting services.
Financial Information Systems Design and Implementation Fees. We did not engagePricewaterhouseCoopers LLP to provide advice to us regarding financial information systems design andimplementation during fiscal year 2008.
Audit Committee Pre-Approval Policies and Procedures
The charter of our Audit Committee requires that the Audit Committee pre-approve all audit and non-auditservices provided to us by the independent auditors or subsequently approve non-audit services in thosecircumstances where a subsequent approval is necessary and permissible. All of the fiscal 2008 audit fees werepre-approved by the Audit Committee of our Board of Directors.
36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits.
ExhibitFootnote
ExhibitNumber Description
(a) 31.1 Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.
(a) 31.2 Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.
(a) Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXAR CORPORATION
By: /s/ PEDRO (PETE) P. RODRIGUEZ
Pedro (Pete) P. RodriguezChief Executive Officer and President
(Principal Executive Officer)
Date: July 28, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below bythe following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ PEDRO (PETE) P. RODRIGUEZ
(Pedro (Pete) P. Rodriguez)
Chief Executive Officer, President andDirector (Principal ExecutiveOfficer)
July 28, 2008
*(Pierre G. Guilbault)
Director July 28, 2008
*(Brian Hilton)
Director July 28, 2008
*(Richard L. Leza)
Chairman of the Board July 28, 2008
*(John McFarlane)
Director July 28, 2008
*(Gary Meyers)
Director July 28, 2008
*(Juan (Oscar) Rodriguez)
Director July 28, 2008
* /s/ PEDRO (PETE) P. RODRIGUEZ
(Pedro (Pete) P. Rodriguez)Attorney-in-Fact
Chief Executive Officer, President andDirector (Principal ExecutiveOfficer)
July 28, 2008
38
EXHIBIT INDEX
ExhibitFootnote
ExhibitNumber Description
(a) 31.1 Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.
(a) 31.2 Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.
(a) Filed herewith.
39
BOARD OF D IREC TORS
Richard L. LezaChairman of the Board
Pierre G. GuilbaultDirector
Brian HiltonDirector
John S. McFarlane Director
Gary Meyers Director
J. Oscar RodriguezDirector
Pete RodriguezPresident, Chief Executive Offi cer and Director
EXECUT IVE OFF ICERS
Pete RodriguezPresident, Chief Executive Offi cer and DirectorGeorge ApostolChief Technology Offi cerDiane HillVice President, Human ResourcesJ. Scott KamslerSenior Vice President and Chief Financial Offi cer Hung P. LeVice President of EngineeringBentley LongVice President, Worldwide SalesThomas R. MelendrezGeneral Counsel, Secretary and Executive Vice President, Business DevelopmentStephen W. MichaelSenior Vice President, Operations and Reliability & Quality Assurance Paul PickeringSenior Vice President of Marketing
ANNUAL ME ET ING
The Annual Meeting of Stockholders of Exar Corporation will be held on Thursday, October 16, 2008, at 3:00 p.m. local time at the Company’s Corporate Headquarters, 48720 Kato Road, Fremont, CA.
FORM 10 -K
A copy of the Company’s Annual Report, Form 10-K and 10-K/A as fi led with the Securities and Exchange Commission (the “SEC”) may be obtained without charge from the Company’s web site at http://www.exar.com or from the SEC’s web site at http://www.sec.gov as well as by writing to Investor Relations, Exar Corporation, 48720 Kato Road, Fremont, CA 94538 or calling (510) 668-7000.
INDE PE NDE NT AUDITORS
PricewaterhouseCoopers LLPTen Almaden Boulevard, Suite 1600San Jose, CA 95113
OUTS IDE COUNSE L
O’Melveny & Myers LLP2765 Sand Hill RoadMenlo Park, CA 94025-7019
REGISTRAR AND TRANSFER AGE NT
Computershare Trust Company, N.A.250 Royall StreetCanton, MA 02021
Shown above from left to right: Richard L. Leza, Gary Meyers, Pierre G. Guilbault, J. Oscar Rodriguez, Brian Hilton, John S. McFarlane, Pete Rodriguez
Shown above from left to right: Bentley Long, George Apostol, Stephen W. Michael, Pete Rodriguez, J. Scott Kamsler, Diane Hill, Hung P. Le, Paul Pickering, Thomas R. Melendrez
Exar Corporation48720 Kato RoadFremont, CA 94538tel 510.668.7000fax 510.668.7001www.exar.com
