Several of the Company's customers are experiencing a slowdown in product demand due to poor visibility at their clients, particularly the telecommunications service providers. Many of these large carriers or service providers have announced plans to reduce or delay capital expenditures. Such factors, coupled with the current macroeconomic condition in the United States, have decreased the demand for semiconductor components at a significant number of the Company's customers, many of whom have announced significant inventories and declines in expected future financial results.
The Company expects that such decrease in demand will negatively impact its revenues and gross profit for at least a significant portion of the fiscal year ending March 31, 2002. The Company has taken and will continue to take actions to control costs and reduce operating expenses while maintaining its focus on developing and marketing new broadband transmission products.
The following table sets forth product line revenue information as a percentage of net sales. The table and subsequent discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net sales. Net sales for the three months ended June 30, 2001 decreased by 54.8% to $12.4 million, compared to $27.3 million for the three months ended June 30, 2000. This decrease was primarily the result of the continued decline in orders by the Company’s customers in response to softening demand by the Company’s customers, high inventory levels of its products and weakness in carrier spending, primarily in the Company’s communications products primarily from lower sales of communications-related products.
The $15.0 million decrease in sales for the three months ended June 30, 2001 from the same period a year ago was the result of a 62.1% decrease from domestic customers and a 39.1% decrease from international customers.
Cost of sales. Cost of sales as a percentage of net sales for the three months ended June 30, 2001 was approximately 43.9%, compared to 41.8% for the three months ended June 30, 2000. The resulting drop in gross margins occurred because the Company’s sales decreased.
Research and development. Research and development (“R&D”) expenses for the three months ended June 30, 2001 were $5.5 million, or 44.1% of net sales, compared to $5.8 million, or 21.2% of net sales, for the three months ended June 30, 2000. Spending was relatively flat, reflecting the Company’s ongoing R&D efforts relating to transmission products. Such spending was primarily associated with expenditures for payroll, supplies and services related to new product development. In the future, the Company expects to increase spending on R&D activities to support growth, particularly for transmission products. The Company expects R&D expenses to continue to fluctuate as a percentage of net sales as a result of the timing of expenditures and changes in the level of net sales.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2001 were $4.6 million, or 37.5% of net sales, compared to $6.0 million, or 22.0% of net sales for the three months ended June 30, 2000. The decrease in expenditures was due primarily to the continued reduction in costs associated with infrastructure spending in reaction to the current slowdown in the market as well as a reduction in sales costs and commissions as a result of reduced revenue. In the short term, many of the SG&A expenses are fixed, causing an increase as a percentage of net sales in periods of slower or declining sales and a decrease as a percentage of net sales when sales growth is strong and increasing.
Other income, Net. Other income, net in the three months ended June 30, 2001 decreased by 14.8% to $5.2 million in comparison to $6.1 million for the three months ended June 30, 2000. The decrease was the result of lower interest rates resulting in decreased earnings on investments.
Provision for income taxes. The effective tax rate for the three months ended June 30, 2001 was approximately 37% compared with the federal statutory rate of 35%. The difference is due to non–deductible expenses and state income taxes.
Liquidity and Capital Resources
At June 30, 2001, total cash, equivalents and both short-term and long-term investments was $432.6 million, comprised of $376.3 million of cash and equivalents, $9.7 million of short-term investments and $46.5 million of long-term investments in marketable securities. The Company has a credit facility agreement with a domestic bank under which it may execute up to $15.0 million in foreign currency transactions. At June 30, 2001, the Company had no foreign currency contracts outstanding.
During the three months ended June 30, 2001, the Company’s operations were financed primarily with cash flows from operations in conjunction with existing cash. The Company generated $750,000 of cash from its operating activities, the result of net income of $1.3 million, a net decrease in working capital of $1.6 million and an increase in non-cash items of $1.1 million. Net capital and other asset expenditures for the three months ended June 30, 2001 totaled $1.9 million, including cash used for strategic investments and for purchases of computer equipment and software used for product development. Other investing activities for the three months ended June 30, 2001 included purchases of $15.2 million of long-term investments offset by proceeds from the maturities of short-term investments of $1.8 million.
During the three months ended June 30, 2001, the Company received $1.2 million from the issuance of 138,025 common shares upon the exercise of stock options and the purchase of common shares under the Company’s stock plans.
The Company has no material firm capital commitments as of the end of June 30, 2001.
The Company anticipates that it will continue to finance its operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capital will be determined by management based on needs and prevailing market conditions. The Company believes that its cash and cash equivalents, short-term investments, long-term investments and cash flows from operations will be sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months. From time to time, the Company evaluates potential acquisitions and equity investments complementary to the Company’s design expertise and market strategy, including investments in wafer fabrication foundries. The Company expects to make additional venture investments during the remainder of fiscal 2001. To the extent that the Company can pursue or position itself to pursue these transactions, the Company could choose to seek additional equity or debt financing. There can be no assurance that additional financing could be obtained on terms acceptable to the Company. The sale of additional equity or convertible debt could result in dilution to the Company’s stockholders.
Subsequent to June 30, 2001, Exar invested $40.0 million in the Series C Preferred Stock round of financing for Internet Machines Corporation, a leading private-company developing a family of highly- integrated communications ICs that provide protocol-independent network processing and switch fabric solutions for high-speed optical, metro area network and Internet infrastructure equipment. This investment will be carried on the Company’s balance sheet at cost.
In July 2001, Exar became a Limited Partner in the Skypoint Telecom Fund II (US), LP, a venture capital fund focused on investments in communications infrastructure companies. The purpose of the investment is to allow the Company to align itself with potential strategic partners in emerging technology companies within the telecommunications and/or networking space. This investment is expected to be carried on the Company’s balance sheet at cost.
RISK FACTORS
The Company is subject to a number of risks - some are normal to the fabless networking semiconductor industry, some are the same or similar to those disclosed in previous SEC filings, and some may be present in the future. You should carefully consider all of these risks and the other information in this report before investing in Exar. The fact that certain risks are endemic to the industry does not lessen the significance of the risk.
As a result of these risks, the Company’s business, financial condition or operating results could be materially adversely affected. This could cause the trading price of the Company’s common stock to decline, and you may lose part or all of your investment.
The Company is exposed to the risks associated with the recent slowdown in the U.S. economy.
Concerns about inflation, decreased consumer confidence and reduced corporate profits and capital spending have resulted in a recent downturn in the U.S. economy. As a result of these unfavorable economic conditions, the Company has recently experienced a significant slowdown in customer orders. If such economic conditions in the U.S. continue or worsen or if a wider or global economic slowdown occurs, the Company’s business, financial condition and results of operations may be materially and adversely affected.
The Company’s operating results may vary significantly due to the cyclicality of the semiconductor industry. Any such variations could adversely affect the market price of the Company’s common stock.
The Company operates in the semiconductor industry, which is cyclical and subject to rapid technological change. From time to time, including during the first half of 2001, the semiconductor industry has experienced significant downturns characterized by diminished product demand, accelerated erosion of prices and excess production capacity. The current downturn and future downturns in the semiconductor industry may be severe and prolonged. Future downturns in the semiconductor industry, or any failure of this industry to fully recover from its recent downturn, could seriously impact the Company’s revenues and harm its business, financial condition and results of operations. This industry also periodically experiences increased demand and production capacity constraints, which may affect the Company’s ability to ship products in future periods. Accordingly, the Company’s quarterly results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause the Company’s stock price to decline.
The Company’s operating results fluctuate significantly because of a number of factors, many of which are beyond the Company’s control.
The Company’s operating results fluctuate significantly. Some of the factors that affect the Company’s results, many of which are difficult to control or predict, are:
• the reduction, rescheduling or cancellation of orders by customers;
• fluctuations in the timing and amount of customer requests for product shipments;
• fluctuations in the manufacturing output, yields and inventory levels of the Company’s suppliers;
• changes in the mix of products that the Company’s customers purchase;
• the Company’s ability to introduce new products on a timely basis;
• the announcement or introduction of products by the Company’s competitors;
• the availability of third–party foundry capacity and raw materials;
• competitive pressures on selling prices;
• the amounts and timing of costs associated with product warranties and returns;
• the amounts and timing of investments in research and development;
• market acceptance of the Company’s products;
• costs associated with acquisitions and the integration of acquired operations;
• the ability of the Company’s customers to obtain components from their other suppliers;
• general conditions in the communications and semiconductor industries;
• changes in capital spending by the telecommunications service providers;
• build-up of channel inventory;
• fluctuations in interest rates; and
• general economic conditions.
The Company’s markets are subject to rapid technological change; therefore, the Company’s success depends on its ability to develop and introduce new products in a timely manner.
The markets for the Company’s products are characterized by:
• rapidly changing technologies;
• evolving and competing industry standards;
• changing customer needs;
• frequent new product introductions and enhancements; and
• increased integration with other functions.
To develop new products for the Company’s target markets, the Company must develop, gain access to and use leading technologies in a cost–effective and timely manner and continue to expand its technical and design expertise. In addition, the Company must have its products designed into its customers' future products and maintain close working relationships with key customers in order to develop new products that meet their changing needs.
In addition, products for communications applications are based on continually evolving industry standards. The Company’s ability to compete will depend on its ability to identify and ensure compliance with these industry standards. As a result, the Company could be required to invest significant time and effort and to incur significant expense to redesign its products to ensure compliance with relevant standards.
The Company cannot assure that it will be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins or respond effectively to new technological changes or product announcements by its competitors. In addition, the Company may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. The Company’s pursuit of necessary technological advances may require substantial time and expense. Failure in any of these areas could harm its operating results.
The markets in which the Company participates are intensely competitive.
The Company’s target markets are intensely competitive. The Company’s ability to compete successfully in its target markets depends on the following factors:
• designing new products that implement new technologies;
• subcontracting the manufacture of new products and delivering them in a timely manner;
• product quality and reliability;
• technical support and service;
• timely product introduction;
• product performance;
• product features;
• price;
• end–user acceptance of the Company’s customers' products;
• compliance with evolving standards; and
• market acceptance of competitors' products.
In addition, the Company’s competitors or customers may offer new products based on new technologies, industry standards or end–user or customer requirements, including products that have the potential to replace or provide lower–cost or higher–performance alternatives to its products. The introduction of new products by the Company’s competitors or customers could render the Company's existing and future products obsolete or unmarketable. In addition, the Company’s competitors and customers may introduce products that integrate the functions performed by its ICs on a single IC, thus eliminating the need for the Company’s products.
Because the IC markets are highly fragmented, the Company generally encounters different competitors in its various market areas. Competitors with respect to the Company’s communications products include Conexant Systems Inc., PMC–Sierra, Inc. and TranSwitch Corporation. In addition, the expansion of the Company’s communications product portfolio may in the future bring it into competition with other established communications IC companies, such as Applied Micro Circuits Corp. and Vitesse Semiconductor Corporation. Competitors in the Company’s other markets include Analog Devices, Inc., Philips Electronics and Texas Instruments, Inc. Many of the Company’s competitors have greater financial, technical and management resources than the Company does. Some of these competitors may be able to sell their products at prices below which it would be profitable for the Company to sell its products.
The Company’s future success depends in part on the continued service of its key engineering and management personnel and its ability to identify hire and retain additional personnel.
The Company’s future success depends, in part, on the continued service of its key design engineering, sales, marketing and executive personnel and its ability to identify, hire and retain additional personnel.
The Company may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of its business. The intense competition, particularly in Silicon Valley, for highly qualified personnel has subsided, in part, due to the current economic slowdown. However, this is a considerable risk inherent to the Company. The Company’s anticipated future growth is expected to place increased demands on its resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Loss of the services of, or failure to recruit key design engineers or other technical and management personnel, could harm the Company’s business.
The Company depends on third party foundries to manufacture its ICs.
The Company does not own or operate a semiconductor fabrication facility. Most of its products are based on CMOS processes. Although two foundries manufacture its products based on CMOS processes, most are manufactured at a single foundry. In addition, one foundry manufactures most of the Company’s BiCMOS products. The Company does not have long–term wafer supply agreements with its CMOS foundries that guarantee wafer or product quantities, prices, delivery or lead times, as its CMOS foundries manufacture its products on a purchase order basis. The Company provides these foundries with rolling forecasts of its production requirements; however, the ability of each foundry to provide wafers to the Company is limited by the foundry's available capacity. Therefore, the Company’s CMOS foundries could choose to prioritize capacity for other customers or reduce or eliminate deliveries to it on short notice. Accordingly, the Company cannot be certain that these foundries will allocate sufficient capacity to satisfy its requirements. In addition, the Company cannot be certain that it will continue to do business with its foundries on terms as favorable as its current terms. Other significant risks associated with the Company’s reliance on third–party foundries include:
| | • | the lack of control over delivery schedules; | |
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| | • | the unavailability of, or delays in obtaining access to, key process technologies; | |
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| | • | limited control over quality assurance, manufacturing yields and production costs; and | |
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| | • | potential misappropriation of the Company’s intellectual property. | |
The Company could experience a substantial delay or interruption in the shipment of its products or an increase in its costs due to the following:
| | • | a sudden demand for semiconductor devices; | |
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| | • | a manufacturing disruption experienced by one or more of the Company’s foundries or sudden reduction or elimination of any existing source or sources of semiconductor devices; | |
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| | • | time required to identify or qualify alternative manufacturing sources for existing or new products; or | |
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| | • | failure of the Company’s suppliers to obtain the raw materials and equipment used in the production of its ICs. | |
If the Company’s foundries discontinue the manufacturing processes needed to meet its demands, or fail to upgrade the technologies needed to manufacture its products, the Company may face production delays.
The Company’s wafer and product requirements typically represent a small portion of the total production of the foundries that manufacture its products. As a result, the Company is subject to the risk that a foundry will cease production on an older or lower–volume process that it uses to produce parts supplied to the Company. Additionally, the Company cannot be certain its foundries will continue to devote resources to the production of its products or continue to advance the process design technologies on which the manufacturing of the Company’s products is based. Each of these events could increase the Company’s costs and harm its ability to deliver its products on time.
The Company expects that revenues currently derived from non–communications products will decline in future periods, and its business will be harmed if its communications products fail to compensate for this decline.
The Company does not intend to increase its funding of development efforts relating to its video and imaging and other non–communications products, and as a result, revenues from these products may decline in future periods. In addition, the markets for these products are subject to extreme price competition, and the Company may not be able to reduce its costs in response to declining average selling prices. Even if the Company reduces its costs, its customers in these markets may not purchase these products. Moreover, these markets may decrease in size in the future. If the Company’s communications products fail to compensate for any revenue shortfall, its business could be harmed.
The Company’s dependence on third–party subcontractors to assemble and test its products subjects it to a number of risks, including an inadequate supply of products and higher materials costs.
The Company depends on independent subcontractors for the assembly and testing of its products. The Company’s reliance on these subcontractors involves the following significant risks:
• reduced control over delivery schedules and quality;
• the potential lack of adequate capacity during periods of excess demand;
• difficulties selecting and integrating new subcontractors;
• limited warranties on products supplied to the Company;
• potential increases in prices due to capacity shortages and other factors; and
• potential misappropriation of the Company’s intellectual property.
These risks may lead to delayed product delivery or increased costs, which would harm the Company’s profitability and customer relationships.
To secure foundry capacity, the Company may be required to enter into financial and other arrangements with foundries, and such agreements may result in the dilution of its earnings or the ownership of its stockholders or otherwise harm its operating results.
Allocation of a foundry's manufacturing capacity may be influenced by a customer's size or the existence of a long��term agreement with the foundry. To address foundry capacity constraints, the Company and other semiconductor companies that rely on third–party foundries have utilized various arrangements, including equity investments in or loans to foundries in exchange for guaranteed production capacity, joint ventures to own and operate foundries, or "take or pay" contracts that commit a company to purchase specified quantities of wafers over extended periods. While the Company is not currently a party to any of these arrangements, it may decide to enter into these arrangements in the future. The Company cannot be sure, however, that these arrangements will be available to it on acceptable terms, if at all. Any of these arrangements could require the Company to commit substantial capital and, accordingly, could require it to obtain additional debt or equity financing. This could result in the dilution of its earnings or the ownership of its stockholders or otherwise harm its operating results.
The Company’s reliance upon foreign suppliers exposes it to risks associated with international operations.
The Company uses semiconductor wafer foundries and assembly and test subcontractors throughout Asia for most of its products. The Company’s dependence on these subcontractors involves the following substantial risks:
• political and economic instability;
• disruption to air transportation from Asia;
• embargo affecting the availability of raw materials, equipment or services;
• changes in tax laws, tariffs and freight rates; and
• compliance with local or foreign regulatory requirements.
These risks may lead to delayed product delivery or increased costs, which would harm the Company’s profitability and customer relationships.
The Company’s reliance on foreign customers could cause fluctuations in its operating results.
International sales accounted for 42.9% of net sales for the three months ended June 30, 2001. International sales may account for an increasing portion of the Company’s revenues, which would subject it to the following risks:
| | • | changes in regulatory requirements; |
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| | • | tariffs and other barriers; |
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| | • | timing and availability of export licenses; |
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| | • | political and economic instability; |
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| | • | difficulties in accounts receivable collections; |
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| | • | difficulties in staffing and managing foreign subsidiary and branch operations; |
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| | • | difficulties in managing distributors; |
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| | • | difficulties in obtaining governmental approvals for communications and other products; |
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| | • | limited intellectual property protection; |
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| | • | foreign currency exchange fluctuations; |
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| | • | the burden of complying with and the risk of violating a wide variety of complex foreign laws and treaties; and |
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| | • | potentially adverse tax consequences. |
In addition, because sales of the Company’s products have been denominated to date primarily in United States Dollars, increases in the value of the United States Dollar could increase the relative price of the Company’s products so that they become more expensive to customers in the local currency of a particular country. Future international activity may result in increased foreign currency denominated sales. Furthermore, because some of the Company’s customer purchase orders and agreements are governed by foreign laws, the Company may be limited in its ability to enforce its rights under these agreements and to collect damages, if awarded.
The Company relies on its distributors and sales representatives to sell many of its products.
The Company sells many of its products through distributors and sales representatives. The Company’s distributors and sales representatives could reduce or discontinue sales of its products. They may not devote the resources necessary to sell the Company’s products in the volumes and within the time frames that it expects. In addition, the Company depends upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. In turn these distributors and sales representatives depend substantially on general economic conditions and conditions within the semiconductor industry. The Company believes that its success will continue to depend upon these distributors and sales representatives. If some or all of the Company’s distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell its products, the Company’s business could be harmed.
Because the Company’s communications ICs typically have lengthy sales cycles, the Company may experience substantial delays between incurring expenses related to research and development and the generation of sales revenue.
Due to the communications IC product cycle, it usually takes the Company more than 12 months to realize volume shipments after it first contacts a customer. The Company first works with customers to achieve a design win, which may take nine months or longer. The Company’s customers then complete the design, testing and evaluation process and begin to ramp up production, a period which typically lasts an additional three months or longer. As a result, a significant period of time may elapse between the Company’s research and development efforts and its realization of revenue, if any, from volume purchasing of the Company’s communications products by its customers.
The Company’s backlog may not result in future revenue.
Due to possible customer changes in delivery schedules and quantities actually purchased, cancellations of orders, distributor returns or price reductions, the Company’s backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period, or the failure of the Company’s backlog to result in future revenue, could harm the Company’s business.
The Company’s operating expenses are relatively fixed, and it may order materials in advance of anticipated customer demand. Therefore, the Company has limited ability to reduce expenses quickly in response to any revenue shortfalls.
The Company’s operating expenses are relatively fixed, and, therefore, it has limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, the Company’s operating results will be harmed if its revenues do not meet its revenue projections. The Company may experience revenue shortfalls for the following reasons:
| | • | a significant reduction in customer demand |
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| | • | significant pricing pressures that occur because of declines in average selling prices over the life of a product; |
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| | • | sudden shortages of raw materials or fabrication, test or assembly capacity constraints that lead the Company’s suppliers to allocate available supplies or capacity to other customers, in turn, harming the Company’s ability to meet its sales obligations; and |
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| | • | the reduction, rescheduling or cancellation of customer orders. |
In addition, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from the Company’s outside suppliers and foundries, the Company may order materials in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write–downs if expected orders fail to materialize.
Periods of rapid growth and expansion could place a significant strain on the Company’s limited personnel and other resources.
To manage the Company’s possible future growth effectively, the Company will be required to continue to improve its operational, financial and management systems and to successfully hire, train, motivate and manage its employees. In addition, the integration of past and future potential acquisitions and the evolution of the Company’s business plan will require significant additional management, technical and administrative resources. The Company cannot be certain that it will be able to manage the growth and evolution of its current business effectively.
Exar has in the past and may in the future make acquisitions and large strategic equity investments, which will involve numerous risks. Exar cannot assure that it will be able to address these risks successfully without substantial expense, delay or other operational or financial problems.
The risks involved with acquisitions include:
• diversion of management's attention;
• failure to retain key personnel;
• amortization of acquired intangible assets;
• customer dissatisfaction or performance problems with an acquired company;
• the cost associated with acquisitions and the integration of acquired operations; and
• assumption of known or unknown liabilities or other unanticipated events or circumstances.
The risks involved with large strategic equity investments include:
• diversion of management’s attention;
• the possibility that the Company may incur losses from these investments; and
• the opportunity cost associated with committing capital in such investments.
The Company cannot assure that it will be able to address these risks successfully without substantial expense, delay or other operational or financial problems.
The Company may not be able to protect its intellectual property rights adequately.
The Company’s ability to compete is affected by its ability to protect its intellectual property rights. The Company relies on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non–disclosure and licensing arrangements to protect its intellectual property rights. Despite these efforts, the Company cannot be certain that the steps it takes to protect its proprietary information will be adequate to prevent misappropriation of the Company’s technology, or that its competitors will not independently develop technology that is substantially similar or superior to the Company’s technology.
More specifically, the Company cannot be sure that its pending patent applications or any future applications will be approved, or that any issued patents will provide it with competitive advantages or will not be challenged by third parties. Nor can the Company be sure that, if challenged, the Company’s patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on the Company’s ability to do business. Furthermore, others may independently develop similar products or processes, duplicate the Company’s products or processes or design around any patents that may be issued to it.
The Company could be harmed by litigation involving patents and other intellectual property rights.
As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. The Company may be accused of infringing the intellectual property rights of third parties. Furthermore, the Company has certain indemnification obligations to customers with respect to the infringement of third–party intellectual property rights by its products. The Company cannot be certain that infringement claims by third parties or claims for indemnification by customers or end users of its products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not harm its business.
Any litigation relating to the intellectual property rights of third parties, whether or not determined in the Company’s favor or settled by the Company, would at a minimum be costly and could divert the efforts and attention of its management and technical personnel. In the event of any adverse ruling in any such litigation, the Company could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all.
Earthquakes and other natural disasters may damage the Company’s facilities or those of its suppliers.
The Company’s corporate headquarters in Fremont, California are located near major earthquake faults that have experienced seismic activity. In addition, some of its suppliers are located near fault lines. In the event of a major earthquake or other natural disaster near its headquarters, the Company’s operations could be harmed. Similarly, a major earthquake or other natural disaster near one or more of the Company’s major suppliers could disrupt the operations of those suppliers, which could limit the supply of the Company’s products and harm its business.
The Company relies on continuous power supply to conduct its operations.
The Company relies on a continuous power supply to conduct its business from its headquarters located in California. Currently, California is experiencing energy shortages which have resulted in rolling blackouts throughout the state. These rolling blackouts are expected to continue in the future and could disrupt the Company’s operations, research and development and other critical functions. Such disruption in power supply may temporarily suspend operations in its headquarters. This disruption may impede the Company’s ability to continue operations, which could delay the introduction of new products, hinder the Company’s sales efforts, impede the Company’s ability to retain existing customers and to obtain new customers, which could have a negative impact on the Company and its results of operations.
The Company’s stock price is volatile.
The market price of the Company’s common stock has fluctuated significantly to date. In the future, the market price of its common stock could be subject to significant fluctuations due to:
• the Company’s anticipated or actual operating results;
• announcements or introductions of new products;
• technological innovations by the Company or its competitors;
• product delays or setbacks by the Company, its customers or its competitors;
• conditions in the communications and semiconductor markets;
• the commencement of litigation;
• changes in estimates of the Company’s performance by securities analysts;
• announcements of merger or acquisition transactions; and
• general economic and market conditions.
In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies, and that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations may harm the market price of the Company’s common stock.
The anti–takeover provisions of the Company’s certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control.
The Company’s Board of Directors has the authority to issue up to 2,250,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by its stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit the Company’s consummation of any merger, reorganization, sale of substantially all of its assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on the Company’s stockholders. The Company’s stockholders must give 120 days advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to the Company’s stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. The Company has in place a stockholder right or “poison pill” plan that may trigger its stockholder rights plan in the event its Board of Directors does not agree to an acquisition proposal. The rights plan may make it more difficult and costly to acquire the Company. The Delaware anti–takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of the Company’s common stock. The Delaware statute makes it more difficult for the Company to be acquired without the consent of its Board of Directors and management.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Fluctuations. In the normal course of business, the Company is exposed to market risk from the effect of foreign exchange rate fluctuations on the U.S, Dollar value of its foreign operations and financial condition. This exposure is the result of the foreign operating expenses being denominated in foreign currency. Operational currency requirements are typically forecasted for a three-month period. If there is a need to hedge this risk, the Company will enter into transactions to enter into forward currency exchange contracts to minimize the effect of fluctuating foreign currencies in its foreign earnings and specifically identifiable anticipated transactions. Such contracts are currently available under its bank lines of credit. Generally, such purchases of forward contracts are available over periods up to 12 months. Such transactions, if entered into, do not qualify for hedge accounting treatment under the new standards of SFAS No. 133. Although Exar has never entered into any type of contracts to hedge against foreign currency risk, the Company may be expected to do so in the future, however, the hedging methodology and/or usage may be changed to manage exposure to foreign currency fluctuations.
If the Company’s foreign operations forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. For the three months ended June 30, 2001, the Company did not have significant foreign currency denominated net assets or net liabilities positions, and had no foreign currency contracts outstanding.
Interest Rate Sensitivity. The Company maintains investment portfolio holdings of various issuers, types, and maturity dates with various banks and investment banking institutions. The market value of these investments on any given day during the investment term may vary as a result of market interest rate fluctuations. This exposure is not hedged because a hypothetical 10% movement in interest rates during the investment term would not likely have a material impact on investment income or the market value. The actual impact on investment income and market value in the future may differ materially from this analysis, depending on actual balances and changes in the timing and the amount of interest rate movements.
Both short-term and long-term investments are classified as “available-for-sale” securities and the cost of securities sold is based on the specific identification method. At June 30, 2001, short-term investments consisted of auction rate securities, government and corporate securities of $9.7 million and long-term investments consisted of government and corporate securities of $46.5 million. At June 30, 2001, the difference between the fair market value and the underlying cost of such investments was attributable to an unrealized gain of $555,915, net of income taxes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits to report.
(b) During the three months for which this report is filed, the Registrant filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EXAR CORPORATION |
| | | |
| | | |
| By | /s/ Donald L. Ciffone, Jr
| Date: August 14, 2001 |
| | Donald L. Ciffone, Jr. | |
| | Chief Executive Officer, President and Director | |
| | | |
| | | |
| By | /s/ Ronald W. Guire
| Date: August 14, 2001 |
| | Ronald W. Guire | |
| | Executive Vice President, Chief Financial Officer, | |
| | Assistant Secretary and Director (Principal Financial and Accounting Officer) | |
