<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _______TO _______
Commission File No. 0-14225
EXAR CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware 94-1741481
- -------------------------------------------------------------------------------
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification No.)
48720 Kato Road, Fremont California 94538
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 668-7000
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- -------------------------------------------------------------------------------
Common Stock, $.0001 par value 9,575,391 shares net of treasury shares
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements . . . . . . . .3-5
Notes to Condensed Consolidated Financial Statements. . . .6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 9-11
PART II OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 12
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 13
2
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 74,023 $ 76,167
Short-term investments 3,154 3,140
Accounts receivable, net 15,864 16,764
Inventories 6,971 6,781
Prepaid expenses and other 1,534 1,521
Deferred income taxes 5,217 5,217
--------- ---------
Total current assets 106,763 109,590
PROPERTY AND EQUIPMENT, Net 27,367 26,746
GOODWILL, Net 1,350 1,534
OTHER ASSETS 5,789 5,799
--------- ---------
TOTAL ASSETS $ 141,269 $ 143,669
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 7,964 $ 10,631
Accrued compensation and related benefits 4,130 8,564
Income taxes payable 1,256 -
--------- ---------
Total current liabilities 13,350 19,195
--------- ---------
LONG-TERM LIABILITIES 713 745
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock; $.0001 par value; 2,250,000 shares authorized;
no shares outstanding - -
Common stock; $.0001 par value; 25,000,000 shares authorized;
10,550,407 and 10,475,503 shares outstanding 87,249 86,091
Cumulative translation adjustments 36 83
Retained earnings 54,066 51,700
Treasury stock; 977,766 shares of common stock at cost (14,145) (14,145)
--------- ---------
Total stockholders' equity 127,206 123,729
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,269 $ 143,669
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements
3
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EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1997
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<S> <C> <C>
NET SALES $ 21,764 $ 24,399
COST AND EXPENSES:
Cost of goods sold 10,066 12,947
Research and development 3,412 3,774
Selling, general and administrative 5,422 5,537
Goodwill amortization 185 292
-------- --------
Total costs and expenses 19,085 22,550
-------- --------
OPERATING INCOME 2,679 1,849
OTHER INCOME:
Interest income, net 1,027 566
Other, net 64 44
-------- --------
Total other income, net 1,091 610
-------- --------
INCOME BEFORE INCOME TAXES 3,770 2,459
INCOME TAXES 1,404 977
-------- --------
NET INCOME $ 2,366 $ 1,482
-------- --------
-------- --------
NET INCOME PER SHARE:
BASIC $ 0.25 $ 0.16
-------- --------
-------- --------
DILUTED $ 0.24 $ 0.16
-------- --------
-------- --------
SHARES USED IN COMPUTATION OF
NET INCOME PER SHARE:
BASIC 9,539 9,199
-------- --------
-------- --------
DILUTED 9,970 9,458
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements
4
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EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,366 $ 1,482
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization 1,194 1,479
Changes in operating assets and liabilities:
Accounts receivable 900 (318)
Inventories (190) (675)
Prepaid expenses and other (276) 654
Accounts payable and other accrued expenses (2,667) (42)
Accrued compensation and related benefits (4,434) 20
Income taxes payable 1,519 -
-------- --------
Net cash provided by (used in) operating activities (1,588) 2,600
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,631) (1,408)
Purchases of short-term investments (14) (15)
Purchases of long-term investments - (3,000)
Other assets 11 50
-------- --------
Net cash used in investing activities (1,634) (4,373)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term liabilities (33) (77)
Proceeds from issuance of common stock 1,158 1,756
-------- --------
Net cash provided by financing activities 1,125 1,679
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (47) 558
-------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,144) 464
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 76,167 48,479
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 74,023 $ 48,943
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 222 $ 70
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements
5
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER ENDED JUNE 30, 1998 AND 1997
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NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Exar Corporation and its wholly-owned subsidiaries ("Exar" or the
"Company"). Such financial statements have been prepared in conformity with
generally accepted accounting principles consistent with those reflected in the
Company's 1998 Annual Report on Form 10-K, and include all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows. The
results of operations for the three months ended June 30, 1998 are not
necessarily indicative of the results of operations to be expected for the full
year. These financial statements should be read in conjunction with the audited
financial statements for the fiscal year ended March 31, 1998 included in the
Company's annual report to security holders furnished to the Securities and
Exchange Commission pursuant to Rule 14a-3(b) in connection with the Company's
1998 Annual Meeting of Stockholders.
Exar designs, develops and markets analog and mixed-signal application specific
integrated circuits for use in the communications, video and imaging, silicon
microstructures and in other selected product areas. Principal markets include
North America, Asia and Europe.
NOTE 2. INVENTORIES
Inventories are stated at the lower of standard cost (first-in, first-out
method) or market and consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
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<S> <C> <C>
Work-in-process $ 4,736 $ 4,579
Finished goods 2,235 2,202
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$ 6,971 $ 6,781
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-------- --------
</TABLE>
6
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NOTE 3. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (SFAS 128). SFAS 128 requires a dual presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Prior periods have been restated to conform with SFAS 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1997
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<S> <C> <C>
NET INCOME $ 2,366 $ 1,482
-------- --------
-------- --------
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding used in
computation of basic net income per share 9,539 9,199
Dilutive effect of stock options 431 259
-------- --------
Shares used in computation of diluted net income per share 9,970 9,458
-------- --------
-------- --------
BASIC NET INCOME PER SHARE $ 0.25 $ 0.16
-------- --------
-------- --------
DILUTED NET INCOME PER SHARE $ 0.24 $ 0.16
-------- --------
-------- --------
</TABLE>
Options to purchase 739,519 and 135,550 shares of common stock at prices ranging
from $20.63 to $37.25 were outstanding as of June 30, 1998 and 1997,
respectively, but not included in the computation of diluted net income per
share because the options' exercise prices were greater than the average market
price of the common shares as of such dates and, therefore, would be
antidilutive under the treasury stock method.
NOTE 4. COMPREHENSIVE INCOME
In the first quarter of fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from nonowner sources. For the three
months ended June 30, 1998 and 1997, comprehensive income, which was comprised
of the Company's net income for the periods and changes in cumulative
translation adjustments, was $2,336,000 and $1,843,000, respectively.
7
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NOTE 5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of this statement will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company will adopt this
statement in its financial statements for the year ending March 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedging accounting when
certain conditions are met. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In a forward looking basis,
although the Company has not fully assessed the implications of this new
statement, the Company does not believe adoption of this statement will have a
material impact on the Company's financial position or results of operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as in the sections entitled
"Business" and "Risk Factors" in the Company's 1998 Form 10-K, filed with the
Securities and Exchange Commission on June 19, 1998.
GENERAL - The Company derives revenue principally from the sale of integrated
circuits for use in communications, video and imaging, silicon sensing and other
selected areas. The Company has wholly-owned subsidiaries in Japan and the
United Kingdom to support its sales operations in the Far East and Europe.
RESULTS OF OPERATIONS - Net sales for the first quarter of fiscal 1999 were
$21.8 million compared to $24.4 million for the corresponding period in fiscal
1998, a decrease of approximately 11%. This decrease was primarily due to
significant decreases in sales of discontinued consumer and custom products in
the Company's legacy product lines.
Cost of goods sold for the first quarter of fiscal 1999 decreased to
approximately 46% of net sales compared to 53% of net sales for the same period
in fiscal 1998. The resulting increase in gross margins is due primarily to
improvements in product mix, improved operating efficiencies, and a slight
increase in license and royalty revenues. The Company's newer analog and mixed-
signal products tend to have higher gross margins than many of the Company's
more mature products, and margins of any particular product may erode over time.
The Company's gross margins from sales of integrated circuits vary depending on
competition from other manufacturers, the volume of products manufactured and
sold, the Company's ability to achieve certain manufacturing efficiencies and
the cost of material procured from the Company's suppliers.
Research and development expenses in the first quarter of fiscal 1999, as a
percentage of net sales, remained consistent at approximately 16% with the
corresponding period in fiscal 1998. Research and development expenses in the
first quarter of fiscal 1999 decreased by approximately 10% compared to the same
period in fiscal 1998. The decrease in research and development expenses is
attributable primarily to the timing of research and development project
spending and a decrease in employee benefits expense for personnel in this area.
Selling, general and administrative expenses, as a percentage of net sales,
increased from approximately 23% in the first quarter of fiscal 1998 to 25% in
the corresponding period in fiscal 1999. Selling, general and administrative
expenses in the first quarter decreased by approximately 2% compared to the same
period in fiscal 1998. This change was primarily due to decreased sales
resulting in decreased commissions.
The Company's provision for income taxes is based on income from operations.
The Company's effective tax rate for the first three months of fiscal 1999 was
approximately 37% compared with the federal statutory rate of 35%. The
difference is due to non-deductible expenses, state income taxes and foreign
income, which is taxed at rates different from U.S. income tax rates, partially
offset by tax advantaged investment income and tax savings generated from
utilization of the Company's foreign sales corporation.
9
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In 1987, one of the Company's subsidiaries identified low-level groundwater
contamination on its principal manufacturing site. Although the area of
contamination appears to have been defined, the source of the contamination has
not been identified. The Company has reached an agreement with another entity
to participate in the cost of ongoing site investigations and the operation of
remedial systems to remove subsurface chemicals which is expected to continue
for 10 to 15 years. The accompanying financial statements include the Company's
approximately $.8 million share of estimated remediation costs.
LIQUIDITY AND CAPITAL RESOURCES - During the first three months of fiscal 1999,
the Company financed its operations primarily from cash flows from operations
and existing cash and short-term investments. At June 30, 1998, the Company had
approximately $77.2 million of cash and short-term investments. In addition,
the Company had available short-term, unsecured lines of credit under which it
may borrow up to $10 million, none of which was being utilized at June 30, 1998.
In addition, the Company has a credit facility with certain domestic and foreign
banks under which it may borrow up to $25 million in support of its foreign
currency transactions. At June 30, 1998, the Company had no outstanding foreign
currency forward contracts.
The Company has no material capital commitment given its current capital
resources.
The Company anticipates that it will finance its operations with cash flows from
operations, existing cash and short-term investment balances, borrowings under
existing bank credit lines, and some combination of long-term debt and/or lease
financing and additional sales of equity securities. The combination and
sources of capital will be determined by management based on the needs of the
Company and prevailing market conditions.
Year 2000
- ---------
What is commonly known as the "Year 2000 issue" arises because many computer
hardware and software systems use only two digits to represent the year. As a
result, these systems and programs may not calculate dates beyond 1999, which
may cause errors in information or systems failures.
The Company has completed the process of identifying the programs and
infrastructure that could be affected by the Year 2000 issue and has developed
an implementation plan to resolve the issue. The Plan includes replacing
certain existing systems with new systems that will be Year 2000 compliant and
will provide additional strategic information. The anticipated costs for the
new systems, of approximately $4 million to $5 million will be capitalized.
The Company believes, with appropriate replacement or modifications, it will be
able to operate its time-sensitive business-application software programs and
infrastructure into and beyond the year 2000. Some risks associated with the
year 2000 issue, however, are beyond the ability of the Company to control,
including the extent to which the Company's suppliers and service providers,
including providers of telephone services, can address the year 2000 issue.
The failure by a third party to adequately address the year 2000 issue could
have a material adverse impact on such third party, and could have an adverse
impact on the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS - The Company is currently transferring
its test and shipping operations to offshore sub-contractors to reduce
manufacturing expenses. In addition, the Company has refocused its product
strategy to provide analog and mixed-signal products for the video, imaging,
communications and silicon sensor markets and, therefore, has discontinued
certain product offerings. Furthermore, the semiconductor industry is
characterized by economic downturns resulting in diminished product demand,
erosion of average selling prices, intense competition, rapid technological
change, occasional shortages of materials, dependence upon highly skilled
engineering and other
10
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personnel and significant expenditures for product development. In addition,
the cyclical market patterns of the semiconductor industry periodically
result in shortages of wafer fabrication capacity. The Company's ability to
meet future demand for its products is dependent upon obtaining sufficient
supply of raw materials and components. The Company's operations have
reflected, and may in the future reflect, substantial fluctuation from
period-to-period as a result of the above factors, as well as general
economic conditions, the timing of orders from major customers, variations in
manufacturing efficiencies, exchange rate fluctuations, the availability and
cost of products from the Company's suppliers, management decisions to
commence or discontinue certain product lines, the Company's ability to
design, introduce and manufacture new products on a cost-effective and timely
basis and other factors. Exar's future operating results could be adversely
affected by a downturn in the semiconductor market or by the failure of one
or more of its customers to compete successfully in such market. The markets
for components used in the video, imaging, communications and silicon sensor
markets are extremely price competitive.
11
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PART II - OTHER INFORMATION
ITEM 5. - OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the company prior to March
15, 1999 (unless such matters are included in the Company's proxy statement
pursuant to rule 14A-3 under the Securities Exchange Act of 1934, as amended).
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
27.0 Financial Data Schedule
(b) During the quarter for which this report is filed, the Registrant filed no
reports on Form 8-K.
12
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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/ Date: August 12, 1998
---------------------------------------------
Donald L. Ciffone, Jr.
President
Chief Executive Officer
By /s/ Date: August 12, 1998
---------------------------------------------
Ronald W. Guire
Executive Vice President,
Chief Financial Officer,
Secretary
13
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EXHIBIT INDEX
Exhibit Page
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27.0 Financial Data Schedule
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 74,023
<SECURITIES> 3,154
<RECEIVABLES> 15,864
<ALLOWANCES> 0
<INVENTORY> 6,971
<CURRENT-ASSETS> 106,763
<PP&E> 27,367
<DEPRECIATION> 0
<TOTAL-ASSETS> 141,269
<CURRENT-LIABILITIES> 13,350
<BONDS> 0
0
0
<COMMON> 73,104
<OTHER-SE> 54,102
<TOTAL-LIABILITY-AND-EQUITY> 141,269
<SALES> 21,764
<TOTAL-REVENUES> 21,764
<CGS> 10,066
<TOTAL-COSTS> 19,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,770
<INCOME-TAX> 1,404
<INCOME-CONTINUING> 2,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,366
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
</TABLE>
