<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, 1999
[ ] 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
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at July 31, 1999
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<S> <C>
Common Stock, $.0001 par value 9,413,690 shares net of treasury shares
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
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....................................9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......12
PART II OTHER INFORMATION
Item 5. Other Information................................................13
Item 6. Exhibits and Reports on Form 8-K.................................13
Signatures.......................................................14
EXHIBITS
Exhibit 27.0.....................................................16
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
EXAR COPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
(UNAUDITED)
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 91,859 $ 79,154
Short-term investments 2,000 2,000
Accounts receivable, net 11,070 11,450
Inventories 5,144 5,873
Prepaid expenses and other 1,511 939
Deferred income taxes 4,365 4,047
------------ ------------
Total current assets 115,949 103,463
PROPERTY AND EQUIPMENT, Net 27,093 27,684
GOODWILL, Net 378 504
OTHER ASSETS 504 6,645
------------ ------------
TOTAL ASSETS $ 143,924 $ 138,296
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,162 $ 4,265
Accrued compensation and related benefits 5,471 3,560
Other accrued expenses 2,212 2,828
Income taxes payable 1,988 1,006
------------ ------------
Total current liabilities 12,833 11,659
------------ ------------
LONG-TERM LIABILITIES 938 961
------------ ------------
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 89,731 88,908
Cumulative translation adjustments 116 123
Retained earnings 61,019 57,124
Treasury stock; 977,766 shares of common stock at cost (20,713) (20,479)
------------ ------------
Total stockholders' equity 130,153 125,676
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 143,924 $ 138,296
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
EXAR COPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
NET SALES $ 16,251 $ 21,764
COSTS AND EXPENSES:
Cost of goods sold 7,302 10,066
Research and development 4,759 3,412
Selling, general and administrative 6,406 5,422
Goodwill amortization 126 185
---------- ----------
Total costs and expenses 18,593 19,085
---------- ----------
OPERATING INCOME (LOSS) (2,342) 2,679
OTHER INCOME:
Interest income, net 1,016 1,027
Gain on sale of investment 7,003 --
Other, net 25 64
---------- ----------
Total other income, net 8,044 1,091
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INCOME BEFORE INCOME TAXES 5,702 3,770
INCOME TAXES 1,807 1,404
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NET INCOME $ 3,895 $ 2,366
---------- ----------
---------- ----------
NET INCOME PER SHARE:
BASIC $ 0.42 $ 0.25
---------- ----------
---------- ----------
DILUTED $ 0.40 $ 0.24
---------- ----------
---------- ----------
SHARES USED IN COMPUTATION OF
NET INCOME PER SHARE:
BASIC 9,332 9,539
---------- ----------
---------- ----------
DILUTED 9,743 9,970
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
EXAR COPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,895 $ 2,366
Reconciliation of net income to net cash used in operating activities:
Depreciation and amortization 992 1,194
Deferred income taxes (320) --
Gain on sale of investment (7,003) --
Changes in operating assets and liabilities:
Accounts receivable 380 900
Inventories 729 (190)
Prepaid expenses and other (572) (276)
Accounts payable (1,103) (2,579)
Accrued compensation and related benefits 1,911 (4,434)
Other accrued expenses (616) (88)
Income taxes payable 982 1,500
---------- ----------
Net cash used in operating activities (725) (1,607)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (275) (1,631)
Purchases of short-term investments -- (14)
Proceeds from sale of investment 13,080 --
Other assets 64 11
---------- ----------
Net cash provided by (used in) investing activities 12,869 (1,634)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term liabilities (21) (33)
Proceeds from issuance of common stock 823 1,158
Acquisition of common stock (234) --
---------- ----------
Net cash provided by financing activities 568 1,125
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7) (28)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 12,705 (2,144)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 79,154 76,167
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 91,859 $ 74,023
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 118 $ 222
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
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 1999 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, 1999 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, 1999 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
1999 Annual Meeting of Stockholders.
Exar designs, develops and markets analog and mixed-signal application specific
integrated circuits for use in communications and video and imaging products.
Principal markets include North America, Asia and Europe.
Certain amounts in the fiscal 1999 financial statements have been reclassified
to conform to the fiscal 2000 presentation.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------------- ---------------
<S> <C> <C>
Work-in-process $ 2,420 $ 3,262
Finished goods 2,724 2,611
----------------- ---------------
$ 5,144 $ 5,873
----------------- ---------------
----------------- ---------------
</TABLE>
NOTE 3. GAIN ON SALE OF INVESTMENT
The gain on investment of $7.0 million is related to the Company's minority
equity investment in IC Works, Inc. ("IC Works") which had a net book value of
$6.1 million. In April 1999, the Company received in excess of 1.1 million
shares of common stock in Cypress Semiconductor, Inc. ("Cypress") in exchange
for the Company's investment in IC Works due to the merger of Cypress and IC
Works. The Company sold this stock at a fair market value of $13.1 million
during the first quarter of fiscal 2000 resulting in a pre-tax gain of $7.0
million in other income and a related employee benefits expense of $3.0 million
in Costs and Expenses.
6
<PAGE>
NOTE 4. NET INCOME PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 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.
A summary of the Company's EPS is as follows (In thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
--------- ----------
<S> <C> <C>
NET INCOME $ 3,895 $ 2,366
--------- ----------
--------- ----------
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding used in
computation of basic net income per share 9,332 9,539
Dilutive effect of stock options 411 431
--------- ----------
Shares used in computation of diluted net income per share 9,743 9,970
--------- ----------
--------- ----------
BASIC NET INCOME PER SHARE $ 0.42 $ 0.25
--------- ----------
--------- ----------
DILUTED NET INCOME PER SHARE $ 0.40 $ 0.24
--------- ----------
--------- ----------
</TABLE>
Options to purchase 688,925 and 739,519 shares of common stock at prices ranging
from $19.88 to $37.25 and $20.63 to $37.25 were outstanding as of June 30, 1999
and 1998, 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.
7
<PAGE>
NOTE 5. COMPREHENSIVE INCOME
SFAS No. 130 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, 1999 and 1998, comprehensive income, which
was comprised of the Company's net income for the periods and changes in
cumulative translation adjustments was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
------- -------
<S> <C> <C>
NET INCOME $ 3,895 $ 2,366
OTHER COMPREHENSIVE INCOME-
Cumulative translation adjustments (7) (28)
------- -------
COMPREHENSIVE INCOME $ 3,888 $ 2,338
------- -------
------- -------
</TABLE>
NOTE 6. INDUSTRY AND SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires that certain selected information about operating segments be
reported in interim financial reports. It also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are defined as components of an enterprise about which separate financial
information is evaluated regularly by the chief operating decision maker, or
decision making group in deciding how to allocate resources and in assessing
performance. SFAS No. 131 differs from accounting standard SFAS No. 14, which
required companies to disclose certain financial information about an industry
segment in which they operate. Under both SFAS No. 14 and SFAS No. 131, the
Company operates in one reportable segment and is engaged in the design,
development and marketing of a variety of analog and mixed-signal
application-specific integrated circuits for use in communications and in video
and imaging products. The nature of the Company's products and production
processes as well as type of customers and distribution methods are consistent
among all of the Company's devices. The Company's foreign operations consist
primarily of its wholly owned subsidiaries in Japan and the United Kingdom. The
Company's principal markets include North America, Asia, Europe and other
countries.
NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 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, 2000. On 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
<PAGE>
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 1999 Form 10-K, filed with the
Securities and Exchange Commission on June 25, 1999.
GENERAL - The Company derives revenue principally from the sale of integrated
circuits for use in communications and video and imaging product areas. The
Company has wholly-owned subsidiaries in Japan, Taiwan, France 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 2000 were
$16.3 million compared to $21.8 million for the corresponding period in fiscal
1999, a decrease of approximately 25.3%. This decrease was primarily due to
significant decreases in sales of discontinued consumer and custom products in
the Company's legacy product lines, as well as the sale of the Company's silicon
microstructures business unit and related product lines. The abrupt closure of
one of the Company's wafer suppliers during the third quarter of fiscal 1999 had
a further negative impact of approximately $1 million on the Company's first
quarter of fiscal 2000 revenue from legacy products. This closure is expected to
result in a further decline in revenue from legacy products of approximately $1
million per quarter through fiscal 2000.
Cost of goods sold for the first quarter of fiscal 2000 decreased to
approximately 44.9% of net sales compared to 46.3% of net sales for the same
period in fiscal 1999. The resulting increase in gross margins is due primarily
to a greater mix of the Company's newer analog and mixed-signal products which
tend to have higher gross margins than many of the Company's more mature
products. The Company's gross margins from sales of integrated circuits vary
depending on competition from other manufacturers, the volume of products
manufactured and sold, the ability of the Company's suppliers to achieve certain
manufacturing efficiencies and the cost of material procured from the Company's
suppliers. Margins on any particular product may erode over time.
Research and development expenses, as a percentage of net sales, increased from
approximately 15.7% in the first quarter of fiscal 1999 to 29.3% in the
corresponding quarter in fiscal 2000. Research and development expenses in the
first quarter of fiscal 2000 increased by approximately 39.5% compared to the
same period in fiscal 1999. The increase in research and development expenses is
attributable primarily to an increase in employee benefits expense (see Other
income below). Research and development expenses net of the increase in employee
benefit expense increased 1.4% over the corresponding period in fiscal 1999 and
would have been 21.3% of net sales in the first quarter of fiscal 2000. In the
future, the Company expects to accelerate its' research and development
expenses, particularly in the communications product areas. Net of any unusual
expense items, the Company expects research and development expenses to continue
to fluctuate as a percentage of net revenues, as a result of the timing of
expenditures and changes in the level of net revenues.
Selling, general and administrative expenses, as a percentage of net sales,
increased from approximately 24.9% in the first quarter of fiscal 1999 to 39.4%
in the corresponding quarter in fiscal 2000. Selling, general and administrative
expenses in the first quarter of fiscal 2000 increased by approximately 18.2%
compared to the same period in fiscal 1999. The increase in selling, general and
9
<PAGE>
administrative expenses is attributable primarily to an increase in employee
benefits (see Other income below). Selling, general and administrative expenses
net of the increase in employee benefit expense decreased 10.9% from the
corresponding period in fiscal 1999 and would have been 29.7% of net sales in
the first quarter of fiscal 2000. This change was primarily due to decreased
sales from the corresponding quarter in fiscal 1999 resulting in decreased
commissions as well as the Company's reduction in operating expenses in response
to decreased revenues. In the short term, many of the selling, general and
administrative expenses are fixed, causing a decline as a percentage of net
revenues in periods of rapidly rising revenues and an increase as a percentage
of net revenue when revenue growth is slower or declining.
Other income in the first quarter of fiscal 2000 includes a pre-tax gain on
investment of $7.0 million related to the Company's minority equity investment
in IC Works, Inc. ("IC Works"). In April, 1999, the Company received in excess
of 1.1 million shares of common stock in Cypress Semiconductor, Inc. ("Cypress")
in exchange for the Company's investment in IC Works due to the merger of
Cypress and IC Works. The Company sold this stock during the first quarter of
fiscal 2000 resulting in a pre-tax gain of $7.0 million in other income and a
related employee benefits expense of $3.0 million in Costs and Expenses (see
Research and development and Selling, general and administrative above).
The Company's provision for income taxes is based on income from operations and
other income. The Company's effective tax rate for the first three months of
fiscal 2000 was approximately 31.7% compared with the federal statutory rate of
35%. The difference is due to utilization of capital loss carryforwards that
offset the gain on sale of the IC Works investment and tax savings generated
from utilization of the Company's foreign sales corporation partially offset by
non-deductible expenses, state income taxes and foreign income, which is taxed
at rates different from U.S. income tax.
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 $.7 million share of estimated remaining remediation costs, which
had been recorded in a prior year.
LIQUIDITY AND CAPITAL RESOURCES - During the first three months of fiscal 2000,
the Company financed its operations primarily from cash flows from operations
and existing cash and short-term investments. At June 30, 1999, the Company had
$93.9 million of cash and short-term investments. The Company has available a
short-term, unsecured line of credit under which it may borrow up to $10
million, none of which was being utilized at June 30, 1999. In addition, the
Company has a credit facility with certain domestic and foreign banks under
which it may execute up to $25 million in foreign currency transactions. At June
30, 1999, the Company had no outstanding foreign currency forward contracts.
The Company has no material firm capital commitments.
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.
10
<PAGE>
YEAR 2000 AND PROXIMATE DATES
Many computer systems are expected to experience problems interpreting dates
around the year 2000. Following is a summary of our activities to address the
ability of our business to operate around these dates:
STATE OF READINESS AND CONTINGENCY PLANS- The Company has completed the process
of identifying the programs and infrastructure in all areas of the Company
(including manufacturing, engineering and facilities) that could be affected by
the Year 2000 issue and has developed an implementation plan to resolve the
issue. In 1997, in order to improve access to business information through
common, integrated computing systems across the Company, the Company began a
worldwide business systems replacement project with systems that use programs
primarily from Oracle Corporation ("Oracle"). The new systems implementation,
which is expected to make the Company's core business computer systems Year 2000
compliant, was substantially completed in the quarter ended March 31, 1999.
A plan has been developed to make any remaining legacy computer systems Year
2000 compliant. These remaining legacy systems include PC based computer
applications, stock option tracking software, and time and attendance hardware
and software. The replacement of these remaining legacy systems is approximately
75% complete and on schedule for completion in the quarter ended September 30,
1999. In the event that the Company is unable to successfully complete the
replacement of these legacy systems, the Company believes that a contingency
plan using manual reporting and tracking systems can be implemented without a
disruption in the Company's critical business functions.
COSTS - The cost of the Oracle implementation was approximately $5.3 million
dollars and the replacement of the remaining legacy systems is estimated to cost
$.3 million. Approximately $5.3 million dollars will be capitalized and is for
the development of the Oracle related software and hardware, and the replacement
of the remaining legacy systems. The Company has expensed approximately $.3
million of project costs in prior periods. The Oracle implementation was
substantially complete as of March 31, 1999 and the capitalized portion will be
depreciated over an average of six years commencing in the current fiscal year.
RISKS - The Company believes that with the implementation of the above mentioned
hardware and software, it will be able to operate its time sensitive
business-application software programs and infrastructure into and beyond the
year 2000. However, due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition.
Furthermore, the Company is in the process of working with certain key suppliers
and customers to assess their year 2000 readiness. The failure by a third party
to adequately address the year 2000 issue could have a material adverse impact
on such third party's ability to furnish products and services to the Company
and, therefore, could have a material adverse effect on the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS - The Company is continuing to transfer
its remaining test and shipping operations to offshore sub-contractors to reduce
manufacturing costs. Reliance on off-shore sub-contractors involves a number of
risks, including reduced control over the quality and timing of testing and
shipping activities as well as a variety of risks associated with conducting
business internationally. In addition, the Company has refocused its product
strategy to provide analog and mixed-signal products for the video, imaging and
communications applications and, therefore, has discontinued certain product
offerings. With a reduction in product offerings, the
11
<PAGE>
Company faces risks associated with a more concentrated product line focused in
particular niche markets. 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 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
continue to be adversely affected by a downturn in the semiconductor market, the
Asian financial crisis or by the failure of one or more of its customers to
compete successfully in their markets. The markets for components used in video,
imaging and communications products are extremely price competitive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion regarding the Company's risk management activities
contains "forward-looking statements" that involve risks and uncertainties.
Actual results may differ materially from those projected in the forward-looking
statements.
FOREIGN CURRENCY FLUCTUATIONS. The Company is exposed to foreign currency
fluctuations primarily through its operations in Japan. This exposure is the
result of timing differences between incoming and outgoing cashflows denominated
in foreign currency. Operational currency requirements are typically forecast
for a three-month period. If there is a need to hedge this risk, the Company
will enter into transactions to purchase or sell currency in the open market; or
enter into forward currency exchange contracts which are currently available
under the Company's bank lines of credit. While it is expected that this method
of hedging foreign currency risk will be utilized in the future, 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, unanticipated currency gains or losses
could be experienced. At the end of the first quarter of fiscal 2000, the
Company did not have significant foreign currency denominated net assets or net
liabilities positions, and has no outstanding foreign currency contracts.
INTEREST RATE SENSITIVITY. The Company maintains investment portfolio holdings
of various issuers, types, and maturity dates with various banks and investment
banking institutions. The Company does not regularly hold investments with
maturity dates beyond 90 days. The market value of these investments on any 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. The actual impact on investment income 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. The
short-term investments are classified as "available-for-sale" securities and the
cost of securities sold is based on the specific identification method. This
designation is re-evaluated as of each balance sheet date. At June 30, 1999,
short-term investments consisted of auction rate securities of $2,000,000. As of
June 30, 1999, there were no significant differences between the fair market
value and the underlying cost of such investments.
12
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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 2000 annual meeting of
stockholders must provide specified information to the Company prior to March
31, 2000 (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:
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) During the quarter for which this report is filed, the Registrant filed no
reports on Form 8-K.
13
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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/ Donald L. Ciffone, Jr. Date: August 6, 1999
------------------------------------------------
Donald L. Ciffone, Jr.
President
Chief Executive Officer
By /s/ Ronald W. Guire Date: August 6, 1999
------------------------------------------------
Ronald W. Guire
Executive Vice President,
Chief Financial Officer,
Secretary
14
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
- ------- ----
<S> <C>
27.0 Financial Data Schedule...........................16
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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