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 September 30, 1995
[ ] 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.)
2222 Qume Drive, San Jose, California 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 434-6400
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 September 30, 1995
Common Stock, .0001 par value 9,818,437 shares
TABLE OF CONTENTS
Page
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............... 9-11
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders. 12
Item 6. Exhibits and Reports on Form 8-K.................. 12
Signatures........................................ 13
EXHIBITS
Exhibit 11.1...................................... 14
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER MARCH
30,1995 31,1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents 61,477 57,029
Short-term investments 5,922 5,133
Accounts receivable, net 21,518 29,719
Inventories 18,375 18,411
Prepaid expenses and other 1,562 1,687
Deferred income taxes 7,277 7,277
Total current assets 116,131 119,256
PROPERTY AND EQUIPMENT, net 30,575 22,192
GOODWILL, net 5,713 4,866
OTHER ASSETS 2,079 3,766
TOTAL ASSETS 154,498 150,080
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 16,979 27,326
Accrued compensation and related benefits 4,707 4,925
Other accrued expenses 1,401 1,912
Income taxes payable 5,121 3,807
Total current liabilities 28,208 37,970
LONG-TERM LIABILITIES:
Long-term liabilities 2,557 2,557
Deferred income taxes 1,820 1,857
STOCKHOLDERS' EQUITY:
Preferred stock; $.0001 par value;
2,250,000 shares authorized;
no shares outstanding - -
Common stock; $.0001 par value; 12,000,000
shares authorized;
9,818,437 and 9,309,066 shares
outstanding 74,684 67,217
Cumulative translation adjustments 320 682
Retained earnings 46,909 39,797
Total stockholders' equity 121,913 107,696
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 154,498 150,080
See notes to condensed consolidated
financial statements.
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
NET SALES 31,681 40,752 66,611 78,813
COST AND EXPENSES:
Cost of sales 14,232 25,110 32,130 49,313
Research and development 4,040 3,385 7,900 6,596
Selling, general and
administrative 6,025 6,154 12,133 12,119
Goodwill amortization 344 234 629 324
Write-off of in-process
research and development - - 2,390 16,875
One-time charges relating to
discontinued product line - - 1,155 -
Total costs and expenses 24,641 34,883 56,337 85,227
OPERATING INCOME (LOSS) 7,040 5,869 10,274 (6,414)
OTHER INCOME (EXPENSE):
Interest income, net 830 482 1,630 1,102
Other, net 340 150 467 352
Total other income, net 1,170 632 2,097 1,454
INCOME (LOSS) BEFORE INCOME
TAXES 8,210 6,501 12,371 (4,960)
INCOME TAXES 2,832 2,320 5,259 4,190
NET INCOME (LOSS) 5,378 4,181 7,112 (9,150)
NET INCOME (LOSS) PER SHARE 0.52 0.45 0.70 (1.01)
SHARES USED IN COMPUTATION 10,411 9,248 10,221 9,086
See notes to condensed
consolidated financial
statements
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 7,112 (9,150)
Reconciliation to net cash provided by operating
activities:
Depreciation and amortization 2,670 2,732
Write-off of in-process research and development 2,390 16,875
Deferred income taxes (37) -
Changes in operating assets and liabilities:
Accounts receivable 8,403 (5,103)
Inventories 409 (1,908)
Prepaid expenses and other (136) 610
Accounts payable and accrued expenses (11,279) (1,589)
Accrued compensation and related benefits (409) (1,371)
Income taxes payable 1,313 841
Net cash provided by operating activities 10,436 1,937
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,995) (2,239)
Short-term investments, net (789) 2,289
Other assets (1,114) (533)
Acquired companies - (19,131)
Net cash used in investing activities (11,898) (19,614)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term liabilities - (2,137)
Proceeds from issuance of common stock 6,272 2,358
Net cash provided by financing activities 6,272 221
EFFECT OF RATE CHANGES ON CASH (362) 57
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 4,448 (17,399)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 57,029 62,400
CASH AND EQUIVALENTS AT END OF PERIOD 61,477 45,001
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes 2,850 3,861
See notes to condensed consolidated financial
statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
NOTE 1.BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Such financial
statements have been prepared in conformity with generally accepted accounting
principles consistent with those reflected in the Company's 1995 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 six month period
ended September 30, 1995 are not necessarily indicative of the results of
operations to be expected for the full year.
Exar Corporation (Exar or the Company) designs, develops, manufactures and
markets analog and mixed-signal application specific integrated circuits for use
in the communications, document imaging, consumer electronics, computer and
automotive markets and other selected areas.
NOTE 2.CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less, when purchased, to be cash equivalents.
NOTE 3.SHORT-TERM INVESTMENTS
The Company's policy is to invest in various short-term instruments with
investment grade credit ratings. Generally such investments have contractual
maturities of less than one year.
The Company accounts for its short-term investments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." The Company classifies its short-term
investments as "available for sale securities." At September 30, 1995, there
was no significant difference between the fair market value and the underlying
cost of such securities.
NOTE 4.INVENTORIES
Inventories are stated at the lower of standard cost (first-in, first-out
method) or market and consist of the following:
September 30, March 31,
1995 1995
Raw materials $ 512 $ 301
Work-in-process 10,915 11,746
Finished goods 6,948 6,364
$18,375 $18,411
NOTE 5.INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," which
requires an asset and liability approach for financial accounting and reporting
of income taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
NOTE 6.NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated based on the weighted average number
of common and dilutive common share equivalents outstanding. Common share
equivalents reflect the dilutive effect of outstanding stock options. In
September 1994, the Board of Directors declared a 3 for 2 stock dividend which
was effected in the form of a stock split. All share and per share amounts for
1994 have been retroactively restated to give effect to the stock split.
NOTE 7.ACQUIRED COMPANIES
In May 1994, the Company acquired all of the outstanding common stock of Origin
Technology, Inc., (Origin) for $1.4 million in cash and invested an additional
$1.0 million in newly issued common stock of Origin. The purchase agreement
includes provisions for additional payments to the selling shareholders of up to
$1.5 million through 1999 based on Origin's future operating performance. Such
contingent payments have been accrued and are included in long-term liabilities
at September 30, 1995.
In June 1994, the Company acquired all of the outstanding common stock of MPS
Holdings, Inc. (Micro Power) for $21.7 million in cash.
On March 31, 1995, the Company acquired all of the outstanding common stock of
Startech Semiconductor, Inc. (Startech), in exchange for 349,587 shares of
common stock, the assumption of Startech's outstanding stock options with an
aggregate value of $8,750,000, and cash of $4,450,000. The purchase agreement
includes provisions for adjustments to the final purchase price, which may
result in additional payments of up to $6 million in April 1996 and an
additional $6 million in October 1996 based on Startech's future operating
performance. In addition, the Company may be required to pay up to $3,000,000
in deferred compensation to certain key employees of Startech through April
1998.
In June 1995, the Company acquired Silicon Microstructures, Inc. (SMI), in
exchange for 43,334 shares of common stock and the conversion to equity of
$1,250,000 of loans previously granted to SMI. In addition, the Company may be
required to issue up to $1,500,000 in additional shares based on SMI's future
operating performance.
For accounting purposes, the acquisitions have been accounted for as purchases.
Accordingly, the results of operations for the three and six month periods ended
September 30, 1995 and 1994 include the operations of the acquired companies
subsequent to the dates of acquisition. As a result of these transactions, the
Company recorded approximately $8.4 million of goodwill which is being amortized
over a period of five years. The remaining portion of the excess purchase price
represented in-process research and development which was charged to operations
(approximately $2.4 million in the six months ended September 30, 1995 and
approximately $16.9 million in the six months ended September 30, 1994.)
Contingent consideration in connection with the Startech and SMI acquisitions
has not been accrued and will be reflected in the Company's financial statements
when issued or paid.
Had the acquisitions been effective at the beginning of fiscal 1995, the impact
would have been to increase revenues by $9.4 million and to decrease operating
loss and net loss by $197,000 and $541,000 ($0.05 per share), respectively. The
acquisition of SMI has not had a significant impact on the Company's results of
operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL - The Company derives revenue principally from the sale of integrated
circuits to unaffiliated customers. In the past, a portion of the Company's
revenues were also derived from wafer services provided to Rohm Co. Ltd. (Rohm).
The Company's gross margins from sales of integrated circuits vary depending on
competition from other manufacturers, the volume of products manufactured and
sold, and the Company's ability to achieve certain manufacturing efficiencies.
The Company's newer analog and mixed-signal products 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 business in Japan includes the sale
of integrated circuits for use in consumer electronics products. Sales in Japan
are made through the Company's wholly-owned subsidiaries. Until April 1 1995,
the Company also sold, in Japan, second source integrated circuits for use in
consumer electronics products. Although this was a high volume business, such
products produced lower gross margins than the Company's other products.
The Company has wholly-owned subsidiaries in Japan and the United Kingdom to
support its sales operations in each of those areas.
During the first quarter of fiscal 1995, the Company acquired Origin Technology,
Inc. (Origin) and Micro Power Systems, Inc. (Micro Power). In March 1995, the
Company acquired Startech Semiconductor, Inc. (Startech), and in June 1995 the
Company acquired Silicon Microstructures, Inc. (SMI). All of the acquisitions
have been accounted for as purchases. Accordingly, the Company's results of
operations include the operations of the acquired companies subsequent to the
dates of acquisition.
RESULTS OF OPERATIONS - Net sales for the second quarter of fiscal 1996 were
$31.7 million compared to $40.8 million for the same period a year ago, a
decrease of approximately 22%. Net sales for the six month period ended
September 30, 1995 decreased by 15% to $66.6 million compared to $78.8 million
for the corresponding period in 1994. The decrease in net sales reflects a
number of actions directed toward reducing the Company's low-margin business and
focusing on higher-margin product lines. Effective April 1, 1995 the Company
eliminated sales of second source consumer products in Japan which resulted in a
reduction in net sales of approximately 18.5 million during the first six months
of fiscal 1996. In addition, during the first quarter of fiscal 1996 the
Company discontinued its mass storage product line as a result of supply
disruptions which resulted in a reduction of approximately 7.7 million in net
sales during the first six months of fiscal 1996. Net sales were also adversely
impacted by delay in product deliveries from certain of the Company's foundry
sources. These decreases were partially offset by an increase in sales of the
Company's other proprietary products of approximately 23% and 31% in the three
and six month periods ended September 30, 1995, respectively, as the Company
experienced strong demand for its data acquisition products and communications
products and benefited from the sale of personal computer and pressure sensor
products as a result of the Startech and SMI acquisitions.
Cost of sales for the second quarter and the first six months of fiscal 1996
decreased to approximately 45% of net sales and 48% of net sales, respectively,
compared to 62% of net sales for the same periods in fiscal 1995. The resulting
increase in gross margins is due primarily to changes in product mix, including
i) the decrease in sales of mass storage and second source consumer products,
which have historically provided lower gross margins than the Company receives
from the sale of its other products, ii) the addition of higher margin product
lines as a result of recent acquisitions, and iii) manufacturing efficiencies
for certain of the Company's products.
Expenditures for research and development for the second quarter and first six
months of fiscal 1996 represented approximately 13% of net sales and 12% of net
sales, respectively, compared to 8% of net sales in the corresponding periods in
fiscal 1995. The increase in research and development expenditures as a
percentage of net sales reflects the additional research and development
expenditures of acquired companies and the elimination of second source consumer
product sales which did not require research and development expenditures.
Selling, general and administrative expenses, as a percentage of net sales,
increased from 15% in the second quarter and first six months of fiscal 1995 to
approximately 19% and 18%, respectively, in the corresponding periods of the
current year. The increase as a percentage of net sales reflects the lower
level of sales in fiscal 1996, as well as additional selling, general and
administrative expenses of acquired companies.
Net interest income for the first six months of fiscal 1996 increased by
approximately $500,000 as a result of higher levels of cash and short-term
investments and higher average investment rates during the period. Other income
consists primarily of foreign currency gains.
The Company's provision for income taxes is based on income from operations,
excluding the write-offs of in-process research and development, as there was no
tax benefit associated with the write-offs. The Company's effective tax rate
for the first six months of fiscal 1996, excluding the write-off of in-process
research and development, was approximately 34% as state income taxes and
foreign income, which is taxed at rates different form U.S. income tax rates,
was offset by tax advantaged investment income and tax savings generated from
utilization of the Company's foreign sales corporation.
Net income for the first six months of fiscal 1996, excluding the effects of
one-time write-offs was $10.3 million ($1.00 per share) compared to $7.7 million
($0.85 per share) for the same period in fiscal 1995.
To date, inflation has not had a significant impact on the Company's operating
results.
The California Regional Water Quality Control Board for the San Francisco Bay
Region is conducting an investigation of contaminants detected in subsurface
groundwater at approximately 50 different sites in Santa Clara County,
California, including a location formerly leased by Exar. Ongoing studies
indicate that contaminants in the groundwater beneath such leased facility
result from the migration of contaminants released by other neighboring
manufacturers. Although this matter is subject to an unusual degree of
uncertainty, on the basis of the facts presently known, the ultimate outcome of
this matter is not expected to have a material adverse effect on the Company's
financial position or results of operations.
In 1987, Micro Power identified low-level groundwater contamination on its
principal manufacturing property. Although the area of contamination appears to
have been defined, the source of the contamination has not been identified. The
Company has reached an informal 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 share of estimated
remediation costs of approximately $1.3 million.
The Company is in an industry which is characterized by intense competition,
rapid technological change, cyclical market patterns, occasional shortages of
materials, dependence upon highly skilled engineering and other personnel and
significant expenditures for product development. 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, management decisions to commence or discontinue
certain product lines, and the Company's ability to design, introduce and
manufacture new products on a cost-effective and timely basis.
LIQUIDITY AND CAPITAL RESOURCES - During the first six months of fiscal 1996,
the Company financed its operations primarily from existing cash balances and
cash flow from operations. At September 30, 1995, the Company had approximately
$67.4 million of cash and short-term investments. In addition, the Company has
available short-term, unsecured lines of credit totaling $35.5 million with
certain domestic and foreign banks, none of which were being utilized at
September 30, 1995.
On March 31, 1995, the Company acquired Startech Semiconductor in exchange for a
combination of cash and common stock valued at $13.2 million. In June 1995, the
Company completed the acquisition of SMI in exchange for 43,334 shares of common
stock and the conversion to equity of $1,250,000 of loans previously granted to
SMI. Certain of the purchase agreements include provisions for adjustments to
the final purchase price and/or include deferred compensation arrangements which
may result in additional payments of up to $16.5 million, in some combination of
cash and/or common stock, over the next three years.
On October 11, 1995, the Company entered into a wafer production agreement with
IC Works, Inc., (IC Works).
Under the terms of the agreement, Exar will invest approximately
$15 million for the purchase and installation of equipment at IC Works in
exchange for a predetermined supply of wafers over the next five years. Under a
separate but related agreement, Exar may be required to make a minority equity
investment in IC Works.
The building lease for the Company's primary manufacturing and administrative
facilities expires in November 1995. The Company is in the process of
constructing new facilities on its property in Fremont, California which it
expects to complete in the third quarter of fiscal 1996. The Company believes
that costs to complete such construction will require the use of approximately
$5 million in cash during the remainder of fiscal 1996.
The Company anticipates that it will finance its operations with cash flows from
operations, existing cash 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.
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Exar Corporation was held on August
31, 1995 in Santa Clara, California. At the meeting the following individual
was elected to the Board of Directors of the Company and will hold office until
the 1998 Annual Meeting of Stockholders. The number of affirmative and negative
votes cast were as follows:
Affirmative Negative
Ronald W. Guire 7,426,178 135,314
In addition, certain individuals will continue to hold office as directors of
the Company until the Annual Meeting of Stockholders as follows:, Mr. Raimon L.
Conlisk - 1996, Mr. George D. Wells - 1996,
Mr. George E. Grega - 1997, and Mr. James E. Dykes - 1997.
Other matters voted upon at the meeting and the number of affirmative and
negative votes cast with respect to each such matter were as follows:
Affirmative Negative Withheld Abstained
Resolution to increase
the number of shares
authorized for issuance
under the Company's 1991
Stock Option Plan. 4,222,665 3,322,348 -- 16,479
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 - Statement re Computation of Per Share Earnings (Loss)
(b) During the quarter 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/ Date: November 14, 1995
George D. Wells
President
Chief Executive Officer
By /s/ Date: November 14, 1995
Ronald W. Guire
Executive Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Exar
Corporations Condensed Financial Statements for the period ended September 30,
1995 and is qualified in its entirety by reference to such 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 61,477
<SECURITIES> 5,922
<RECEIVABLES> 21,518
<ALLOWANCES> 0
<INVENTORY> 18,375
<CURRENT-ASSETS> 116,131
<PP&E> 30,575
<DEPRECIATION> 0
<TOTAL-ASSETS> 154,498
<CURRENT-LIABILITIES> 28,208
<BONDS> 0
<COMMON> 74,684
0
0
<OTHER-SE> 47,229
<TOTAL-LIABILITY-AND-EQUITY> 121,913
<SALES> 31,681
<TOTAL-REVENUES> 66,611
<CGS> 32,130
<TOTAL-COSTS> 56,337
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,371
<INCOME-TAX> 5,259
<INCOME-CONTINUING> 7,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,112
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0
</TABLE>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
NET INCOME (LOSS)
5,378 4,181 7,112 (9,150)
SHARES USED IN COMPUTATION:
Weighted average common shares 9,727 8,823 9,580 9,086
outstanding
Dilutive effect of stock options 684 425 641 -
Shares used in computation 10,411 9,248 10,221 9,086
NET INCOME (LOSS) PER SHARE 0.52 0.45 0.70 (1.01)
See notes to consolidated financial
