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 30,1995
[ ] 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 June 30, 1995
Common Stock, .0001 par value 9,605,106 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 6. Exhibits and Reports on Form 8-K..........................12
Signatures................................................13
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30 MARCH
31,
1995 1995
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 57,662 $ 57,029
Short-term investments 4,155 5,133
Accounts receivable, net 25,520 29,719
Inventories 18,101 18,411
Prepaid expenses and other 1,748 1,687
Deferred income taxes 7,277 7,277
Total current assets 114,463 119,256
PROPERTY AND EQUIPMENT, Net 24,852 22,192
GOODWILL, Net 6,056 4,866
OTHER ASSETS 2,364 3,766
TOTAL ASSETS $147,735 $150,080
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,975 $ 27,326
Accrued compensation and related benefits 4,828 4,925
Other accrued expenses 1,230 1,912
Income taxes payable 5,169 3,807
Total current liabilities 29,202 37,970
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; 25,000,000 shares
authorized;
9,605,106 and 9,309,066 shares outstanding 71,726 67,217
Cumulative translation adjustments 899 682
Retained earnings 41,531 39,797
Total stockholders' equity 114,156 107,696
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $147,735 $150,080
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
JUNE 30,
1995 1994
NET SALES $34,930 $38,061
COST AND EXPENSES:
Cost of sales 17,898 24,203
Research and development 3,860 3,212
Selling, general and
administrative 6,108 5,965
Goodwill amortization 285 78
Write-off of in-process research
and development 2,390 16,875
One-time charges relating to
discontinued operations 1,155 -
Total costs and 31,696 50,333
expenses
OPERATING INCOME (LOSS) 3,234 (12,272)
OTHER INCOME:
Interest income, net 800 620
Other, net 127 191
Total other income, NET 927 811
INCOME (LOSS) BEFORE INCOME TAXES 4,161 (11,461)
INCOME TAXES 2,427 1,870
INCOME (LOSS) 1,734 (13,331)
NET INCOME (LOSS) PER SHARE $0.17 ($1.49)
SHARES USED IN COMPUTATION 10,030 8,924
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,734 $(13,331)
Reconciliation to net cash provided by operating
activities:
Depreciation and amortization 1,249 1,254
Write-off of in-process research and
development 2,390 16,875
Deferred income taxes (37) -
Changes in operating assets and liabilities:
Accounts receivable 4,398 (1,239)
Inventories 682 458
Prepaid expenses and other (322) 559
Accounts payable and accrued expenses (10,454) 753
Accrued compensation and related benefits 36 (944)
Income taxes payable 1,362 1,217
Net cash provided by operating 1,038 5,602
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,194) (1,854)
Short-term investments, net 978 (6)
Other assets (1,399) (726)
Acquired companies - (18,810)
Net cash used in investing activities (3,615) (21,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt - (2,121)
Proceeds from issuance of common stock 2,993 913
Net cash provided by financing 2,993 (1,208)
activities
EFFECT OF RATE CHANGES ON CASH 217 79
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 633 (16,923)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 57,029 62,400
CASH AND EQUIVALENTS AT END OF PERIOD $57,662 $45,477
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 315 $ 2,075
Cash paid for interest $ - $ -
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JUNE 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 three month period
ended June 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 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 June 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:
June 30, March 31,
1995 1995
Raw $ 408 $ 301
materials
Work-in- 10,748 11,746
process
Finished 6,944 6,364
goods
$18,101 $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 in 1999 based on Origin's future operating performance. Such
contingent payments have been accrued and are included in long-term liabilities
at June 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 month periods ended June
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 three months ended June 30, 1995 and
approximately $16.9 million in the three months ended June 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 the quarter ended June
30, 1994, the impact would have been to increase revenues by $6.2 million and to
decrease operating loss and net loss by $358,000 and $298,000 ($0.03 per share),
respectively. The acquisition of SMI had no significant impact on the Company's
results of operations for the three months ended June 30, 1995.
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. 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 has wholly-owned subsidiaries in Japan and the United Kingdom to
support its sales operations in each of those areas. The Company's business in
Japan includes the sale of integrated circuits which are primarily for use in
consumer electronics products.
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 first quarter of fiscal 1996 were
$34.9 million compared to $38.1 million for the corresponding period in fiscal
1995, a decrease of approximately 8%. 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
$9.7 million reduction in net sales. 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 $2 million decrease in net sales.
These decreases were partially offset by an increase in sales of the Company's
other proprietary products of approximately 40%. The Company experienced
significant increases in sales of data acquisition products and communications
products and benefited from the sale of personal computer products as a result
of the Startech acquisition.
Cost of sales decreased to approximately 51% of net sales for the first quarter
of fiscal 1996 compared to 64% for the first quarter of 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, and ii) the addition of higher
margin product lines as a result of recent acquisitions.
As a percentage of net sales, expenditures for research and development
increased from approximately 8% in the first quarter of fiscal 1995 to
approximately 11% in the first quarter of fiscal 1996. The increase in research
and development expenses is primarily attributable to the elimination of the
Company's second source consumer products which did not require research and
development effort, the additional research and development expenditures of
acquired companies, and additional headcount.
Selling, general and administrative expenses for the first quarter of fiscal
1996 were consistent with the amounts reported for the same period in fiscal
1995. As a percentage of net sales, selling, general and administrative
expenses increased from approximately 16% of net sales in the first quarter of
fiscal 1995 to 17% of net sales in the first quarter of fiscal 1996. The
increase as a percentage of net sales reflects the lower volume of sales in the
first quarter of fiscal 1996, as well as additional selling, general and
administrative expenses of acquired companies.
The results of operations for the first quarter of fiscal 1996 include the
operations of the Company's mass storage product line which was
discontinued during the quarter. As a result of the termination of this product
line, the Company incurred one-time charges associated with the discontinuance
of this product line of approximately $1.2 million and operating losses of
approximately $600,000. The one-time charges include severance, contract
cancellation costs and losses on disposal of existing assets associated with the
mass storage operations. Had the mass storage product line been discontinued as
of April 1, 1995, the impact would have been to decrease net sales by $3.3
million and to increase operating income and net income by $1.8 million and $1.3
million ($0.13 per share), respectively, compared to actual operating results
for the quarter.
Net interest income for the first three months of fiscal 1996 increased by
approximately $160,000 as a result of higher average investment rates during the
period. Other income for the first three monhs of fiscal 1996 and fiscal 1995
consists primarily of foreign currency transaction 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 three months of fiscal 1996, excluding the write-off of in-process
research and development, was consistent with the federal statutory rate of 35%
as state income taxes and foreign income, which is taxed at rates different form
U.S. income tax rates, was partially offset by tax advantaged investment income
and tax savings generated from utilization of the Company's foreign sales
corporation.
Net income for the first three months of fiscal 1996 was $0.17 per share
compared to a loss of $1.49 per share for the same period in fiscal 1995.
Excluding the effects of the one-time write-off of in-process research and
development and the operations of the mass storage product line, net income for
the first quarter of fiscal 1996 was $5.4 million ($0.54 per share).
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 $1.1 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 three months of fiscal 1996,
the Company financed its operations primarily from existing cash balances and
cash flow from operations. At June 30, 1995, the Company had approximately
$61.2 million of cash and short-term investments. In addition, the Company has
short-term, unsecured, informal lines of credit under which it may borrow up to
$35.5 million, none of which were being utilized at June 30, 1995.
On March 31, 1995, the Company acquired Startech 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 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.
The building lease for the Company's principal manufacturing, engineering and
administrative facility 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
$9 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 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/ George D. Wells Date: July 25, 1995
George D. Wells
Chief Executive Officer
By /s/ Ronald W. Guire Date: July 25, 1995
Ronald W. Guire
Senior Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
11.1 Statement RE Computation of Per Share Earnings 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Exar
Corporations Condensed Financial Statements for the period ended June 30,
1995 and is qualified in its entirety by reference to such 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 57,662
<SECURITIES> 4,155
<RECEIVABLES> 25,520
<ALLOWANCES> 0
<INVENTORY> 18,101
<CURRENT-ASSETS> 114,463
<PP&E> 24,852
<DEPRECIATION> 0
<TOTAL-ASSETS> 147,735
<CURRENT-LIABILITIES> 29,202
<BONDS> 0
<COMMON> 71,726
0
0
<OTHER-SE> 42,430
<TOTAL-LIABILITY-AND-EQUITY> 147,735
<SALES> 34,930
<TOTAL-REVENUES> 34,930
<CGS> 17,898
<TOTAL-COSTS> 31,696
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,161
<INCOME-TAX> 2,427
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,734
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 11.1
EXAR CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30,
1995 1994
NET INCOME (LOSS) $1,734 $(13,331)
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding 9,432 8,924
Dilutive effect of stock options 598 -
Shares used in computation 10,030 8,924
NET INCOME (LOSS) PER SHARE $ 0.17 $(1.49)
