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 30,1996
[ ] 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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 668-7000
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 12, 1996
Common Stock, .0001 par value 9,029,484 shares, net of treasury
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....... 3-5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition.... and Results of Operations 8-10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................. 11
Signatures........................................ 12
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30 March 31,
1996 1996
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $45,505 $49,302
Short-term investments 7,980 2,981
Accounts receivable, net 17,365 19,319
Inventories 18,253 18,065
Prepaid expenses and other 996 582
Deferred income taxes 5,697 5,697
Total current assets 95,796 95,946
PROPERTY AND EQUIPMENT, Net 33,725 34,185
GOODWILL, Net 4,682 5,026
OTHER ASSETS 3,833 3,917
TOTAL ASSETS $138,036 $139,074
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $8,591 $12,680
Accrued compensation and related
benefits 4,532 4,017
Other accrued expenses 1,197 1,699
Income taxes payable 698 -
Total current
liabilities 15,018 18,396
LONG-TERM LIABILITIES 979 979
DEFERRED INCOME TAXES 1,825 1,852
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;
9,957,250 and 9,918,371 shares
outstanding 78,048 77,688
Cumulative translation adjustments 140 200
Retained earnings 55,446 53,379
Treasury stock; 927,766 shares of
common stock at cost (13,420) (13,420)
Total stockholders'
equity 120,214 117,847
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $138,036 $139,074
See notes to condensed consolidated
financial statements.
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30,
1996 1995
NET SALES $ 25,190 $ 34,930
COST AND EXPENSES:
Cost of goods sold 13,038 17,898
Research and development 3,422 3,860
Selling, general and administrative 5,928 6,108
Goodwill amortization 344 285
Write-off of in-process research
and development - 2,390
One-time charges relating to
discontinued product line - 1,155
Total costs and expenses 22,732 31,696
OPERATING INCOME 2,458 3,234
OTHER INCOME:
Interest income, net 606 800
Other, net 330 127
Total other income, net 936 927
INCOME BEFORE INCOME TAXES 3,394 4,161
INCOME TAXES 1,327 2,427
NET INCOME 2,067 1,734
NET INCOME PER SHARE $0.23 $0.17
SHARES USED IN COMPUTATION 9,104 10,030
See notes to condensed consolidated
financial statements
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
THREE MONTHS ENDED
JUNE 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,067 $1,734
Reconciliation to net cash provided
by operating activities:
Depreciation and amortization 1,623 1,249
Write-off of in-process research
and development - 2,390
Deferred income taxes (27) (37)
Changes in operating assets and
liabilities:
Accounts receivable 1,954 4,398
Inventories (188) 682
Prepaid expenses and other (414) (322)
Accounts payable and accrued
expenses (4,591) (10,454)
Accrued compensation and
related benefits 515 36
Income taxes payable 698 1,362
Net cash provided by
operating activities 1,637 1,038
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (819) (3,194)
Short-term investments, net (4,999) 978
Other assets 84 (1,399)
Net cash used in investing
activities (5,734) (3,615)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 360 2,993
Net cash provided by
financing activities 360 2,993
EFFECT OF RATE CHANGES ON CASH (60) 217
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (3,797) 633
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 49,302 57,029
CASH AND EQUIVALENTS AT END OF PERIOD $45,505 $57,662
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $535 $315
See notes to condensed consolidated
financial statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
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 1996
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, 1996 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, 1996, 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,
1996 1996
Raw materials $ 292 $ 762
Work-in-process 11,260 11,563
Finished goods 6,701 5,740
$18,253 $18,065
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 PER SHARE
Net income 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.
NOTE 7. ACQUIRED COMPANIES
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 acquisition has been accounted for as a purchase.
Accordingly, the results of operations for the three month period ended June 30,
1995 includes the operations of SMI subsequent to the date of acquisition. As a
result of these transactions, the Company recorded approximately $1.5 million of
goodwill in the three months ended June 30, 1995 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
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
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 section entitled
"Business" in the Company's 1996 Form 10K filed with the Securities and Exchange
Commission.
General - The Company derives revenue principally from the sale of integrated
circuits for use in communications, consumer electronics, document imaging,
automotive, personal computers and other selected areas. In addition, until
June 1995, the Company also generated revenues from sales of mass storage
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, and the Company's ability to achieve certain
manufacturing efficiencies. 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 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.
In May 1995, the Company was notified by its foundry supplier of wafers used in
its mass storage products that no wafers would be delivered in the second and
third quarters of fiscal 1996. Accordingly, the Company discontinued its mass
storage product line, in the second quarter of fiscal 1996. The Company has
made a claim against its foundry supplier for recovery of write-offs and other
losses it incurred related to the termination of this product line, and this
matter is currently in arbitration.
In June 1995 the Company acquired Silicon Microstructures, Inc. (SMI). The
acquisition has been accounted for as a purchase. Accordingly, the Company's
results of operations include the operations of SMI subsequent to the date of
acquisition.
Results of Operations - Net sales for the first quarter of fiscal 1997 were
$25.2 million compared to $34.9 million for the corresponding period in fiscal
1996, a decrease of approximately 28%. The decrease in net sales reflects the
discontinuance of hard disk drive which resulted in a $3.3 million decrease in
net sales as well as decreases in essentially all of its continuing product
lines.
Cost of goods sold increased to approximately 52% of net sales for the first
quarter of fiscal 1997 compared to 51% for the first quarter of fiscal 1996.
The resulting decrease in gross margins is due primarily to changes in product
mix and certain manufacturing inefficiencies as a result of the lower volume of
production.
Research and development expenses in the first quarter of fiscal 1997 decreased
approximately 11% from the amount reported in the first quarter of fiscal 1996.
As a percentage of net sales, expenditures for research and development
increased from approximately 11% in the first quarter of fiscal 1996 to
approximately 14% in the first quarter of fiscal 1997. The increase in research
and development expenses as a percentage of sales is attributable to the lower
volume of sales.
Selling, general and administrative expenses for the first quarter of fiscal
1997 decreased slightly from the amounts reported for the same period in fiscal
1996. As a percentage of net sales, selling, general and administrative
expenses increased from approximately 17% of net sales in the first quarter of
fiscal 1996 to 24% of net sales in the first quarter of fiscal 1997. The
increase as a percentage of net sales reflects the lower volume of sales in the
first quarter of fiscal 1996.
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. 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 1997 decreased by
approximately $194,000 as a result of lower levels of cash available for
investment during the period. Other income for the first three months of fiscal
1997 and fiscal 1996 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 1997 was approximately 39% compared with
the federal statutory rate of 35% due to non-deductable expenses, state income
taxes and foreign income, which is taxed at rates different form 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.
Net income for the first three months of fiscal 1997 was $0.23 per share
compared to $0.17 per share for the same period in fiscal 1996. 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.
In 1987, Micro Power Systems, Inc., a subsidiary of the Company, 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, exchange rate fluctuations, 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 1997,
the Company financed its operations primarily from existing cash balances and
cash flow from operations. At June 30, 1996, the Company had approximately
$53.5 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, 1996. In addition,
the Company has credit facilities with certain domestic and foreign banks under
which it may borrow up to $35 million in support of its foreign currency
transactions. At June 30, 1996 the Company had outstanding Japanese yen forward
contracts totaling approximately $1.2 million which mature through March 1997.
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 price and/or include deferred compensation arrangements which may
result in additional payments of up to $9.8 million, in some combination of cash
and/or common stock, over the next five years.
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: August 12, 1996
George D. Wells
Chief Executive Officer
By /s/ Ronald W. Guire Date: August 12, 1996
Ronald W. Guire
Executive Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
11.1 Statement re Computation of Per Share Earnings 14
18
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,
1996 1995
NET INCOME $ 2,067 $ 1,734
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding 8,998 9,432
Dilutive effect of stock options 106 598
Shares used in computation 9,104 10,030
NET INCOME PER SHARE $ 0.23 $ 0.17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
This schedule contains summary financial information extracted from Exar
Corporations Condensed Financial Statements for the period ended June 30, 1996
and is qualified in tis entirety by reference to such 10-Q filing.
</LEGEND>
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64,628
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