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, 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 September 30, 1996
Common Stock, .0001 par value 9,052,671 shares
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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 4. Submission of Matters to Vote of Security Holders. 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
1996 1996
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $40,438 $49,302
Short-term investments 2,997 2,981
Accounts receivable, net 17,406 19,319
Inventories 16,884 18,065
Prepaid expenses and other 1,719 582
Deferred income taxes 5,697 5,697
Total current assets 85,141 95,946
PROPERTY, PLANT, AND EQUIPMENT, net 43,981 34,185
GOODWILL, net 4,339 5,026
OTHER ASSETS 3,831 3,917
TOTAL ASSETS $137,292 $139,074
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $8,267 $12,680
Accrued compensation and related benefits 4,286 4,017
Other accrued expenses 710 1,699
Total current liabilities 13,263 18,396
DEFERRED INCOME TAXES 1,822 1,852
LONG-TERM OBLIGATIONS 979 979
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;
9,980,437 and 9,918,371 shares outstanding 78,068 77,688
Cumulative translation adjustments 204 200
Retained earnings 56,376 53,379
Treasury stock; 927,766 shares of Common stock at
cost (13,420) (13,420)
Total stockholders' equity 121,228 117,847
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $137,292 $139,074
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,
1996 1995 1996 1995
NET SALES $22,689 $31,681 $47,879 $66,611
COST AND EXPENSES:
Cost of sales 12,544 14,232 25,582 32,130
Research and development 3,526 4,040 6,948 7,900
Selling, general and
administrative 5,255 6,025 11,183 12,133
Goodwill amortization 343 344 687 629
Write-off of in-process
research and development -- -- -- 2,390
One-time charges relating to
discontinued product line -- -- -- 1,155
Total costs and expenses 21,668 24,641 44,400 56,337
OPERATING INCOME 1,021 7,040 3,479 10,274
OTHER INCOME:
Interest income, net 596 830 1,202 1,630
Other, net 14 340 344 467
Total other income, net 610 1,170 1,546 2,097
INCOME BEFORE INCOME TAXES 1,631 8,210 5,025 12,371
INCOME TAXES 701 2,832 2,028 5,259
NET INCOME $930 $5,378 $2,997 $7,112
NET INCOME PER SHARE $0.10 $0.52 $0.33 $0.70
SHARES USED IN COMPUTATION 9,068 10,411 9,086 10,221
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,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,997 $7,112
Reconciliation to net cash provided by operating
activities
Depreciation and amortization 3,129 2,670
Write-off of in-process research and
development -- 2,390
Deferred income taxes (30) (37)
Changes in operating assets and liabilities:
Accounts receivable 1,913 8,403
Inventories 1,181 409
Prepaid expenses and other (1,137) (136)
Accounts payable and accrued expenses (5,402) (11,279)
Accrued compensation and related benefits 269 (409)
Income taxes payable -- 1,313
Net cash provided by operating activities 2,920 10,436
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,238) (9,995)
Short-term investments, net (16) (789)
Other assets 86 (1,114)
Net cash provided by financing activities (12,168) (11,898)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 380 6,272
Net cash provided by financing activities 380 6,272
EFFECT OF RATE CHANGES ON CASH 4 (362)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (8,864) 4,448
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 49,302 57,029
CASH AND EQUIVALENTS AT END OF PERIOD $40,438 $61,477
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $2,250 $2,850
See notes to condensed consolidated financial statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 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 six month period
ended September 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 and
automotive markets and other selected areas.
NOTE 2. 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,
1996 1996
(In thousands)
Raw materials $279 $762
Work-in-
process 10,280 11,563
Finished
goods 6,325 5,740
$16,884 $18,065
NOTE 3. 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 4. 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 $1.3
million of loans previously granted to SMI. In addition, the Company may be
required to issue up to $1.5 million in additional shares based on SMI's future
operating performance.
For accounting purposes, the acquisition was accounted for as a purchase.
Accordingly, the results of operations for the three and six month periods ended
September 30, 1995 include the operations of SMI subsequent to the date of
acquisition. As a result of this transaction, the Company recorded
approximately $1.5 million of goodwill which is being amortized over a period of
five years. The remaining portion of the excess purchase price (approximately
$2.4 million) represented in-process research and development which was charged
to operations in the six months ended September 30, 1995. Contingent
consideration in connection with the SMI acquisition has not been accrued and
will be reflected in the Company's financial statements when issued or paid.
Had the acquisition been effective at the beginning of fiscal 1996, there would
not have been a significant impact on the Company's results of operations.
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 10-K and in Item 2 of the Company's Form
10-Q for the quarter ended June 30, 1996 filed with the Securities and Exchange
Commission on July 1, 1996, and August 14, 1996, respectively.
GENERAL - The Company derives revenues 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 the sale of mass storage
products. The Company's gross margins from the sale of integrated circuits may
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 filed a
claim against its foundry supplier for recovery of write-offs and other losses
it incurred as a result of 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 (see Note 4 to Notes to Condensed Consolidated Financial
Statements).
RESULTS OF OPERATIONS - Net sales for the second quarter of fiscal 1997 were
$22.7 million compared to $31.7 million for the same period a year ago, a
decrease of approximately 28%. Net sales for the six month period ended
September 30, 1996 decreased by 28% to $47.9 million compared to $66.6 million
for the corresponding period in fiscal 1996 as the Company experienced decreases
in net sales in essentially all of its continuing product lines. In addition,
the decrease in net sales reflects the discontinuance of hard disk drive
products which resulted in a $3.3 million decrease in net sales for the six
month period ended September 30, 1996.
Cost of sales for the second quarter and the first six months of fiscal 1997
increased to approximately 55% of net sales and 53% of net sales, respectively,
compared to 45% and 48% of net sales for the same periods in fiscal 1996. The
resulting decrease in gross margins was due primarily to changes in product mix
and manufacturing inefficiencies as a result of the lower volume of production.
Expenditures for research and development for the second quarter and first six
months of fiscal 1997 represented approximately 16% of net sales and 15% of net
sales, respectively, compared to 13% and 12% of net sales in the corresponding
periods in fiscal 1996. The increase in research and development expenditures
as a percentage of net sales was primarily attributable to the lower volume of
sales in fiscal 1997.
Selling, general and administrative expenses represented approximately 23% of
net sales in the second quarter and first six months of fiscal 1997, compared to
19% and 18% of net sales in the corresponding periods of fiscal 1996,
respectively. The increase as a percentage of net sales results from the lower
volume of sales in fiscal 1997.
The results of operations for the first six months of fiscal 1996 include the
operations of the Company's mass storage product line which was discontinued
during the period. 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 first six months of fiscal 1996.
Net interest income for the first six months of fiscal 1997 decreased by
approximately $428,000 as a result of lower levels of cash and short-term
investments available for investment 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 1997 was approximately 40% as non-deductible
expenses, state income taxes and foreign income, which is taxed at rates
different from U.S. income tax rates, were 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 six months of fiscal 1997 was $0.33 per share compared
to $0.70 per share for the same period in fiscal 1996. Excluding the effects of
the one-time write-offs, net income for the first six months of fiscal 1996 was
$10.3 million ($1.00 per share). The decrease in net income during fiscal 1997
reflects severence costs of approximately $200,000 resulting from a reduction in
the Company's workforce of approximately 8%. In addition the Company incurred
legal costs associated with the claim against its mass storage foundry supplier
of approximately $300,000. These costs are reflected in the financial results.
To date, inflation has not had a significant impact on the Company's operating
results.
In 1987, Micro Power Systems 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 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The semiconductor industry 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 six months of fiscal 1997,
the Company financed its operations primarily from existing cash balances and
cash flow from operations. At September 30, 1996, the Company had approximately
$43.4 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, 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 September 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 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. 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 $3.8 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"). Pursuant to the terms of the agreement, Exar has
invested approximately $11 million for the purchase and installation of
equipment at IC Works in exchange for a predetermined supply of wafers over the
next five years. As of September 30, 1996, the Company may be required to
invest an additional $4.5 million in equipment at IC Works. Under a separate
but related agreement, Exar made a minority equity investment in IC Works.
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
29, 1996 in Fremont, California. At the meeting the following individuals were
elected to the Board of Directors of the Company and will hold office until the
1999 Annual Meeting of Stockholders. The number of affirmative and negative
votes cast were as follows:
Affirmative Negative
Mr. George D. Wells 7,540,904 497,245
Mr. Raimon L. Conlisk 7,534,193 503,956
In addition, certain individuals will continue to hold office as directors of
the Company until the Annual Meeting of Stockholders as follows:, Mr. James E.
Dykes - 1997, Mr. George E. Grega - 1997 and Mr. Ronald W. Guire - 1998.
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 approve
the amendment to
the Company's 1991
Stock Option Plan to
increase the aggregate
number of shares of
Common Stock authorized
for issuance by
300,000 shares 5,189,256 2,232,819 614,374 1,700
Resolution to approve
the Company's 1996
Non-Employee Director's
Stock Option Plan 6,321,573 1,095,324 619,552 1,700
ITEM 5. - OTHER INFORMATION
On October 14, 1996, Donald L. Ciffone, Jr. was elected as the President and
Chief Executive Officer of the Company. Mr. Ciffone was also appointed to the
Board of Directors of the Company. Mr. Ciffone succeeds George Wells, who had
previously announced his intention to step down as CEO and President but will
continue on the Board of Directors.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 - Statement re Computation of Per Share Earnings
(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 13, 1996
Ronald W. Guire
Executive Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
11.1 14
19
EXHIBIT 11.1
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
NET INCOME $930 $5,378 $2,997 $7,112
SHARES USED IN COMPUTATION:
Weighted average common shares
outstanding 9,030 9,727 9,014 9,580
Dilutive effect of stock options 38 684 72 641
Shares used in computation 9,068 10,411 9,086 10,221
NET INCOME PER SHARE $0.10 $0.52 $0.33 $0.70
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Exar
Corporation's Condensed Financial Statements for the period ended September 30,
1996 and is qualified in it's entirety by reference to such 10-Q filing.
</LEGEND>
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