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, 1997
[ ] 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, 1997
Common Stock, .0001 par value 9,347,056 shares net of treasury shares
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 Conditionand Results of Operations............8-10
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 11
Item 6. Exhibits and Reports on Form 8-K..........................11
Signatures................................................12
EXHIBITS
Exhibit 11.1..............................................14
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, expect share amounts)
SEPTEMBER 30, MARCH 31,
1997 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $54,400 $48,479
Short-term investments 3,157 5,053
Accounts receivable, net 14,007 13,644
Inventories 9,478 7,276
Prepaid expenses and other 1,275 3,225
Deferred income taxes 5,985 5,985
Total current assets 88,302 83,662
PROPERTY, PLANT AND EQUIPMENT, net 32,825 32,823
GOODWILL, net 2,625 3,211
OTHER ASSETS 8,599 5,841
TOTAL ASSETS $132,351 $125,537
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $8,168 $9,563
Accrued compensation and related benefits 6,822 5,277
Total current liabilities 14,990 14,840
LONG-TERM OBLIGATIONS 807 880
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;
10,324,822 and 10,123,076 shares
outstanding 82,879 80,072
Cumulative translation adjustments 216 (292)
Retained earnings 47,604 44,182
Treasury stock; 977,766 shares of common (14,145) (14,145)
stock at cost
Total stockholders' equity 116,554 109,817
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $132,351 $125,537
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,
1997 1996 1997 1996
NET SALES $25,935 $22,689 $50,334 $47,879
COSTS AND EXPENSES:
Cost of sales 13,335 12,544 26,282 25,582
Research and development 3,948 3,526 7,722 6,948
Selling, general and
administrative 5,873 5,255 11,410 11,183
Goodwill amortization 293 343 585 687
Total costs and expenses 23,449 21,668 45,999 44,400
OPERATING INCOME 2,486 1,021 4,335 3,479
OTHER INCOME:
Interest income, net 704 596 1,270 1,202
Other, net (21) 14 23 344
Total other income, net 683 610 1,293 1,546
INCOME BEFORE INCOME TAXES 3,169 1,631 5,628 5,025
INCOME TAXES 1,229 701 2,206 2,028
NET INCOME $1,940 $930 $3,422 $2,997
NET INCOME PER SHARE $0.20 $0.10 $0.36 $0.33
SHARES USED IN COMPUTATION 9,812 9,068 9,635 9,086
See notes to condensed consolidated
financial statements
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED COMSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED
(Unaudited) (In thousands) SEPTEMBER 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,422 $2,997
Reconciliation to net cash provided by operating
activities:
Depreciation and amortization 2,937 3,129
Deferred income taxes -- (30)
Changes in operating assets and liabilities:
Accounts receivable (363) 1,913
Inventories (2,202) 1,181
Prepaid expenses and other 1,950 (1,137)
Accounts payable and other accrued expenses (1,395) (5,402)
Accrued compensation and related benefits 1,545 269
Net cash provided by operating activities 5,894 2,920
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,353) (12,238)
Purchases of short-term investments (104) (16)
Sales of short-term investments 2,000 --
Purchases of long-term investments (3,000) --
Other assets 242 86
Net cash used in financing activities (3,215) (12,168)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term obligations (73) --
Proceeds from issuance of common stock 2,807 380
Net cash provided by financing activities 2,734 380
EFFECT OF EXCHANGE RATE CHANGES ON CASH 508 4
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,921 (8,864)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 48,479 49,302
CASH AND EQUIVALENTS AT END OF PERIOD $54,400 $40,438
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $144 $2,250
See notes to condensed consolidated financial
statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
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 1997 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 and six months ended September 30, 1997 are
not necessarily indicative of the results of operations to be expected for the
full year.
Exar designs, develops and markets analog and mixed-signal application specific
integrated circuits for use in the communications, video and imaging, silicon
microstructures and in other selected product areas. Principal markets include
North America, Asia, Europe and other countries.
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,
1997 1997
Work-in-process $ 6,779 $ 4,987
Finished goods 2,699 2,289
$ 9,478 $ 7,276
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. In
February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share," (SFAS 128). The Company is required to adopt SFAS 128 in
the third quarter of fiscal 1998 and will restate, at that time, earnings per
share (EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted. SFAS 128 replaces current EPS reporting
requirements and 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. If SFAS 128 had
been in effect during the current and prior year periods, basic EPS and diluted
EPS for the quarter and six months ended September 30, 1997 and 1996 would not
have been significantly different than primary EPS currently reported for such
periods.
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131 (Disclosures about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
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 1997 Form 10-K filed with the Securities and
Exchange Commission on June 30, 1997.
GENERAL - The Company derives revenue principally from the sale of integrated
circuits for use in communications, video and imaging, silicon microstructures
and other selected areas. 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 Company's ability to achieve certain
manufacturing efficiencies and the cost of material procured from the Company's
suppliers. 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 the Far East and Europe.
The Company has made a number of changes in its underlying business over the
past three years in an effort to reduce its low-margin businesses and focus its
product strategy. At the same time, to increase its share of revenues from the
sale of proprietary products and to acquire additional technology, the Company
made significant investments through direct acquisition of companies with
related product lines.
In the fourth quarter of fiscal 1997, the Company announced and began to
implement a restructuring plan to i) reduce manufacturing expenses by
transferring its test and shipping operations to offshore sub-contractors, ii)
focus the Company's product strategy to provide analog and mixed signal products
for the video, imaging, communications and silicon sensor markets and iii)
narrow the Company's distribution channels to create more leverage. The
Company's restructuring actions consisted primarily of writing down certain
equipment as a result of the transfer of operations and change in product focus;
terminating 54 full-time employees, 29 of whom have been terminated through
September 30, 1997; writing down inventory associated with product lines which
are being discontinued; canceling certain facility leases and cancellation of
contracts as a result of a change in distribution channels; and writing down
goodwill associated with discontinued products. These actions resulted in a
charge of $5,345,000 to operating expenses and $4,631,000 to cost of goods sold
in the fourth quarter of fiscal 1997. The charges included non-cash items of
$8,454,000 and cash items of $1,522,000. During the first six months of fiscal
1998, the Company utilized $347,000 of cash related to the $924,000 accrued
balance at March 31, 1997. The Company expects that most of the remaining
contemplated restructuring action will be completed within the next six months
and will be financed through cash.
RESULTS OF OPERATIONS - Net sales for the second quarter of fiscal 1998 were
$25.9 million compared to $22.7 million for the corresponding period in fiscal
1997, an increase of approximately 14%. Net sales for the six month period ended
September 30, 1997 increased by approximately 5% to $50.3 million compared to
$47.9 million for the corresponding period in fiscal 1997. These increases were
primarily due to significant increases in net sales of the Company's silicon
microstructure and communications product lines. These increases were partially
offset by a significant decrease in net sales of discontinued consumer products
in the Company's video and imaging product line.
Cost of goods sold for the second quarter and the first six months of fiscal
1998 decreased to approximately 51% and 52% of net sales, respectively, compared
to 55% and 53% of net sales for the same periods in fiscal 1997. The resulting
increase in gross margins is due primarily to manufacturing efficiencies due to
higher production volumes, changes in product mix and efficiencies gained as a
result of the Company's decision, in the fourth quarter of fiscal 1997, to
transfer its test and shipping operations to offshore sub-contractors to reduce
manufacturing expenses.
Research and development expenses in the second quarter and first six months of
fiscal 1998 represented approximately 15% of net sales compared to 16% and 15%
of net sales, respectively, in the corresponding periods in fiscal 1997.
Research and development expenses in the second quarter and first six months of
fiscal 1998 increased by approximately 12% and 11%, respectively, compared to
the same periods in fiscal 1997. The increase in research and development
expenses is attributable primarily to increased spending on masks and other
related costs for new product development.
Selling, general and administrative expenses for the second quarter and first
six months of fiscal 1998, as a percentage of net sales, remained consistent at
23% with the corresponding periods in fiscal 1997.
The Company's provision for income taxes is based on income from operations.
The Company's effective tax rate for the first six months of fiscal 1998 was
approximately 39% compared with the federal statutory rate of 35% due to non-
deductible expenses, state income taxes and foreign income, which is taxed at
rates different from 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.
To date, inflation has not had a significant impact on the Company's operating
results.
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 $.9 million share of estimated remediation costs.
LIQUIDITY AND CAPITAL RESOURCES - During the first six months of fiscal 1998,
the Company financed its operations primarily from cash flows from operations
and existing cash and short-term investments. At September 30, 1997, the
Company had approximately $57.6 million of cash and short-term investments. In
addition, the Company had available short-term, unsecured lines of credit
totaling $17.5 million, none of which was being utilized at September 30, 1997.
In addition, the Company has credit facilities with certain domestic and foreign
banks under which it may borrow up to $35 million to support its foreign
currency transactions. At September 30, 1997, the Company had no outstanding
foreign currency forward contracts.
The Company made a $4.5 million minority equity investment in IC Works, Inc., a
semiconductor manufacturer ("IC Works"), in February 1996. In April 1997, the
13
Company made an additional equity investment in IC Works of $3 million.
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS - The Company is currently transferring
its test and shipping operations to offshore sub-contractors to reduce
manufacturing expenses. In addition, the Company has refocused its product
strategy to provide analog and mixed-signal products for the video, imaging,
communications and silicon sensor markets and, therefore, has eliminated certain
product offerings. 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 be
adversely affected by a downturn in this market or by the failure of one or more
of its customers to compete successfully in such market. The markets for
components used in personal computer and consumer electronics products are
extremely price competitive.
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 September
18, 1997 in Fremont, California. At the meeting the following individual was
elected to the Board of Directors of the Company and will hold office until the
2000 Annual Meeting of Stockholders. The number of affirmative and withheld
votes were as follows:
Affirmative Withheld
Mr. James E. Dykes 8,037,978 79,826
In addition, certain individuals will continue to hold office as directors of
the Company until the Annual Meeting of Stockholders as follows:, Mr. Donald L.
Ciffone, Jr. - 1998, Mr. Ronald W. Guire - 1998, Mr. George D. Wells - 1999 and
Mr. Raimon L. Conlisk - 1999.
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 Company's1997 Equity
Incentive Plan 4,230,468 2,369,773 1,337,662 179,901
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 - Statement re Computation of Earnings Per Share
(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 7, 1997
Donald L. Ciffone, Jr.
President
Chief Executive Officer
By /s/ Date: November 7, 1997
Ronald W. Guire
Executive Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
11.1 Statement re Computation of Earnings
Per Share 14
17
Exhibit 11.1
EXAR CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, expect per share amounts)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
NET INCOME $1,940 $930 $3,422 $2,997
SHARES USED IN COMPUTATION:
Weighted average common shares outstanding 9,304 9,030 9,251 9,014
Dilutive effect of stock options 508 38 384 72
Shares used in computation 9,812 9,068 9,635 9,086
NET INCOME PER SHARE $0.20 $0.10 $0.36 $0.33
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 54,400
<SECURITIES> 3,157
<RECEIVABLES> 14,007
<ALLOWANCES> 0
<INVENTORY> 9,478
<CURRENT-ASSETS> 88,302
<PP&E> 32,825
<DEPRECIATION> 0
<TOTAL-ASSETS> 132,351
<CURRENT-LIABILITIES> 14,990
<BONDS> 0
0
0
<COMMON> 68,734
<OTHER-SE> 47,820
<TOTAL-LIABILITY-AND-EQUITY> 132,351
<SALES> 25,935
<TOTAL-REVENUES> 25,935
<CGS> 13,335
<TOTAL-COSTS> 23,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,169
<INCOME-TAX> 1,229
<INCOME-CONTINUING> 1,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,940
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0
</TABLE>
