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 December 31, 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 December 31, 1996
Common Stock, .0001 par value 9,164,591 shares net of treasury shares
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements....3-5
Notes to Condensed Consolidated Financial
Statements.......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..7-9
PART II OTHER INFORMATION
Item 5. Other Information...............................10
Item 6. Exhibits and Reports on Form 8-K................10
Signatures......................................11
EXHIBITS
Exhibit 11.1....................................13
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31, MARCH 31,
1996 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $44,345 $49,302
Short-term investments 3,034 2,981
Accounts receivable, net of allowances of 15,356 19,319
$2,998 and $2,643
Inventories 13,493 18,065
Prepaid expenses and other 2,010 582
Deferred income taxes 5,697 5,697
Total current assets 83,935 95,946
Property, Plant and Equipment, net 44,813 34,185
Goodwill, net of accumulated amortization of 3,995 5,026
$3,126 and $2,095
Other Assets 3,937 3,917
TOTAL ASSETS $136,680 $139,074
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $7,137 $12,680
Accrued compensation and related benefits 3,777 4,017
Other accrued expenses 554 1,699
Total current liabilities 11,468 18,396
Deferred Income Taxes 1,816 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;
10,092,357 and 9,918,371 shares
outstanding 79,164 77,688
Cumulative translation adjustments 194 200
Retained earnings 56,479 53,379
Treasury stock; 927,766 shares at cost (13,420) (13,420)
Total stockholders' equity 122,417 117,847
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,680 $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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
NET SALES $21,819 $30,217 $69,698 $96,828
COST AND EXPENSES:
Cost of sales 12,952 15,219 38,535 47,349
Research and development 3,340 4,279 10,288 12,179
Selling, general and
administrative 5,364 6,313 16,547 18,446
Goodwill amortization 344 343 1,031 972
Write-off of in-process
research and development
and other acquisition
related expenses - - - 2,390
Discontinued product line - - - 1,155
Total costs and expenses 22,000 26,154 66,401 82,491
INCOME (LOSS) FROM OPERATIONS (181) 4,063 3,297 14,337
OTHER INCOME (EXPENSE):
Interest income 542 845 1,787 2,474
Interest expense (21) - (64) -
Other, net 8 82 353 550
Total other income, net 529 927 2,076 3,024
INCOME BEFORE INCOME TAXES 348 4,990 5,373 17,361
INCOME TAXES 245 1,893 2,273 7,152
NET INCOME $103 $3,097 $3,100 $10,209
NET INCOME PER SHARE $0.01 $0.31 $0.34 $1.00
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,185 10,107 9,119 10,183
See notes to condensed consolidated financial statements
EXAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
NINE MONTHS ENDED
DECEMBER 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,100 $10,209
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 4,716 4,061
Provision for doubtful accounts
and sales returns 356 -
Write-off of in process research
and development - 2,390
Deferred income taxes (36) (38)
Changes in operating assets
and liabilities:
Accounts receivable 3,607 10,176
Inventories 4,572 21
Prepaid expenses and other (178) 408
Accounts payable and
accrued expenses (5,543) (12,299)
Accrued compensation and
related benefits (240) (138)
Other accrued expenses (1,145) -
Income taxes payable (1,250) (690)
Net cash provided by operating activities 7,959 14,100
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
leasehold improvements (14,313) (14,292)
Short-term investments, ne t (53) 2,177
Other assets (20) (1,004)
Net cash used in investing activities (14,386) (13,119)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,476 6,579
Acquisition of treasury stock - (6,254)
Net cash provided by financing activities 1,476 325
Effect of Exchange Rate Changes on Cash (6) (467)
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (4,957) 839
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 49,302 57,029
CASH AND EQUIVALENTS AT END OF PERIOD $ 44,345 $ 57,868
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $2,650 $6,585
See notes to condensed consolidated financial statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
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 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 and nine month periods ended December 31,
1996 are not necessarily indicative of the results of operations to be expected
for the full year.
Exar designs, develops, manufactures and markets analog and mixed-signal
application specific integrated circuits for use in the communications, document
imaging, consumer electronics and computer 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:
December 31, March 31,
1996 1996
Raw materials $ 896 $ 762
Work-in-process 7,868 11,563
Finished goods 4,729 5,740
$13,493 $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.
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 quarters ended June 30, 1996 and September 30, 1996, filed with the
Securities and Exchange Commission on July 1, 1996, August 14, 1996, and
November 14, 1996, respectively.
GENERAL - The Company derives revenue principally from the sale of integrated
circuits for use in communications, consumer electronics, document imaging,
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, however, 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. The resolution
of this matter had no material impact on the Company. See Item 5. "Other
Information".
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 third quarter and first nine months of
fiscal 1997 were approximately $21.8 million and $69.7 million, respectively, a
28% decrease from the $30.2 million and $96.8 million reported for the same
periods a year ago. The decrease in net sales reflects decreases in most of the
Company's continuing product lines. In addition, during the first quarter of
fiscal 1996 the Company discontinued its mass storage product line, which
resulted in a reduction of approximately $3.3 million in net sales for the nine
months ended December 31, 1996. Revenue decreases were partially offset by
increases in sales of the Company's sensor products as a result of the SMI
acquisition.
Cost of goods sold for the third quarter and the first nine months of fiscal
1997 increased to approximately 59% and 55% of net sales, respectively, compared
to 50% and 49% of net sales for the same periods of fiscal 1996. The resulting
decrease in gross margin is due primarily to manufacturing inefficiencies due to
decreased production volumes.
Expenditures for research and development for the third quarter and first nine
months of fiscal 1997 represented approximately 15% of net sales, compared to
14% and 13% of net sales, respectively, in the corresponding periods in fiscal
1996. The increase in research and development expenditures as a percentage of
net sales reflected the lower volume of sales.
Selling, general and administrative expenses, as a percentage of net sales,
increased from 21% and 19% in the third quarter and first nine months of fiscal
1996 to approximately 25% and 24%, respectively, in the corresponding periods of
the current year. The increase as a percentage of net sales reflects i)the
lower level of sales in fiscal 1997, ii)compensation expenses related to the
acquisition of Startech Semiconductor, Inc. ("Startech") paid during the third
quarter of fiscal 1997, iii) severance costs paid during the second quarter of
fiscal 1997 as a result of an 8% reduction in workforce and iv) legal expenses
incurred in the first and second quarters of fiscal 1997 associated with the
claim against its mass storage foundry supplier.
Net interest income for the first nine months of fiscal 1997 decreased by
approximately $0.8 million compared to the same period in fiscal 1996 as a
result of lower levels of cash and short-term investments 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 nine months of fiscal was approximately 42% as non-deductible
expenses, state income taxes and foreign income, which is taxed at rates
different from 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 nine months of fiscal 1997 was $0.34 per share which
compared to $1.00 per share for the same period in fiscal 1996. Excluding the
effects of one-time write-offs, net income for the first nine months of fiscal
1996 was $13.3 million ($1.31 per share). The decrease in net income during
fiscal 1997 reflects compensation expenses related to the acquisition of
Startech of approximately $500,000, severance cost of approximately $200,000
resulting from a reduction in the Company's workforce and 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, Inc. 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 approximately $1 million share of estimated remediation costs.
FACTORS THAT MAY AFFECT FUTURE RESULTS - The Company is currently evaluating the
transfer of its test and shipping operations to off shore sub-contractors to
reduce manufacturing expenses. In addition, the Company is refocusing its
product strategy to provide analog and mixed-signal products for the video,
imaging, communications and silicon sensor markets and, therefore, may eliminate
certain product offerings. Management expects that such restructuring would
result in a pre-tax charge of $8 to $10 million in the fourth quarter of fiscal
1997. The transfer of operations and market concentration would result in a
reduction in workforce of approximately 15%.
The semiconductor industry is characterized by 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 results in shortages of wafer fabrication capacity. The
Company's ability to meet customer future demand is dependent upon obtaining
sufficient supply of products. 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, the
availability and cost of products from the Company's suppliers, 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 nine months of fiscal 1997,
the Company financed its operations primarily from existing cash balances and
cash flow from operations. At December 31, 1996, the Company had approximately
$47.4 million of cash and short-term investments. In addition, the Company had
available short-term, unsecured lines of credit totaling $35.5 million with
certain domestic and foreign banks, none of which were being utilized at
December 31, 1996. In addition, the Company had credit facilities with certain
domestic and foreign banks under which it may borrow up to $35 million to
support its foreign currency transactions. At December 31, 1996, the Company
had outstanding Japanese yen forward contracts totaling approximately $1.4
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.
The purchase agreements include provisions for adjustments to the final purchase
price or include deferred compensation arrangements which may result in
additional payments of up to $3.3 million, in some combination of cash and/or
common stock, over the next four 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 $12.5 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 December 31, 1996, the Company may be required to invest
an additional $3 million in equipment at IC Works. Under a separate but related
agreement, Exar made a minority equity investment in IC Works.
In December 1995, the Board of Directors of the Company authorized the open
market repurchase of shares of Exar Common Stock. Pursuant to such repurchase
program, as of December 31, 1996, the Company had utilized approximately $13.4
million to purchase its Common Stock and had available approximately $5.1
million for additional share repurchases.
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 5. - OTHER INFORMATION
On January 29, 1997, the Company announced that it had settled all outstanding
issues with SGS-Thompson Microelectronics, Inc. and SGS-Thompson, SRL, its
former foundry supplier of wafers used in mass storage products. The settlement
will not have a material effect on the Company's consolidated financial position
or results of operations.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 - Statement re Computation of Per Share Earnings (Loss)
(b) The Registrant filed a report on Form 8-K dated February 7, 1996. In Item
4 of Form 8-K, Change in Registrant's Certifying Accountant, the Company
reported the dismissal of KPMG Peat Marwick LLP as the Registrant's independent
accountants effective February 3, 1997 and the engagement of Deloitte and Touche
LLP as independent accountants for the Registrant for the fiscal year ending
March 31, 1997.
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: February 13, 1997
Donald L. Ciffone
President
Chief Executive Officer
By /s/ Date: February 13, 1997
Ronald W. Guire
Executive Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
11.1 Statement re Computation of Per Share
Earnings......................................13
EXHIBIT 11.1
EXAR CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
NET INCOME $103 $3,097 $3,100 $10,209
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
Weighted average common shares 9,098 9,773 9,053 9,645
outstanding
Dilutive effect of stock options 87 334 66 538
Common and common equivalent
shares outstanding 9,185 10,107 9,119 10,183
NET INCOME PER SHARE $0.01 $0.31 $0.34 $1.00
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