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, 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 December 31, 1997
Common Stock, .0001 par value 9,403,489 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 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 1. - FINANCIAL STATEMENTS
EXAR COPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31, MARCH
31,
1997 1997
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $66,651 $48,479
Short-term investments 3,172 5,053
Accounts receivable, net 16,084 13,644
Inventories 7,371 7,276
Prepaid expenses and other 1,448 3,225
Deferred income taxes 5,985 5,985
Total current assets 100,711 83,662
PROPERTY, PLANT AND EQUIPMENT, net 26,117 32,823
GOODWILL, net 2,333 3,211
OTHER ASSETS 8,355 5,841
TOTAL ASSETS $137,516 $125,537
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued $7,841 $9,563
expenses
Accrued compensation and related 7,927 5,277
benefits
Income taxes payable 1,167 0
Total current liabilities 16,935 14,840
LONG-TERM OBLIGATIONS 763 880
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;
10,381,255 and 10,123,076 shares
outstanding 83,982 80,072
Cumulative translation adjustments 70 (292)
Retained earnings 49,911 44,182
Treasury stock; 977,766 shares of
common stock at cost (14,145)(14,145)
Total stockholders' equity 119,818 109,817
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $137,516 $125,537
See notes to condensed consolidated
financial statements.
EXAR COPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(In thousands, except share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
NET SALES $26,577 $21,819 $76,910 $69,698
COSTS AND EXPENSES:
Cost of sales 13,455 12,952 39,737 38,535
Research and development 3,953 3,340 11,675 10,288
Selling, general and administrative 5,982 5,364 17,392 16,547
Goodwill amortization 293 344 878 1,031
Total costs and expenses 23,683 22,000 69,682 66,401
OPERATING INCOME (LOSS) 2,894 (181) 7,228 3,297
OTHER INCOME:
Interest income, net 837 521 2,065 1,723
Other, net 7 8 73 353
Total other income, net 844 529 2,138 2,076
INCOME BEFORE INCOME TAXES 3,738 348 9,366 5,373
INCOME TAXES 1,431 245 3,637 2,273
NET INCOME $2,307 $103 $5,729 $3,100
NET INCOME PER SHARE:
BASIC $0.25 $0.01 $0.62 $0.34
DILUTED $0.23 $0.01 $0.59 $0.34
SHARES USED IN COMPUTATION OF
NET INCOME PER SHARE:
BASIC 9,365 9,098 9,289 9,042
DILUTED 9,933 9,185 9,734 9,119
See notes to condensed consolidated
financial statements
EXAR COPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,729 $3,100
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization 4,342 4,716
Deferred income taxes -- (36)
Changes in operating assets and
liabilities:
Accounts receivable (2,440) 3,963
Inventories (95) 4,572
Prepaid expenses and other (436) (178)
Accounts payable and other accrued
expenses (2,283) (6,688)
Accrued compensation and related
benefits 2,650 (240)
Income taxes payable 3,380 (1,250)
Net cash provided by operating
activities 10,847 7,959
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,931) (14,313)
Proceeds from sales of equipment 7,353 --
Purchases of short-term investments (2,120) (53)
Sales of short-term investments 4,000 --
Purchases of long-term investments (3,000) --
Other assets (133) (20)
Net cash provided by (used in)
investing activities 3,169 (14,386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term obligations (117) --
Proceeds from issuance of common stock 3,910 1,476
Net cash provided by financing
activities 3,793 1,476
EFFECT OF EXCHANGE RATE CHANGES ON CASH 363 (6)
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 18,172 (4,957)
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 48,479 49,302
CASH AND EQUIVALENTS AT END OF PERIOD $66,651 $44,345
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $351 $2,650
See notes to condensed consolidated
financial statements.
EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER AND NINE MONTHS ENDED DECEMBER 31, 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 nine months ended December 31, 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:
December 31, March 31,
1997 1997
Work-in-process $ 5,371 $ 4,987
Finished goods 2,000 2,289
$ 7,371 $ 7,276
NOTE 3. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (SFAS 128). SFAS 128 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. Prior periods have been restated to conform with SFAS 128.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
NET INCOME $ 2,307 $ 103 $ 5,729 $ 3,100
SHARES USED IN COMPUTATION:
Weighted average common shares
outstanding used in computation
of basic net income per share 9,365 9,098 9,289 9,042
Dilutive effect of stock options 568 87 445 77
Shares used in computation of diluted
net income per share 9,933 9,185 9,734 9,119
BASIC NET INCOME PER SHARE $ 0.25 $ 0.01 $ 0.62 $ 0.34
DILUTED NET INCOME PER SHARE $ 0.23 $ 0.01 $ 0.59 $ 0.34
Options to purchase 109,300 and 1,169,733 shares of common stock at prices
ranging from $25.19 to $37.25 and $15.75 to $37.25 were outstanding as of
December 31, 1997 and 1996, respectively, but not included in the computation of
diluted net income per share because the options' exercise prices were greater
than the average market price of the common shares as of such dates and,
therefore, would be antidilutive under the treasury stock method.
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 and in Item 2 of the Company's Form
10-Q for the quarters ended June 30, 1997 and September 30, 1997, filed with the
Securities and Exchange Commission on June 30, 1997, August 14, 1997 and
November 7, 1997, respectively.
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.
RESTRUCTURING AND OTHER CHARGES - In the quarter ended March 31, 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, 44 of whom have
been terminated through December 31, 1997; writing down inventory associated
with product lines which are being discontinued; canceling certain facility
leases and terminating 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 nine months of fiscal 1998, the Company utilized $482,000 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 three months and will be financed through cash. Also,
in the quarter ended March 31, 1997, the Company incurred a charge of $9 million
relating to the write-down of capital assets and investments made under the
terms of a wafer production agreement with IC Works, Inc. During the quarter
ended December 31, 1997, the Company sold the capital assets written down in
connection with this prior year charge. The sales proceeds exceeded the
carrying value and, as a result, the Company reversed $1.2 million of the
related reserve during the quarter. Offsetting this reversal, the Company
decided during the quarter to replace its current information system under
development with a system determined to better meet the Company's needs and
wrote off $1.2 million of capitalized costs associated with system modules which
the Company does not intend to use.
RESULTS OF OPERATIONS - Net sales for the third quarter of fiscal 1998 were
$26.6 million compared to $21.8 million for the corresponding period in fiscal
1997, an increase of approximately 22%. Net sales for the nine month period
ended December 31, 1997 increased by approximately 10% to $76.9 million compared
to $69.7 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 as well as last time buy
activity pertaining to some of the Company's discontinued custom legacy
products. These increases were partially offset by a significant decrease in
net sales of discontinued consumer products in the Company's legacy consumer
product line.
Cost of goods sold for the third quarter and the first nine months of fiscal
1998 decreased to approximately 51% and 52% of net sales, respectively, compared
to 59% and 55% 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 third quarter and first nine months of
fiscal 1998, as a percentage of net sales, remained consistent at approximately
15% with the corresponding periods in fiscal 1997. Research and development
expenses in the third quarter and first nine months of fiscal 1998 increased by
approximately 18% and 13%, 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 third quarter and the first
nine months of fiscal 1998 remained relatively consistent as a percentage of net
sales for the same periods in fiscal 1997. Selling, general and administrative
expenses in the third quarter and first nine months of fiscal 1998 increased by
approximately 12% and 5%, respectively, compared to the same periods in fiscal
1997. The increase in selling, general and administrative expenses is
attributable primarily to increased spending on marketing efforts.
The Company's provision for income taxes is based on income from operations.
The Company's effective tax rate for the first nine months of fiscal 1998 was
approximately 39% compared with the federal statutory rate of 35%. The
discrepancy is 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.
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 nine months of fiscal 1998,
the Company financed its operations primarily from cash flows from operations
and existing cash and short-term investments. At December 31, 1997, the Company
had approximately $69.8 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 December 31, 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 December 31, 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
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. Furthermore, 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 the semiconductor market or
by the failure of one or more of its customers to compete successfully in such
market. The markets for components used in the video, imaging, communications
and silicon sensor markets are extremely price competitive.
PART II - OTHER INFORMATION
ITEM 6. - REPORTS ON FORM 8-K
(a) 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: February 5, 1998
Donald L. Ciffone, Jr.
President
Chief Executive Officer
By /s/ Date: February 5, 1998
Ronald W. Guire
Executive Vice President,
Chief Financial Officer,
Secretary
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