UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2013

OR

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

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

48720 Kato Road, Fremont, CA 94538

(Address of principal executive offices, Zip Code)

 

Registrant’s telephone number, including area code: (510) 668-7000

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

Name of each exchange on which registered

Common Stock, $0.0001 Par Value

The NASDAQ Global Select Market

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.    Yes      No  

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes      No  

 

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      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer                Accelerated filer    

Non-accelerated filer      (Do not check if a smaller reporting company)

  

Smaller reporting company    

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

 

The aggregate market value of the outstanding voting stock held by non-affiliates of the Registrant as of September 30, 2012 was approximately $153.9 million based upon the closing price reported on The NASDAQ Global Select Market as of the last business day of the Registrant’s most recently completed second fiscal quarter. Approximately 26.6 million shares of common stock held by officers, directors and persons known to the Registrant to hold 5% or more of the Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares outstanding of the Registrant’s Common Stock was 46,936,401 as of June 10, 2013, net of 19,924,369 treasury shares.

 

DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Registrant’s 2013 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2013 fiscal year are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

 

 
1

 

  

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

ANNUAL REPORT ON FORM 10-K

 

FOR FISCAL YEAR ENDED MARCH 31, 2013

 

 

 

Page

 

PART I

 

Item 1.

Business

3

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

27

Item 2.

Properties

28

Item 3.

Legal Proceedings

28

Item 4.

Mine Safety Disclosures

28

 

 

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

29

Item 6.

Selected Financial Data

31

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

89

Item 9A.

Controls and Procedures

89

Item 9B.

Other Information

90

 

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

91

Item 11.

Executive Compensation

91

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

91

Item 13.

Certain Relationships and Related Transactions, and Director Independence

91

Item 14.

Principal Accounting Fees and Services

91

 

 

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

92

 

 

Signatures

93

 

 
2

 

 

 

PART I

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “would,” “could,” “expect,” “suggest,” “possible,” “potential,” “target,” “commit,” “continue,” “believe,” “anticipate,” “intend,” “project,” “projected,” “positioned,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements made in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary” and elsewhere regarding: (1) our future strategies and target markets; (2) our future revenues, gross profits and margins; (3) our future research and development (“R&D”) efforts and related expenses; (4) our future selling, general and administrative expenses (“SG&A”); (5) our cash and cash equivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months; (6) our ability to continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities; (7) the possibility of future acquisitions and investments; (8) our ability to accurately estimate our assumptions used in valuing stock-based compensation;, (9) our ability to estimate and reconcile distributors’ reported inventories to their activities; (10) our ability to estimate future cash flows associated with long-lived assets; and (11) the volatile global economic and financial market condition. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ materially from those stated herein include, but are not limited to, the factors contained under the captions Part I, Item 1—“Business,” Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We disclaim any obligation to revise or update information in any forward-looking statement, except as required by law.

 

ITEM 1.

BUSINESS

 

Overview 

 

Exar Corporation (“Exar” or “We”) designs, develops and markets high performance analog mixed-signal integrated circuits and advanced sub-system solutions for the Networking & Storage, Industrial & Embedded Systems, and Communications Infrastructure markets. Exar’s product portfolio includes power management and connectivity components, communications products, and data compression and storage solutions. Our comprehensive knowledge of end-user markets along with the underlying analog, mixed signal and digital technology has enabled us to provide innovative solutions designed to meet the needs of the evolving connected world. Applying both analog and digital technologies, our products are deployed in a wide array of applications such as portable electronic devices, set top boxes, digital video recorders, networking and telecommunication systems, servers, enterprise storage systems and industrial automation equipment. We provide customers with a breadth of component products and sub-system solutions based on advanced silicon integration.

 

We market our products worldwide with sales offices and personnel located throughout the Americas, Europe, and Asia. Internationally, our products are sold through various regional and country specific distributors and manufacturers’ representatives. Globally, these channel partners are assisted and managed by our regional sales teams. In addition to our regional sales teams, we also employ a worldwide team of field application engineers to work directly with our customers.

 

Exar was incorporated in California in 1971 and was reincorporated in Delaware in 1991. Our common stock trades on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “EXAR”. See the information in Part II, Item 8— Financial Statements and Supplementary Data” for information on our financial position as of March 31, 2013, April 1, 2012 and March 27, 2011, and results of operations and cash flows for fiscal years ended March 31, 2013, April 1, 2012 and March 27, 2011.

 

Core Competencies and Key Initiatives

 

Analog and Mixed-Signal Design ExpertiseWe have over 40 years of proven technical competency in developing analog and mixed-signal ICs. As a result, we have developed a deep understanding of the subtleties of analog and mixed-signal design and a comprehensive library of analog core blocks. We leverage this expertise across our broad range of products and in our new product development efforts. From programmable power management chips to advanced telecommunications products, our solutions share a heavy concentration of analog and mixed-signal content to achieve high performance, power efficient solutions for our customers.

 

 
3

 

 

Connectivity Solutions Our focus on connectivity is a key initiative that drives product strategy and serves as a foundation for our customer engagements. We have added system architecture expertise and extended our portfolio of products to offer new silicon products, cards and software to support the demand for complete system solutions as well as component products. Our connectivity solutions serve data and telecommunications, networking and storage, industrial control and consumer applications. Our devices facilitate and optimize the interface between systems and across networks with Serial Transceivers, Multi-Protocol Interface products and Universal Asynchronous Receiver/Transmitters (“UARTs”).

 

Power Management Solutions — Our focus on power management includes traditional analog power management solutions as well as an innovative approach to software programmable power management. We design and develop linear and switching regulators that support the diverse power conversion needs of data and telecommunications, networking and storage, industrial control and consumer applications. We have also introduced a new family of programmable power management products that provide power conversion and control of multiple output voltages through a graphical user interface (“GUI”).

 

Enhanced System Integration Our effort to provide comprehensive solutions that encompass hardware, software and applications support is fundamental to our initiative in networking and storage applications. The combination of our design expertise, diverse circuit technology and system-level expertise enables us to provide complete solutions that are used in data compression and aggregation, data transmission, acceleration and computer offloading. We believe that by using our solutions OEMs can develop higher performance systems, better leverage their development resources and reduce their time-to-market.

 

Data Compression and Storage Solutions We offer a complete solution set of data compression and cryptographic algorithms. With our solution, customers have the flexibility to successfully address diverse market segments with varying storage, throughput, and security requirements. The comprehensive product portfolio also includes a new software architecture that simplifies system integration, reduces time to market and provides a smooth migration path across the entire product portfolio.

 

Markets and Products 

 

Our products are organized into four product lines, which allow product definition based on market opportunities and trends. We define our product lines as Connectivity and Power Management Components, Data Compression and Storage Solutions, and Communications Products.

 

Connectivity Components

 

The demand for connectivity is projected to grow significantly during the next decade as the Internet evolves to support machine-to-machine connectivity. The need to connect billions of devices at home, in the office and in factories through the Internet is driving the requirement for smart connectivity solutions. Our connectivity product strategy is to continue to enhance our portfolio with higher speed, lower power and enhanced functionality devices that meet the growing demands of our customers. Growth drivers in our connectivity product business include increased integration and value through the introduction of differentiated bridging products for popular and growing bus interfaces such as Universal Serial Bus (“USB”), Ethernet and Peripheral Interconnect Express (“PCIe”), as well as innovative new UARTs and serial transceiver devices.

 

We offer a broad line of industry-proven UARTs solutions as well as complementary serial transceiver devices for use in applications in the communications infrastructure, networking and storage, industrial & embedded systems, and consumer markets. Typical applications include point-of-sale (“POS”), process control, and factory automation, as well as servers, embedded systems, routers, network management equipment, remote access servers, wireless base-stations and repeaters. Additionally, our single and multi-channel UARTs are used in portable consumer applications such as multi-media, global positioning system (“GPS”), personal digital assistant (“PDA”) and smart phone devices.

 

Our UARTs product portfolio ranges from cost-effective industry-standard devices to high-performance multi-channel UARTs with a broad range of first in, first out (“FIFO”) depths and industry leading performance and features. We support popular central processing unit (“CPU”) bus interfaces such as 8-bit Industry Standard Architecture (“ISA”), 8-bit VLIO, 2-wire Inter-Integrate Circuit (“I2C”), 4-wire Serial Peripheral Interface (“SPI”), Peripheral Component Interconnect (“PCI”), PCIe and USB. In addition, we market a wireless UARTs solution that includes a high-performance UART, a controller and a Radio Frequency (“RF”) transceiver with our proprietary firmware. This device enables applications to send and receive data wirelessly over a secure proprietary protocol.

 

Our serial transceiver solutions consist of Recommended Standard (“RS”)-232, RS-485, RS-422 and multiprotocol devices that ensure reliable connectivity between computing devices. Our RS-232, RS-485 and RS-422 transceivers comply with international standards in delivering multi-channel digital signals between two systems. Our proprietary multiprotocol transceivers enable network equipment to communicate with a large population of peripherals that use a diverse set of serial protocol standards without the added burden of multiple add-on boards and cables.

 

 
4

 

 

Power Management Components

 

The market for power management components is a large and diverse semiconductor segment covering a wide range of requirements. We have developed solutions for DC/DC voltage conversion and supervision. Our products are designed to meet the needs of various communications infrastructure, networking and storage, industrial & embedded systems, and consumer applications.

 

We provide analog control of DC voltages and deliver regulated power to electronic systems such as data and telecommunication systems, servers and routers, enterprise storage systems, industrial control and process automation equipment, set top boxes, digital video recorders and portable electronic devices. Our PowerXR programmable power management system solutions provide system designers the ability to reconfigure the power management sub-system through a software interface. This proprietary approach enables customers to reduce product development cycles from many months to several weeks and provides a flexible and configurable solution for control of critical attributes of the power management system.

 

Power XR technology combines digital control and monitoring with our high performance analog circuitry, enabling the system architect to design products that significantly reduce wasted energy and are quickly reconfigurable.

 

Power management product development requires close customer interaction, advanced design skills and world-class process capability and design tools. As a fabless semiconductor manufacturer, we have access to a broad range of wafer fabrication facilities and process technologies. This access to leading process technology and our ongoing investment in analog and mixed-signal design automation tools enables us to compete with the world’s leading manufacturers of analog power management products.

 

Data Compression and Storage Solutions

 

We provide highly integrated semiconductors and board level products that enable OEMs to develop high performance computing, storage and networking equipment at significantly lower cost and with lower power consumption.

 

With the rapid growth of data volume and Input/Output (“I/O”) performance of CPUs far outpacing storage I/O performance improvements, overall computing performance is increasingly limited by storage I/O throughput. Data compression is a more cost-effective way to improve I/O throughput compared to other solutions such as Solid State Disks (SSDs) or distributed parallel systems. Our chips and boards can achieve compression throughput of between 10Gbps to 40Gbps and beyond at a fraction of the cost and power consumption of alternative approaches. We enable storage vendors to improve storage efficiency with much lower cost and lower power as compared to their alternate architecture choice of utilizing general purpose CPUs. Our solution off-loads specific tasks from the general purpose CPU by providing compression and hashing technology in a single pass with low latency to reduce and de-duplicate data at very high throughput. Deployment of our devices can be found in storage appliances such as primary storage, data protection and remote replication.

 

Networking equipment vendors utilize our products for bandwidth optimization and security. As more companies migrate applications to the Cloud there is an increasing need by cloud service providers to secure and optimize the connection between the Cloud and their customers. Our devices enable networking equipment vendors to supply cloud infrastructure with competitive advantages in cost and power. Our compression technology can be used in wide area network (“WAN”) optimization to improve bandwidth, and our high throughput security technology is used in public-key handshakes and symmetric encryptions for secure sockets layer (“SSL”) and internet protocol security (“IPSec”) connections to secure traffic.

 

Our devices and board level products are supported by our software development kit (“SDK”) and also by an open-source Exalerator solution software kit. These software kits are designed to enable a fast development and integration cycle. Our devices together with SDK and Exalerator software kits have been widely deployed at several leading computing, storage and networking vendors.

 

Communications Products

 

We provide high-performance communications products for the transmission of digital data through global service provider networks. Conforming to international standards for copper, fiber optic and wireless protocols, our broad portfolio of Plesiochronous Digital Hierarchy (“PDH”), Synchronous Optical NETwork (“SONET”) and Synchronous Digital Hierarchy (“SDH”) products enable the delivery of highly reliable, value added communication services.

 

 
5

 

 

SONET and SDH protocols are the backbone of today’s high capacity, long distance communications networks. Our portfolio of SONET/SDH products process data at speeds from 155Mb/s to 40Gb/s for the efficient transport of digital data over fiber optic networks. Products include mixed signal clock and data recovery (“CDR”) circuits, transceivers, protocol framers and service mappers. Our high density, high-integration products offer significant flexibility in line card design while providing cost, area and power savings over alternative solutions.

 

Service providers have a large investment in their existing copper infrastructure. This infrastructure remains a cost effective means of providing high value leased line and data services for enterprises, mobile backhaul and network interconnection. We offer a comprehensive portfolio of T1 and E1 devices for twisted pair copper connections and DS3 and E3 devices for coaxial copper connections. Our broad range of T1/E1 devices includes short-haul and long-haul Line Interface Units (“LIUs”) and LIU/framer combinations that incorporate reconfigurable, relayless redundancy (Exar R3 Technology™) with integrated termination resistors and jitter attenuation. Used individually or in chip sets, our T1/E1 technologies offer customers key advantages including design flexibility, enhanced system reliability and standards compliance, which are critical components of high-density, low-power system boards and linecards. In addition, our T1/E1/J1 Framer/LIU combination products simplify the design process by saving board space and by reducing complexity as a result of lowering component count. In addition to T1/E1 solutions, we have developed a diverse portfolio of single- and multi-channel T3/E3 physical interface solutions with integrated LIU logic and jitter attenuation that achieve high performance levels while reducing board space and overall power in multi-port applications.

 

Strategy

 

Our goal is to be the leading provider of high performance analog mixed-signal integrated circuits and advanced sub-system solutions for Networking & Storage, Industrial & Embedded Systems, and Communications Infrastructure markets. To achieve our long-term business objectives, we employ the following strategies:

 

Leverage Analog and Mixed-Signal Design Expertise to Provide Integrated System-Level SolutionsUtilizing our analog and mixed-signal design expertise, we integrate mixed-signal physical interface devices for a broad range of silicon solutions. This capability continues to be the backbone of our integration strategy and enables us to offer optimized solutions to the markets we serve. Our customers depend on analog and mixed-signal integration for power reduction, size optimization and signal integrity.

 

Expand Product Portfolio We have developed a strong presence in the data and telecommunications, networking and storage, industrial control and consumer markets where we have industry leading customers and proven technological capabilities. Our design expertise has enabled us to offer a diverse portfolio of both industry standard and proprietary products serving a range of connectivity and power management needs. Our extensive product portfolio provides the framework for customers to work with many of our products on a single board design. Our ability to serve the various needs of a customer’s system enables us to meet procurement and support demands by providing a single point of contact for applications support and supply chain management while reducing its number of vendors.

 

Grow Market Share with System SolutionsWe create systems solutions by coupling system expertise, software and advanced silicon integration to provide an optimized solution that is designed to be technically compelling and cost effective, resulting in distinctive device and card products like DeMux, DX1700 and DX1800 Cards, and Power XR. These solutions and others provide platform-level engagements that involve software and hardware integration, resulting in a cohesive bond with customers.

 

Strengthen and Expand Strategic OEM RelationshipsTo promote the early adoption of our solutions, we actively seek collaborative relationships with strategic OEMs during product development. We believe that OEMs recognize the value of our early involvement because designing their system products in parallel with our development can accelerate time-to-market for their end products. Collaborative relationships also help us to obtain early design wins and to increase the likelihood of market acceptance of our new products, while giving us the advantage of being the incumbent device provider on future generations of our customers’ platforms.

 

Use Standard Complementary Metal Oxide Semiconductor (“CMOS”) and Bipolar CMOS-DMOS (“BCD”) Process Technologies to Provide Compelling Price/Performance Solutions We design our products to be manufactured using standard CMOS and BCD processes. We believe that these processes are proven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS and BCD processes. In certain specialized cases, we may use other process technologies to take advantage of their performance characteristics.

 

 
6

 

 

Employ Fabless Semiconductor ModelWe have long-standing relationships with third-party wafer foundries and assembly and test subcontractors to manufacture our ICs. Our fabless approach allows us to avoid substantial capital spending, obtain competitive pricing, minimize the negative effects of industry cycles, reduce time-to-market, reduce technology and product risks, and facilitate the migration of our products to new CMOS and BCD process technologies. By employing the fabless model, we can focus on our core competencies in product design, development and support, as well as on sales and marketing.

 

Broaden Sales Coverage with Channel PartnersWe have strong relationships with our distributors, catalog firms and sales representatives throughout the world, from which we derive a significant portion of our total revenue. Through our partners, we have access to large market segments that we cannot directly support. Through these relationships, we extend our expertise and product exposure by enabling our partners to discover new demands for our solutions as well as aid us in defining our next generation solutions.

 

Sales and Customers 

 

We sell our products globally through both direct and indirect channels. In the United States we have our own direct sales force and are also represented by 21 independent sales representatives, three independent non-exclusive distributors, and three catalog distributors. We currently have domestic presences in or near Chicago, Illinois, Wilmington, Delaware, Atlanta, Georgia, Dallas, Texas and Fremont, California.

 

Internationally, we are represented in Canada, Europe and Asia by our wholly-owned foreign subsidiaries and international support offices in Canada, China, France, Germany, Hong Kong, Japan, South Korea, Taiwan and the United Kingdom. In addition to these offices, approximately 27 independent sales representatives and other independent, non-exclusive distributors represent us. The percentage of our net sales represented by certain geographies is as follows:

 

 

Fiscal Years Ended

 

March 31,

2013

April 1,

2012

March 27,

2011

China

    34

%

    34

%

    34

%

United States

    26

%

    26

%

    22

%

Singapore

    11

%

    11

%

    10

%

Germany

    10

%

    10

%

    9

%

Japan

    5

%

    5

%

    6

%

Europe (excluding Germany)

    4

%

    4

%

    7

%

Rest of world

    10

%

    10

%

    12

%

Total net sales

    100

%

    100

%

    100

%

 

We expect international sales to continue to be a significant portion of our net sales in the future. All of our sales to foreign customers are denominated in U.S. dollars. For a detailed description of our sales by geographic regions, see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations, Net Sales by Geography” and Part II, Item 8—“Notes to Consolidated Financial Statement, Note 19—Segment and Geographic Information.” For a discussion of the risk factors associated with our foreign sales, see Part I, Item 1A—“Risk Factors—“Our engagement with foreign customers could cause fluctuations in our operating results, which could materially and adversely impact our business, financial condition and results of operations’.

 

We sell our products to original equipment manufacturers (“OEM”) or their designated subcontract manufacturers and distributors (affiliated and unaffiliated) who buy our products and resell to their customers throughout the world. The following distributors accounted for 10% or more of our net sales in the fiscal years indicated below:

 

 

Fiscal Years Ended

 

March 31,

2013

April 1,

2012

March 27,

2011

Distributor A

    30

%

    31

%

    30

%

Distributor B

    *     11

%

    10

%

Distributor C

    10

%

    *     *

 


 

*

Net sales for this distributor for this period were less than 10% of our net sales.

 

No other distributor or customer accounted for 10% or more of our net sales in fiscal years 2013, 2012 or 2011.

 

 
7

 

 

The following distributors accounted for 10% or more of our net accounts receivable as of the dates indicated below:

 

 

March 31,

2013

April 1,

2012

Distributor A

    21

%

    26

%

Distributor B

    20

%

    14

%

Distributor D

    11

%

    11

%

 

No other distributor or customer accounted for 10% or more of our net accounts receivable as of March 31, 2013, and April 1, 2012.

 

Manufacturing

 

We outsource all of our fabrication and assembly, as well as the majority of our testing operations. This fabless manufacturing model allows us to focus on product design, development and support as well as on sales and marketing.

 

Our products are manufactured using standard CMOS, bipolar, bipolar CMOS (“BiCMOS”) and BCD bipolar (“CMOS DMOS”) process technologies. We use wafer foundries located in the United States and Asia to manufacture our semiconductor wafers.

 

Most of our semiconductor wafers are shipped directly from our foundries to our subcontractors in Asia for wafer test and assembly where the wafers are cut into individual dies and packaged. Independent contractors in China, Indonesia, Malaysia and Taiwan perform most of our assembly work. Final test and quality assurance are performed at our subcontractors’ facilities in Asia or at our Fremont, California facility. Most of our board products are manufactured in the United States. All of our primary manufacturing partners are certified to ISO 9001:2008.

 

Research and Development

 

We believe that ongoing innovation and introduction of new products in our targeted and adjacent markets is essential to delivering growth. Our ability to compete depends on our ability to offer technologically innovative products on a timely basis. As performance demands and the complexity of ICs have increased, the design and development process has become a multi-disciplinary effort requiring diverse competencies.

 

Our research and development efforts will continue to focus on developing high-performance analog, digital and mixed-signal solutions addressing the high-bandwidth requirements of communications and storage systems OEMs and the high-current, high-voltage requirements of interface and power management OEMs.

 

We make investments in advanced design tools, design automation and high-performance intellectual property libraries while taking advantage of readily available specialty intellectual property through licensing or purchases. We also augment our skill sets and intellectual property through university collaboration, incorporating talent through acquisition and by accessing needed skills with off-campus design centers. We continue to pursue the development of design methodologies that are optimized for reducing design cycle time and increasing the likelihood of first-time success. We have a substantive research and development presence in the People’s Republic of China (“PRC”) and have a research and development presence in Toronto, Canada. In connection with our restructuring efforts in the fourth quarter of fiscal year 2012, we eliminated our deep submicron physical design capability and adopted an application specific integrated circuit (“ASIC”) model for future deep submicron physical design and product procurement. We invested an aggregate of $22.4 million, $35.0 million and $49.9 million on research and development in fiscal years 2013, 2012 and 2011, respectively. For further explanation of our increased expenses in research and development, please see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Competition

 

The semiconductor industry is intensely competitive and is characterized by rapid technological change and a history of price reductions as design improvements and production efficiencies are achieved in successive generations of products. Although the market for analog and mixed-signal ICs is generally characterized by longer product life cycles and less dramatic price reductions than the market for digital ICs, we face substantial competition in each market in which we participate.

We believe that the principal competitive factors in the market segments in which we operate are:

 

 

time-to-market;

 

 

product innovation;

 

 
8

 

 

 

product performance, quality, reliability and features;

 

 

customer support and services;

 

 

price;

 

 

rapid technological change;

 

 

number of design wins released to production;

 

 

lowering total system cost; and

 

 

compliance with and support of industry standards.

 

We compete with many other companies and many of our current and potential competitors may have certain advantages over us such as:

 

 

longer presence in key markets;

 

 

greater brand recognition;

 

 

more secure supply chain;

 

 

access to larger customer bases;

 

 

broader product offerings;

 

 

deeper engagement with customers;

 

 

stronger financial position and liquidity; and

 

 

significantly greater sales, marketing, development, and other resources.

 

Competitors in our Industrial & Embedded Systems, and Communications Infrastructure markets include Analog Devices, Inc., Integrated Device Technology, Inc., Intersil Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc., Micrel Incorporated, Monolithic Power Systems, NXP B.V., Richtek, Silicon Labs, Texas Instruments Incorporated and Vitesse Semiconductor Corporation. Our competitors in the Networking & Storage market include Cavium Networks and Comtech Telecommunications Corp. See Part I, Item 1A—“Risk Factors—“If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross margins and lost market share’.”

 

Backlog

 

Our sales are made pursuant to either purchase orders for current delivery of standard items or agreements covering purchases over a period of time, which are frequently subject to revisions and, to a lesser extent, cancellations with little or no penalties. Lead times for the release of purchase orders depend on the scheduling practices of the individual customer, and our rate of bookings varies from month-to-month. Certain distributors’ agreements allow for stock rotations, scrap allowances and volume discounts. Further, we defer recognition of revenue on shipments to certain distributors until the product is sold to end customers. For all of these reasons, we believe backlog as of any particular date should not be used as a predictor of future sales.

 

Intellectual Property Rights

 

To protect our intellectual property, we rely on a combination of patents, mask work registrations, trademarks, copyrights, trade secrets, and employee and third-party nondisclosure agreements. As of March 31, 2013, we have 151 patents issued and 22 patent applications pending in the United States and 69 patents issued and 30 patent applications pending in various foreign countries. Our existing patents will expire between 2013 and 2030, or sooner if we choose not to pay renewal fees. We may also enter into license agreements or other agreements to gain access to externally developed products or technologies. While our intellectual property is critically important, we do not believe that our current or future success is materially dependent upon any one patent.

 

 
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Despite our protection efforts, we may fail to adequately protect our intellectual property. Others may gain access to our trade secrets or disclose such trade secrets to third parties without our knowledge. Some or all of our pending and future patent applications may not result in issued patents that provide us with a competitive advantage. Even if issued, such patents, as well as our existing patents, may be challenged and later determined to be invalid or unenforceable. Others may develop similar or superior products without access to or without infringing upon our intellectual property, including intellectual property that is protected by trade secrets and patent rights. In addition, the laws of certain territories in which our products are or may be developed, manufactured or sold, including Asia, Europe, the Middle East and Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States of America.

 

We cannot be sure that our products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications or that our products do not infringe any patents or proprietary rights of third parties. Occasionally, we are informed by third parties of alleged patent infringement. In the event that any relevant claims of third-party patents are found to be valid and enforceable, we may be required to:

 

 

stop selling, incorporating or using our products that use the infringed intellectual property;

 

 

obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, although such license may not be available on commercially reasonable terms, if at all; or

 

 

redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible or meet customer requirements.

 

If we are required to take any of the actions described above or defend against any claims from third parties, our business, financial condition and results of operations could be harmed. See Part I, Item 1A—“Risk Factors—“We may be unable to protect our intellectual property rights, which could harm our competitive position’ and “We could be required to pay substantial damages or could be subject to various equitable remedies if it were proven that we infringed the intellectual property rights of others’.”

 

Acquisitions

 

On March 22, 2013, we completed the acquisition of substantially all of the assets of Altior Inc. (“Altior”), a developer of data management solutions in Eatontown, New Jersey. Altior’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 23, 2013.

 

On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a developer of 10 gigabit Ethernet (“10GbE”) controller silicon and card solutions optimized for virtualized environments located in Sunnyvale, California. During the course of fiscal year 2011, we participated in the 10GbE market and established a limited set of customers, but market adoption and revenue fell short of our revenue goals for the product line. After assessing our position in this market and our product development roadmap, we announced on March 4, 2011 that we were exiting the data center virtualization market and, in connection therewith, had decided to discontinue development of these products. We promptly reduced our resources and sold assets devoted to the development of these products.

 

On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”). Galazar, based in Ottawa, Ontario, Canada, was a fabless semiconductor and software supplier focused on carrier grade transport over telecom networks. Galazar’s product portfolio addressed transport of a wide range of networking and telecom services including Ethernet, TDM, Fiber Channel and video over SONET/SDH, PDH and OTN networks. On February 1, 2012 we terminated development of OTN products and ceased operations in Ottawa.

 

On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a fabless semiconductor company that was founded in 1996. The acquisition of Hifn expanded and complemented our product offering in the enterprise storage, networking and telecom markets where we have had a significant base of business for more than 10 years. The Hifn technology added compression and data deduplication products used in storage applications to optimize data and speed up data backup and retrieval. Hifn had also been a leading provider in security acceleration technology by providing encryption and compression products to leading networking and telecom system manufacturers. The Hifn products complement our connectivity solutions and provide us with a more significant product offering to our customers.

 

Employees 

 

As of March 31, 2013, we employed 291 full-time employees, with 133 in research and development, 50 in operations, 70 in marketing and sales and 38 in administration. Of the 291 employees, 91 are located in our international offices. See Part I, Item 1A—“Risk Factors—“We depend in part on the continued service of our key engineering and management personnel and our ability to identify, hire, incentivize and retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business, financial condition and results of operations could be materially and adversely impacted’. ” None of our employees are represented by a collective bargaining agreement and we have never experienced a work stoppage due to labor issues.

 

 
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Available Information

 

We file electronically with the Securities and Exchange Commission (“SEC”) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those Reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. Those Reports and statements: (1) may be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, (2) are available at the SEC’s Internet site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC; and (3) are available free of charge through our website (www.exar.com) as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC. Information regarding the operation of the SEC’s public reference room may be obtained by calling the SEC at 1-800-SEC-0330. Copies of such documents may be requested by contacting our Investor Relations Department at (510) 668-7201 or by sending an e-mail through the Investor Relations page on our website. Information on our website is not incorporated by reference into this Annual Report.

 

Executive Officers of the Registrant

 

Our executive officers and their ages as of May 30, 2013, are as follows:

 

Name

Age

Position

   

Louis DiNardo

53

President, Chief Executive Officer and Director

Steve Bakos

46

Senior Vice President, Worldwide Sales and Marketing

Ryan A. Benton

42

Senior Vice President and Chief Financial Officer

Parviz Ghaffaripour

49

Senior Vice President, Connectivity and Power Management Products

Diane Hill

56

Vice President, Human Resources

Carlos Laber

61

Senior Vice President, Worldwide Research and Development

Thomas R. Melendrez

59

General Counsel, Secretary and Executive Vice President, Business Development

Todd Smathers

64

Senior Vice President, Worldwide Operations

 

Louis DiNardo was appointed President, Chief Executive Officer and Director as of January 3, 2012. Prior to joining us, he was a Partner at Crosslink Capital, a stage-independent venture capital and growth equity firm based in San Francisco, which he joined in January of 2008, and focused on semiconductor and alternative energy technology investment in private companies. Mr. DiNardo was a partner at VantagePoint Venture Partners from January of 2007 through January of 2008. Mr. DiNardo was President and Chief Operating Officer at Intersil Corporation from January 2006 through October 2006. Prior to his promotion, Mr. DiNardo held the position of Executive Vice President of the Power Management Business. He held the position of President and CEO as well as Co-Chairman of the Board of Directors at Xicor Corporation, a public company, from 2000 until Intersil acquired the company in July of 2004. Mr. DiNardo spent thirteen years at Linear Technology where he was Vice President of Worldwide Marketing and General Manager of the Mixed-Signal Business Unit. He began his career in the semiconductor industry at Analog Devices Incorporated where he served for eight years in a variety of technical and management roles. Mr. DiNardo holds a B.A. from Ursinus College, 1981. Mr. DiNardo currently serves on Board of Directors of Synapsense Corporation, a manufacturer of high performance Data Center Infrastructure Management (DCIM) energy efficiency products, located in Folsom, California. Mr. DiNardo also is Chairman of the Board of Directors of SoloPower Inc, a manufacturer of thin-film solar cells and flexible solar modules, located in San Jose, California. Mr. DiNardo has held executive leadership positions with and served on the Board of Directors of a variety of privately held technology companies. 

 

Steve Bakos was appointed Senior Vice President, Worldwide Sales and Marketing in July of 2012. Mr. Bakos has nearly 25 years of experience in analog and mixed signal sales and marketing, including over 10 years of executive management experience. Mr. Bakos began his sales career at National Semiconductor. Mr. Bakos spent the next 11 years at Linear Technology where he held various sales and marketing management positions. In 2002, he joined Xicor as Vice President of Worldwide Sales until the company was acquired by Intersil in July of 2004. At Intersil, he was appointed Vice President of Sales for the Americas and Global Distribution 2004 until 2006. Mr. Bakos spent the next several years as Vice President of Sales and Senior Vice President of Marketing and Sales for SiTime and Active-Semi, respectively. Prior to joining Exar, Mr. Bakos served as Vice President of Worldwide Sales at Conexant Systems. Mr. Bakos holds a Bachelor of Science in Engineering from Cornell University, Ithaca, NY.

 

 
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Ryan A. Benton was appointed Senior Vice President and Chief Financial Officer in December of 2012. Prior to joining the Company, Mr. Benton was Chief Financial Officer of SynapSense Corporation located in Folsom, California, a private venture backed company serving the Data Center Infrastructure Management market. Prior to SynapSense, from February 2007 until May 2012, Mr. Benton was Chief Financial Officer of SoloPower Inc, a manufacturer of thin-film solar cells and flexible solar modules, located in San Jose, California. From November 2004 until February 2007, Mr. Benton served as a financial consultant for the United States subsidiary of ASM International NV in Phoenix, Arizona, a semiconductor capital equipment company, where he supported acquisitions and integration process. He also served as Chief Financial Officer for PB Unlimited, an advertising specialty manufacturer located in the Dallas-Fort Worth area, from April 2002 through November 2004. Mr. Benton served as corporate controller for eFunds, which was a public company located in Scottsdale, Arizona that provides information technology solutions for the financial service industry, where he was employed from September 2000 until March 2002. Mr. Benton received his B.A. from the University of Texas.

 

Parviz Ghaffaripour was appointed Senior Vice President, Connectivity and Power Management Products in May of 2013. He brings over 29 years of analog mixed-signal experience to Exar. Mr. Ghaffaripour most recently served as CEO of Akros Silicon, a privately funded power management company located in Sunnyvale, California. Prior to Akros, he was Chief Operating Officer at Advanced Analogic Technologies which was acquired by Skyworks. Mr. Ghaffaripour has held technical and executive management roles at Maxim Integrated Products and National Semiconductor. Mr. Ghaffaripour began his career at Exar in 1984. He earned his B.S.E.E. at the University of California, Berkeley and his M.S.E.E. at Santa Clara University, and executive degrees in Business Administration at Stanford University and Western Ontario.

 

Diane Hill was appointed Vice President, Human Resources in April of 2010. With over 30 years of human resources experience, including 20 in the semiconductor industry, Ms. Hill is responsible for developing and implementing all global and regional human resources policies and programs at Exar. Since joining us in September 2000, Ms. Hill has held various senior Human Resources positions prior to her current role, including Division Vice President, Director and Senior Manager. Previously, Ms. Hill held various management positions at Daisy Systems Corporation, a manufacturer of computer hardware and software for electronic design automation (EDA), from October 1987 to April 1990 and Teledyne MEC, a subsidiary of Teledyne Technologies, Inc., from August 1979 to October 1987. Ms. Hill holds a BA in Psychology from the University of California at Santa Barbara.

 

Carlos Laber was appointed Senior Vice President, Worldwide Research and Development in February of 2012. Mr. Laber has over 30 years of experience in analog and mixed-signal technology and product development. Prior to his appointment at Exar, Mr. Laber served as Senior Director of Product Development at ON Semiconductor and led the power management development efforts in Santa Clara, California. Mr. Laber was at ON Semiconductor for almost three years. Mr. Laber previously served for two years as Intersil's Vice President of Worldwide Technology, and before that, two years as Intersil's Vice President of Engineering for the Power Management Group. He joined Intersil after the acquisition of Xicor Incorporated, where he served for two years as Vice President of Engineering. Mr. Laber came to Xicor from Micrel Semiconductor where he was the Vice President of Engineering for the Analog and RF Product group for more than two years. Prior to Micrel, Mr. Laber served at Micro Linear for 16 years, where he was Vice President of Engineering. Before Micro Linear, Mr. Laber was at National Semiconductor and Intel Corporation where he had increasingly more senior design engineering and management roles. Mr. Laber holds a BSEE degree in Electromechanical and Electronic Engineering from the University of Buenos Aires, Argentina and an MSEE degree from the University of Minnesota, Minneapolis.

 

Thomas R. Melendrez joined us in April of 1986 as our Corporate Attorney. He was promoted to Director, Legal Affairs in July 1991, and again to Corporate Vice President, Legal Affairs in March 1993. In March 1996, he was promoted to Corporate Vice President, General Counsel and in June 2001, he was appointed Secretary. In April 2003, he was promoted to General Counsel, Secretary and Vice President of Business Development and in July 2005, he was promoted to Senior Vice President, Business Development. In April 2007, he was promoted to his current position as General Counsel, Secretary and Executive Vice President of Business Development. Mr. Melendrez has over 25 years of legal experience in the semiconductor and related industries and he received a BA from the University of Notre Dame, a JD from University of San Francisco and an MBA from Pepperdine University.

 

Todd Smathers was appointed Senior Vice President, Worldwide Operations in March of 2012. Mr. Smathers has over 40 years of experience in analog and mixed-signal technology and product development. He served as Vice President of Operations at Intersil Corporation and Xicor, Incorporated, which was acquired by Intersil in 2004. Prior to joining Xicor, Mr. Smathers was General Manager of the Mixed Signal Business Unit at Linear Technology Corporation where he had previously served in a variety of management and executive roles since the company's founding in 1981. Mr. Smathers holds a Bachelor of Science in Electrical Engineering degree from Clemson University.

 

ITEM 1A.

RISK FACTORS

 

The following factors, as well as other factors affect our business financial condition and operating results. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

 
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Our financial results may fluctuate significantly because of a number of factors, many of which are beyond our control.

 

Our financial results may fluctuate significantly as a result of a number of factors, many of which are difficult or impossible to control or predict, which include:

 

 

the continuing effects of economic uncertainty;

 

 

the cyclical nature of the general economy and the semiconductor industry;

 

 

difficulty in predicting revenues and ordering the correct mix of components from suppliers due to limited visibility into customers and channel partners;

 

 

changes in the mix of product sales as our margins vary by product;

 

 

fluctuations in the capitalization and amortization of unabsorbed manufacturing costs;

 

 

the impact of our revenue recognition policies on reported results;

 

 

the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channel partners due to, among others, the following factors:

 

 

management of customer, subcontractor, logistic provider and/or channel inventory;

 

 

delays in shipments from our foundries and subcontractors causing supply shortages;

 

 

inability of our foundries and subcontractors to provide quality products, in adequate quantities and in a timely manner;

 

 

dependency on a single product with a single customer and/or distributor;

 

 

volatility of demand for equipment sold by our large customers, which in turn, introduces demand volatility for our products;

 

 

demand disruption if customers change or modify their complex subcontract manufacturing supply chain;

 

 

demand disruption in customer demand due to technical or quality issues with our devices or components in their system;

 

 

the inability of our customers to obtain components from their other suppliers;

 

 

disruption in sales or distribution channels;

 

 

our ability to maintain and expand distributor relationships;

 

 

changes in sales and implementation cycles for our products;

 

 

the ability of our suppliers and customers to remain solvent, obtain financing or fund capital expenditures as a result of the recent global economic slowdown;

 

 

risks associated with entering new markets;

 

 

the announcement or introduction of products by our existing competitors or new competitors;

 

 

loss of market share by our customers;

 

 

competitive pressures on selling prices or product availability;

 

 

pressures on selling prices overseas due to foreign currency exchange fluctuations;

 

 
13

 

 

 

erosion of average selling prices coupled with the inability to sell newer products with higher average selling prices, resulting in lower overall revenue and margins;

 

 

delays in product releases;

 

 

market and/or customer acceptance of our products;

 

 

consolidation among our competitors, our customers and/or our customers’ customers;

 

 

changes in our customers’ end user concentration or requirements;

 

 

loss of one or more major customers;

 

 

significant changes in ordering pattern by major customers;

 

 

our or our channel partners’ or logistic providers’ ability to maintain and manage appropriate inventory levels;

 

 

the availability and cost of materials and services, including foundry, assembly and test capacity, needed by us from our foundries and other manufacturing suppliers;

 

 

disruptions in our or our customers’ supply chain due to natural disasters, fire, outbreak of communicable diseases, labor disputes, civil unrest or other reasons;

 

 

delays in successful transfer of manufacturing processes to our subcontractors;

 

 

fluctuations in the manufacturing output, yields, and capacity of our suppliers;

 

 

fluctuation in suppliers’ capacity due to reorganization, relocation or shift in business focus, financial constraints, or other reasons;

 

 

problems, costs, or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher levels of design and device integration;

 

 

our ability to successfully introduce and transfer into production new products and/or integrate new technologies;

 

 

excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize or inventory becomes obsolete;

 

 

increased manufacturing costs;

 

 

higher mask tooling costs associated with advanced technologies; and

 

 

the amount and timing of our investment in research and development;

 

 

costs and business disruptions associated with stockholder or regulatory issues;

 

 

the timing and amount of employer payroll tax to be paid on our employees’ gains on exercise of stock options;

 

 

an inability to generate profits to utilize net operating losses;

 

 

increased costs and time associated with compliance with new accounting rules or new regulatory requirements;

 

 

changes in accounting or other regulatory rules, such as the requirement to record assets and liabilities at fair value;

 

 

write-off of some or all of our goodwill and other intangible assets;

 

 

fluctuations in interest rates and/or market values of our marketable securities;

 

 

litigation costs associated with the defense of suits brought or complaints made against us or enforcement of our rights; and

 

 

changes in or continuation of certain tax provisions.

 

 
14

 

  

If we are unable to grow or secure and convert a significant portion of our design wins into revenue, our business, financial condition and results of operations would be materially and adversely impacted.

 

We continue to secure design wins for new and existing products. Such design wins are necessary for revenue growth. However, many of our design wins may never generate revenues if end-customer projects are unsuccessful in the market place, the end-customer terminates the project, which may occur for a variety of reasons or the end-customer selects a competitive solution. Mergers, consolidations, changing market requirements and cost reduction activities among our customers may lead to termination of certain projects before the associated design win generates revenue. If design wins do generate revenue, the time lag between the design win and meaningful revenue is typically between six months to longer than 18 months. If we fail to grow and convert a significant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materially and adversely impacted. Under continued uncertain global economic conditions, our design wins could be delayed even longer than the typical lag period and our eventual revenue could be less than anticipated from products that were introduced within the last eighteen to thirty-six months, which would likely materially and adversely affect our business, financial condition and results of operations.

 

Global capital, credit market, employment, and general economic and political conditions, and resulting declines in consumer confidence and spending, could have a material adverse effect on our business, operating results and financial condition.

 

Because our customers, suppliers and other business partners are in many countries around the world, we must monitor general global conditions for impact on our business. Economies throughout global regions continue to be volatile and, in many countries, inconsistent with trends in the U.S. or other stable economies. In Europe uncertainty continues regarding the ability of certain countries to service their level of debt. In recent quarters in China and certain other Asian countries growth has continued but at a slower pace than earlier in the recovery. Political conditions in individual countries or across regions can also impact our business.

 

We cannot predict the timing, severity or duration of any economic slowdown or recovery or the impact of any such events on our vendors, customers or us. If the economy or markets in which we operate deteriorate from current levels, many related factors could have a material adverse effect on our business, operating results, and financial condition, including the following:

 

 

slower spending by our target markets and economic fluctuations may result in reduced demand for our products, reduced orders for our products, order cancellations, lower revenues, increased inventories, and lower gross margins;

 

 

if recent restructuring activities insufficiently lower our operating expense or we fail to execute on our growth strategy, our restructuring efforts may not be successful and we may not be able to realize the cost savings and other anticipated benefits; 

 

 

if we further reduce our workforce or curtail or redirect research and development efforts, it may adversely impact our ability to respond rapidly to product development or growth opportunities;

 

 

we may be unable to predict the strength or duration of market conditions or the effects of consolidation of our customers or competitors in their industries, which may result in project delays or cancellations;

 

 

we may be unable to find suitable investments that are safe or liquid, or that provide a reasonable return resulting in lower interest income or longer investment horizons, and disruptions to capital markets or the banking system may also impair the value of investments or bank deposits we currently consider safe or liquid;

 

 

the failure of financial institution counterparties to honor their obligations to us under credit instruments could jeopardize our ability to rely on and benefit from those instruments, and our ability to replace those instruments on the same or similar terms may be limited under poor market conditions;

 

 

continued volatility in the markets and prices for commodities, such as gold, and raw materials we use in our products and in our supply chain, could have a material adverse effect on our costs, gross margins, and profitability;

 

 

if distributors of our products experience declining revenues, experience difficulty obtaining financing in the capital and credit markets to purchase our products or experience severe financial difficulty, it could result in insolvency, reduced orders for our products, order cancellations, inability to timely meet payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expenses associated with collection efforts and increased bad debt expenses;

 

 
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if contract manufacturers or foundries of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delays or non-delivery of shipments of our products;

 

 

potential shutdowns or over capacity constraints by our third-party foundry, assembly and test subcontractors could result in longer lead-times, higher buffer inventory levels and degraded on-time delivery performance; and

 

 

the current macroeconomic envir onment also limits our visibility into future purchases by our customers and renewals of existing agreements, which may necessitate changes to our business model.

 

If we fail to develop, introduce or enhance products that meet evolving needs or which are necessitated by technological advances, or we are unable to grow revenue in our served markets, then our business, financial condition and results of operations could be materially and adversely impacted.

 

The markets for our products are characterized by a number of factors, some of which are listed below:

 

 

changing or disruptive technologies;

 

 

evolving and competing industry standards;

 

 

changing customer requirements;

 

 

increasing price pressure from lower priced solutions;

 

 

increasing product development costs;

 

 

finite market windows for product introductions;

 

 

design-to-production cycles;

 

 

increasing functional integration;

 

 

competitive solutions, stronger customer engagement or broader product offering;

 

 

fluctuations in capital equipment spending levels and/or deployment;

 

 

rapid adjustments in customer demand and inventory;

 

 

moderate to slow growth;

 

 

frequent product introductions and enhancements; and

 

 

changing competitive landscape (due to consolidation, financial viability, etc.).

 

Our growth depends in large part on our continued development and timely release of new products for our core markets. We must: (1) anticipate customer and market requirements and changes in technology and industry standards; (2) properly define, develop and introduce new products on a timely basis; (3) gain access to and use technologies in a cost-effective manner; (4) have suppliers produce quality products consistent with our requirements; (5) continue to expand and retain our technical and design expertise; (6) introduce and cost-effectively deliver new products in line with our customer product introduction requirements; (7) differentiate our products from our competitors’ offerings; and (8) gain customer acceptance of our products. In addition, we must continue to have our products designed into our customers’ future products and maintain close working relationships with key customers to define and develop new products that meet their evolving needs. Moreover, we must respond in a rapid and cost-effective manner to shifts in market demands to increased functional integration and other changes. Migration from older products to newer products may result in earnings volatility as revenues from older products decline and revenues from newer products begin to grow.

 

Products for our customers’ applications are subject to continually evolving industry standards and new technologies. Our ability to compete will depend in part on our ability to identify and ensure compliance with these industry standards. The emergence of new standards could render our products incompatible with other products that meet those standards. We could be required to invest significant time, effort and expense to develop and qualify new products to ensure compliance with industry standards.

 

 
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The process of developing and supporting new products is complex, expensive and uncertain, and if we fail to accurately predict, understand and execute to our customers’ changing needs and emerging technological trends, our business, financial condition and results of operations may be harmed. In addition, we may make significant investments to define new products according to input from our customers who may choose a competitor’s or an internal solution or cancel their projects. We may not be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins, ensure when and which design wins actually get released to production, or respond effectively to technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or may incorrectly anticipate market demand and develop products that achieve little or no market acceptance. Our pursuit of technological advances may require substantial time and expense and may ultimately prove unsuccessful. Failure in any of these areas may materially and adversely harm our business, financial condition and results of operations.

 

We derive a substantial portion of our revenues from distributors, especially from our two primary distributors, Future Electronics Inc. (“Future”), a related party, and Arrow Electronics, Inc. (“Arrow”). Our revenues would likely decline significantly if our primary distributors elected not to or we were unable to effectively promote or sell our products or if they elected to cancel, reduce or defer purchases of our products.

 

Future and Arrow have historically accounted for a significant portion of our revenues and they are our two primary distributors worldwide. We anticipate that sales of our products to these distributors will continue to account for a significant portion of our revenues. The loss of either Future or Arrow as a distributor, for any reason, or a significant reduction in orders from either of them would materially and adversely affect our business, financial condition and results of operations.

 

Sales to Future and Arrow are made under agreements that provide protection against price reduction for their inventory of our products. As such, we could be exposed to significant liability if the inventory value of the products held by Future and Arrow declined dramatically. Our distributor agreements with Future and Arrow do not contain minimum purchase commitments. As a result, Future and Arrow could cease purchasing our products with short notice or cease distributing our products. In addition, they may defer or cancel orders without penalty, which would likely cause our revenues to decline and materially and adversely impact our business, financial condition and results of operations.

 

If our distributors or sales representatives stop selling or fail to successfully promote our products, our business, financial condition and results of operations could be materially and adversely impacted.

 

We sell many of our products through sales representatives and distributors, many of which sell directly to OEMs, contract manufacturers and end customers. Our non-exclusive distributors and sales representatives may carry our competitors’ products, which could adversely impact or limit sales of our products. Additionally, they could reduce or discontinue sales of our products or may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. Our agreements with distributors contain limited provisions for return of our products, including stock rotations whereby distributors may return a percentage of their purchases from us based upon a percentage of their most recent three or six months of shipments. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return some portion of their prior purchases. The loss of business from any of our significant distributors or the delay of significant orders from any of them, even if only temporary, could materially and adversely impact our business, financial conditions and results of operations.

 

Moreover, we depend on the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic and semiconductor industry conditions. We believe that our success will continue to depend on these distributors and sales representatives. If some or all of our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business, financial condition and results of operations could be materially and adversely impacted.

 

Certain of our distributors may rely heavily on the availability of short-term capital at reasonable rates to fund their ongoing operations. If this capital is not available, or is only available on onerous terms, certain distributors may not be able to pay for inventory received or we may experience a reduction in orders from these distributors, which would likely cause our revenue to decline and materially and adversely impact our business, financial condition and results of operations.

 

 
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If we are unable to accurately forecast demand for our products, we may be unable to efficiently manage our inventory.

 

Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on customer forecasts, internal evaluation of customer demand and current backlog, which can fluctuate substantially. Due to a number of factors such as customer changes in delivery schedules and quantities actually purchased, cancellation of orders, distributor returns or price reductions, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. The still unsettled, uncertain and weak economy may increase the risk of purchase order cancellations or delays, product returns and price reductions. We may not be able to meet our expected revenue levels or results of operations if there is a reduction in our order backlog for any particular period and we are unable to replace those anticipated sales during the same period. Our forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, new part introductions by our competitors, loss of previous design wins, adverse changes in our scheduled product order mix and demand for our customers’ products or models. As a consequence of these factors and other inaccuracies inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some of our products and shortages of others. Such shortages can adversely impact customer relations and surpluses can result in larger-than-desired inventory levels, either of which can materially and adversely impact our business, financial condition and results of operations. Due to the unpredictability of global economic conditions and increased difficulty in forecasting demand for our products, we could experience an increase in inventory levels.

 

In instances where we have hub agreements with certain vendors, the inability of our partners to provide accurate and timely information regarding inventory and related shipments of the inventory may impact our ability to maintain the proper amount of inventory at the hubs, forecast usage of the inventory and record accurate revenue recognition which could materially and adversely impact our business, financial conditions and the results of operations.

 

We depend on third-party subcontractors to manufacture our products. We utilize wafer foundries for processing our wafers and assembly and test subcontractors for manufacturing and testing our integrated circuit products and board assembly subcontractors for our board-level products. Any disruption in or loss of our subcontractors’ capacity to manufacture and test our products subjects us to a number of risks, including the potential for an inadequate supply of products and higher materials costs. These risks may lead to delayed product delivery or increased costs, which could materially and adversely impact our business, financial condition and results of operations.

 

We do not own or operate a semiconductor fabrication facility or a foundry. We utilize various foundries for different processes. Our products are based on complementary metal oxide semiconductor (“CMOS”) processes, bipolar processes and bipolar-CMOS (“BiCMOS”) processes. Our foundries produce semiconductors for many other companies (many of which have greater volume requirements than us), and therefore, we may not have access on a timely basis to sufficient capacity or certain process technologies and we have from time to time, experienced extended lead times on some products. In addition, we rely on our foundries’ continued financial health and ability to continue to invest in smaller geometry manufacturing processes and additional wafer processing capacity.

 

Many of our new products are designed to take advantage of smaller geometry manufacturing processes. Due to the complexity and increased cost of migrating to smaller geometries, as well as process changes, we could experience interruptions in production or significantly reduced yields causing product introduction or delivery delays. If such delays occur, our products may have delayed market acceptance or customers may select our competitors’ products during the design process.

 

New and current process technologies or products can be subject to wide variations in manufacturing yields and efficiency. Our foundries or the foundries of our suppliers may experience unfavorable yield variances or other manufacturing problems that result in product introduction or delivery delays. Further, if the products manufactured by our foundries contain production defects, reliability issues or quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may cancel orders or be reluctant to continue to buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these defects or bugs could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition and results of operations.

 

Our foundries and test assembly subcontractors manufacture our products on a purchase order basis. We provide our foundries with rolling forecasts of our production requirements; however, the ability of our foundries to provide wafers is limited by the foundries’ available capacity. Our third-party foundries may not allocate sufficient capacity to satisfy our requirements. In addition, we may not continue to do business with our foundries on terms as favorable as our current terms.

 

Furthermore, any sudden reduction or elimination of any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products. Any delays or shortages would likely materially and adversely impact our business, financial condition and results of operations. In particular, the products produced from the wafers manufactured by our supplier in Hangzhou, China currently constitute a significant part of our total revenue, and so any delay, reduction or elimination of our ability to obtain wafers from this supplier could materially and adversely impact our business, financial condition and results of operations.

 

Our reliance on our wafer foundries, assembly and test subcontractors and board assembly subcontractors involves the following risks, among others:

 

 

a manufacturing disruption or sudden reduction or elimination of any existing source(s) of semiconductor manufacturing materials or processes, which might include the potential closure, change of ownership, change in business conditions or relationships, change of management or consolidation by one of our foundries;

 

 
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disruption of manufacturing or assembly or test services due to vendor transition, relocation or limited capacity of the foundries or subcontractors;

 

 

inability to obtain, develop or ensure the continuation of technologies needed to manufacture our products;

 

 

extended time required to identify, qualify and transfer to alternative manufacturing sources for existing or new products or the possible inability to obtain an adequate alternative;

 

 

failure of our foundries or subcontractors to obtain raw materials and equipment;

 

 

increasing cost of commodities, such as gold, raw materials and energy resulting in higher wafer or package costs;

 

 

long-term financial and operating stability of the foundries or their suppliers or subcontractors and their ability to invest in new capabilities and expand capacity to meet increasing demand, to remain solvent or to obtain financing in tight credit markets;

 

 

continuing measures taken by our suppliers such as reductions in force, pay reductions, forced time off or shut down of production for extended periods of time to reduce and/or control operating expenses in response to weakened customer demand;

 

 

subcontractors’ inability to transition to smaller package types or new package compositions;

 

 

a sudden, sharp increase in demand for semiconductor devices, which could strain the foundries’ or subcontractors’ manufacturing resources and cause delays in manufacturing and shipment of our products;

 

 

manufacturing quality control or process control issues, including reduced control over manufacturing yields, production schedules and product quality;

 

 

potential misappropriation of our intellectual property;

 

 

disruption of transportation to and from Asia where most of our foundries and subcontractors are located;

 

 

political, civil, labor or economic instability;

 

 

embargoes or other regulatory limitations affecting the availability of raw materials, equipment or changes in tax laws, tariffs, services and freight rates; and

 

 

compliance with U.S., local or international regulatory requirements.

 

Other additional risks associated with subcontractors include:

 

 

subcontractors imposing higher minimum order quantities for substrates;

 

 

potential increase in assembly and test costs;

 

 

our board level product volume may not be attractive to preferred manufacturing partners, which could result in higher pricing, extended lead times or having to qualify an alternative vendor;

 

 

difficulties in selecting, qualifying and integrating new subcontractors;

 

 

inventory and delivery management issues relating to hub arrangements;

 

 

entry into “take-or-pay” agreements; and

 

 

limited warranties from our subcontractors for products assembled and tested for us.

 

 
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We depend in part on the continued service of our key engineering and executive management personnel and our ability to identify, hire, incentivize and retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business, financial condition and results of operations could be materially and adversely impacted.

 

Our future success depends, in part, on the continued service of our key design, engineering, technical, sales, marketing and executive personnel and our ability to identify, hire, motivate and retain such qualified personnel, as well as effectively and quickly replace key personnel with qualified successors with competitive incentive compensation packages.

 

Under certain circumstances, including a company acquisition, significant restructuring or business downturn, current and prospective employees may experience uncertainty about their future roles with us. Volatility or lack of positive performance in our stock price and the ability or willingness to offer meaningful competitive equity compensation and incentive plans or in amounts consistent with market practices may also adversely affect our ability to retain and incentivize key employees. In addition, competitors may recruit our employees, as is common in the high tech sector. If we are unable to retain personnel that are critical to our future operations, we could face disruptions in operations, loss of existing customers, loss of key information, expertise or know-how, unanticipated additional recruiting and training costs, and potentially higher compensation costs.

 

Competition for skilled employees having specialized technical capabilities and industry-specific expertise is intense and continues to be a considerable risk inherent in the markets in which we compete. At times, competition for such employees has been particularly notable in California and People’s Republic of China (“PRC”). Further, the PRC historically has different managing principles from Western style management and financial reporting concepts and practices, as well as different banking, computer and other control systems, making the successful identification and employment of qualified personnel particularly important, and hiring and retaining a sufficient number of such qualified employees may be difficult. As a result of these factors, we may experience difficulty in establishing and maintaining management, legal and financial controls, collecting financial data, books of account and records and instituting business practices that meet Western standards and regulations, which could materially and adversely impact our business, financial condition and results of operations.

 

Our employees are employed “at-will”, which means that they can terminate their employment at any time. Our international locations are subject to local labor laws, which are often significantly different from U.S. labor laws and which may under certain conditions, result in large separation costs upon termination. Further, employing individuals in international locations is subject to other risks inherent in international operations, such as those discussed with respect to international sales below, among others. The failure to recruit and retain, as necessary, key design engineers and technical, sales, marketing and executive personnel could materially and adversely impact our business, financial condition and results of operations.

 

Stock-based awards are critical to our ability to recruit, retain and motivate highly skilled talent. In making employment decisions, particularly in the semiconductor industry and the geographies where our employees are located, a key consideration of current and potential employees is the value of the equity awards they receive in connection with their employment. If we are unable to offer employment packages with a competitive equity award component, our ability to attract highly skilled employees would be harmed. In addition, volatility in our stock price could result in a stock option’s exercise price exceeding the market value of our common stock or a deterioration in the value of restricted stock units granted, thus lessening the effectiveness of stock-based awards for retaining and motivating employees. Similarly, decreases in the number of unvested in-the-money stock options held by existing employees, whether because our stock price has declined, options have vested, or because the size of follow-on option grants has decreased, may make it more difficult to retain and motivate employees. Consequently, we may not continue to successfully attract and retain key employees, which could have an adverse effect on our business, financial condition and results of operations.

 

We have made, and in the future may make, acquisitions and significant strategic equity investments, which may involve a number of risks. If we are unable to address these risks successfully, such acquisitions and investments could have a material adverse effect on our business, financial condition and results of operations.

 

We have undertaken a number of strategic acquisitions, have made strategic investments in the past, and may make further strategic acquisitions and investments from time to time in the future. The risks involved with these acquisitions and investments include:

 

 

the possibility that we may not receive a favorable return on our investment or incur losses from our investment or the original investment may become impaired;

 

 

revenues or synergies could fall below projections or fail to materialize as assumed;

 

 

failure to satisfy or set effective strategic objectives;

 

 

the possibility of litigation arising from or in connection with these acquisitions;

 

 

our assumption of known or unknown liabilities or other unanticipated events or circumstances; and

 

 

the diversion of management’s attention from day-to-day operations of the business and the resulting potential disruptions to the ongoing business.

 

 
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Additional risks involved with acquisitions include:

 

 

difficulties in integrating and managing various functional areas such as sales, engineering, marketing, and operations;

 

 

difficulties in incorporating or leveraging acquired technologies and intellectual property rights in new products;

 

 

difficulties or delays in the transfer of manufacturing flows and supply chains of products of acquired businesses;

 

 

failure to retain and integrate key personnel;

 

 

failure to retain and maintain relationships with existing customers, distributors, channel partners and other parties;

 

 

failure to manage and operate multiple geographic locations both effectively and efficiently;

 

 

failure to coordinate research and development activities to enhance and develop new products and services in a timely manner that optimize the assets and resources of the combined company;

 

 

difficulties in creating uniform standards, controls (including internal control over financial reporting), procedures, policies and information systems;

 

 

unexpected capital equipment outlays and continuing expenses related to technical and operational integration;

 

 

difficulties in entering markets or retaining current markets in which we have limited or no direct prior experience or where competitors in such markets may have stronger market positions;

 

 

insufficient revenues to offset increased expenses associated with acquisitions;

 

 

under-performance problems with an acquired company;

 

 

issuance of common stock that would dilute our current stockholders’ percentage ownership;

 

 

reduction in liquidity and interest income on lower cash balances;

 

 

recording of goodwill and intangible assets that will be subject to periodic impairment testing and potential impairment charges against our future earnings;

 

 

incurring amortization expenses related to certain intangible assets; and

 

 

incurring large and immediate write-offs of assets.

 

Strategic equity investments also involve risks associated with third parties managing the funds and the risk of poor strategic choices or execution of strategic and operating plans.

 

We may not address these risks successfully without substantial expense, delay or other operational or financial problems, or at all. Any delays or other such operations or financial problems could materially and adversely impact our business, financial condition and results of operations.

 

 
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Our business may be materially and adversely impacted if we fail to effectively utilize and incorporate acquired technologies.

 

We have acquired and may in the future acquire intellectual property in order to expand our serviceable markets, accelerate our time to market, and to accelerate to gain market share for new and existing products. Acquisitions of intellectual property may involve risks relating to, among other things, valuation of innovative capabilities, successful technical integration into new products, loss of key technical personnel, compliance with contractual obligations, market acceptance of new product features or capabilities, and achievement of planned return on investment. Successful technical integration in particular requires a variety of capabilities that we may not currently have, such as available technical staff with sufficient time to devote to integration, the requisite skills to understand the acquired technology and the necessary support tools to effectively utilize the technology. The timely and efficient integration of acquired technology may be adversely impacted by inherent design deficiencies or application requirements. The potential failure of or delay in product introduction utilizing acquired intellectual property could lead to an impairment of capitalized intellectual property acquisition costs, which could materially and adversely impact our business, financial condition and results of operations.

 

Because a significant portion of our total assets were, and may again be with future potential acquisitions, represented by goodwill and other intangible assets, which are subject to mandatory annual impairment evaluations, we could be required to write-off some or all of our goodwill and other intangible assets, which could materially and adversely impact our business, financial condition and results of operations.

 

A significant portion of the purchase price for any business combination may be allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of consummation. As required by U.S. Generally Accepted Accounting Principles (“GAAP”), the excess purchase price, if any, over the fair value of these assets less liabilities typically would be allocated to goodwill. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We typically conduct our annual analysis of our goodwill at the reporting unit level in the fourth quarter of our fiscal year.

 

The assessment of goodwill and other intangible assets impairment is a subjective process. Estimations and assumptions regarding the number of reporting units, future performance, results of our operations and comparability of our market capitalization and net book value will be used. Changes in estimates and assumptions could impact fair value resulting in an impairment, which could materially and adversely impact our business, financial condition and results of operations.

 

Because some of our integrated circuit and board level products have lengthy sales cycles, we may experience substantial delays between incurring expenses related to product development and the revenue derived from these products.

 

A portion of our revenue is derived from selling integrated circuits and board level products to end customer equipment vendors. Due to their product development cycle, we have typically experienced at least an eighteen-month time lapse between our initial contact with a customer and realizing volume shipments. In such instances, we first work with customers to achieve a design win, which may take six months or longer. Our customers then complete their design, test and evaluation process and begin to ramp-up production, a period which typically lasts an additional six months. The customers of equipment manufacturers may also require a period of time for testing and evaluation, which may cause further delays. As a result, a significant period of time may elapse between our research and development efforts and realization of revenue, if any, from volume purchasing of our products by our customers. Due to the length of the end customer equipment vendors’ product development cycle, the risks of project cancellation by our customers, price erosion or volume reduction are common aspects of such engagements.

 

The complexity of our products may lead to errors, defects and bugs, which could subject us to significant costs or damages and adversely affect market acceptance of our products.

 

Although we, our customers and our suppliers rigorously test our products, they may contain undetected errors, performance weaknesses, defects or bugs when first introduced, as new versions are released when manufacturing or process changes are made. If any of our products contain production defects or reliability issues, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to continue to design in or buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these defects or bugs could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition and results of operations.

 

If defects or bugs are discovered after commencement of commercial production, we may be required to make significant expenditures of capital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from our other business development efforts. We could also incur significant costs to repair or replace defective products or may agree to be liable for certain damages incurred. These costs or damages could have a material adverse effect on our business, financial condition and results of operations.

 

 
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If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross margins and lost market share.

 

We compete in markets that are intensely competitive, and which are subject to both rapid technological change, continued price erosion and changing business terms with regard to risk allocation. Our competitors include many large domestic and foreign companies that may have substantially greater financial, market share, technical and management resources, name recognition and leverage than we have. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to promote the sale of their products.

 

We have experienced increased competition at the design stage, where customers evaluate alternative solutions based on a number of factors, including price, performance, product features, technologies, and availability of long-term product supply and/or roadmap guarantee. Additionally, we experience, and may in the future experience, in some cases, severe pressure on pricing from competitors or on-going cost reduction expectations from customers. Such circumstances may make some of our products unattractive due to price or performance measures and result in the loss of our design opportunities or a decrease in our revenue and margins.

 

Also, competition from new companies, including those from emerging economy countries, with significantly lower costs could affect our selling price and gross margins. In addition, if competitors in Asia continue to reduce prices on commodity products, it would adversely affect our ability to compete effectively in that region. Specifically, we have licensed rights to a supplier in China to market our commodity connectivity products, which could reduce our sales in the future should they become a meaningful competitor. Loss of competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced gross margins and loss of market share, any of which would adversely affect our operating results and financial condition.

 

Furthermore, many of our existing and potential customers internally develop solutions which attempt to perform all or a portion of the functions performed by our products. To remain competitive, we continue to evaluate our manufacturing operations for opportunities for additional cost savings and technological improvements. If we or our contract partners are unable to successfully implement new process technologies and to achieve volume production of new products at acceptable yields, our business, financial condition and results of operations may be materially and adversely affected.

 

Our stock price is volatile.

 

The market price of our common stock has fluctuated significantly at times. In the future, the market price of our common stock could be subject to significant fluctuations due to, among other reasons:

 

 

our anticipated or actual operating results;

 

 

announcements or introductions of new products by us or our competitors;

 

 

technological innovations by us or our competitors;

 

 

investor perception of the semiconductor sector;

 

 

loss of or changes to key executives;

 

 

product delays or setbacks by us, our customers or our competitors;

 

 

potential supply disruptions;

 

 

sales channel interruptions;

 

 

concentration of sales among a small number of customers;

 

 

conditions in our customers’ markets and the semiconductor markets;

 

 

the commencement and/or results of litigation;

 

 

changes in estimates of our performance by securities analysts;

 

 

decreases in the value of our investments or long-lived assets, thereby requiring an asset impairment charge against earnings;

 

 

repurchasing shares of our common stock;

 

 

announcements of merger or acquisition transactions; and/or

 

 

general global economic and capital market conditions.

 

 
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In the past, securities and class action litigation has been brought against companies following periods of volatility in the market prices of their securities. We may be the target of one or more of these class action suits, which could result in significant costs and divert management’s attention, thereby materially and adversely impacting our business, financial condition and results of operations.

 

In addition, at times the stock market has experienced extreme price, volume and value fluctuations that affect the market prices of the stock of many high technology companies, including semiconductor companies, that are unrelated or disproportionate to the operating performance of those companies. Any such fluctuations may harm the market price of our common stock.

 

Occasionally, we enter into agreements that expose us to potential damages that exceed the value of the agreement.

 

We have given certain customers increased indemnification protection for product deficiencies or intellectual property infringement that is in excess of our standard limited warranty and indemnification provisions and could result in costs that are in excess of the original contract value. In an attempt to limit this liability, we have purchased insurance coverage to partially offset some of these potential additional costs; however, our insurance coverage could be insufficient in terms of amount and/or coverage to prevent us from suffering material losses if the indemnification amounts are large enough or if there are coverage issues.

 

As of March 31, 2013, affiliates of Future, Alonim Investments Inc. and two of its affiliates (collectively “Alonim”), beneficially own approximately 16% of our common stock and Soros Fund Management LLC, as principal investment manager for Quantum Partners LP (“Soros”), beneficially owns approximately 14% of our common stock. As such, Alonim and Soros are our largest stockholders. These substantial ownership positions provide the opportunity for Alonim and Soros to significantly influence matters requiring stockholder approval, which may or may not be in our best interests or the interest of our other stockholders. In addition, Alonim is an affiliate of Future and an executive officer of Future is on our board of directors, which could lead to actual or perceived influence from Future.

 

Alonim and Soros each own a significant percentage of our outstanding shares. Due to such ownership, Alonim and Soros, acting independently or jointly, have not in the past, but may in the future, exert strong influence over actions requiring the approval of our stockholders, including the election of directors, many types of change of control transactions and amendments to our charter documents. Further, if one of these stockholders were to sell or even propose to sell a large number of their shares, the market price of our common stock could decline significantly.

 

Although we have no reason to believe it to be the case, the interests of these significant stockholders could conflict with our best interests or the interests of the other stockholders. For example, the significant ownership percentages of these two stockholders could have the effect of delaying or preventing a change of control or otherwise discouraging a potential acquirer from obtaining control of us, regardless of whether the change of control is supported by us and our other stockholders. Conversely, by virtue of their percentage ownership of our stock, Alonim and/or Soros could facilitate a takeover transaction that our board of directors and/or other stockholders did not approve.

 

Further, Alonim is an affiliate of Future, our largest distributor, and Pierre Guilbault, executive vice president and chief financial officer of Future, is a member of our board of directors. These relationships could also result in actual or perceived attempts to influence management or take actions beneficial to Future which may or may not be beneficial to us or in our best interests. Future could attempt to obtain terms and conditions more favorable than those we would typically provide to other distributors because of its relationship with us. Any such actual or perceived preferential treatment could materially and adversely affect our business, financial condition and results of operations.

 

Earthquakes and other natural disasters, may damage our facilities or those of our suppliers and customers.

 

The occurrence of natural disasters in certain regions, such as the recent natural disasters in Asia, could adversely impact our manufacturing and supply chain, our ability to deliver products on a timely basis (or at all) to our customers and the cost of or demand for our products. Our corporate headquarters in Fremont, California is located near major earthquake faults that have experienced seismic activity and is approximately 170 miles from a nuclear power plant. In addition, some of our other offices, customers and suppliers are in locations, which may be subject to similar natural disasters. In the event of a major earthquake or other natural disaster near our offices, our operations could be disrupted. Similarly, a major earthquake or other natural disaster, such as the flooding in Thailand, affecting one or more of our major customers or suppliers could adversely impact the operations of those affected, which could disrupt the supply or sales of our products and harm our business, financial condition and results of operations.

 

 
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Any error in our sell-through revenue recognition judgment or estimates could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.

 

Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgment to reconcile distributors’ reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income, which could have an adverse effect on our business, financial condition and results of operations.

 

We may be unable to protect our intellectual property rights, which could harm our competitive position.

 

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we may be unable to protect our proprietary information. Such intellectual property rights may not be recognized or if recognized, may not be commercially feasible to enforce. Moreover, our competitors may independently develop technology that is substantially similar or superior to our technology.

 

More specifically, our pending patent applications or any future applications may not be approved, and any issued patents may not provide us with competitive advantages or may be challenged by third parties. If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.

 

We could be required to pay substantial damages or could be subject to various equitable remedies if it were proven that we infringed the intellectual property rights of others.

 

As a general matter, semiconductor companies may from time to time become involved with ongoing litigation regarding patents and other intellectual property rights. If a third party were to prove that our technology infringed its intellectual property rights, we could be required to pay substantial damages for past infringement and could be required to pay license fees or royalties on future sales of our products. If we were required to pay such license fees whenever we sold our products, such fees could exceed our revenue. In addition, if it was proven that we willfully infringed a third party’s proprietary rights, we could be held liable for three times the amount of the damages that we would otherwise have to pay. Such intellectual property litigation could also require us to:

 

 

stop selling, incorporating or using our products that use the infringed intellectual property;

 

 

obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable terms, if at all; and/or

 

 

redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible.

 

The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive and could require a significant portion of management’s time. In addition, rather than litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include the payment of damages and our agreement to license technology in exchange for a license fee and ongoing royalties. These fees could be substantial. If we were required to pay damages or otherwise became subject to equitable remedies, our business, financial condition and results of operations would suffer. Similarly, if we were required to pay license fees to third parties based on a successful infringement claim brought against us, such fees could exceed our revenue.

 

Our results of operations could vary as a result of the methods, estimations and judgments we use in applying our accounting policies.

 

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties, assumptions and changes in rulemaking by regulatory bodies; and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates and judgments could materially and adversely impact our business, financial condition and results of operations.

 

 
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Our revenue reporting is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data regarding the product, price, quantity and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgment to reconcile distributors’ reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.

 

We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of stock-based compensation represent our estimates, but these estimates involve inherent uncertainties and the application of management judgments, which include the expected term of the stock-based awards, stock price volatility and forfeiture rates. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

 

On an on-going basis, we use estimates and judgment to evaluate valuation of inventories, income taxes, goodwill and long-lived assets in preparing our consolidated financial statements. Actual results could differ from these estimates and material effects on operating results and financial position may result.

 

The final determination of our income tax liability may be materially different from our income tax provision, which could have an adverse effect on our results of operations.

 

Our future effective tax rates may be adversely affected by a number of factors including:

 

 

the jurisdictions in which profits are determined to be earned and taxed;

 

 

the resolution of issues arising from tax audits with various tax authorities;

 

 

changes in the valuation of our deferred tax assets and liabilities;

 

 

adjustments to estimated taxes upon finalization of various tax returns;

 

 

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;

 

 

changes in available tax credits;

 

 

changes in stock-based compensation expense;

 

 

changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles; and/or

 

 

the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

 

Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the U.S. Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our business, financial condition and results of operations could be materially and adversely impacted if these assessments or any other assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor.

 

We have acquired significant Net Operating Loss (“NOL”) carryforwards as a result of our acquisitions. The utilization of acquired NOL carryforwards is subject to the IRS’s complex limitation rules that carry significant burdens of proof. Limitations include certain levels of a change in ownership. As a publicly traded company, such change in ownership may be out of our control. Our eventual ability to utilize our estimated NOL carryforwards is subject to IRS scrutiny and our future results may not benefit as a result of potential unfavorable IRS rulings.

 

Our engagement with foreign customers could cause fluctuations in our operating results, which could materially and adversely impact our business, financial condition and results of operations.

 

International sales have accounted for, and will likely continue to account for a significant portion of our revenues, which subjects us to the following risks, among others:

 

 

changes in regulatory requirements;

 

 
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tariffs, embargoes, directives and other trade barriers which impact our or our customers’ business operations;

 

 

timing and availability of export or import licenses;

 

 

disruption of services due to political, civil, labor or economic instability;

 

 

disruption of services due to natural disasters outside the United States;

 

 

disruptions to customer operations outside the United States due to the outbreak of communicable diseases;

 

 

difficulties in accounts receivable collections;

 

 

difficulties in staffing and managing foreign subsidiary and branch operations;

 

 

difficulties in managing sales channel partners;

 

 

difficulties in obtaining governmental approvals for our products;

 

 

limited intellectual property protection;

 

 

foreign currency exchange fluctuations;

 

 

the burden of complying with foreign laws and treaties;

 

 

contractual or indemnity issues that are materially different from our standard sales terms; and

 

 

potentially adverse tax consequences.

 

In addition, because sales of our products have been denominated primarily in U.S. dollars, increases in the value of the U.S. dollar as compared with local currencies could make our products more expensive to customers in the local currency of a particular country resulting in pricing pressures on our products. Increased international activity in the future may result in foreign currency denominated sales. Furthermore, because some of our customers’ purchase orders and agreements are governed by foreign laws, we may be limited in our ability, or it may be too costly for us, to enforce our rights under these agreements and to collect damages, if awarded.

 

We may be exposed to additional credit risk as a result of the addition of significant direct customers through acquisitions.

 

From time to time one of our customers has contributed more than 10% of our quarterly net sales. A number of our customers are OEMs, or the manufacturing subcontractors of OEMs, which might result in an increase in concentrated credit risk with respect to our trade receivables and therefore, if a large customer were to be unable to pay, it could materially and adversely impact our business, financial condition and results of operations.

 

Compliance with new regulations regarding the use of conflict minerals could adversely impact the supply and cost of certain metals used in manufacturing our products.

 

In August 2012, the U.S. Securities and Exchange Commission (“SEC”) issued final rules for compliance with Section 1502 of the Dodd-Frank Act, and outlined what publicly-traded companies in the U.S. have to disclose regarding their use of conflict minerals in their products. According to the rule, companies that utilize any of the 3TG (tin, tantalum, tungsten and gold) minerals in their products need to conduct a reasonable country of origin inquiry to determine if the minerals are coming from the conflict zones in and around the Democratic Republic of Congo. The first filings are due May 31, 2014 for calendar year 2013. The implementation of these new regulations may limit the sourcing and availability of some metals used in the manufacture of our products and may affect our ability to obtain products in sufficient quantities or at competitive prices.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

 
27

 

 

ITEM 2.

PROPERTIES 

 

Our executive offices and our marketing and sales, research and development, manufacturing, test and engineering operations are located in Fremont, California in two adjacent buildings that we own, which consist of approximately 151,000 square feet. Additionally, we own approximately 4.5 acres of partially developed property adjacent to our headquarters.

 

We also lease smaller facilities in Canada, China, South Korea, Malaysia, Taiwan and the United States, which are occupied by administrative offices, sales offices, design centers and field application engineers.

 

Based upon our estimates of future hiring, we believe that our current facilities will be adequate to meet our requirements at least through the next fiscal year.

 

The former Hillview Facility located in Milpitas, California (the “Hillview Facility”) totaling approximately 95,700 square feet, which we originally leased from Mission West Properties, L.P, as part of a sale-leaseback transaction, was sublet in April 2008. The sublease expired on March 31, 2011. In accordance with the lease agreement, the leased building was returned to the lessor on March 31, 2011. For further discussion of this facility and its effect on our financial condition and results of operations, see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Part II, Item 8 —“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 15—Lease Financing Obligation.”

 

ITEM 3.

LEGAL PROCEEDINGS

 

Information required by this item is set forth in Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 17—Legal Proceedings ” of this Annual Report on Form 10-K.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 
28

 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 

 

Market Information

 

Our common stock is traded on NASDAQ Global Select Market (“NASDAQ”) under the symbol “EXAR.” The following table set forth the range of high and low sales prices of our common stock for the periods indicated, as reported by NASDAQ.

 

 

Common Stock

Price

 

High

Low

Fiscal year 2013

               

Fourth quarter ended March 31, 2013

  $ 11.97   $ 8.59

Third quarter ended December 30, 2012

    9.02     7.50

Second quarter ended September 30, 2012

    8.46     7.26

First quarter ended July 1, 2012

    8.51     7.51
                 

Fiscal year 2012

               

Fourth quarter ended April 1, 2012

  $ 8.54   $ 6.24

Third quarter ended January 1, 2012

    6.97     5.40

Second quarter ended October 2, 2011

    7.10     5.46

First quarter ended July 3, 2011

    6.85     5.76

 

The closing sales price for our common stock on June 10, 2013, was $11.37 per share. As of June 10, 2013, the approximate number of record holders of our common stock was 281 (not including beneficial owners of stock held in street name).

 

Dividend Policy

 

We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our common stock. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be, subject to applicable law, at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

 

Unregistered Securities

 

On March 22, 2013, we acquired certain assets from Altior Inc., a privately held company in Eatontown, New Jersey (the “Acquisition”). The transaction included approximately $4.7 million in initial consideration which was paid to the sellers in a combination of cash and shares of our common stock. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 4—Business Combinations” for more information about the Acquisition.

 

We have issued approximately 358,000 shares of our common stock pursuant to the terms of the Acquisition, which had a fair market value of $3.7 million as of March 22, 2013, based on the closing price of our common stock on that date. The issuance of the common stock pursuant to the Acquisition was exempt from registration in reliance on an exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) as a transaction by us not involving a public offering. The common stock has not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The purchase price also includes additional consideration earn-outs which may be paid in the form of cash, shares or a combination thereof (not to exceed $20.0 million in aggregate) payable over the next three fiscal years contingent upon achieving certain revenue targets.

 

 
29

 

  

Stock Price Performance (1)

 

The following table and graph shows a five-year comparison of cumulative total stockholder returns for Exar, The NASDAQ Composite Index, and The NASDAQ Electronic Components Index (SIC code 3670-3679). The table and graph assumed the investment of $100 in stock or index on March 30, 2008 and that all dividends, if any, were reinvested. The performance shown is not necessarily indicative of future performance.

 

 

 

 

Cumulative Total Return as of

 

March 30,

2008

March 29,

2009

March 28,

2010

March 27,

2011

April 1,

2012

March 31,

2013

Exar Corporation Stock

  $ 100.00   $ 75.82   $ 85.66   $ 73.15   $ 102.07   $ 127.58

NASDAQ Composite Index

    100.00     67.15     105.94     124.71     139.71     150.83

NASDAQ Electronic Components Index

    100.00     65.71     104.40     121.36     124.37     116.63

 

 

(1)

This graph and data are not “soliciting material,” are not deemed “filed” with the SEC and are not to be incorporated by reference in any filing of Exar Corporation under the 1933 Act or the 1934 Act, unless specifically and expressly incorporated by reference, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

 
30

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.

 

 

As of and For the Years Ended

 

March 31,

2013

April 1,

2012

March 27,

2011

March 28,

2010

March 29,

2009

Consolidated statements of operations data:

                                       

Net sales

  $ 122,026   $ 130,566   $ 146,005   $ 134,878   $ 115,118

Gross profit

    55,687     55,924     63,997     63,382     50,245

Loss from operations

    (583

)

    (30,593

)

    (40,018

)

    (33,990

)

    (80,222

)

Net income (loss)

    2,882     (28,056

)

    (35,668

)

    (28,110

)

    (73,036

)

                                         

Net income (loss) per share:

                                       

Basic

  $ 0.06   $ (0.63

)

  $ (0.81

)

  $ (0.64

)

  $ (1.70

)

Diluted

  $ 0.06   $ (0.63

)

  $ (0.81

)

  $ (0.64

)

  $ (1.70

)

                                         

Shares used in computation of net income (loss) per share:

                                       

Basic

    45,809     44,796     44,218     43,584     42,887

Diluted

    46,476     44,796     44,218     43,584     42,887
                                         

Consolidated balance sheets data:

                                       

Cash, cash equivalents and short-term investments

  $ 205,305   $ 196,382   $ 200,999   $ 212,084   $ 256,343

Working capital

    203,732     190,878     202,256     208,052     257,179

Total assets

    293,168     271,652     298,215     333,314     336,389

Long-term obligations

    12,546     9,986     16,399     17,260     16,869

Accumulated deficit

    (259,468

)

    (262,350

)

    (234,294

)

    (198,626

)

    (170,516

)

Stockholders’ equity

    240,454     223,292     244,579     274,132     292,094

 

On March 22, 2013, March 16, 2010, June 17, 2009 and April 3, 2009 we acquired the businesses of Altior, Neterion, Galazar, and Hifn, respectively. Accordingly, the results of operations of Altior and Hifn have been included in our consolidated financial statements since March 23, 2013 and April 4, 2009, respectively. On March 4, 2011, we decided to exit the data center virtualization market and therefore, the results of operations of Neterion were included in our consolidated financial statements from March 17, 2010 through March 4, 2011.  On February 1, 2012, we decided to discontinue development of products for the OTN market and therefore, the results of operations of Galazar were included in our consolidated financial statements from June 18, 2009 through February 1, 2012. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 4—Business Combinations.”  

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” above and elsewhere in this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “would,” “could,” “expect,” “suggest, “possible,” “potential,” “target,” “commit,” “continue,” “believe,” “anticipate,” “intend,” “project,” “projected,” “positioned,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements made in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary” and elsewhere regarding: (1) our future strategies and target markets; (2) our future revenues, gross profits and margins; (3) our future research and development (“R&D”) efforts and related expenses; (4) our future selling, general and administrative expenses (“SG&A”); (5) our cash and cash equivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months; (6) our ability to continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities; (7) the possibility of future acquisitions and investments; (8) our ability to accurately estimate our assumptions used in valuing stock-based compensation; (9) our ability to estimate and reconcile distributors’ reported inventories to their activities; (10) our ability to estimate future cash flows associated with long-lived assets; and (11) the volatile global economic and financial market conditions. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including, among others, those identified above under Part I, Item 1A—“Risk Factors.” We disclaim any obligation to revise or update information in any forward-looking statement, except as required by law.

 

 
31

 

 

Company Overview

 

Exar Corporation (“Exar” or “We”) designs, develops and markets high performance analog mixed-signal integrated circuits and advanced sub-system solutions for the Networking & Storage, Industrial & Embedded Systems, and Communications Infrastructure markets. Exar’s product portfolio includes power management and connectivity components, communications products, and data compression and storage solutions. Our comprehensive knowledge of end-user markets along with the underlying analog, mixed signal and digital technology has enabled us to provide innovative solutions designed to meet the needs of the evolving connected world. Applying both analog and digital technologies, our products are deployed in a wide array of applications such as portable electronic devices, set top boxes, digital video recorders, networking and telecommunication systems, servers, enterprise storage systems and industrial automation equipment. We provide customers with a breadth of component products and sub-system solutions based on advanced silicon integration.

 

We market our products worldwide with sales offices and personnel located throughout the Americas, Europe, and Asia. Our products are sold in the United States through a number of manufacturers’ representatives and distributors. Internationally, our products are sold through various regional and country specific distributors. Globally, these channel partners are assisted and managed by our regional sales teams. In addition to our regional sales teams, we also employ a worldwide team of field application engineers to work directly with our customers.

 

Our international sales are denominated in U.S. dollars. Our international related operating expenses expose us to fluctuations in currency exchange rates because our foreign operating expenses are denominated in foreign currencies while our sales are denominated in U.S. dollars. Our operating results are subject to quarterly and annual fluctuations as a result of several factors that could materially and adversely affect our future profitability as described in “Part I, Item 1A. Risk Factors—Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control.”

 

Executive Summary

 

We experienced a sequential quarterly increase of 1% in our net sales in the fourth quarter as compared to the third fiscal quarter of 2013. The increase in net sales as compared to the immediately prior quarter was primarily attributed to the growth in our data compression and storage solution products. Operating expenses decreased from $14.5 million in the third fiscal quarter to $14.0 million in the fourth fiscal quarter of 2013, as a result of release of $0.5 million liability related to Industrial Research Agreement Program (“IRAP”) with a Canadian governmental agency. We believe we are effectively managing our operating expenses while continuing to invest an appropriate amount in research and development projects for future products. In the first fiscal quarter of 2014 compared to the fourth fiscal quarter of 2013, we expect sales and operating expenses to increase slightly and the gross margin to remain consistent or increase slightly.

 

Acquisitions

 

On March 22, 2013, we completed the acquisition of substantially all of the assets of Altior Inc. (“Altior”), a developer of data management solutions in Eatontown, New Jersey. Altior’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 23, 2013.

 

On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a developer of 10 gigabit Ethernet (10GbE) controller silicon and card solutions optimized for virtualized environments located in Sunnyvale, California. During the course of fiscal year 2011, Exar participated in the 10GbE market and established a limited set of customers but fell short of customer expansion and revenue growth goals for the product line. After assessing our market position, degree of target customer adoption and development roadmap, we announced on March 4, 2011 that we had decided to exit the data center virtualization market and, in connection therewith, had decided to discontinue development of these products. We promptly reduced our resources and sold assets devoted to the development of these products in June 2011.

 

On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”), a fabless semiconductor company focused on carrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazar’s product portfolio addressed transport of a wide range of datacom and telecom services including Ethernet, SAN, TDM and video over SONET/SDH, PDH and OTN networks. After assessing our market position, recent changes in the competitive landscape and future prospects, we announced on February 1, 2012 that we had decided to discontinue development of products for the OTN market. We promptly reduced our resources dedicated to our OTN products.

 

On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a provider of network-and storage-security and data reduction products located in Los Gatos, California.

 

 
32

 

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2013, 2012 and 2011 consisted of 52, 53 and 52 weeks, respectively. Fiscal year 2014 will consist of 52 weeks. Fiscal years ended March 31, 2013, April 1, 2012 and March 27, 2011 are also referred to as “2013,” “2012,” and “2011” unless otherwise indicated.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements and accompanying disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The U.S. Securities and Exchange Commission (“SEC”) has defined a company’s critical accounting policies as policies that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue recognition; (2) valuation of inventories; (3) capitalized mask set tools; (4) income taxes; (5) stock-based compensation; (6) goodwill; (7) long-lived assets; and (8) valuation of business combinations; each of which is addressed below. We also have other key accounting policies that involve the use of estimates, judgments and assumptions that are significant to understanding our results. For additional information, see Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 3—Accounting Policies.” Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be inaccurate.

 

Revenue Recognition

 

We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance for Revenue Recognition. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

 

We derive revenue principally from the sale of our products to distributors and to OEMs or their contract manufacturers. Our delivery terms are primarily free on board (“FOB”) shipping point, at which time title and all risks of ownership are transferred to the customer.

 

To date, software revenue has been an immaterial portion of our net sales.

 

Non-distributors

 

For non-distributors, revenue is recognized when title to the product is transferred to the customer, which occurs upon shipment or delivery, depending upon the terms of the customer order, provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, collection of the resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. Provisions for returns and allowances for non-distributor customers are provided at the time product sales are recognized. Allowances for sales returns and other reserves are recorded based on historical experience or specific identification of an event necessitating an allowance.

 

Our history of actual returns from our non-distributors has not been material and, therefore, the allowance for sales returns for non-distributor customers is not significant.

 

Distributors

 

Agreements with our two primary distributors permit the return of 3% to 6% of their purchases during the preceding quarter for purposes of stock rotation. For one of these distributors, a scrap allowance of 1% of the preceding quarter’s purchases is permitted. We also provide discounts to certain distributors based on volume of product they sell or purchase for a period not to exceed one year.

 

 
33

 

 

We recognize revenue from each of our distributors using either the sell-in basis or sell-through basis, each as described below. Once adopted, the basis for revenue recognition for a distributor is maintained unless there is a change in circumstances indicating the basis for revenue recognition for that distributor is no longer appropriate.

 

 

Sell-in BasisRevenue is recognized upon shipment if we conclude we meet the same criteria as for non-distributors discussed above and we can reasonably estimate the credits for returns, pricing allowances and/or other concessions. We record an estimated allowance, at the time of shipment, based upon historical patterns of returns, pricing allowances and other concessions (i.e., “sell-in” basis).

 

 

Sell-through BasisRevenue and the related costs of sales are deferred until the resale to the end customer if we grant more than limited rights of return, pricing allowances and/or other concessions or if we cannot reasonably estimate the level of returns and credits issuable (i.e., “sell-through” basis). Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred income and allowances on sales to distributors in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred income as sales and cost of sales. The following table summarizes the deferred income balance, primarily consisting of sell-through distributors (in thousands):

 

 

As of March 31,

2013

As of April 1,

2012

Deferred revenue at published list price

  $ 18,652   $ 20,787

Deferred cost of revenue

    (6,778

)

    (7,769

)

Deferred income

  $ 11,874   $ 13,018

 

Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.

 

Mask Costs

 

We incur costs for the fabrication of masks to manufacture our products. If we determine the product technological feasibility has been achieved when costs are incurred, the costs will be treated as pre-production costs and capitalized as machinery and equipment under property, plant and equipment. The amount will be amortized to cost of sales over the estimated production period of the product. If product technological feasibility has not been achieved or the mask is not expected to be utilized in production manufacturing, the related mask costs are expensed to R&D when incurred. We will periodically assess capitalized mask costs for impairment. During the fiscal years ended March 31, 2013 and April 1, 2012, total mask costs capitalized was $1.7 million and $0, respectively. The costs capitalized during March 31, 2013 will be amortized over five years.

 

Valuation of Inventories

 

Our policy is to establish a provision for excess inventories, based on the nature of the specific product, that is greater than twelve months of forecasted demand unless there are other factors indicating that the inventories will be sold at a profit after such periods. Among other factors, management considers known backlog of orders, projected sales and marketing forecasts, shipment activity, inventory-on-hand at our primary distributors, past and current market conditions, anticipated demand for our products, changing lead times in the manufacturing process and other business conditions when determining if a provision for excess inventory is required. Should the assumptions used by management in estimating the provision for excess inventory differ from actual future demand or should market conditions become less favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on our gross margins. See Part I, Item 1A. “Risk Factors—“Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control’.”

 

Income Taxes

 

We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assets and liabilities. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities, which arise from timing differences in the recognition of revenue and expense for tax and financial statement purposes. Such deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base, operating losses and tax credit carryforwards. Changes in tax rates affect the deferred income tax assets and liabilities and are recognized in the period in which the tax rates or benefits are enacted.

 

 
34

 

 

We must determine the probability that we will be able to utilize our deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. We measure and recognize uncertain tax positions in accordance with GAAP, whereby we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the merits of the position. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 18—Income Taxes” for more details about our deferred tax assets and liabilities.

 

Stock-Based Compensation

 

We compute the fair value of stock options utilizing the Black-Scholes model. Calculating stock-based compensation expense requires the input of highly subjective assumptions. The assumptions used in calculating the fair value of stock-based compensation represent our estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to the Consolidated Financial Statements, Note 14—Stock-Based Compensation” for more details about our assumptions used in calculating the stock-based compensation expenses and equity related transactions during the fiscal year.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of the reporting unit is estimated using a combination of the income approach that uses discounted cash flows and the market approach that utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one reporting unit, we utilize an entity-wide approach to assess goodwill for impairment.

 

Long-Lived Assets

 

We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset group may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant negative industry or economic trends and significant changes or planned changes in our use of the assets. These factors can also be referred to as triggering events. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset group to our estimate of the related total future undiscounted net cash flows. If an asset group’s carrying value is not recoverable through the related undiscounted cash flows, the asset group is considered to be impaired. The impairment is measured by comparing the difference between the asset group’s carrying value and its fair value. Long-lived assets such as goodwill; intangible assets; and property, plant and equipment are considered non-financial assets, and are recorded at fair value only if an impairment charge is recognized.

 

Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. We operate with one asset group on an enterprise basis. As a result, we believe the lowest identifiable cash flows reside at the enterprise level.

 

When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciation and/or amortization over the assets’ new, shorter useful lives. See “Goodwill and Other Intangible Asset Impairment” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for more details regarding charges associated with the shortening of useful lives of certain intangible assets.

 

Valuation of Business Combinations

 

We periodically evaluate potential strategic acquisitions to broaden our product offering and build upon our existing library of intellectual property, human capital and engineering talent, in order to expand our capabilities in the areas in which we operate or to acquire complementary businesses.

 

 
35

 

 

We account for each business combination by applying the acquisition method, which requires (1) identifying the acquiree; (2) determining the acquisition date; (3) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree at their acquisition date fair value; and (4) recognizing and measuring goodwill or a gain from a bargain purchase.

 

Assets acquired and liabilities assumed and/or incurred in a business combination that arise from contingencies are recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, we typically account for the acquired contingencies using existing guidance for a reasonable estimate.

 

To establish fair value, we measure the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximize the value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the asset is different.

 

Goodwill is measured and recorded as the amount, by which the consideration transferred, generally at the acquisition date fair value, exceeds the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree. To the contrary, if the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree exceeds the consideration transferred, it is considered a bargain purchase and we would recognize the resulting gain in earnings on the acquisition date.

 

In-process research and development (“IPR&D”) assets are considered an indefinite-lived intangible asset and are not subject to amortization until its useful life is determined to be no longer indefinite. IPR&D assets must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the IPR&D asset will be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. The initial determination and subsequent evaluation for impairment of the IPR&D asset requires management to make significant judgments and estimates. Once the IPR&D projects have been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off.

 

Acquisition related costs, including finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees are accounted for as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognized in accordance with other applicable GAAP.

 

Results of Operations

 

On April 3, 2009, June 17, 2009 and March 16, 2010, we acquired Hifn, Galazar and Neterion, respectively. On March 4, 2011, we decided to exit the data center virtualization market and therefore, the results of operations of Neterion were included in our consolidated financial statements from March 17, 2010 through March 4, 2011. On February 1, 2012, we decided to discontinue development of products for the OTN market and therefore, the results of operations of Galazar were included in our consolidated financial statements from June 18, 2009 through February 1, 2012.

 

Fiscal years 2013, 2012 and 2011 consist of 52, 53 and 52 weeks, respectively. In the following discussion of the results of operations, the fiscal year 2013 amounts are less than fiscal year 2012 amounts due to the shorter fiscal year length, in addition to the other explanations cited below.

 

Net Sales by Product Line

 

The following table shows net sales by product line in dollars and as a percentage of net sales for the periods indicated (in thousands except percentages):

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs. 2012

Change

2012 vs. 2011

Change

Net sales:

                                                               

Connectivity Components

  $ 65,914     54

%

  $ 69,128     53

%

  $ 76,937     53

%

    (5

%)

    (10

%)

Power Management Components

    25,690     21

%

    29,164     22

%

    29,033     20

%

    (12

%)

   

Data Compression and Storage Solutions

    19,547     16

%

    15,097     12

%

    16,876     11

%

    29

%

    (11

%)

Communications Products

    10,875     9

%

    17,177     13

%

    23,159     16

%

    (37

%)

    (26

%)

Total

  $ 122,026     100

%

  $ 130,566     100

%

  $ 146,005     100

%

               

 

 
36

 

 

We continued to sell products acquired from Neterion in fiscal year 2012, on a last time buy basis, and we will continue to sell products acquired from Galazar until those products reach their end of life.

 

Software revenues have been an immaterial portion of our net sales.

 

Fiscal Year 2013 versus Fiscal Year 2012

 

Connectivity Components 

 

Net sales of Connectivity Components, including UARTs and serial transceiver products, for fiscal year 2013 decreased by $3.2 million as compared to fiscal year 2012. Connectivity products sales volume started to decrease in the third fiscal quarter of 2012. Although sales volume started to recover during the third fiscal quarter of 2013, the year-to-date revenue for fiscal year 2013 was still lower than revenue from the same period a year ago.

 

Power Management Components

 

Net sales of Power Management Components, including DC-DC regulators, LED drivers and programmable power management devices, for fiscal year 2013 decreased by $3.5 million compared to fiscal year 2012 due to reduced demand at certain Communications Infrastructure and Automotive customers.

 

Data Compression and Storage Solutions

 

Net sales of Data Compression and Storage Solutions, include network access and storage products, encryption and data reduction and packet processing products, for fiscal year 2013 increased $4.5 million as compared to fiscal year 2012. The increase was primarily due to increased shipments of our compression and encryption products offset by lower sales volume and price erosion on our end of life products.

 

Communications Products

 

Net sales of Communications Products, including network access, transmission and transport products, for fiscal year 2013 decreased $6.3 million, as compared to fiscal year 2012. The decrease in net sales of these products is primarily due to reduced demand of legacy SONET/SDH-based and packet-based devices.

 

Fiscal Year 2012 versus Fiscal Year 2011

 

Connectivity Components

 

Net sales of Connectivity Components, including UARTs and serial transceiver products, for fiscal year 2012 decreased by $7.8 million as compared to fiscal year 2011. The decrease was primarily due to lower shipments of our UARTs and serial transceivers products as customers depleted inventory and remained cautious in the second half of fiscal year 2012. The decrease also includes price erosion of $0.7 million as the serial transceiver market became more competitive throughout fiscal year 2012.

 

Power Management Components

 

Net sales of Power Management Components, including DC-DC regulators, LED drivers and power management, for fiscal year 2012 increased $0.1 million as compared to fiscal year 2011. The increase was primarily due to license revenue generated from our power management technology offset by lower shipments in the EMEA region and price erosion of $0.2 million as the analog power market became more competitive throughout fiscal year 2012.

 

Data Compression and Storage Solutions

 

Net sales of Data Compression and Storage Solutions include network access and storage products, encryption, data reduction and packet processing products as well as 10GbE controller products acquired from Neterion. Following our exit from the 10GbE controller market, we sold $0.6 million of those products in fiscal year 2012, a $2.0 million decline from fiscal year 2011. Net sales of Data Compression and Storage Solutions for fiscal year 2012 increased $0.3 million as compared to fiscal year 2011 from initial sales of our new DX series data compression and encryption cards offset by reduced demand for our encryption processors as an end customer’s product reached end-of-life.

 

 
37

 

  

Communications Products

 

Net sales of Communications Products, including network access, transmission and network transport products, for fiscal year 2012 decreased by $6.0 million as compared to fiscal year 2011. The decrease was primarily due to lower shipments of legacy SONET, T/E carrier transport and packet based products.

 

Net Sales by Channel

 

For fiscal years 2013, 2012 and 2011, approximately 39%, 42% and 40%, respectively, of our net sales were derived from product sales to our two primary distributors, Future Electronics Inc. (“Future”) and Arrow Electronics (“Arrow”). The remaining net sales were derived from sales to other distributors, OEM customers and other non-distributors.

 

The following table shows net sales by channel in dollars and as a percentage of net sales for the periods indicated (in thousands, except percentages):

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs. 2012

Change

2012 vs. 2011

Change

Net sales:

                                                               

Sell-through distributors

  $ 65,271     53

%

  $ 75,773     58

%

  $ 85,201     58

%

    (14

%)

    (11

%)

Direct and others

    56,755     47

%

    54,793     42

%

    60,804     42

%

    4

%

    (10

%)

Total

  $ 122,026     100

%

  $ 130,566     100

%

  $ 146,005     100

%

               

 

Fiscal Year 2013 versus Fiscal Year 2012

 

Net sales to our distributors, for which we recognize revenue on the sell-through basis, for fiscal year 2013 decreased by $10.5 million, as compared to fiscal year 2012 due to lower sales volume across all product lines except data compression and storage solution products and price erosion on serial transceiver and UARTs products.

 

Net sales to our direct customers and other distributors for which we recognize revenue on a sell-in basis, for fiscal year 2013 increased by $2.0 million compared to fiscal year 2012. The increase is primarily attributable to higher sales volume of our data compression and storage solution products.

 

Fiscal Year 2012 versus Fiscal Year 2011

 

Net sales to our distributors, for which we recognize revenue on the sell-through basis, for fiscal year 2012 decreased by $9.4 million from the fiscal year 2011. The decrease was primarily due to lower sales volume in the second half of fiscal year 2012 across all product lines and price erosion in serial transceiver and power management component products.

 

Net sales to direct customers and other distributors for fiscal year 2012 decreased by $6.0 million from fiscal year 2011. This decrease was primarily attributable to lower sales volume of all our products with the exception of our power management component products.

 

Net Sales by Geography

 

The following table shows net sales by geography in dollars and as a percentage of net sales for the periods indicated (in thousands, except percentages):

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs.

2012

Change

2012 vs.

2011

Change

Net sales:

                                                               

Asia

  $ 72,610     60

%

  $ 76,906     59

%

  $ 89,140     61

%

    (6

%)

    (14

%)

Americas

    32,959     27

%

    34,361     26

%

    33,760     23

%

    (4

%)

    2

%

EMEA

    16,457     13

%

    19,299     15

%

    23,105     16

%

    (15

%)

    (16

%)

Total

  $ 122,026     100

%

  $ 130,566     100

%

  $ 146,005     100

%

               

 

Fiscal Year 2013 versus Fiscal Year 2012

 

Net sales in Asia, Americas and EMEA for fiscal year 2013 decreased by $4.3 million, $1.4 million and $2.8 million, respectively, as compared to fiscal year 2012 due to lower sales volume across all of our product lines in the regions with the exception of data compression and storage solution products.

 

 
38

 

 

Fiscal Year 2012 versus Fiscal Year 2011

 

Net sales in Asia in fiscal year 2012 decreased by $12.2 million as compared to fiscal year 2011. The decrease was primarily due to lower shipments across all product lines with the exception of power management component products.

 

Net sales in EMEA in fiscal year 2012 decreased by $3.8 million as compared to fiscal year 2011. The decrease was primarily due to lower shipments across all our product lines.

 

Gross Profit

 

The following table shows gross profit and cost of sales in dollars and as a percentage of net sales for the periods indicated (in thousands, except percentages):

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs.

2012

Change

2012 vs.

2011

Change

Net sales:

  $ 122,026           $ 130,566           $ 146,005                        

Cost of Sales

                                                               

Cost of Sales

    62,960     52

%

    71,039     54

%

    75,922     52

%

    (11

%)

    (6

%)

Fair value adjustment of acquired inventories

                    42             (100

%)

Amortization of acquired intangible assets

    3,379     2

%

    3,603     3

%

    6,044     4

%

    (6

%)

    (40

%)

Gross profit

  $ 55,687     46

%

  $ 55,924     43

%

  $ 63,997     44

%

        (13

%)

 

Gross profit represents net sales less cost of sales. Cost of sales includes:

 

 

the cost of purchasing finished silicon wafers manufactured by unaffiliated foundries;

 

 

the costs associated with assembly, packaging, test, quality assurance and product yield loss;

 

 

the cost of purchasing finished tested “turnkey” units;

 

 

the cost of personnel and equipment associated with manufacturing, engineering and support;

 

 

the cost of stock-based compensation associated with manufacturing, engineering and support personnel;

 

 

the amortization of purchased intangible assets and acquired intellectual property;

 

 

the provision for excess and obsolete inventory; and

 

 

provisions for restructuring charges and exit costs

 

We believe that gross profit will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, product, manufacturing costs, our ability to leverage fixed operational costs, shipment volumes, competitive pricing pressure on our products, and currency fluctuations. We reduced employee-related costs through restructuring activities in the fourth quarter of fiscal year 2012. We began to realize the reduction in the underlying costs in fiscal year 2013.

 

Fiscal Year 2013 versus Fiscal Year 2012

 

Gross profit as a percentage of net sales for fiscal year 2013 increased by 3% compared to fiscal year 2012. The increase in gross profit percentage was primarily due to favorable product mix and successful cost reduction efforts.

 

Fiscal Year 2012 versus Fiscal Year 2011

 

Gross profit as a percentage of net sales for fiscal year 2012 decreased by 1% as compared to fiscal year 2011. The decrease in gross profit as a percentage of sales was primarily due to unfavorable product mix with the decline in communications and 10GbE controller products that have higher than average margins, price erosion on serial transceiver and analog power products, manufacturing inefficiencies at lower volume and continued high gold costs partially offset by product cost reductions. Restructuring charges in fiscal year 2012 were primarily severance payments.

 

 
39

 

 

Stock-based compensation expense recorded in cost of sales was $0.5 million, $0.3 million and $0.5 million for fiscal years 2013, 2012 and 2011, respectively.

 

Other Costs and Expenses

 

The following table shows other costs and expenses in dollars and as a percentage of net sales for the periods indicated (in thousands, except percentages):

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs.

2012

Change

2012 vs.

2011

Change

Net sales:

  $ 122,026           $ 130,566           $ 146,005                        

R&D expense

    22,379     18

%

    35,006     27

%

    49,888     34

%

    (36

%)

    (30

%)

SG&A expense

    32,638     27

%

    38,598     30

%

    45,267     31

%

    (15

%)

    (15

%)

 

On March 4, 2011, we decided to exit the data virtualization market and therefore, operating expenses of Neterion were in included in our consolidated financial statements from March 17, 2010 through March 4, 2011. On February 1, 2012, we decided to discontinue product development for the OTN market and therefore, operating expenses of Galazar were included in our consolidated financial statements from June 18, 2009 through February 1, 2012.

 

Research and Development Expenses

 

Our Research and Development (“R&D”) expenses consist primarily of:

 

 

the salaries, stock-based compensation, and related expenses of employees engaged in product research, design and development activities;

 

 

costs related to engineering design tools, expenses related to new mask tool sets, software amortization, test hardware, and engineering supplies and services;

 

 

amortization of acquired intangible assets such as existing technology and patents/core technology; and

 

 

facilities expenses.

 

We believe that R&D expenses will fluctuate as a percentage of sales and increase in absolute dollars due to, among other factors, increased investment in software development, incentives, annual merit increases and fluctuations in reimbursements under a research and development contract. We reduced employee related costs, rent and electronic design automation tool expenses through restructuring activities in the fourth quarter of fiscal year 2012. In connection with the restructuring, we eliminated our internal capability to physically design certain deep submicron products and adopted an outsourcing model instead. Partially offsetting our cost reductions: incremental subcontract costs for deep submicron design; we continue to hire engineers and other personnel to execute our strategy; increases in salary, benefits, and profit sharing rates. We began to realize the net cost reduction in fiscal year 2013.

 

Fiscal Year 2013 versus Fiscal Year 2012

 

R&D expenses for fiscal year 2013 decreased $12.6 million, or 36%, as compared to fiscal year 2012. The decrease was primarily a result of lower labor and facility related expenses resulting from our reduction in force in the fourth quarter of fiscal year 2012 and lower maintenance costs on our design software.

 

We have a contractual agreement under which certain of our R&D costs are eligible for reimbursement. Amounts collected under this arrangement are offset against R&D expenses. During fiscal year 2013, we offset $2.0 million of R&D expenses in connection with this agreement, representing a $2.0 million decrease in reimbursement from fiscal year 2012.

 

Fiscal Year 2012 versus Fiscal Year 2011

 

R&D expenses decreased by $14.9 million, or 30%, in fiscal year 2012 as compared to fiscal year 2011. The decrease was primarily due to decreased labor expenses following the reduction in engineering headcount in March 2011 related to our exit from the data virtualization market and additional attrition experienced throughout the year. In addition, we reduced costs through the closure of two acquired research and development sites.

 

We entered into a new contractual agreement under which certain of our R&D costs are eligible for reimbursement. Amounts reimbursed under this arrangement are offset against R&D expenses. During fiscal year 2012, we offset $4.0 million of R&D expenses in connection with this agreement, representing a $1.0 million decrease in reimbursement from fiscal year 2011.

 

 

 
40

 

 

Sales, General and Administrative Expenses

 

Sales, General, and Administrative (“SG&A”) expenses consist primarily of:

 

 

salaries, stock-based compensation and related expenses;

 

 

sales commissions;

 

 

professional and legal fees;

 

 

amortization of acquired intangible assets such as distributor relationships, tradenames/trademarks and customer relationships;

 

 

facilities expenses; and

 

 

acquisition related costs.

 

We believe that SG&A expenses will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, variable commissions, legal costs, incentives and annual merit increases. We reduced employee related costs through restructuring activities in the fourth quarter of fiscal year 2012. We began to realize the net cost reduction in fiscal year 2013.

 

Fiscal Year 2013 versus Fiscal Year 2012

 

SG&A expenses for fiscal year 2013 decreased $6.0 million, or 15%, as compared to the same period a year ago. The decrease was primarily a result of lower labor-related costs, incentives and professional fees, offset by an accrual for a dispute resolution of $1.4 million.

 

Fiscal Year 2012 versus Fiscal Year 2011

 

SG&A expenses decreased by $6.7 million, or 15%, in fiscal year 2012 as compared to fiscal year 2011. The decrease was primarily due to decreased labor expenses following the reduction in sales headcount in March 2011 related to our exit from the data virtualization market and additional attrition experienced throughout the year. In addition, we collected $0.3 million from the Neterion acquisition escrow account and received a China business tax refund offset by an accrual for a dispute resolution.

 

Restructuring Charges and Exit Costs

 

 

March 31,

2013

 

April 1,

2012

March 27,

2011

2013 vs.

2012

Change

2012 vs.

2011

Change

Net sales:

  $ 122,026             $ 130,566           $ 146,005                        

Restructuring charges and exit costs – cost of sales

    301           1,312     1

%

    2,212     2

%

    (77

%)

    (41

%)

Restructuring charges and exit costs – operating expenses

    1,253       1

%

    12,913     10

%

    1,375     1

%

    (90

%)

    839

%

 

Fiscal Year 2013

 

During fiscal year 2013, we incurred additional restructuring charges and exit costs of $1.6 million, primarily consisting of severance benefits, which were offset by a release of $0.5 million liability related to Industrial Research Assistance Program (“IRAP”) with a Canadian governmental agency. See “Note 8 – Restructuring Charges and Exit Costs.”

 

Fiscal Year 2012

 

Restructuring charges in fiscal year 2012 consist of severance benefits of $3.5 million, contract termination and other costs of $7.0 million, charges for abandoned leases of $0.8 million and accelerated amortization and depreciation of $1.6 million. See “Note 8 – Restructuring Charges and Exit Costs.”

 

 
41

 

 

Fiscal Year 2011

 

Restructuring charges in fiscal year 2011 consist of severance benefits of $1.1 million and accelerated depreciation and amortization of $0.3 million. See “Note 8 – Restructuring Charges and Exit Costs.

 

Goodwill and Other Intangible Asset Impairment

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs.

2012

Change

2012 vs.

2011

Change

Net sales:

  $ 122,026           $ 130,566           $ 146,005                        

Impairment of acquired intangible assets

  $       $         7,485     5

%

        (100

%)

 

Fiscal Year 2013

 

In the fourth quarter of fiscal year 2013, we conducted our annual impairment review comparing the fair value of our single reporting unit with its carrying value. As of the test date and as of year-end, and before consideration of a control premium, the fair value, which was estimated as our market capitalization, exceeded the carrying value of our net assets. As a result, no impairment was recorded for fiscal year 2013.

 

Fiscal Year 2012

 

In the fourth quarter of fiscal year 2012, we conducted our annual impairment review comparing the fair value of our single reporting unit with its carrying value. As of the test date and as of year-end, and before consideration of a control premium, the fair value, which was estimated as our market capitalization, exceeded the carrying value of our net assets. As a result, no impairment was recorded for fiscal year 2012.

 

Fiscal Year 2011

 

During the fourth quarter of fiscal year 2011, we decided to exit the data center virtualization market, and in connection therewith, to discontinue development of our 10GbE network interface cards. We determined that the current economic and market environment did not provide the potential to deliver acceptable returns on the required investments in these products. As a result, we abandoned all related in-process research and development. We promptly reduced our resources and sold assets devoted to the development of these products.

 

In the fourth quarter of fiscal year 2011, we conducted our annual impairment review comparing the fair value of our single reporting unit with its carrying value and recorded an impairment charge of $7.5 million. The impairment charge consisted of $0.8 million to write-off abandoned IPR&D and $6.7 million to write-down the carrying value of intangible assets that were held for sale to $0.2 million at March 27, 2011, which represented their estimated fair value less cost to sell based on third party bids received. In June 2011, we completed the asset sale process and received $0.2 million, net of selling costs.

 

Other Income and Expenses

 

The following table shows other income and expenses in dollars and as a percentage of net sales for the periods indicated (in thousands, except percentages):

 

 

March 31,

2013

April 1,

2012

March 27,

2011

2013 vs.

2012

Change

2012 vs.

2011

Change

Net sales

  $ 122,026           $ 130,566           $ 146,005                        

Interest income and other, net

    2,441     2

%

    2,803     2

%

    5,925     4

%

    (13

%)

    (53

%)

Interest expense

    (165

)

        (215

)

        (1,258

)

    (1

%)

    (23

%)

    (83

%)

Impairment charges on investments

                    (62

)

            (100

%)

 

Interest Income and Other, Net

 

Interest income and other, net primarily consists of:

 

 

interest income;

 

 

foreign exchange gains or losses;

 

 

realized gains or losses on marketable securities; and

 

 
42

 

 

Fiscal Year 2013 versus Fiscal Year 2012

 

The decrease in other income and expenses during fiscal year 2013 as compared to fiscal year 2012 was primarily attributable to decrease in interest income as a result of lower yield related to our cash and short-term investments.

 

Fiscal Year 2012 versus Fiscal Year 2011

 

The $3.1 million, or 53%, decrease in interest income and other, net during fiscal year 2012 as compared to fiscal year 2011 was primarily attributable to a decrease in interest income as a result of lower invested cash balances and lower yield of the investments.

 

The former Hillview Facility, which we originally leased from Mission West Properties, L.P. as part of a sale-leaseback transaction, was sublet in April 2008. The sublease expired on March 31, 2011. There was no suble