UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 


 

 

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended June 30, 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)

 

(510) 668-7000

(Registrant’s telephone number, including area code)

 

 


 

 

 

 

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 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 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 Exchange Act).    Yes  ☐    No  ☒

 

The number of shares outstanding of the Registrant’s Common Stock was 47,483,175 as of August 2, 2013.

 



  

 
 

 

  

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

 

   

Page 

 

PART I – FINANCIAL INFORMATION  

 
     

Item 1.

Financial Statements

3

     
 

Condensed Consolidated Balance Sheets (Unaudited)

3

     
 

Condensed Consolidated Statements of Operations (Unaudited)

4

     
 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

5

     
 

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

     

Item 2.

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

26

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

     

Item 4.

Controls and Procedures

32

     
 

PART II – OTHER INFORMATION  

 
     

Item 1.

Legal Proceedings

33

     

Item 1A.

Risk Factors

33

     

Item 6.

Exhibits

48

     
 

Signatures

49

     
 

Index to Exhibits

50

 

 
2

 

  

PART I – FINANCIAL INFORMATION

 

ITEM 1.           FINANCIAL STATEMENTS

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

   

June 30,

2013

   

March 31,

2013

 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 36,458     $ 14,718  

Short-term marketable securities

    169,333       190,587  

Accounts receivable (net of allowances of $673 and $944)

    15,811       12,614  

Accounts receivable, related party (net of allowances of $318 and $346)

    3,203       3,374  

Inventories

    19,391       19,430  

Assets held for sale

    13,083        

Other current assets

    2,853       3,177  

Total current assets

    260,132       243,900  
                 

Property, plant and equipment, net

    9,870       24,100  

Goodwill

    10,356       10,356  

Intangible assets, net

    11,804       13,338  

Other non-current assets

    1,489       1,474  

Total assets

  $ 293,651     $ 293,168  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 12,556     $ 9,455  

Accrued compensation and related benefits

    3,765       3,624  

Deferred income and allowances on sales to distributors

    2,040       2,399  

Deferred income and allowances on sales to distributors, related party

    10,282       9,475  

Other current liabilities

    10,642       15,215  

Total current liabilities

    39,285       40,168  
                 

Long-term lease financing obligations

    1,012       1,342  

Other non-current obligations

    11,130       11,204  

Total liabilities

    51,427       52,714  
                 

Commitments and contingencies (Notes 13,14 and 15)

               
                 

Stockholders' equity:

               

Common stock, $.0001 par value; 100,000,000 shares authorized; 46,976,590 and 46,607,246 shares outstanding

    5       5  

Additional paid-in capital

    502,050       749,426  

Accumulated other comprehensive loss

    (1,169 )     (526 )

Treasury stock at cost, 0 and 19,924,369 shares

          (248,983 )

Accumulated deficit

    (258,662 )     (259,468 )

Total stockholders' equity

    242,224       240,454  

Total liabilities and stockholders’ equity

  $ 293,651     $ 293,168  

 

  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
3

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

 
   

June 30,

2013

   

July 1,

2012

 

Sales:

               

Net sales

  $ 23,858     $ 19,447  

Net sales, related party

    8,769       9,804  

Total net sales

    32,627       29,251  
                 

Cost of sales:

               

Cost of sales

    11,812       10,870  

Cost of sales, related party

    3,907       4,512  

Amortization of purchased intangible assets

    1,350       919  

Restructuring charges and exit costs

    81       81  

Total cost of sales

    17,150       16,382  

Gross profit

    15,477       12,869  
                 

Operating expenses:

               

Research and development

    6,198       5,449  

Selling, general and administrative

    7,801       7,782  

Restructuring charges and exit costs

    931       804  

Total operating expenses

    14,930       14,035  

Income (loss) from operations

    547       (1,166 )

Other income and expense, net:

               

Interest income and other, net

    287       646  

Interest expense

    (37 )     (34 )

Total other income and expense, net

    250       612  

Income (loss) before income taxes

    797       (554 )

Provision for (benefit from) income taxes

    (9 )     22  

Net income (loss)

  $ 806     $ (576 )
                 

Net income (loss) per share:

               

Basic

  $ 0.02     $ (0.01 )

Diluted

    0.02       (0.01 )
                 

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

               

Basic

    46,805       45,388  

Diluted

    48,085       45,388  

  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
4

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

   

Three Months Ended

 
   

June 30,

   

July 1,

 
   

2013

   

2012

 

Net income (loss)

  $ 806     $ (576 )

Changes in market value of investments, net of tax:

               

Changes in unrealized losses

    (584 )     (269 )

Reclassification adjustment for net realized losses

    (59 )     (38 )

Net change in market value of investments

    (643 )     (307 )

Comprehensive income (loss)

  $ 163     $ (883 )

 

 

 

 See accompanying Notes to Condensed Consolidated Financial Statements.

  

 
5

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Three Months Ended

 
   

June 30,

2013

   

July 1,

2012

 

Cash flows from operating activities:

               

Net income (loss)

  $ 806     $ (576 )

Reconciliation of net income (loss) to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    2,850       3,042  

Stock-based compensation expense

    1,087       174  

Changes in operating assets and liabilities:

               

Accounts receivable and accounts receivable, related party

    (3,026 )     (3,259 )

Inventories

    39       2,136  

Other current and non-current assets

    184       (271 )

Accounts payable

    3,101       681  

Accrued compensation and related benefits

    141       (341 )

Other current and non-current liabilities

    (4,647 )     (3,526 )

Deferred income and allowance on sales to distributors and related party distributor

    448       (321 )

Net cash provided by (used in) operating activities

    983       (2,261 )
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment and intellectual property, net

    (349 )     (460 )

Purchases of short-term marketable securities

    (63,332 )     (36,107 )

Proceeds from maturities of short-term marketable securities

    10,457       12,593  

Proceeds from sales of short-term marketable securities

    73,666       25,948  

Other disposal (investment) activities

    125       (15 )

Net cash provided by investing activities

    20,567       1,959  
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    1,497       2,128  

Purchase of stock for withholding taxes on vested restricted stock

    (977 )      

Payments of lease financing obligations

    (330 )     (315 )

Net cash provided by financing activities

    190       1,813  
                 

Net increase in cash and cash equivalents

    21,740       1,511  

Cash and cash equivalents at the beginning of period

    14,718       8,714  

Cash and cash equivalents at the end of period

  $ 36,458     $ 10,225  

 

 

 See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
6

 

 

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

Description of Business— Exar Corporation was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs, develops and markets high performance analog mixed-signal integrated circuits and advanced sub-system solutions for the Networking & Storage, Industrial & Embedded, and Communications Infrastructure markets. Exar's product portfolio includes power management and connectivity components, high-performance analog and mixed-signal products, communications products and data compression and storage solutions.

 

Basis of Presentation and Use of Management Estimates—The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 as filed with the SEC. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, that we believe are necessary for a fair statement of Exar’s financial position as of June 30, 2013 and our results of operations for the three months ended June 30, 2013 and July 1, 2012, respectively. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.

 

The financial statements include management’s estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates, and material effects on operating results and financial position may result.

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2014 and 2013 consist of 52 weeks, respectively. The first quarter of fiscal years 2014 and 2013 both consisted 13 weeks.

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued amended standards to simplify how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. These amended standards are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In February 2013, the FASB issued amended standards to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. These amended standards are effective for interim and annual reporting periods beginning after December 15, 2012. The adoption of this guidance did not have any material impact on our financial position, results of operations or cash flows.

 

NOTE 3.    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.

  

 
7

 

 

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 noncontrolling 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 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.

 

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.

 

Acquisition of Altior

 

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. The pro forma effects of the portion of the Altior operations assumed through the transaction on our results of operations during fiscal years 2013 and 2012 were considered immaterial.

 

Consideration

 

The purchase consideration includes approximately 358,000 shares issued to the shareholders of Altior, cash payment of $1.0 million (of which $0.25 million was held back temporarily to satisfy potential indemnity claims), and additional purchase price 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. The $3.7 million worth of shares issued as consideration were valued on the date of the acquisition, and the fair value of contingent earn-outs was derived using a probability-based approach on various revenue assumptions. Final determination of the earn-out liability can range from zero to $20.0 million based on the actual achievement of the revenue targets. Fair value of contingent consideration is subject to periodic revaluation and any change in the fair value of contingent consideration from the events after the acquisition date, will be recognized in earnings of the period in which the fair value changes. The probability–based approach used to fair value contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The significant unobservable inputs include projected revenues, percentage probability of occurrence and a discount rate to present value the future payments. The summary of the purchase consideration is as follows (in thousands):

 

   

Amount

 

Cash

  $ 1,000  

Equity instruments

    3,740  

Estimated Fair value of earn-out payments

    10,138  

Total consideration paid

  $ 14,878  

 

In accordance with ASC 805, Business Combinations, the acquisition of Altior was recorded as a purchase business acquisition since Altior was considered a business. Under the purchase method of accounting, the fair value of the consideration was allocated to assets and liabilities assumed at their fair values. The fair value of purchased identifiable intangible assets and contingent earn-outs were derived from model-based valuations from significant unobservable inputs (“Level 3 inputs”) determined by management. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return ranging from 12% to 19%. The fair value of the contingent earn-outs was a probability-based approach that includes significant unobservable inputs. The excess of the fair value of consideration paid over the fair values of net assets and liabilities acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $7.2 million. The goodwill consists largely of expected synergies from combining the operations of Altior with that of Exar and is deductible over 15 years for tax purposes.

  

 
8

 

 

Purchase Price Allocation

 

The allocation of the purchase price to Altior’s tangible and identifiable intangible assets and liabilities assumed was based on their estimated fair values at the date of acquisition.

 

The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the Altior acquisition was as follows (in thousands):

 

   

Amount

 

Identifiable tangible assets

       

Inventories

  $ 126  

Property, plant and equipment

    140  

Other assets

    36  

Accounts payable and accruals

    (24

)

Other short-term liabilities

    (51

)

Long-term liabilities

    (61

)

Total identifiable tangible assets, net

    166  

Identifiable intangible assets – existing technology

    7,540  

Total identifiable assets, net

    7,706  

Goodwill

    7,172  

Fair value of total consideration transferred

  $ 14,878  

 

Acquisition Related Costs

 

Acquisition related costs, or deal costs, relating to Altior are included in the selling, general and administrative lines on the consolidated statement of operations for fiscal year 2013, were approximately $48,000.

 

For a further discussion of an additional acquisition, see “Note 19 – Subsequent Events.”

 

NOTE 4.  

CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES  

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

The fair value of contingent consideration arising from the acquisition of Altior Inc (“Altior”) is classified within Level 3 of the fair value hierarchy since it is based on a probability-based approach that includes significant unobservable inputs.

 

There were no transfers between Level 1, Level 2, and Level 3 during the fiscal quarter ended June 30, 2013.

  

 
9

 

 

Our investment assets, measured at fair value on a recurring basis, as of the dates indicated below were as follows (in thousands, except for percentages):

 

   

June 30, 2013

 
   

Level 1

   

Level 2

   

Level 3

   

Total

         

Assets:

                                       

Money market funds

  $ 22,820     $     $     $ 22,820       12

%

U.S. government and agency securities

    20,153       20,863             41,016       21

%

State and local government securities

          2,872             2,872       2

%

Corporate bonds and securities

          82,675             82,675       43

%

Asset-backed securities

          27,776             27,776       14

%

Mortgage-backed securities

          14,994             14,994       8

%

Total investment assets

  $ 42,973     $ 149,180     $     $ 192,153       100

%

                                         

Liabilities:

                                       

Acquisition-related contingent consideration

  $     $     $ 10,138     $ 10,138       100

%

 

   

March 31, 2013

 
   

Level 1

   

Level 2

   

Level 3

   

Total

         

Assets:

                                       

Money market funds

  $ 5,042     $     $     $ 5,042       3

%

U.S. government and agency securities

    22,460       19,261             41,721       21

%

State and local government securities

          2,935             2,935       1

%

Corporate bonds and securities

    274       91,955             92,229       47

%

Asset-backed securities

          30,966             30,966       16

%

Mortgage-backed securities

          22,736             22,736       12

%

Total investment assets

  $ 27,776     $ 167,853     $     $ 195,629       100

%

                                         

Liabilities:

                                       

Acquisition-related contingent consideration

  $     $     $ 10,138     $ 10,138       100

%

 

Our cash, cash equivalents and short-term marketable securities as of the dates indicated below were as follows (in thousands):

 

   

June 30,

2013 

   

March 31,

2013 

 

Cash and cash equivalents

               

Cash at financial institutions

  $ 13,638     $ 9,676  
                 

Cash equivalents

               

Money market funds

    22,820       5,042  

Total cash and cash equivalents

  $ 36,458     $ 14,718  
                 

Available-for-sale securities

               

U.S. government and agency securities

  $ 41,016     $ 41,721  

State and local government securities

    2,872       2,935  

Corporate bonds and securities

    82,675       92,229  

Asset-backed securities

    27,776       30,966  

Mortgage-backed securities

    14,994       22,736  

Total short-term marketable securities

  $ 169,333     $ 190,587  

 

 

 
10

 

 

Our marketable securities include U.S. government and agency securities, state and local government securities, corporate bonds and securities, and asset-backed and mortgage-backed securities. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. We amortize premiums and accrete discounts to interest income over the life of the investment. Our available-for-sale securities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90 days or less from the date of purchase and as short-term marketable securities if the maturity date is greater than 90 days from the date of purchase.

 

All marketable securities are reported at fair value based on the estimated or quoted market prices as of each balance sheet date, with unrealized gains or losses, net of tax effect, recorded in the condensed consolidated statements of other comprehensive income except those unrealized losses that are deemed to be other than temporary which are reflected in the impairment charges on investments line item on the condensed consolidated statements of operations.

 

The fair value of contingent consideration was determined based on probability-based approach which includes projected revenues, percentage probability of occurrence and discount rate to present value payments. A significant increase (decrease) in the projected revenue, discount rate or probability of occurrence in isolation could result in a significantly higher (lower) fair value measurement. We calculate the fair value of the contingent consideration on a quarterly basis based on a collaborative effort of our operations and financial accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period. Subsequent to the date of acquisition through June 30, 2013, no change was made to the estimated fair value of the earn-out liability.

 

Realized gains (losses) on the sale of marketable securities are determined by the specific identification method and are reflected in the interest income and other net, line item on the condensed consolidated statements of operations.

 

Our net realized gains (losses) on marketable securities for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

 
   

June 30, 2013

   

July 1, 2012

 

Gross realized gains

  $ 218     $ 240  

Gross realized losses

    (277 )     (278 )

Net realized losses

  $ (59 )   $ (38 )

  

 
11

 

 

The following table summarizes our investments in marketable securities as of the dates indicated below (in thousands):

 

   

June 30, 2013

 
   

Amortized Cost

   

Unrealized Gross

Gains (1) 

   

Unrealized Gross

Losses (1) 

   

Fair Value

 

Money market funds

  $ 22,820     $     $     $ 22,820  

U.S. government and agency securities

    41,081       6       (71 )     41,016  

State and local government securities

    2,880             (8 )     2,872  

Corporate bonds and securities

    82,822       95       (242 )     82,675  

Asset-backed securities

    27,867       13       (104 )     27,776  

Mortgage-backed securities

    14,997       82       (85 )     14,994  

Total investments

  $ 192,467     $ 196     $ (510 )   $ 192,153  

 

   

March 31, 2013

 
   

Amortized Cost

   

Unrealized Gross

Gains (1) 

   

Unrealized Gross

Losses (1) 

   

Fair Value

 

Money market funds

  $ 5,042     $     $     $ 5,042  

U.S. government and agency securities

    41,694       27             41,721  

State and local government securities

    2,927       10       (2 )     2,935  

Corporate bonds and securities

    92,059       215       (45 )     92,229  

Asset-backed securities

    30,932       61       (27 )     30,966  

Mortgage-backed securities

    22,646       194       (104 )     22,736  

Total investments

  $ 195,300     $ 507     $ (178 )   $ 195,629  

 

—————

 

(1)

Gross of tax impact

 

Our asset-backed securities are comprised primarily of premium tranches of vehicle loans and credit card receivables, while our mortgage-backed securities are primarily from Federal agencies. We do not own auction rate securities nor do we own securities that are classified as subprime. As of June 30, 2013, we have sufficient liquidity and do not intend to sell these securities to fund normal operations or realize any significant losses in the short term; however, these securities are available for use, if needed, for current operations.

 

Management determines the appropriate classification of cash equivalents or short-term marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and accretion of discounts to maturity and such accretion/amortization, which is immaterial for all periods presented, is included in the interest income and other, net line in the consolidated statements of operations. Cash equivalents and short-term marketable securities are reported at fair value with the related unrealized gains and losses included in the accumulated other comprehensive losses line in the consolidated balance sheets. As of June 30, 2013, there was approximately $1.1 million of unrealized losses, net of tax from our Level 1 and Level 2 investments.

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will not have to sell the security before recovery of its cost basis. For the three months ended June 30, 2013 and July 1, 2012, respectively, there were no investments identified with other-than-temporary declines in value.

 

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale by expected maturity as of the dates indicated below were as follows (in thousands):

 

   

June 30, 2013

   

March 31, 2013

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Less than 1 year

  $ 80,702     $ 80,620     $ 61,011     $ 61,029  

Due in 1 to 5 years

    111,765       111,533       134,289       134,600  

Total

  $ 192,467     $ 192,153     $ 195,300     $ 195,629  

  

 
12

 

 

The following table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as of the dates indicated below, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

   

June 30, 2013

 
   

Less than 12 months

   

12 months or greater

   

Total

 
   

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

 

U.S. government and agency securities

  $ 32,973     $ (70 )   $     $     $ 32,973     $ (70 )

State and local government securities

    2,515       (7 )     357       (1 )     2,872       (8 )

Corporate bonds and securities

    60,376       (241 )     348       (1 )     60,724       (242 )

Asset-backed securities

    21,219       (94 )     828       (11 )     22,047       (105 )

Mortgage-backed securities

    1,741       (19 )     3,222       (66 )     4,963       (85 )

Total

  $ 118,824     $ (431 )   $ 4,755     $ (79 )   $ 123,579     $ (510 )

 

 

     

March 31, 2013

 
     

Less than 12 months

     

12 months or greater

     

Total

 
     

Fair Value

     

Gross Unrealized Losses

     

Fair Value

     

Gross Unrealized Losses

     

Fair Value

     

Gross Unrealized Losses

 

State and local government securities

  $     $     $ 404     $ (2 )   $ 404     $ (2 )

Corporate bonds and securities

    29,609       (42 )     497       (3 )     30,106       (45 )

Asset-backed securities

    10,008       (17 )     1,241       (10 )     11,249       (27 )

Mortgage-backed securities

    2,911       (39 )     3,263       (65 )     6,174       (104 )

Total

  $ 42,528     $ (98 )   $ 5,405     $ (80 )   $ 47,933     $ (178 )

  

 

NOTE 5.  

GOODWILL AND INTANGIBLE ASSETS 

 

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. Estimations and assumptions regarding the number of reporting units, future performances, results of our operations and comparability of our market capitalization and net book value will be used. 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. As of June 30, 2013, no events or changes in circumstances suggest that the carrying amount for goodwill may not be recoverable and therefore we did not perform an interim goodwill impairment analysis.

 

The changes in the carrying amount of goodwill for fiscal years 2014 and 2013 were as follows (in thousands):

 

   

June 30, 2013

   

March 31, 2013

 

Beginning balance

  $ 10,356     $ 3,184  

Goodwill additions

          7,172  

Ending balance

  $ 10,356     $ 10,356  

 

 
13

 

 

Intangible Assets

 

Our purchased intangible assets as of the dates indicated below were as follows (in thousands):

 

   

June 30, 2013

   

March 31, 2013

   

Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

   

Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

   

Existing technology

  $ 42,868     $ (32,056 )   $ 10,812     $ 42,858     $ (30,668 )   $ 12,190    

Patents/Core technology

    3,459       (3,231 )     228       3,459       (3,182 )     277    

Distributor relationships

    1,264       (1,244 )     20       1,264       (1,219 )     45    

Customer relationships

    2,905       (2,161 )     744       2,905       (2,079 )     826    

Total

  $ 50,496     $ (38,692 )   $ 11,804     $ 50,486     $ (37,148 )   $ 13,338    

 

Long-lived assets are amortized on a straight-line basis over their respective estimated useful lives. Existing technology is amortized over two to seven years. Patents/core technology is amortized over five to six years. Distributor relationships are amortized over six years. Customer relationships are amortized over six to seven years. We evaluate the remaining useful life of our long-lived assets that are being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the long-lived asset is amortized prospectively over the remaining useful life. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an indicator of impairment exists, we compare the carrying value of long-lived assets to our projection of future undiscounted cash flows attributable to such assets and, in the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge equal to the excess of the carrying value over the asset’s fair value. Although the assumptions used in projecting future revenues and gross margins are consistent with those used in our annual strategic planning process, intangible asset impairment charges might be required in future periods if our assumptions are not achieved.

 

As of June 30, 2013, there were no indicators that required us to perform an intangible assets impairment review.

 

The aggregate amortization expenses for our purchased intangible assets for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

 
   

June 30,

2013 

   

July 1,

2012 

 

Amortization expense

  $ 1,544     $ 1,113  

 

The total future amortization expenses for our purchased intangible assets are summarized below (in thousands):

 

Amortization Expense (by fiscal year)

 

2014 (9 months remaining)

  $ 4,193  

2015

    3,510  

2016

    2,334  

2017

    966  

2018

    788  

2019 and thereafter

    13  

Total future amortization

  $ 11,804  

 

NOTE 6.  

LONG-TERM INVESTMENT 

 

Our long-term investment consists of our investment in Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”). Skypoint Fund is a venture capital fund that invested primarily in private companies in the telecommunications and/or networking industries. We account for this non-marketable equity investment under the cost method. We periodically review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

  

 
14

 

 

As of the dates indicated below, our long-term investment balance, which is included in the “Other non-current assets” line item on the condensed consolidated balance sheets, consisted of the following (in thousands):

 

   

June 30,

2013 

   

March 31,

2013 

 

Beginning balance

  $ 1,288     $ 1,273  

Contributions

          15  

Ending balance

  $ 1,288     $ 1,288  

 

The carrying amount of $1.3 million as of June 30, 2013 reflects the net of the capital contributions, capital distributions and cumulative impairment charges. We have made $4.8 million in capital contributions to Skypoint Fund since we became a limited partner in July 2001. During the first quarter of fiscal year 2013, we contributed $15,000 to the fund and the limited partners of the Skypoint Fund agreed to extend the term of the Skypoint Fund for one additional year. As of June 30, 2013, we do not have any further capital commitments.

 

Impairment

 

We evaluate our long-term investment 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 by comparing the carrying amount to the fair value of the underlying investments. If the carrying amount exceeds its fair value, long term-investment is considered impaired and a second step is performed to measure the amount of impairment loss. We analyzed the fair value of the underlying investments of Skypoint Fund and as a result, no impairment was recorded during the first fiscal quarter of 2014.

 

NOTE 7.      RELATED PARTY TRANSACTION

 

Affiliates of Future Electronics Inc. (“Future”), Alonim Investments Inc. and two of its affiliates (collectively “Alonim”), own approximately 7.6 million shares, or approximately 16%, of our outstanding common stock as of June 30, 2013. As such, Alonim is our largest stockholder.

 

Our sales to Future are made under a distribution agreement that provides protection against price reduction for its inventory of our products and other sales allowances that are provided to certain of our other partners. We recognize revenue on sales to Future when Future sells the products to its end customers. Future has historically accounted for a significant portion of our net sales.

 

Related party contributions to our total net sales for the periods indicated below were as follows:

 

   

Three Months Ended

 
   

June 30,

2013

   

July 1,

2012

 

Future

    27 %     34 %

 

Related party receivables to our net accounts receivables were as follows as of the dates indicated below:

  

   

June 30,

2013 

   

March 31,

2013 

 

Future

    17 %     21 %

 

Related party expenses for marketing promotional materials reimbursed were not significant for either the three months ended June 30, 2013 or July 1, 2012, respectively.

 

NOTE 8.  

RESTRUCTURING CHARGES AND EXIT COSTS 

 

2014 Restructuring Charges and Exit Costs

 

During the first quarter of fiscal year 2014, we incurred $1.0 million restructuring charges and exit costs. The charges include $0.9 million of severance benefits and $0.1 million of costs related to the preparation for the sale of Exar campus in Fremont, California.

  

 
15

 

 

2013 Restructuring Charges and Exit Costs

 

In fiscal year 2013, we recorded $0.3 million restructuring charges and exit costs and released a $0.5 million liability related to Industrial Research Assistance Program (IRAP) with Canadian governmental agency. In the third, second and first quarters of fiscal year 2013, we recorded restructuring charges and exit costs of $0.6 million, $0.3 million and $0.9 million, respectively. Of the total restructuring charges and exit costs recorded in fiscal year 2013, $0.3 million was reflected in cost of sales and $1.3 million was reflected in operating expenses within our consolidated statements of operations. 

 

Our restructuring liabilities were included in the other current liabilities and other non-current obligations lines within our condensed consolidated balance sheets. The following table summarizes the activities affecting the liabilities as of the dates indicated below (in thousands):

 

   

June 30, 2013

 
   

Beginning balance

   

Additions/

adjustments 

   

Non-cash charges

   

Payments

   

Ending balance

 

Lease termination costs and others

  $ 2,860     $     $ (21

)

  $ (140

)

  $ 2,699  

Severance

    426       912             (777

)

    561  

Sale / Leaseback of campus

          100             (45

)

    55  

Balance at June 30, 2013

  $ 3,286     $ 1,012     $ (21

)

  $ (962

)

  $ 3,315  

 

   

March 31, 2013

 
   

Beginning balance

   

Additions/

adjustments 

   

Non-cash charges

   

Payments

   

Ending balance

 

Lease termination costs and others

  $ 5,235     $ 6     $ (56

)

  $ (2,325

)

  $ 2,860  

Severance

    2,806       1,548             (3,928

)

    426  

Balance at March 31, 2013

  $ 8,041     $ 1,554     $ (56

)

  $ (6,253

)

  $ 3,286  

 

NOTE 9.  

BALANCE SHEET DETAILS 

 

Our inventories consisted of the following as of the dates indicated (in thousands):

 

   

June 30,

2013 

   

March 31,

2013 

 

Work-in-process and raw materials

  $ 10,599     $ 9,981  

Finished goods

    8,792       9,449  

Total inventories

  $ 19,391     $ 19,430  

 

Our property, plant and equipment consisted of the following as of the dates indicated below (in thousands):

 

   

June 30,

2013 

   

March 31,

2013 

 

Land

  $     $ 6,660  

Building

    782       16,224  

Machinery and equipment

    42,496       42,258  

Software and licenses

    17,566       17,566  

Property, plant and equipment, total

    60,844       82,708  

Accumulated depreciation and amortization

    (50,974

)

    (58,608

)

Total property, plant and equipment, net

  $ 9,870     $ 24,100  

 

 
16

 

 

Our other current liabilities consisted of the following as of the dates indicated (in thousands):

 

   

June 30,

2013 

   

March 31,

2013 

 

Short-term lease financing obligations

  $ 3,189     $ 3,189  

Fair value of earn-out liability – short-term

    2,599       2,599  

Accrued restructuring charges and exit costs

    2,096       2,020  

Accrued legal and professional services

    1,213       746  

Accrued manufacturing expenses, royalties and licenses

    731       2,370  

Accrued sales and marketing expenses

    406       576  

Accrual for dispute resolution

          2,727  

Other

    408       988  

Total other current liabilities

  $ 10,642     $ 15,215  

 

Our other non-current obligations consisted of the following (in thousands) as of the dates indicated:

 

   

June 30,

2013 

   

March 31,

2013 

 

Fair value of earn-out liability – long–term

  $ 7,539     $ 7,539  

Long-term taxes payable

    2,195       2,225  

Accrued restructuring charges and exit costs

    1,219       1,266  

Other

    177       174  

Total other non-current obligations

  $ 11,130     $ 11,204  

 

NOTE 10. NET INCOME (LOSS) PER SHARE

 

Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the applicable period. Diluted earnings per share reflects the potential dilution that would occur if outstanding stock options or warrants to purchase common stock were exercised for common stock, using the treasury stock method, and the common stock underlying outstanding restricted stock units (“RSUs”) was issued.

 

The following table summarizes our loss per share for the periods indicated below (in thousands, except per share amounts):

 

   

Three Months Ended

 
   

June 30,

2013 

   

July 1,

2012 

 

Net income (loss)

  $ 806     $ (576 )
                 

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

               

Basic

    46,805       45,388  

Effect of options and awards

    1,280        

Diluted

    48,085       45,388  

Net income (loss) per share:

               

Basic

  $ 0.02     $ (0.01 )

Diluted

  $ 0.02     $ (0.01 )

 

All outstanding stock options and restricted stock units (“RSUs”) are potentially dilutive securities. As of June 30, 2013, stock options, warrants to purchase common stock and RSUs of 1.0 million were excluded from the computation of diluted net income per share because they were determined to be anti-dilutive. For the first quarter of fiscal year 2012, all shares attributable to outstanding options and RSUs were excluded from the computation of diluted net loss per share, as inclusion of such shares would have had an anti-dilutive effect. Accordingly, basic and diluted net loss per share were the same in the period presented.

 

NOTE 11.  

COMMON STOCK REPURCHASES  

 

From time to time, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs, to increase our return on our invested capital and to bring our cash to a more appropriate level for Exar.

  

 
17

 

  

On August 28, 2007, we announced the approval of a share repurchase plan (“2007 SRP”) and authorized the repurchase of up to $100 million of our common stock.

 

As of March 27, 2011, we had purchased shares valued at $88.2 million under the 2007 SRP. During the three months ended June 30, 2013 and July 1, 2012, respectively, we did not repurchase any shares under the 2007 SRP. As of June 30, 2013, the remaining authorized amount for the stock repurchase under the 2007 SRP was $11.8 million. The 2007 SRP does not have a termination date. We may continue to utilize our 2007 SRP, which would reduce our cash, cash equivalents and/or short-term marketable securities available to fund future operations and to meet other liquidity requirements.

 

In the first fiscal quarter of 2014, we retired all of our 19.9 million treasury shares.

 

On July 9, 2013, we announced the approval of an additional stock repurchase program. See “Note 19 – Subsequent Events.”

 

NOTE 12.  

STOCK-BASED COMPENSATION 

 

Employee Stock Participation Plan (“ESPP”)

 

Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price that is equal to 95% of our common stock price on the last trading day of each three-calendar-month offering period. Our ESPP is non-compensatory.

 

The following table summarizes our ESPP transactions during the fiscal periods presented (in thousands, except per share amounts):

 

   

As of

June 30, 2013 

   

Three Months Ended

June 30, 2013 

 
   

Shares of Common Stock

   

Shares of Common Stock

   

Weighted

Average Price 

 

Authorized to issue

    4,500                  

Reserved for future issuance

    1,386                  

Issued

            6     $ 10.34  

 

Equity Incentive Plans

 

We currently have two equity incentive plans, in which shares are available for future issuance, the Exar Corporation 2006 Equity Incentive Plan (the “2006 Plan”) and the Sipex Corporation (“Sipex”) 2006 Equity Incentive Plan (the “Sipex Plan”), the latter of which was assumed in connection with the August 2007 acquisition of Sipex.

 

The 2006 Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, stock bonuses and other forms of awards granted or denominated in common stock or units of common stock, as well as cash bonus awards. RSUs granted under the 2006 Plan are counted against authorized shares available for future issuance on a basis of two shares for every RSU issued. The 2006 Plan allows for performance-based vesting and partial vesting based upon the level of performance. Grants under the Sipex Plan are only available to former Sipex’s employees or employees of Exar hired after the Sipex acquisition. At our annual meeting on September 15, 2010, our stockholders approved an amendment to the 2006 Plan to increase the aggregate share limit under the 2006 Plan by an additional 5.5 million shares to 8.3 million shares. At June 30, 2013, there were 3.2 million shares available for future grant under all our equity incentive plans.

  

 
18

 

 

Stock Option Activities

 

Our stock option transactions during the three months ended June 30, 2013 are summarized as follows:

 

   

Outstanding

   

Weighted
Average
Exercise
Price per
Share

   

Weighted
Average
Remaining
Contractual
Term

(in years) 

   

Aggregate
Intrinsic

Value

(in thousands) 

   

In-the-money

Options

Vested and Exercisable

(in thousands)

 

Balance at March 31, 2013

    6,212,333     $ 7.48       5.04     $ 19,199     $ 1,481  

Granted

    441,800       10.81                          

Exercised

    (202,623 )     7.01                          

Cancelled

    (4,700 )     7.87                          

Forfeited

    (268,608 )     7.62                          

Balance at June 30, 2013

    6,178,202     $ 7.73       5.01     $ 19,299     $ 1,792  
                                         

Vested and expected to vest, June 30, 2013

    5,530,934     $ 7.67       4.90     $ 17,621          

Vested and exercisable, June 30, 2013

    1,933,355     $ 7.45       3.43     $ 6,784          

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stock of $10.77 and $10.50 as of June 30, 2013 and March 31, 2013, respectively. These are the values which would have been received by option holders if all option holders exercised their options on that date.

 

In January 2012, we granted 480,000 performance-based stock options to our Chief Executive Officer, President and Director (“CEO”). The options are scheduled to vest in four equal annual installments at the end of fiscal years 2013 through 2016 if certain predetermined financial measures are met. If the financial measures are not met, each installment will be rolled over to the subsequent fiscal year for vesting except for the last installment. If the financial measures are not met for two consecutive years, the options will be forfeited except for the last installment which will be forfeited at the end of fiscal year 2016. We recorded $65,000 of compensation expense for these options in the three months ended June 30, 2013 and July 1, 2012, respectively.

 

Options exercised for the periods indicated below were as follows (in thousands):

 

   

Three months Ended

 
   

June 30,

2013 

   

July 1,

2012 

 

Intrinsic value of options exercised

  $ 822     $ 398  

 

RSU Activities

 

Our RSU transactions during the three months ended June 30, 2013 are summarized as follows:

 

   

Shares

   

Weighted
Average
Grant-

Date
Fair Value
 

   

Weighted
Average
Remaining
Contractual
Term

(in years) 

   

Aggregate
Intrinsic

Value

(in thousands) 

 

Unvested at March 31, 2013

    732,204     $ 7.73       1.72     $ 7,688  

Granted

    241,495       10.58                  

Issued and released

    (251,064 )     10.14                  

Cancelled

 

   

                 

Unvested at June 30, 2013

    722,635     $ 7.84       1.73     $ 7,783  
                                 

Vested and expected to vest, June 30, 2013

    603,629               1.66     $ 6,501  

 

The aggregate intrinsic value of RSUs represents the closing price per share of our stock at the end of the periods presented, multiplied by the number of unvested RSUs or the number of vested and expected to vest RSUs, as applicable, at the end of each period.

 

 
19

 

 

For RSUs, stock- based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs less estimated forfeitures was recognized on a straight-line basis, over the vesting period.

 

In March 2012, we granted 300,000 performance-based RSUs to our CEO. The RSUs are scheduled to start vesting in three equal annual installments at the end of fiscal year 2013 through 2015 with three year vesting periods if certain predetermined financial measures are met. If the financial measures are not met, each installment will be forfeited at the end of its respective fiscal year. In the three months ended June 30, 2013 and July 1, 2012, we recorded $52,000 and $112,000, respectively, of compensation expense for these awards.

 

Stock-Based Compensation Expense

 

The following table summarizes stock-based compensation expense related to stock options and RSUs during the fiscal periods presented below (in thousands):

 

   

Three Months Ended

 
   

June 30,

2013 

   

July 1,

2012 

 

Cost of sales

  $ 142     $ (15 )

Research and development

    140       (126 )

Selling, general and administrative

    805       315  

Total Stock-based compensation expense

  $ 1,087     $ 174  

 

The amount of stock-based compensation cost capitalized in inventory was immaterial for all periods presented.

 

Unrecognized Stock-Based Compensation Expense

 

The following table summarizes unrecognized stock-based compensation expense related to stock options and RSUs for the periods indicated below:

 

   

June 30, 2013

 
   

Amount

(in thousands) 

   

Weighted Average Expected Remaining

Period (in years) 

 

Options

  $ 7,340       2.8  

RSUs

    3,816       2.5  

Total Stock-based compensation expense

  $ 11,156          

 

Valuation Assumptions

 

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’s judgment 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.

 

We used the following weighted average assumptions to calculate the fair values of options granted during the fiscal periods presented: