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 30, 2014

 

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

New York Stock Exchange, Inc.

 

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 27, 2013 was approximately $278.8 million based upon the last price reported in the NYSE-Composite transactions as of the last business day of the Registrant’s most recently completed second fiscal quarter.

 

The number of shares outstanding of the Registrant’s Common Stock was 47,242,288 as of June 9, 2014.

 

DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Registrant’s 2014 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2014 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 30, 2014

 

 

 

Page

 

PART I

 

Item 1.

Business

3

Item 1A.

Risk Factors

14

Item 1B.

Unresolved Staff Comments

29

Item 2.

Properties

29

Item 3.

Legal Proceedings

29

Item 4.

Mine Safety Disclosures

29

 

 

 

 

PART II

 

Item 5.

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

30

Item 6.

Selected Financial Data

32

Item 7.

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

33

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

93

Item 9A.

Controls and Procedures

93

Item 9B.

Other Information

94

 

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

95

Item 11.

Executive Compensation

95

Item 12.

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

95

Item 13.

Certain Relationships and Related Transactions, and Director Independence

95

Item 14.

Principal Accounting Fees and Services

95

 

 

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

96

 

 

Signatures

97

 

 
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 market; (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. 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.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. 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,” “us,” “our” or “we”) designs, develops and markets high performance analog mixed-signal integrated circuits (“ICs”) 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, high performance analog and mixed-signal products, 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 industrial, instrumentation and medical equipment, networking and telecommunication systems, servers, enterprise storage systems, set top boxes and digital video recorders. 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 primarily through various regional and country specific distributors, as well as some 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 (“FAE”) 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 New York Stock Exchange (“NYSE”) 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 30, 2014, March 31, 2013 and April 1, 2012, and results of operations and cash flows for fiscal years ended March 30, 2014, March 31, 2013 and April 1, 2012.

 

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. Our connectivity solutions serve data and telecommunications, networking and storage, industrial control and embedded applications. Our devices facilitate and optimize the interface between systems and across networks with Serial Transceivers, Multi-Protocol Interface products, Universal Asynchronous Receiver/Transmitters (“UARTs”) and interface Bridges.

 

Power Management Solutions — Our focus on power management includes traditional linear and switching power management solutions as well as an innovative approach to software programmable power management with the universal PMIC family. 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 embedded applications. We have also introduced a new family of programmable power module solutions that provide programmable power conversion with integrated inductors for the smallest profile solutions on the market.

 

Signal Path Solutions — Our focus on signal path includes a wide selection of high performance or high precision amplifiers, data converters and reference circuitries. We design and develop amplifiers and data converters that support the diverse signal path and conditioning needs of networking, industrial control and embedded applications. We have also introduced a new family of improved second sources to existing industry’s amplifiers.

 

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, original equipment manufacturers (“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 software architecture that simplifies system integration, reduces time to market and provides a smooth migration path across the entire product portfolio.

 

Video Processor Solutions We are one of the leading providers of solutions for the video surveillance industry including state-of-the art video processors, board-level solutions and a sophisticated and market-proven software stack. Our expertise is in image processing, video compression, video analytics and associated networking interface software.

 

Markets and Products 

 

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

 

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, 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 and embedded systems. Typical applications include point-of-sale, process control, and factory automation, as well as servers, embedded systems, routers, network management equipment, remote access servers, wireless base-stations and repeaters.

 

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 depths and industry leading performance and features. We support popular central processing unit (“CPU”) bus interfaces such as 8-bit Industry Standard Architecture, 8-bit VLIO, 2-wire Inter-Integrate Circuit , 4-wire Serial Peripheral Interface, Peripheral Component Interconnect, PCIe and USB.

 

 
4

 

 

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.

 

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 and embedded systems.

 

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 and package development 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 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 optimization to improve bandwidth, and our high throughput security technology is used in public-key handshakes and symmetric encryptions for secure sockets layer and internet protocol security 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 Components

 

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 155Mbps to 40Gbps for the efficient transport of digital data over fiber optic networks. Products include mixed signal clock and data recovery 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.

 

High Performance Analog Components

 

The demand for signal amplification, conditioning and conversion is a required part of any system given the real world is analog, connecting sight, touch and sound. With our acquisition of Cadeka Microcircuits LLC (“Cadeka”), we have over 250 products that range from amplifiers to data converters with emphasis on either high precision or high speed. Our portfolio of products includes instrumentation, low noise, high speed and hybrid amplifiers, as well as high speed analog-to-digital converters (“ADCs”) and digital-to-analog converters. As a performance leader, we offer the industry’s lowest noise and distortion amplifiers, and the industry’s lowest power consumption high speed ADCs. Our amplifier and data converter products are designed to meet the needs of various industrial, medical, and video applications.

 

Video Processor Solutions

 

Our video processor solutions offering is focused on the fast-growing surveillance industry. We offer chip- and board-level solutions for a wide variety of surveillance products including IP Cameras, DVRs, Hybrid NVRs and video streamers. We are also leaders in new methods of video transmission including aCVI, which is a method to transmit high-definition video over legacy coax cables.

 

The surveillance industry is demanding ever increasing pixel counts growing from standard definition video, to high definition, to 4K (“Ultra HD”) (from 345 thousand to 8 million pixels). Our video processors can be configured to handle multiple standard definition video streams or a single 4K video stream, depending on the application.

 

The industry is also adopting video analytics and our unique architecture is particularly well suited for the complex computational task of analyzing live video for threats or abnormalities.

 

Our software stack is optimized for the unique needs of the surveillance industry and has been production proven by the industry's largest manufacturers for over six years.

 

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.

 

 
6

 

 

Expand Product Portfolio We have developed a strong presence in the data and telecommunications, networking and storage, industrial control and automation 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, power management and signal path 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 system products like XRP9711 power modules, and Panther I and Panther II-based compression cards. 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, Bipolar and BCD processes. We believe that these processes are proven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS, Bipolar and BCD processes. In certain specialized cases, we may use other process technologies to take advantage of their performance characteristics.

 

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, Bipolar 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 Delaware, Georgia, Illinois, Texas and California.

 

 
7

 

 

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 internationally. The percentage of our net sales represented by certain geographies is as follows:

 

   

Fiscal Years Ended

 
   

March 30,

2014

   

March 31,

2013

   

April 1,

2012

 

China

    35

%

    34

%

    34

%

United States

    29

%

    26

%

    26

%

Singapore

    11

%

    11

%

    11

%

Germany

    9

%

    10

%

    10

%

Japan

    5

%

    5

%

    5

%

Europe (excluding Germany)

    3

%

    4

%

    4

%

Rest of world

    8

%

    10

%

    10

%

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 OEMs 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 30,

2014

   

March 31,

2013

   

April 1,

2012

 

Distributor A

    27

%

    30

%

    31

%

Distributor B

    21

%

    11

%

    11

%

Distributor C

    12

%

    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 2014, 2013 or 2012.

 

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

 

   

March 30,

2014

   

March 31,

2013

 

Distributor B

    17 %     20 %

Distributor A

    16 %     21 %

Distributor D

    14 %     11 %

Distributor C

    12 %     *  

 

 

 

*

Net accounts receivable for this distributor for this period were less than 10% of our net accounts receivables.

 

No other distributor or customer accounted for 10% or more of our net accounts receivable as of March 30, 2014 or March 31, 2013.

 

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.

 

 
8

 

 

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

 

Most of our semiconductor wafers are shipped directly from our foundry partners 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, ultra-low voltage, high precision or high speed requirements of interface, power management and signal path 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. In addition to the United States, 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. We invested an aggregate of $27.0 million, $22.4 million and $35.0 million on research and development in fiscal years 2014, 2013 and 2012, respectively. For further explanation of our research and development expenses, 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;

 

 

product performance, quality, reliability, cost and features;

 

 

customer requirements, support, services and engagements;

 

 

price;

 

 

rapid technological change;

 

 

number of design wins released to production;

 

 

lowering total system cost; and

 

 

compliance with and support of industry standards.

 

 
9

 

 

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 companies such as 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, Vitesse Semiconductor Corporation, Ambarella, Inc. and HiSilicon Technologies Co., Ltd. Our competitors in the Networking & Storage market include companies such as Cavium Networks and Intel. 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 30, 2014, we have 202 patents issued and 15 patent applications pending in the United States and 40 patents issued and 25 patent applications pending in various foreign countries. Our existing patents will expire between 2014 and 2031, 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 or technology.

 

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, used 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;

 

 
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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 April 26, 2014, we signed a definitive agreement (“Merger Agreement”) to acquire Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. The iML acquisition supports Exar's strategy of building a large scale diversified analog mixed-signal business. Under the terms of the transaction, Exar's subsidiary (“Sub”) has commenced a tender offer to acquire all of the outstanding shares of iML for NT$91.00 (approximately US$3.00) per iML share in cash and acquire any remaining shares at NT$91.00 per share pursuant to a follow-on merger. On May 29, 2014, Sub completed the offer. 68,319,091 shares (the “Accepted Shares”) were validly tendered in the offer, representing approximately 92% of iML’s outstanding shares. The persons from whom the Accepted Shares were acquired were the shareholders of iML. Sub will pay an aggregate purchase price of NT$6.2 billion (approximately US$206.0 million) to iML shareholders for the tendered shares. Pursuant to the terms and conditions set forth in the Merger Agreement, Sub intends to conduct a second-step merger in which Sub will merge with and into iML and the remaining outstanding shares will be converted into the right to receive NT$91.00 per share in cash. When complete, the gross transaction value is currently estimated to be NT$6.8 billion (approximately US$224.0 million), or NT$2.8 billion (approximately US$92.0 million), net of cash acquired. After the closing, iML will become a wholly owned subsidiary of Exar and iML stock will cease trading on the Taiwan Stock Exchange. Exar financed the acquisition of the shares with a combination of cash on hand and a new $90.0 million senior secured bridge loan facility. Stifel Financial Corp. has provided Exar a commitment letter to provide Exar up to $90.0 million in senior secured bridge loans. The commitment letter is subject to customary conditions to consummation.

 

Due to the limited time since the date of the acquisition, the initial disclosure for this business combination is incomplete as of the date of this filing. As such, it is impracticable for us to make certain business combination disclosures at this time. We are unable to present the acquisition date fair value of and information related to assets acquired and liabilities assumed. We plan to provide this information in our quarterly report on Form 10-Q for the quarter ending June 29, 2014.

 

On January 14, 2014, we completed the acquisition of Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market. Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning January 14, 2014.

 

On July 5, 2013 we completed the acquisition of Cadeka, a provider of high precision analog ICs for use in industrial and high reliability applications. Cadeka’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning July 5, 2013.

 

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 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 Optical Transport networks (“OTN”). On February 1, 2012 we terminated development of OTN products and ceased operations in Ottawa.

 

Employees 

 

As of March 30, 2014, we employed 312 full-time employees, with 143 in research and development, 46 in operations, 79 in marketing and sales and 44 in administration. Of the 312 employees, 110 are located in our international offices. See Part I, Item 1A—“Risk FactorsWe 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, 2014, are as follows:

 

Name

 

Age

  

Position

         

Louis DiNardo

 

54

 

President, Chief Executive Officer and Director

Steve Bakos

 

47

 

Senior Vice President, Worldwide Sales and Marketing

Robert K. Beachler

 

50

 

Vice President, Corporate Marketing and Business Development

Ryan A. Benton

 

43

 

Senior Vice President and Chief Financial Officer

Parviz Ghaffaripour

 

50

 

Senior Vice President and General Manager, Component Products

Diane Hill

 

57

 

Vice President, Human Resources

Craig Lytle

 

50

 

Senior Vice President, Systems Solution Products

Thomas R. Melendrez

 

60

 

General Counsel, Secretary and Senior Vice President

Todd Smathers

 

65

 

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 and 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 (“Xicor”), 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 has held executive leadership positions with and served on the Board of Directors of a variety of privately held and public 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 served as Senior Vice President of Marketing and Sales for Active-Semi from 2008 to 2010 and Vice President of Sales with SiTime from 2010 to 2011. Prior to joining Exar, Mr. Bakos served as Vice President of Worldwide Sales at Conexant Systems from 2011 to 2012. Mr. Bakos holds a Bachelor of Science in Engineering from Cornell University, Ithaca, NY.

 

 
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Robert K. Beachler was appointed Vice President, Corporate Marketing and Business Development in April 2014. He was appointed as Vice President of Marketing and Systems Design of Processor Products in January 2014 following the Stretch Inc. acquisition. A long-time veteran of the semiconductor industry, he has broad experience across all facets of marketing and corporate business development disciplines in both start-up and public company environments. Mr. Beachler joined Stretch in May 2006 as Vice President of Marketing, and prior to joining Stretch he was with Altera Corporation for over 15 years. While at Altera, he led successful worldwide product launches that broke awareness records for FPGA products and software; led new product architecture development for the industry's best-selling programmable logic family and design automation tools; and held titles including Senior Director of the Intellectual Property Business Unit, Senior Director of Business Development, Senior Director of Software Tools Marketing, and Director of Strategic Marketing and Communications. Early in his Altera career he led product planning and applications engineering teams. Mr. Beachler received a Bachelor's of Science in Electrical Engineering from The Ohio State University (Columbus), has served on the board of directors for the Virtual Socket Initiative Alliance and has been a board observer for a number of start-up semiconductor and electronic design automation (“EDA”) companies.

 

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 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 and General Manager, Component Products in May of 2013. He brings to Exar over 29 years of analog mixed-signal experience during which time he built and grew leading profitable businesses. Mr. Ghaffaripour most recently served as CEO of Akros Silicon from 2008 to 2013, a privately funded power management company located in Sunnyvale, California. Prior to Akros, he was Chief Operating Officer at Advanced Analogic Technologies (now Skyworks). Mr. Ghaffaripour has held executive management and technical roles at Maxim Integrated Products and National Semiconductor. Mr. Ghaffaripour began his career at Exar in 1984 as an analog IC designer. He earned his B.S.E.E. at the University of California, Berkeley, his M.S.E.E. at Santa Clara University, executive degrees in Business Administration at Stanford University and Western Ontario, and he holds four patents.

 

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 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.

 

Craig Lytle was appointed Senior Vice President, Systems Solutions Products in January of 2014 following the Stretch Inc. acquisition, where he had served as Chief Executive Officer since 2006. Mr. Lytle brings over 20 years of experience in the semiconductor market with expertise in the FPGA, processors, communications, and video market segments. Prior to Stretch, he was Vice President System Engineering at Altera Corporation. Mr. Lytle joined Altera as an Applications Engineer in 1986. From there he became Altera's first FAE and then rose through the sales, engineering, product planning, marketing and executive ranks. Mr. Lytle holds a BS in Electrical Engineering from Stanford University and a BA in Management Engineering from Claremont McKenna College.   

 

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 Senior Vice President. 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 and Xicor, 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.

 

 
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ITEM 1A.

RISK FACTORS

 

The following factors describe risks and uncertainties that could adversely affect our business, financial condition, results of operations, and the market price of our common stock. The risks and uncertainties described below should not be considered to be a complete statement of all potential risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we do not currently consider material may also harm our business, financial condition, results of operations or the market price of our common stock. 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.

 

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;

 

 

warranty costs related to our product sales;

 

 

the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channel partners; 

 

 

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 products with few customers and/or distributors;

 

 

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;

 

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

 

 

loss of market share by us or by our customers;

 

 

competitive pressures on selling prices or product availability;

 

 

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

 

 

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, services or processing capabilities, 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 products or manufacturing processes to or between our subcontractors;

 

 

fluctuations in the product quality or 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;

 

 

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 (“NOLs”) prior to their statutory expiration;

 

 
15

 

 

 

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;

 

 

change in fair value of contingent consideration; and/or

 

 

changes in or continuation of certain tax provisions.

 

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. Unstable 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 pace of 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;

 

 
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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;

 

 

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 on a temporary or permanent basis 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/or

 

 

the current macroeconomic environment 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/or

 

 

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

 

 
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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.

 

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.

 

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;

 

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

 

  

the possibility of planned acquisitions failing to materialize and not realizing anticipated benefits; and/or

 

 

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

 

Additional risks involved with acquisitions include:

 

 

exposure to foreign exchange risk associated with acquisition consideration denominated in foreign currencies;

 

  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 product manufacturing flows and supply chains 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/or

 

 

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 or 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 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.

 

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 CMOS processes, bipolar processes, BiCMOS and BCD 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, assert product warranty or damage claims, or be reluctant to continue to buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these errors and defects 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 and 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 reduction or discontinuance, either on a permanent or temporary basis, of any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products, lost sales opportunities, and increased costs. 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 reduction or elimination of any existing source(s) of semiconductor manufacturing materials or processes, which might include the potential temporary or permanent closure, product and /or process discontinuation, change of ownership, change in business conditions or relationships, change of management or consolidation by one of our foundries;

 

 

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;

 

 
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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 or equipment, or changes in tax laws, tariffs, services and freight rates; and/or

 

 

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 subjecting us to high fixed costs; and/or

 

 

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

 

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.

 

 
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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.

 

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.

 

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 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 the 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.

 

 
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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. Because of the number of shares available under our 2006 Equity Incentive Plan is inadequate to provide for future equity awards and incentives, we intend to seek stockholder approval of the 2014 Equity Incentive Plan. Stockholder approval is necessary to our continued success. 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.

 

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, 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 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.

 

 
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The complexity of our products may lead to errors and defects, 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 or errors or defects when first introduced, or as new versions are released when manufacturing or process changes are made. If any of our products contain design or production defects, reliability issues or 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 errors or defects could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition and results of operations.

 

If errors or defects 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.

 

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;

 

 
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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.

 

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 30, 2014, 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 10% 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, Future, our largest distributor, is an affiliate of Alonim, 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.

 

 
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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 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 recent earthquakes in Japan or 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.

 

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.

 

A breach of our security systems may have a material adverse effect on our business.

 

Our information systems are designed to maintain and protect our customers’, suppliers’ and employees’ confidential and business intelligence data as well as our proprietary information and technology. We may experience cyber-attacks and other security breaches, and as a result, unauthorized parties may obtain access to our information systems. Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims or harm our or business partner’s competitive position. Any significant system or network disruption, including but not limited to, new system implementations, computer viruses or worms, security breaches or unexpected energy blackouts could have a material adverse impact on our operations, sales and operating results. Maintaining the security integrity of our enterprise network is paramount for us, our customers and our suppliers. We have implemented measures to manage, monitor and detect our risks related to such disruptions, but despite precautionary efforts such disruptions could still occur and negatively impact our operations and financial results. In addition, we may incur additional costs to remedy any damages caused by these disruptions or security breaches.

 

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.

 

 
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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, estimates 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.

 

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, intangible assets, goodwill, long-lived assets and contingent consideration liabilities 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;

 

 
27

 

 

 

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 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 or compliance with regulatory requirements;

 

 

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/or

 

 

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.

 

 
28

 

 

We may be exposed to additional credit risk as a result of concentrated customer revenue.

 

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 U.S. publicly-traded companies 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) and other listed 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 were due June 2, 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. Our customers, including our OEM customers, may require that our products contain only conflict free 3TG, and our revenues and margins may be harmed if we are unable to meet this requirement at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting this requirement. Additionally, we may suffer reputational harm with our customers and other stakeholders if our products are not conflict free or if we are unable to sufficiently verify the origins of the 3TG contained in our products through the due diligence procedures that we implement. We could incur significant costs to the extent that we are required to make changes to products, processes or sources of supply due to the foregoing requirements or pressures.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

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 FAEs.

 

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

 

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.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 
29

 

 

PART II

 

ITEM 5.

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

 

Market Information

 

Prior to July 29, 2013, our common stock was listed and traded on the NASDAQ Global Select Market (the “NASDAQ”) under the ticker symbol “EXAR”. Our common stock was approved for listing on the New York Stock Exchange (the “NYSE”), and on July 29, 2013, we began trading our common stock on the NYSE. Our common stock has continued to trade on the NYSE under the ticker symbol “EXAR.” Our common stock ceased trading on the NASDAQ effective at the close of the market on July 26, 2013.

 

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 and NYSE.

 

   

Common Stock

Price

 
   

High

   

Low

 

Fiscal year 2014

               

Fourth quarter ended March 30, 2014

  $ 12.55     $ 10.67  

Third quarter ended December 29, 2013

    13.74       11.38  

Second quarter ended September 29, 2013

    13.85       10.80  

First quarter ended June 30, 2013

    11.72       10.00  
                 

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  

 

The closing sales price for our common stock on June 9, 2014, was $11.03 per share. As of June 9, 2014, the approximate number of record holders of our common stock was 276 (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 for the foreseeable future. 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.

 

 

 
30

 

 

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 our common stock and these indices at market close on March 27, 2009 and that all dividends, if any, were reinvested. The performance shown is not necessarily indicative of future performance.

 

 

   

Cumulative Total Return as of

 
   

March 29,

2009

   

March 28,

2010

   

March 27,

2011

   

April 1,

2012

   

March 31,

2013

   

March 30,

2014

 

Exar Corporation Stock

  $ 100.00     $ 118.64     $ 98.54     $ 136.14     $ 170.18     $ 189.79  

NASDAQ/NYSE Composite Index

    100.00       158.32       185.39       210.13       226.02       296.17  

NASDAQ/NYSE Electronic Components Index

    100.00       158.85       184.71       189.24       177.48       239.48  

 

(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 Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, 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.

 

 
31

 

 

Purchases of Equity Securities by the Issuer

 

Stock repurchase activities during the three months ended March 30, 2014 were as follows:

 

   

Total Number
of Shares
Purchased (1)

   

Average Price
Paid per Share

   

Total Number of Shares
Purchased as Part of
Publicly Announced
Programs

   

Dollar Value

of Shares That May Yet Be Purchased
Under the Programs

(in thousands)

 

December 30 - January 26

    122,070     $ 11.61       122,070          

January 27 - February 23

    324,171       11.05       324,171          

Total

    446,241               466,241     $ 52,811  

 

 

(1) On August 28, 2007, we announced the approval of a share repurchase plan under which we were authorized to repurchase up to $100.0 million of our common stock. On July 9, 2013, we announced the approval of a share repurchase program under which we were authorized to repurchase an additional $50.0 million of our common stock. There are no expiration dates under the programs. Shares are retired upon repurchase.

 

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 (in thousands, except per share amounts).

 

   

As of and For the Years Ended

 
   

March 30,

2014

   

March 31,

2013

   

April 1,

2012

   

March 27,

2011

   

March 28,

2010

 

Consolidated statements of operations data:

                                       

Net sales

  $ 125,322     $ 122,026     $ 130,566     $ 146,005     $ 134,878  

Gross profit

    50,654       55,687       55,924       63,997       63,382  

Loss from operations

    (3,701

)

    (583

)

    (30,593

)

    (40,018

)

    (33,990

)

Net income (loss)

    5,801       (2,882

)

    (28,056

)

    (35,668

)

    (28,110

)

                                         

Net income (loss) per share:

                                       

Basic

  $ 0.12     $ 0.06     $ (0.63

)

  $ (0.81

)

  $ (0.64

)

Diluted

  $ 0.12     $ 0.06     $ (0.63

)

  $ (0.81

)

  $ (0.64

)

                                         

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

                                       

Basic

    47,291       45,809       44,796       44,218       43,584  

Diluted

    48,823       46,476       44,796       44,218       43,584  
                                         

Consolidated balance sheets data:

                                       

Cash, cash equivalents and short-term investments

  $ 167,034     $ 205,305     $ 196,382     $ 200,999     $ 212,084  

Working capital

    175,751       203,732       190,878       202,256       208,052  

Total assets

    302,217       293,168       271,652       298,215       333,314  

Long-term obligations

    6,696       12,546       9,986       16,399       17,260  

Accumulated deficit

    (253,667

)

    (259,468

)

    (262,350

)

    (234,294

)

    (198,626

)

Stockholders’ equity

    253,375       240,454       223,292       244,579       274,132  

 

On January 14, 2014, July 5, 2013, March 22, 2013, March 16, 2010, and June 17, 2009 we acquired the businesses of Stretch, Cadeka, Altior, Neterion, and Galazar, respectively. Accordingly, the results of operations of Stretch, Cadeka and Altior have been included in our consolidated financial statements since January 14, 2014, July 5, 2013 and March 23, 2013, 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. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 4—Business Combinations.”  

 

 
32

 

 

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 market; (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.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We disclaim any obligation to revise or update information in any forward-looking statement, except as required by law.

 

Company Overview

 

Exar Corporation (“Exar,” “us,” “our” 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, high performance analog and mixed-signal products, 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 industrial, instrumentation and medical equipment, networking and telecommunication systems, servers, enterprise storage systems, set top boxes and digital video recorders. 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 primarily through various regional and country specific distributors, as well as some 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 (“FAEs”) 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 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.”

 

Fourth Quarter of Fiscal Year 2014 Executive Summary

 

We experienced a sequential quarterly decrease of 9% in our net sales in the fourth quarter as compared to the third fiscal quarter of 2014. The decrease in net sales as compared to the immediately prior quarter was primarily attributed to supply chain inventory exceeding demand in the networking market, as well as timing issues in certain contracts for proprietary high reliability products and technology licenses. Net income of $0.1 million increased $1.8 million from net loss in the third quarter of fiscal year 2014. The increase in net income as compared to the immediately prior quarter was primarily attributed to the change in fair value of contingent considerations related to the Altior and Cadeka acquisitions. Diluted income per share of $0.00 per share in the fourth quarter of fiscal year 2014 increased $0.03 per share from the basic loss per share in the third quarter of fiscal year 2014. We believe we are effectively managing our operating expenses while continuing to invest an appropriate amount in research and development projects for future products.

 

 
33

 

 

Acquisitions

 

On April 26, 2014, we signed a definitive agreement (“Merger Agreement”) to acquire Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. The iML acquisition supports Exar's strategy of building a large scale diversified analog mixed-signal business. Under the terms of the transaction, Exar's subsidiary (“Sub”) has commenced a tender offer to acquire all of the outstanding shares of iML for NT$91.00 (approximately US$3.00) per iML share in cash and acquire any remaining shares at NT$91.00 per share pursuant to a follow-on merger. On May 29, 2014, Sub completed the offer. 68,319,091 shares (the “Accepted Shares”) were validly tendered in the offer, representing approximately 92% of iML’s outstanding shares. The persons from whom the Accepted Shares were acquired were the shareholders of iML. Sub will pay an aggregate purchase price of NT$6.2 billion (approximately US$206.0 million) to iML shareholders for the tendered shares. Pursuant to the terms and conditions set forth in the Merger Agreement, Sub intends to conduct a second-step merger in which Sub will merge with and into iML and the remaining outstanding shares will be converted into the right to receive NT$91.00 per share in cash. When complete, the gross transaction value is currently estimated to be NT$6.8 billion (approximately US$224.0 million), or NT$2.8 billion (approximately US$92.0 million), net of cash acquired. After the closing, iML will become a wholly owned subsidiary of Exar and iML stock will cease trading on the Taiwan Stock Exchange. Exar financed the acquisition of the shares with a combination of cash on hand and a new $90.0 million senior secured bridge loan facility. Stifel Financial Corp. has provided Exar a commitment letter to provide Exar up to $90.0 million in senior secured bridge loans. The commitment letter is subject to customary conditions to consummation.

 

Due to the limited time since the date of the acquisition, the initial disclosure for this business combination is incomplete as of the date of this filing. As such, it is impracticable for us to make certain business combination disclosures at this time. We are unable to present the acquisition date fair value of and information related to assets acquired and liabilities assumed. We plan to provide this information in our quarterly report on Form 10-Q for the quarter ending June 29, 2014.

 

On January 14, 2014, we completed the acquisition of Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market. Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning January 14, 2014.

 

On July 5, 2013, we completed the acquisition of substantially all of the assets of Cadeka Technologies (Cayman) Holding Ltd., a privately held company organized under the laws of the Cayman Islands and all the outstanding stock of the subsidiaries of Cadeka Technologies (Cayman) Holding Ltd., including the equity of its wholly owned subsidiary Cadeka Microcircuits, LLC, a Colorado limited liability company (“Cadeka”). With locations in Loveland, Colorado, Shenzhen and Wuxi, China, Cadeka designs, develops and markets high precision analog integrated circuits for use in industrial and high reliability applications. Cadeka’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning July 5, 2013.

 

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 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 Synchronous Optical NETwork and Synchronous Digital Hierarchy (“SONET/SDH”), Plesiochronous Digital Hierarchy (“PDH”) and optical transport network (“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.

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2014, 2013 and 2012 consisted of 52, 52 and 53 weeks, respectively. Fiscal year 2015 will consist of 52 weeks. Fiscal years ended March 30, 2014, March 31, 2013 and April 1, 2012 are also referred to as “2014,” “2013,” and “2012,” respectively, 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 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.

 

 
34

 

 

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 original equipment manufacturers (“OEMs”) or their contract manufacturers. Our delivery terms are primarily free on board 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 5% 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.

 

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. 

 

 
35

 

 

The following table summarizes the deferred income balance, primarily consisting of sell-through distributors (in thousands):

 

   

As of March 30,

2014

   

As of March 31,

2013

 

Deferred revenue at published list price

  $ 15,871     $ 18,652  

Deferred cost of revenue

    (4,757

)

    (6,778

)

Deferred income

  $ 11,114     $ 11,874  

 

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.

 

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’.”

 

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. Total mask costs capitalized was $2.3 million and $1.7 million as of March 30, 2014 and March 31, 2013, respectively. The costs capitalized are amortized over a five year estimated life.

 

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.

 

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 measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. We use the Black-Scholes model to estimate the fair value of our options. The fair value of time-based and performance-based restricted stock units is based on the grant date share price. The fair value of market-based restricted stock units is estimated using a Monte Carlo simulation model. 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.

 

 
36

 

 

We recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest. This expense is recorded on a straight-line basis over the requisite service period of the entire awards, unless the awards are subject to performance or market conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche. For the performance-based awards, we recognize compensation expense when it becomes probable that the performance criteria specified in the plan will be achieved. For the market-based awards, compensation expense is not reversed if the market condition is not satisfied. The amount of stock-based compensation that we recognize is also based on an expected forfeiture rate. If there is a difference between the forfeiture assumptions used in determining stock-based compensation costs and the actual forfeitures which become known over time, we may change the forfeiture rate, which could have a significant impact on our results of operations.

 

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 review long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets (or asset group) may not be fully recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets may not be recoverable, we estimate the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in the discounted cash flow method of valuation. If our actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

 

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.

 

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.

 

 
37

 

 

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 June 17, 2009, March 22, 2013, July 5, 2013 and January 14, 2014, we acquired Galazar, Altior, Cadeka and Stretch, respectively. 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 2014, 2013 and 2012 consist of 52, 52 and 53 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.

 

 
38

 

 

The following table sets forth our financial results as a percentage of total net sales:

 

   

March 30,

2014

   

March 31,

2013

   

April 1,

2012

 
                         

Net Sales

    100

%

    100

%

    100

%

Cost of sales:

                       

Cost of sales

    38

%

    38

%

    38

%

Cost of sales-related party

    13

%

    14

%

    15

%

Amortization of purchased intangible assets and inventory step-up

    6

%

    3

%

    3

%

Warranty Reserve

    1

%

           

Impairment of intangible assets

    1

%

           

Restructuring charges and exit costs

                1

%

Total cost of sales

    60

%

    54

%

    57

%

Gross profit

    40

%

    46

%

    43

%

Operating expenses:

                       

Research and development

    22

%

    18

%

    27

%

Selling, general and administrative

    26

%

    27

%

    30

%

Restructuring charges and exit costs

    2

%

    1

%

    10

%

Merger and acquisition costs

    2

%

           

Net change in fair value of contingent consideration

    (8

)%

           

Total operating expenses

    43

%

    46

%

    66

%

                         

Loss from operations

    (3

)%

          (23

)%

Interest income and other, net

    1

%

    2

%

    2

%

Income (Loss) before income taxes

    (2

)%

    1

%

    (21

)%

(Benefit from) Provision for income taxes

    (7

)%

    (1

)%

     

Net income (loss)

    5

%

    2

%

    (21

)%

 

 
39

 

 

The following table sets forth our financial results in dollars and the increase (decrease) over prior periods for the periods indicated (in thousands, except percentages):

 

   

March 30,

2014

   

March 31,

2013

   

Change

 
                                 

Net Sales

  $ 125,322     $ 122,026     $ 3,296       3

%

Cost of sales:

                               

Cost of sales

    48,067       45,943       2,124       5

%

Cost of sales-related party

    15,738       16,716       (978 )     (6

)%

Amortization of purchased intangible assets and inventory step-up

    7,600       3,379       4,221       125

%

Impairment of intangible assets

    1,636             1,636        

Warranty Reserve

    1,440             1,440        

Restructuring charges and exit costs

    187       301       (114 )     (38

)%

Total cost of sales

    74,668       66,339       8,329       13

%

Gross profit

    50,654       55,687       (5,033 )     (9

)%

Operating expenses:

                               

Research and development

    27,048       22,376       4,672       21

%

Selling, general and administrative

    33,055       32,531       524       2

%

Restructuring charges and exit costs

    2,827       1,253       1,574       126

%

Merger and acquisition costs

    1,880       110       1,770       1,609

%

Net change in fair value of contingent considerations

    (10,455 )           (10,455 )      

Total operating expenses

    54,355       56,270       (1,915 )     (3

)%

Loss from operations

    (3,701 )     (583 )     (3,118 )     535

%

Interest income and other, net

    1,503       2,441       (938 )     (38

)%

Interest expense

    (156 )     (165 )     9       (5

)%

Impairment of long term investment

    (323 )           (323 )      

Income (Loss) before income taxes

    (2,677 )     1,693       (4,370 )     (258

)%

Benefit from income taxes

    (8,478 )     (1,189 )     (7,289 )     613

%

Net income

  $ 5,801     $ 2,882     $ 2,919       101

%

 

   

March 31,

2013

   

April 1,

2012

   

Change

 
                                 

Net Sales

  $ 122,026     $ 130,566     $ (8,540 )     (7

)%

Cost of sales:

                               

Cost of sales

    45,943       49,839       (3,896 )     (8

)%

Cost of sales-related party

    16,716       19,888       (3,172 )     (16

)%

Amortization of purchased intangible assets

    3,379       3,603       (224 )     (6

)%

Restructuring charges and exit costs

    301       1,312       (1,011 )     (77

)%

Total cost of sales

    66,339       74,642       (8,303 )     (11

)%

Gross profit

    55,687       55,924       (237 )      

Operating expenses:

                               

Research and development

    22,379       35,006       (12,627 )     (36

)%

Selling, general and administrative

    32,638       38,598       (5,960 )     (15

)%

Restructuring charges and exit costs

    1,253       12,913       (11,660 )     (90

)%

Total operating expenses

    56,270       86,517       (30,247 )     (35

)%

Loss from operations

    (583 )     (30,593 )     30,010       (98

)%

Interest income and other, net

    2,441       2,803       (362 )     (13

)%

Interest expense

    (165 )     (215 )     50       (23

)%

Income (Loss) before income taxes

    1,693       (28,005 )     29,698       (106

)%

(Benefit from) Provision for income taxes

    (1,189 )     51       (1,240 )     (2,431

)%

Net income (loss)

  $ 2,882     $ (28,056 )   $ 30,938       (110

)%

 

 
40

 

 

Net Sales

 

The following table shows net sales by end market for the periods indicated (in thousands except percentages):

 

   

March 30,

2014

   

March 31,

2013

   

April 1,

2012

   

2014 vs. 2013

Change

   

2013 vs. 2012

Change

 

Net sales:

                                                               

Industrial and Embedded Systems

  $ 72,458       58

%

  $ 63,396       52

%

  $ 66,602       51

%

    14

%

    (5

%)

Networking & Storage

    30,594       25

%

    32,737       27

%

    27,005       21

%

    (7

%)

    21

%

Communications Infrastructure

    21,808       17

%

    24,965       20

%

    35,829       27

%

    (13

%)

    (30

%)

Other

    462             928       1

%

    1,130       1

%

    (50

%)

    (18

%)

Total

  $ 125,322       100

%

  $ 122,026       100

%

  $ 130,566       100

%

               

 

Geographically, our net sales in dollars and as a percentage of total net sales were as follows for the periods presented (in thousands, except percentages):

 

   

March 30,

2014

   

March 31,

2013

   

April 1,

2012

   

2014 vs. 2013

Change

   

2013 vs. 2012

Change

 

Net sales:

                                                               

Asia

  $ 71,856       57

%

  $ 72,610       60

%

  $ 76,906       59

%

    (1

%)

    (6

%)

Americas

    38,197       31

%

    32,959       27

%

    34,361       26

%

    16

%

    (4

%)

EMEA

    15,269       12

%

    16,457       13

%

    19,299       15

%

    (7

%)

    (15

%)

Total