UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 10-Q

 

 

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

 

For the quarterly period ended September 28, 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)

 

(510) 668-7000

(Registrant’s telephone number, including area code)

 

 

 

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No  ☐

 

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

 

Large accelerated filer    ☐            Accelerated filer    ☒            

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

 

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

 

The number of shares outstanding of the Registrant’s Common Stock was 47,075,018 as of November 4, 2014.

 


 
1

 

 

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2014

 

   

Page

 

PART I – FINANCIAL INFORMATION

 
     
     

Item 1.

Financial Statements

3

     
 

Condensed Consolidated Balance Sheets (Unaudited)

3

     
 

Condensed Consolidated Statements of Operations (Unaudited)

4

     
 

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

5

     
 

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

     

Item 2.

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

29

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

     

Item 4.

Controls and Procedures

37

     
     
 

PART II – OTHER INFORMATION

 
     
     

Item 1.

Legal Proceedings

38

     

Item 1A.

Risk Factors

38

     

Item 6.

Exhibits

55

     
 

Signatures

56

     
 

Index to Exhibits

57

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

   

September 28,

   

March 30,

 
   

2014

   

2014

 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 78,377     $ 14,614  

Restricted cash

    26,000        

Short-term marketable securities

          152,420  

Accounts receivable (net of allowances of $1,273 and $1,178)

    25,828       15,023  

Accounts receivable, related party (net of allowances of $613 and $608)

    2,108       3,309  

Inventories

    31,223       28,982  

Other current assets

    5,323       3,549  

Total current assets

    168,859       217,897  
                 

Property, plant and equipment, net

    17,212       21,280  

Goodwill

    45,106       30,410  

Intangible assets, net

    93,136       31,390  

Other non-current assets

    1,408       1,240  

Total assets

  $ 325,721     $ 302,217  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 17,737     $ 15,488  

Accrued compensation and related benefits

    5,175       4,174  

Deferred income and allowances on sales to distributors

    4,052       1,765  

Deferred income and allowances on sales to distributors, related party

    10,342       9,349  

Short-term debt financing

    26,000        

Liability for acquisition of non-controlling interests

    18,883        

Other current liabilities

    14,798       11,370  

Total current liabilities

    96,987       42,146  
                 

Long-term lease financing obligations

    19       70  

Other non-current obligations

    5,476       6,626  

Total liabilities

    102,482       48,842  
                 

Commitments and contingencies (Notes 14, 15 and 16)

               
                 

Stockholders' equity:

               

Common stock, $.0001 par value; 100,000,000 shares authorized; 47,091,877 and 47,336,005 shares outstanding

    5       5  

Additional paid-in capital

    512,384       508,116  

Accumulated other comprehensive loss

    (25 )     (1,079 )

Accumulated deficit

    (289,125 )     (253,667 )

Total stockholders' equity

    223,239       253,375  

Total liabilities and stockholders’ equity

  $ 325,721     $ 302,217  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

  

 
3

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

September 28,

   

September 29,

   

September 28,

   

September 29,

 
   

2014

   

2013

   

2014

   

2013

 

Sales:

                               

Net sales

  $ 34,369     $ 24,978     $ 56,067     $ 48,836  

Net sales, related party

    8,790       9,040       17,811       17,809  

Total net sales

    43,159       34,018       73,878       66,645  
                                 

Cost of sales:

                               

Cost of sales

    19,747       12,371       32,100       24,183  

Cost of sales, related party

    3,471       4,156       7,309       8,063  

Amortization of purchased intangible assets and inventory step-up

    3,137       2,098       6,682       3,448  

Impairment of Intangibles

    8,367             8,367        

Warranty Reserve

          1,440             1,440  

Restructuring charges and exit costs

    4,305       24       4,332       105  

Total cost of sales

    39,027       20,089       58,790       37,239  

Gross profit

    4,132       13,929       15,088       29,406  
                                 

Operating expenses:

                               

Research and development

    10,369       7,136       18,612       13,316  

Selling, general and administrative

    11,597       9,376       21,674       16,730  

Impairment of Intangibles

    3,917             3,917        

Merger and acquisition costs

    2,726       144       6,776       609  

Restructuring charges and exit costs

    2,265       384       2,634       1,315  

Net change in fair value of contingent consideration

    (3,912 )     (2,495 )     (4,343 )     (2,495 )

Total operating expenses

    26,962       14,545       49,270       29,475  

Loss from operations

    (22,830 )     (616 )     (34,182 )     (69 )
                                 

Other income and expense, net:

                               

Interest income and other, net

    177       372       467       659  

Interest expense

    (494 )     (41 )     (980 )     (78 )

Total other income and expense, net

    (317 )     331       (513 )     581  
                                 

Income (Loss) before income taxes

    (23,147 )     (285 )     (34,695 )     512  

(Benefit) Provision for income taxes

    107       (6,767 )     799       (6,776 )

Net income (loss)

  $ (23,254 )   $ 6,482     $ (35,494 )   $ 7,288  

Less: Net income (loss) attributable to non-controlling interests

    98             (37 )      

Net income (loss) attributable to Exar Corporation

    (23,352 )     6,482       (35,457 )     7,288  
                                 

Net income (loss) per share:

                               

Basic

  $ (0.50 )   $ 0.14     $ (0.75 )   $ 0.15  

Diluted

  $ (0.50 )   $ 0.13     $ (0.75 )   $ 0.15  
                                 

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

                               

Basic

    47,139       47,496       47,188       47,151  

Diluted

    47,139       49,150       47,188       48,647  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 
4

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited) 

 

   

Three Months Ended

   

Six Months Ended

 
   

September 28,

   

September 29,

   

September 28,

   

September 29,

 
   

2014

   

2013

   

2014

   

2013

 

Net income (loss)

  $ (23,254 )   $ 6,482     $ (35,494 )   $ 7,288  

Changes in market value of investments:

                               

Changes in unrealized loss

          166       199       (418 )

Reclassification adjustment for net realized gains (losses)

          33       26       (26 )

Release of tax provision for unrealized gains

                828        

Net change in market value of investments

          199       1,053       (444 )

Comprehensive income (loss)

  $ (23,254 )   $ 6,681     $ (34,441 )   $ 6,844  

Less: comprehensive income (loss) attributable to non-controlling interests

    98             (37 )      

Comprehensive income (loss) attributable to Exar Corporation

  $ (23,352 )   $ 6,681     $ (34,404 )   $ 6,844  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
5

 

   

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Six Months Ended

 
   

September 28,

   

September 29,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income (loss)

  $ (35,494 )   $ 7,288  

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

               

Depreciation and amortization

    8,570       6,171  

Impairment of Intangibles

    12,284        

Restructuring charges and exit costs

    6,966        

Stock-based compensation expense

    6,727       4,710  

Release of deferred tax valuation allowance

    828       (6,770 )

Net change in fair value of contingent consideration

    (4,343 )     (2,495 )

Changes in operating assets and liabilities, net of effect of acquisitions:

               

Accounts receivable and accounts receivable, related party

    492       (4,230 )

Inventories

    (573 )     1,345  

Other current and non-current assets

    (1,025 )     (427 )

Accounts payable

    (2,469 )     2,807  

Accrued compensation and related benefits

    (1,339 )     77  

Other current and non-current liabilities

    (4,001 )     (3,256 )

Deferred income and allowance to distributors including related party

    3,280       (668 )

Net cash provided by (used in) operating activities

    (10,097 )     4,552  
                 

Cash flows from investing activities:

               

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

    (656 )     (749 )

Purchases of short-term marketable securities

    (9,296 )     (116,589 )

Proceeds from maturities of short-term marketable securities

    3,997       18,589  

Proceeds from sales of short-term marketable securities

    158,412       113,618  

Acquisition of Integrated Memory Logic Limited, net of cash acquired

    (72,659 )      

Acquisition of Cadeka Microcircuits, LLC, net of cash acquired

          (23,111 )

Restricted cash

    (26,000 )      

Other disposal activities

          125  

Net cash provided by (used in) investing activities

    53,798       (8,117 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    2,542       2,897  

Purchase of stock for withholding taxes on vested restricted stock

    (611 )     (1,018 )

Proceeds from issuance of debt

    91,000        

Repayment of debt

    (65,000 )      

Repurchase of common stock

    (6,864 )     (1,999 )

Payments of lease financing obligations

    (1,005 )     (982 )

Net cash provided by (used in) financing activities

    20,062       (1,102 )
                 

Net increase (decrease) in cash and cash equivalents

    63,763       (4,667 )

Cash and cash equivalents at the beginning of period

    14,614       14,718  

Cash and cash equivalents at the end of period

  $ 78,377     $ 10,051  
                 

Supplemental disclosure of cash flow and non-cash information:

               

Cash paid for income tax

  $ 62     $ 66  

Cash paid for (received from) interest

    (466 )     78  

Release of restricted stock upon vesting

    408        

Reclassification of non-controlling interest as liability upon close of iML acquisition

    18,883        

Issuance of common stock in connection with Cadeka acquisition

          5,005  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
6

 

 

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.         ORGANIZATION AND BASIS OF PRESENTATION

 

Description of Business— Exar Corporation was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs, develops and markets high-performance integrated circuits and system solutions for the High-End Consumer, Industrial & Embedded Systems, and Infrastructure markets. Exar's broad product portfolio includes analog, display, LED lighting, mixed-signal, power management, connectivity, data management, and video processing solutions.

 

Basis of Presentation and Use of Management Estimates— The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 30, 2014 as filed with the SEC. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, that we believe are necessary for a fair statement of Exar’s financial position as of September 28, 2014 and our results of operations for the three and six months ended September 28, 2014 and September 29, 2013, respectively. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year ending March 29, 2015.

 

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

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2015 and 2014 both consist of 52 weeks.

 

NOTE 2.         RECENT ACCOUNTING PRONOUNCEMENTS

  

In May 2014, the Financial Accounting Standard Board (“FASB”) issued a new standard, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that would (1) provide a more robust framework for addressing revenue recognition; (2) improve comparability of revenue recognition practice across entities, industries, jurisdictions, and capital markets; and (3) provide more useful information to users of financial statements through improved disclosure requirements. This standard is effective for annual reporting periods beginning after December 15, 2016. Exar is currently evaluating the effect adoption of this standard will have, if any, on our consolidated financial position, results of operations or cash flows.

 

In June 2014, the FASB issued amended standards to provide explicit guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the amended standards, a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition and therefore, should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. These standards are effective for annual reporting periods beginning after December 15, 2015. Exar is currently evaluating the effect of adoption of this standard will have, if any, on our consolidated financial position, results of operations or cash flows.

 

 
7

 

 

        In August 2014, the FASB issued amended standards to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures requirement. The amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). These standards are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Exar does not expect the adoption of this guidance will have a material impact on our consolidated financial position, results of operations or cash flows.

 

NOTE 3.         BUSINESS COMBINATIONS

 

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

 

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

 

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

 

Acquisition of Integrated Memory Logic

 

On June 3, 2014, we acquired approximately 92% of outstanding shares of Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. On September 15, 2014, we completed the acquisition through a second-step merger to acquire all of the remaining outstanding shares of iML. The iML acquisition supports Exar's strategy of building a large scale diversified analog mixed-signal business. iML’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our condensed consolidated financial statements beginning June 4, 2014.

 

Consideration

 

In June 2014, we acquired approximately 92% of iML’s outstanding shares for $206.4 million in cash. In September 2014, we acquired the remaining 8% of iML outstanding shares for $18.9 million, which was paid subsequent to the quarter ended September 28, 2014. Additionally, as required under the terms of the merger agreement, we assumed and converted iML’s employees’ then outstanding options into options to purchase 1.5 million shares of Exar’s common stock. The fair value of pre-merger vested options of $3.8 million was recorded as purchase consideration.

 

In accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations, the acquisition of iML’s outstanding shares was recorded as a purchase business acquisition since iML was considered a business. Under the purchase method of accounting, the fair value of the consideration was allocated to net assets acquired. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return of 16.9%. The excess of the preliminary fair value of consideration paid over the preliminary fair values of net assets acquired and identifiable intangible assets resulted in recognition of goodwill of $14.7 million. Goodwill is primarily from expected synergies resulting from combining the operations of iML with that of Exar and is not deductible for tax purposes.

 

 
8

 

 

The summary of the purchase consideration is as follows (in thousands):

 

   

Amount

 

Cash

  $ 206,411  

Consideration for the acquisition of non-controlling interests

    17,872  

Fair value of assumed iML employee options

    3,835  

Total purchase price

  $ 228,118  

 

Preliminary Purchase Price Allocation

 

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

 

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

 

   

Amount

 

Identifiable tangible assets (liabilities)

       

Cash

  $ 133,752  

Accounts receivable

    10,096  

Inventories

    3,950  

Other current assets

    727  

Property, plant and equipment

    480  

Other assets

    308  

Current liabilities

    (12,356

)

Long-term liabilities

    (3,595

)

Total identifiable tangible assets (liabilities), net

    133,362  

Identifiable intangible assets

    80,060  

Total identifiable assets, net

    213,422  

Goodwill

    14,696  

Fair value of total consideration transferred

  $ 228,118  

 

The following table sets forth the components of identifiable intangible assets acquired in connection with the iML acquisition (in thousands):

 

   

Fair Value

 

Developed technologies

  $ 55,780  

In-process research and development

    8,100  

Customer relationships

    15,060  

Trade names

    1,120  

Total identifiable intangible assets

  $ 80,060  

 

In valuing specific components of the acquisition, that includes deferred taxes, and intangibles, we were required to make estimates that may be adjusted in the future, if new information is obtained about circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. Thus, the purchase price allocation is considered preliminary and dependent upon the finalization of the valuation of assets acquired and liabilities assumed, including income tax effects. Final determination of these estimates could result in an adjustment to the preliminary purchase price allocation, with an offsetting adjustment to goodwill.

 

Acquisition Related Costs

 

Acquisition related costs, or deal costs, relating to iML are included in the merger and acquisition costs and interest expense line on the condensed consolidated statement of operations for the three and six months ended September 28, 2014 and were approximately $3.0 and $7.2 million, respectively.

 

 
9

 

 

Unaudited Pro Forma Financial Information

 

The following unaudited pro forma condensed financial information presents the combined results of operations of Exar and iML as if the acquisition was completed as of April 1, 2013, (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

September 28,

2014

   

September 29,

2013

   

September 28,

2014

   

September 29,

2013

 

Net sales

  $ 43,322     $ 49,124     $ 84,608     $ 98,301  

Net income (loss)

  $ (19,751 )   $ 6,062     $ (27,426 )   $ 5,340  

Earnings (loss) per share

                               

Basic

  $ (0.42 )   $ 0.13     $ (0.58 )   $ 0.11  

Diluted

  $ (0.42 )   $ 0.12     $ (0.58 )   $ 0.11  

  

Three Months Ended September 28, 2014 Compared with Three Months Ended September 29, 2013

 

The pro forma financial information includes (1) amortization charges from acquired intangible assets of $0 and $2.4 million, respectively; (2) the estimated stock-based compensation expense related to the stock options assumed of $0.1 million and $0.5 million, respectively; (3) the elimination of historical intangible assets of $0 and $0.1 million, respectively; (4) the elimination of historical stock-based compensation charges recorded by iML of $0.2 million and $0.4 million, respectively, as a result of the cancellation of all outstanding options on the acquisition date; (5) the elimination of acquisition related costs of $3.0 million and $0, respectively; and (6) the related tax provision of $0.4 million and $0.3 million, respectively.

 

Six Months Ended September 28, 2014 Compared with Three Months Ended September 29, 2013 

 

The pro forma financial information includes (1) amortization charges from acquired intangible assets of $2.4 million and $4.9 million, respectively; (2) the estimated stock-based compensation expense related to the stock options assumed of $0.3 million and $0.6 million, respectively; (3) the elimination of historical intangible assets of $0.1 million and $0.2 million, respectively; (4) the elimination of historical stock-based compensation charges recorded by iML of $0.4 million and $0.1 million, respectively, as a result of the cancellation of all outstanding options on the acquisition date; (5) the elimination of acquisition related costs of $11.2 million and $0, respectively; and (6) the related tax provision of $0.6 million and tax benefit $0.6 million, respectively.

 

The unaudited pro forma condensed financial information is not intended to represent or be indicative of the condensed results of operations of Exar that would have been reported had the acquisition been completed as of the beginning of the periods presented, and should not be taken as representative of the future consolidated results of operations of Exar.

 

Acquisition of Stretch

 

On January 14, 2014, we completed the acquisition of Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market previously located in Sunnyvale, California. The transaction provides Exar with the technology to deliver an end-to-end high-definition solution for both digital and analog transmission of data from the camera to the DVR or NVR in surveillance applications. Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our condensed consolidated financial statements beginning January 14, 2014.

 

In accordance with ASC 805, Business Combinations, the total consideration paid for Stretch was first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition date. The excess of the fair value of the consideration paid over the fair value of Stretch’s net tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of $0.7 million primarily related to expected synergies to be achieved in connection with the acquisition. The goodwill is deductible over 15 years for tax purposes.

 

 
10

 

 

The table below shows the allocation of the purchase price to tangible and intangible assets acquired and liabilities assumed (in thousands):

 

   

Amount

 

Tangible assets

  $ 2,937  

Intangible assets

    7,010  

Goodwill

    667  

Liabilities assumed

    (10,604

)

Fair value of total consideration transferred

  $ 10  

 

Acquisition of Cadeka

 

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, 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 condensed consolidated financial statements beginning July 5, 2013. The pro forma effects of the portion of the Cadeka operations assumed through the transaction on our results of operations during fiscal 2014 were considered immaterial.

 

In accordance with ASC 805, Business Combinations, the total consideration paid for Cadeka was first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition date. The excess of the fair value of the consideration paid over the fair value of Cadeka’s net tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of $19.4 million primarily related to expected synergies from combining the operations of Cadeka with that of Exar and the release of deferred tax liabilities. The goodwill is not expected to be tax deductible.

 

The table below shows the allocation of the purchase price to tangible and intangible assets acquired and liabilities assumed (in thousands):

 

   

Amount

 

Tangible assets

  $ 3,286  

Intangible assets

    20,380  

Goodwill

    19,387  

Liabilities assumed

    (8,216

)

Fair value of total consideration transferred

  $ 34,837  

 

NOTE 4.         BALANCE SHEET DETAILS

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Work-in-process and raw materials

  $ 18,403     $ 13,555  

Finished goods

    12,820       15,427  

Total inventories

  $ 31,223     $ 28,982  

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Land

  $ 6,660     $ 6,660  

Building

    17,284       16,787  

Machinery and equipment

    41,064       40,675  

Software and licenses

    17,836       17,549  

Property, plant and equipment, total

    82,844       81,671  

Accumulated depreciation and amortization

    (65,632 )     (60,391

)

Total property, plant and equipment, net

  $ 17,212     $ 21,280  

 

 
11

 

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Accrued restructuring charges and exit costs

    2,585       2,214  

Accrued retention bonus

    1,832        

Accrued income tax

    1,760       74  

Short-term lease financing obligations

    1,717       2,671  

Accrued manufacturing expenses, royalties and licenses

    1,587       1,639  

Purchase consideration holdback

    1,006       1,256  

Accrued legal and professional services

    827       1,453  

Other

    3,484       2,063  

Total other current liabilities

  $ 14,798     $ 11,370  

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Long-term taxes payable

  $ 4,338     $ 794  

Deferred tax liability

    1,057       614  

Accrued restructuring charges and exit costs

    62       155  

Fair value of earn out liability – long-term

          3,853  

Accrued retention bonus

          1,181  

Other

    19       29  

Total other non-current obligations

  $ 5,476     $ 6,626  

 

NOTE 5.         FAIR VALUE

 

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

 

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

 

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

 

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

 

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

 

The fair value of contingent consideration arising from the acquisitions of Altior Inc. (“Altior”) and Cadeka are classified within Level 3 of the fair value hierarchy since it is based on a probability-based approach that includes significant unobservable inputs. Due to a significant decrease in revenue projections during the quarter ended September 28, 2014, we reversed $3.9 million of contingent consideration as the payment of such consideration was no longer probable. The fair value of the contingent consideration from the acquisitions of Altior and Cadeka was fully released as of September 28, 2014.

 

We received approximately 93,000 common shares of CounterPath Corporation (“CounterPath”) through the dissolution of Skypoint in which we were a limited partner since 2001. CounterPath was one of the investee companies of Skypoint. We estimated the fair value using the market value of common shares as determined by trading on the Nasdaq Capital Market. These securities have been classified to Level 2 as of September 28, 2014 and recorded in the other non-current assets line item on the condensed consolidated balance sheet. We believe the fair value inputs of CounterPath do not meet all of the criteria for Level 1 classification primarily due to the low trading volume of the stock. See Note 7–Long-term Investments for the discussion on Skypoint.

 

There were no transfers between Level 1, Level 2, and Level 3 during the fiscal quarter ended September 28, 2014.

 

 
12

 

 

The following table summarizes our other investments assets and liabilities as September 28, 2014 (in thousands):

 

   

September 28, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Money market funds

  $ 2,000     $     $     $ 2,000  

Common shares of CounterPath

          92             92  

Total investment assets

  $ 2,000     $ 92     $     $ 2,092  

 

As of March 30, 2014, our investment assets and liabilities, measured at fair value on a recurring basis, were as follows (in thousands):

 

   

March 30, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Money market funds

  $ 4,636     $     $     $ 4,636  

U.S. government and agency securities

    9,378       13,134             22,512  

State and local government securities

          2,772             2,772  

Corporate bonds and securities

    5       71,248             71,253  

Asset-backed securities

          27,635             27,635  

Mortgage-backed securities

          28,248             28,248  

Total investment assets

  $ 14,019     $ 143,037     $     $ 157,056  
                                 

Liabilities:

                               

Acquisition-related contingent consideration – Altior

  $     $     $ 2,973     $ 2,973  

Acquisition-related contingent consideration – Cadeka

                1,370       1,370  

Total liabilities

  $     $     $ 4,343     $ 4,343  

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Cash and cash equivalents

               

Cash at financial institutions

  $ 76,377     $ 9,978  

Restricted cash

    26,000        

Cash equivalents

               

Money market funds

    2,000       4,636  

Total cash and cash equivalents

  $ 104,377     $ 14,614  
                 

Available-for-sale securities

               

U.S. government and agency securities

  $     $ 22,512  

State and local government securities

          2,772  

Corporate bonds and securities

          71,253  

Asset-backed securities

          27,635  

Mortgage-backed securities

          28,248  

Total short-term marketable securities

  $     $ 152,420  

 

Our marketable securities include U.S. government and agency securities, state and local government securities, corporate bonds and securities, asset-backed and mortgage-backed securities and certificates of deposit. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. We amortize premiums and accrete discounts to interest income over the life of the investment. Our available-for-sale securities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90 days or less from the date of purchase and as short-term marketable securities if the maturity date is greater than 90 days from the date of purchase. As of September 28, 2014, $26.0 million of short-term certificate deposit was used as collateral against our CTBC Bank Corporation (USA) (“CTBC”) bridge loan and classified as restricted cash. See Note 9-“Short-term Debt”.

 

 
13

 

 

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

 

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

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

September 28,

2014

   

September 29,

2013

   

September 28,

2014

   

September 29,

2013

 

Gross realized gains

  $     $ 164     $ 264     $ 382  

Gross realized losses

          (131 )     (238 )     (408 )

Net realized income (losses)

  $     $ 33     $ 26     $ (26 )

 

We did not have any unrealized gain (loss) as of September 28, 2014.

 

The following table summarizes our investments in marketable securities as of March 30, 2014 (in thousands):  

 

   

March 30, 2014

 
   

Amortized

Cost

   

Unrealized

Gross

Gains (1)

   

Unrealized

Gross

Losses (1)

   

Fair Value

 

Money market funds

  $ 4,636     $     $     $ 4,636  

U.S. government and agency securities

    22,550       1       (39

)

    22,512  

State and local government securities

    2,762       10             2,772  

Corporate bonds and securities

    71,309       32       (88

)

    71,253  

Asset-backed securities

    27,661       22       (48

)

    27,635  

Mortgage-backed securities

    28,362       24       (138

)

    28,248  

Total investments

  $ 157,280     $ 89     $ (313

)

  $ 157,056  

—————

 

(1)

Gross of tax impact of $828

 

Our asset-backed securities as of March 31, 2014 were comprised primarily of premium tranches of vehicle loans and credit card receivables, while our mortgage-backed securities are primarily from Federal agencies. We did not own auction rate securities nor did we own securities that were classified as subprime.

 

Management determines the appropriate classification of cash equivalents or short-term marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and accretion of discounts to maturity and such accretion/amortization, which is immaterial for the period presented, is included in the interest income and other, net line in the condensed statements of operations. Cash equivalents and short-term marketable securities are reported at fair value with the related unrealized gains and losses included in the accumulated other comprehensive losses line in the condensed consolidated balance sheets.

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will not have to sell the security before recovery of its cost basis. For the three and six months ended September 28, 2014, no investments were identified with other-than-temporary declines in value. All investments were redeemed in the first quarter of fiscal 2015.

 

 
14

 

 

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale by expected maturity as of March 30, 2014 (in thousands):

 

   

March 30, 2014

 
   

Amortized

Cost

   

Fair Value

 

Less than 1 year

  $ 49,539     $ 49,504  

Due in 1 to 5 years

    107,741       107,552  

Total

  $ 157,280     $ 157,056  

 

The following table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as of March 30, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

   

March 30, 2014

 
   

Less than 12 months

   

12 months or greater

   

Total

 
   

Fair Value

   

Gross

Unrealized

Losses

   

Fair Value

   

Gross

Unrealized

Losses

   

Fair Value

   

Gross

Unrealized

Losses

 

U.S. government and agency securities

  $ 18,245     $ (39 )   $     $     $ 18,245     $ (39 )

Corporate bonds and securities

    48,379       (87 )     596       (1 )     48,975       (88 )

Asset-backed securities

    7,118       (12 )     5,478       (36 )     12,596       (48 )

Mortgage-backed securities

    19,682       (120 )     983       (18 )     20,665       (138 )

Total

  $ 93,424     $ (258 )   $ 7,057     $ (55 )   $ 100,481     $ (313 )

 

The fair value of contingent consideration was determined based on a probability-based approach which includes projected revenues, percentage probability of occurrence and discount rate to present value payments. A significant increase (decrease) in the projected revenue, discount rate or probability of occurrence in isolation could result in a significantly higher (lower) fair value measurement. We calculate the fair value of the contingent consideration on a quarterly basis based on a collaborative effort of our operations and financial accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period.

 

During the three months ended September 28, 2014, we measured the fair value of the contingent consideration liabilities for Altior and Cadeka acquisition based on a combination of income and market approach. Due to the significant decrease in revenue projection with the period in which such contingent consideration could be earned, we determined that the probability of revenue target achievement was highly unlikely. As a result, the fair value of the contingent consideration liabilities was reduced to zero.

 

The change in the fair value of our Altior purchase consideration liability is as follows (in thousands):

 

   

Amount

 

As of March 30, 2014

  $ 2,973  

Fair value adjustment

    (2,973 )

As of September 28, 2014

  $  

 

The change in the fair value of our Cadeka purchase consideration liability is as follows (in thousands):

 

   

Amount

 

As of March 30, 2014

  $ 1,370  

Fair value adjustment

    (1,370

)

As of September 28, 2014

  $  

 

 
15

 

 

NOTE 6.         GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

       Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Estimations and assumptions regarding the number of reporting units, future performances, results of our operations and comparability of our market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one single operating segment and one chief operating decision maker, our President and Chief Executive Officer (“CEO”), we utilize an entity-wide approach to assess goodwill for impairment. As of September 28, 2014, no events or changes in circumstances suggest that the carrying amount for goodwill may not be recoverable and therefore we did not perform an interim goodwill impairment analysis.

 

The changes in the carrying amount of goodwill for the dates indicated below were as follows (in thousands):

 

   

September 28,

2014

   

March 30,

2014

 

Beginning balance

  $ 30,410     $ 10,356  

Goodwill additions

    14,696       20,054  

Ending balance

  $ 45,106     $ 30,410  

 

Goodwill additions during the six months ended September 28, 2014 consisted of $14.7 million residual allocation from the iML acquisition purchase price accounting. The goodwill additions during fiscal 2014 consist of $19.4 million and $0.7 million residual allocation from the Cadeka and Stretch acquisition purchase price accounting, respectively.

 

Intangible Assets

 

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

 

   

September 28, 2014

   

March 30, 2014

 
   

Carrying Amount

   

Accumulated Amortization

   

Impairment charge

   

Net Carrying Amount

   

Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Amortized intangible assets:

                                                       

Existing technology

  $ 118,794     $ (42,268 )   $ (9,134 )   $ 67,392     $ 63,043     $ (37,510 )   $ 25,533  

Customer relationships

    15,165       (3,600 )     (870 )     10,695       6,095       (2,762 )     3,333  

Distributor relationships

    7,254       (1,536 )           5,718       1,264       (1,260 )     4  

Patents/Core technology

    3,459       (3,412 )           47       3,459       (3,378 )     81  

Trade names

    1,330       (146 )           1,184       210       (51 )     159  

Total intangible assets subject to amortization

    146,002       (50,962 )     (10,004 )     85,036       74,071       (44,961 )     29,110  

In-process research and development

    10,380             (2,280 )     8,100       2,280             2,280  

Total

  $ 156,382       (50,962 )     (12,284 )     93,136       76,351       (44,961 )     31,390  

 

Long-lived assets are amortized on a straight-line basis over their respective estimated useful lives. Existing technology is amortized over two to nine years. Customer relationships are amortized over five to seven years on an accelerated basis. Distributor relationships are amortized over six to seven years. Patents/core technology is amortized over five to six years. Trade names are amortized over three to six years. We expect the amortization of IPR&D to start in late fiscal 2015. We evaluate the remaining useful life of our long-lived assets that are being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the long-lived asset is amortized prospectively over the remaining useful life.

 

Long-lived assets are evaluated for impairment whenever events or changes in 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.

 

 
16

 

 

Exar completed a significant strategic restructuring process that began in the quarter ended September 28, 2014 and ended in October 2014.  This restructuring was prompted by the recent acquisition of iML, and an associated significant reduction in force, including reductions at our Hangzhou, China and Loveland, Colorado units.  We believe this restructuring allows us to achieve meaningful synergies and operating efficiencies and focus our resources on strategic priorities that we expect will yield the highest incremental return for Exar’s stockholders.  For additional details, see “Note 11 – Restructuring Charges and Exit Costs.”   As a result of this restructuring and the resultant re-prioritization of resources, we anticipate a decline in forecasted revenue related to certain intangible assets that were acquired in prior business combinations.  Consequently, we performed an intangible assets impairment review during the second quarter of fiscal year 2015. Upon completion of this review, we recorded $12.3 million of impairment charges to acquired intangibles for the three and six months ended September 28, 2014.  Of these impairment charges, $7.5 million and $4.8 million are related to High-Performance Analog and Data Compression products, respectively. As of September 29, 2013, there were no indicators or events that required us to perform an intangible assets impairment review.

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

September 28,

2014

   

September 29,

2013

   

September 28,

2014

   

September 29,

2013

 

Amortization expense

  $ 3,724     $ 2,130     $ 6,001     $ 3,674  

 

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

 

Amortization Expense (by fiscal year)

 

2015 (6 months remaining)

  $ 6,406  

2016

    12,696  

2017

    12,609  

2018

    12,572  

2019

    12,248  

2020 and thereafter

    28,505  

Total future amortization

  $ 85,036  

 

NOTE 7.         LONG-TERM INVESTMENT

 

In July 2001, Exar became a Limited Partner in the Skypoint Telecom Fund II (US), LP. (“Skypoint Fund”), a venture capital fund focused on investments in communications infrastructure companies. We accounted for this non-marketable equity investment under the cost method in the other non-current assets in the consolidated balance sheet. The partnership was dissolved and the fund distributed stock of investee companies to Exar during first quarter of fiscal 2015.

 

We regularly review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Beginning balance

  $ 946     $ 1,288  

Net distributions

          (19 )

Impairment charges

    (7 )     (323 )

Ending balance

  $ 939     $ 946  

 

The carrying amount of approximately $0.9 million as of September 28, 2014 reflects the net of the capital contributions, capital distributions and $0.3 million cumulative impairment charges. During the term of the fund we have made $4.8 million in capital contributions to Skypoint Fund since we became a limited partner in July 2001. As of September 28, 2014, we do not have any further capital commitments. 

 

 
17

 

 

Impairment

 

We evaluate our long-term investment for impairment whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our impairment analysis by comparing the carrying amount to the fair value of the underlying investments. If the carrying amount exceeds its fair value, long term-investment is considered impaired and a second step is performed to measure the amount of impairment loss. We analyzed the fair value of the remaining underlying investments of Skypoint Fund and as a result, $7,000 and $323,000 impairment charge was recorded during the second fiscal quarter of fiscal year 2015 and fourth quarter of fiscal year 2014, respectively.

 

NOTE 8.        RELATED PARTY TRANSACTIONS

 

Alonim Investments Inc. (“Alonim”) owns approximately 7.6 million shares, or approximately 16%, of our outstanding common stock as of September 28, 2014. As such, Alonim is our largest stockholder.

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

September 28,

2014

   

September 29,

2013

   

September 28,

2014

   

September 29,

2013

 

Alonim

    20 %     27 %     24 %     27 %

 

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

 

   

September 28,

2014

   

March 30,

2014

 

Alonim

    8 %     18 %

 

Related party expenses for marketing promotional materials reimbursed were not significant for the three and six months ended September 28, 2014 and September 29, 2013, respectively.

 

NOTE 9.          SHORT-TERM DEBT

 

As part of the acquisition of iML, we entered into short-term financing agreements with Stifel Financial Corporation (“Stifel”) and CTBC to provide bridge financing for the acquisition.

 

As of the date indicated below, our short-term debts principal balances, which is included in the Short-term debt financing line item on the condensed consolidated balance sheets, consisted of the following (in thousands):

 

   

September 28,

2014

 

CTBC

  $ 26,000  

Stifel

     

Total short-term debt

  $ 26,000  

 

CTBC

 

On June 9, 2014 we entered into a Business Loan Agreement with CTBC to provide a loan for $26.0 million. This loan bears an interest rate of 3.25% and matures on December 9, 2014. Interest payments are due monthly with the entire principal due not later than December 9, 2014.

 

All obligations of Exar under the Business Loan Agreement are unconditionally guaranteed by iML through a $26.0 million short-term certificate deposit with the same institution which has been recorded as restricted cash as of September 28, 2014. 

 

As of October 2014, the CTBC business loan has been completely paid off. See Note 19 – Subsequent Event.

 

 
18

 

 

Stifel

 

On May 27, 2014 (the “Initial Funding Date”), Exar entered into a bridge credit agreement (the “Credit Agreement”) with certain lender parties and Stifel Financial Corp., as Administrative Agent. The Credit Agreement provided Exar with a bridge term loan credit facility in an aggregate principal amount of up to $90.0 million (the “Bridge Facility”).

 

Interest on loans made under the Bridge Facility accrues, at Exar’s option, at a rate per annum equal to (1) the Base Rate (as defined below) plus (a) during the first 90 days following the Initial Funding Date, 7.5% and (b) thereafter, 8.5% or (2) 1-month LIBOR plus (a) during the first 90 days following the Initial Funding Date, 8.5% and (b) thereafter, 9.5%. The “Base Rate” is equal to, for any day, a rate per annum equal to the highest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) 1 month LIBOR plus 1.00%. The Base Rate is subject to a floor of 2.5%, and LIBOR is subject to a floor of 1.5%. The interest rate for June 2014 was 8.65%.

 

Exar had drawn $65.0 million in May 2014 to fund the acquisition of iML’s outstanding shares. We repaid $26.0 million of the debt in June 2014 through a loan from CTBC with lower interest rate. As of July 2014, we completely paid off the Stifel loan.

 

Interest

 

For three and six months ended September 28, 2014, interest on our short-term debt, which is included in the “Interest expense” line item on the condensed consolidated statement of operations, consisted of the following (in thousands):

 

   

September 28, 2014

 
   

Three months

ended

   

Six months

ended

 

CTBC

  $ 211     $ 256  

Stifel

    244       646  

Total interest on short-term debt

  $ 455     $ 902  

  

NOTE 10.      COMMON STOCK REPURCHASES

 

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

 

On August 28, 2007, we announced the approval of a share repurchase plan and authorized the repurchase of 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. The repurchase program does not have a termination date, and may be modified, extended or terminated at any time. We intend to retire all shares repurchased under the stock repurchase plan. The purchase price for the repurchased shares of Exar is reflected as a reduction of common stock and additional paid-in capital. We may continue to repurchase our common stock under the repurchase plan, which would reduce our cash, cash equivalents and/or short-term marketable securities available to fund future operations and to meet other liquidity requirements.

 

 
19

 

 

Stock repurchase activities during six months ended September 28, 2014 were indicated below (in thousands, except per share amounts):

 

   

Total number of

Shares Purchased

   

Average Price Paid

Per Share

(or Unit)

   

Amount Paid for

Purchase

 

As of March 31, 2013

    9,564     $ 9.22     $ 88,189  

Repurchases – August 25 to September 29, 2013

    153       13.07       1,999  

Repurchases – September 30 to October 27, 2013

    73       13.63       1,001  

Repurchases – November 24 to December 29, 2013

    83       12.09       1,000  

Repurchases – December 30, 2013 to January 26, 2014

    122       11.61       1,417  

Repurchases – January 27 to February 23, 2014

    324       11.05       3,583  

As of March 30, 2014

    10,319     $ 9.22     $ 97,189  

Repurchases – March 31 to April 27, 2014

    273       10.98       3,000  

Repurchases – July 28 to September 28, 2014

    393       9.83       3,864  

As of September 28, 2014

    10,985     $ 9.47     $ 104,053  

—————

Note: The average price paid per share is based on the total price paid by Exar, which includes applicable broker fees.

 

NOTE 11.       RESTRUCTURING CHARGES AND EXIT COSTS

 

2015 Restructuring Charges and Exit Costs

 

Exar completed a significant strategic restructuring process that began in the quarter ended September 28, 2014 and ended in October 2014.  This restructuring was prompted by the recent acquisition of iML, and an associated significant reduction in force, including reductions at our Hangzhou, China and Loveland, Colorado units.  We believe this restructuring allows us to achieve meaningful synergies and operating efficiencies and focus our resources on strategic priorities that we expect will yield the highest incremental return for Exar’s stockholders.  During the three and six months ended September 28, 2014, we incurred $6.6 million and $7.0 million restructuring charges and exit costs, respectively. The charges consisted primarily of reduction of our workforce, the impairment of certain fixed assets, licensed technologies and write-off of related inventory.

 

2014 Restructuring Charges and Exit Costs

 

During the three and six months ended September 29, 2013, we incurred restructuring charges and exit costs of $0.4 million and $1.4 million, respectively. The charges include $1.2 million of severance benefits, net of adjustments in other costs and $0.2 million of costs related to efforts to sell and market our campus in Fremont, California.

 

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

 

   

March 30,

2014

   

Additions/

adjustments

   

Non-cash

charges

   

Payments

   

September 28,

2014

 

Lease termination costs and others

  $ 1,615     $ 236     $ (109 )   $ (234 )   $ 1,508  

Impairment of fixed assets, licensed technologies and write down of inventory

          5,478       (5,478 )            

Severance

    754       1,252             (867 )     1,139  

Total

  $ 2,369     $ 6,966     $ (5,587 )   $ (1,101 )   $ 2,647  

 

   

April 1,

2013

   

Additions/

adjustments

   

Non-cash

charges

   

Payments

   

March 30,

2014

 

Lease termination costs and others

  $ 2,860     $ 570     $ (57

)

  $ (1,758

)

  $ 1,615  

Severance

    426       2,444             (2,116

)

    754  

Total

  $ 3,286     $ 3,014     $ (57

)

  $ (3,874

)

  $ 2,369  

 

 
20

 

 

NOTE 12.      STOCK-BASED COMPENSATION

 

Employee Stock Participation Plan (“ESPP”)

 

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

 

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

 

   

As of

September 28,2014

   

Six Months Ended

September 28,2014

 
   

Shares of Common

Stock

   

Shares of Common

Stock

   

Weighted

Average

Price per Share

 

Authorized to issue

    4,500                  

Reserved for future issuance

    1,359                  

Issued

            13     $ 10.94  

 

Equity Incentive Plans

 

At the annual meeting of stockholders on September 18, 2014 (the “Annual Meeting”), our stockholders approved the Exar Corporation 2014 Equity Incentive Plan (“2014 Plan”). The 2014 Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, stock bonuses and other forms of awards granted or denominated in common stock or units of common stock, as well as cash bonus awards.

 

Prior to the Annual Meeting, we maintained the Exar Corporation 2006 Equity Incentive Plan (the “2006 Plan”) and the Sipex Corporation 2006 Equity Incentive Plan (the “Sipex 2006 Plan”). As of June 30, 2014, a total of 6,555,492 shares of our common stock were then subject to outstanding awards granted under the 2006 Plan and the Sipex 2006 Plan, and an additional 669,008 shares of our common stock were then available for new award grants under the 2006 Plan. As part of the stockholder approval of the 2014 Plan at the Annual Meeting, we agreed that no new awards will be granted under the 2006 Plan and the Sipex 2006 Plan, although awards made under these plans will remain subject to the terms of each such plan.

 

The maximum number of shares of our common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals the sum of: (1) 5,170,000 shares, plus (2) the number of any shares subject to stock options granted under the 2006 Plan and the Sipex 2006 Plan and outstanding as of the date of the Annual Meeting which expire, or for any reason are cancelled or terminated, after the date of the Annual Meeting without being exercised, plus (3) the number of any shares subject to restricted stock and restricted stock unit awards granted under the 2006 Plan and the Sipex 2006 Plan that are outstanding and unvested as of the date of the Annual Meeting which are forfeited, terminated, cancelled, or otherwise reacquired after the date of the Annual Meeting without having become vested. Awards other than a stock option or stock appreciation right granted under the 2014 Plan are counted against authorized shares available for future issuance on a basis of two shares for every award issued. As of September 28, 2014, there were 5.1 million shares available for future grant under the 2014 Plan.

 

 
21

 

 

Stock Option Activities

 

Our stock option transactions during the six months ended September 28, 2014 were indicated below:

 

   

Outstanding

   

Weighted
Average
Exercise
Price per
Share

   

Weighted
Average
Remaining
Contractual
Term

(in years)