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 endedDecember ~~29, 2013~~28, 2014

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF ~~193~~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~~.company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒

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

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

The number of shares outstanding of the Registrant’s Common Stock was ~~47,483,455~~47,443,328 as of February ~~3, 2014.~~4, 2015.

EXAR CORPORATION AND SUBSIDIARIES

INDEX TO

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~DECEMBER 29, 2013~~DECEMBER 28, 2014

		Page
	PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements ~~(Unaudited)~~	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	2930

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3638

Item 4.	Controls and Procedures	3639


	PART II – OTHER INFORMATION


Item 1.	Legal Proceedings	3739

Item 1A.	Risk Factors	3739

Item 6.	Exhibits	5256

	Signatures	5357

	Index to Exhibits	5458

PART I – FINANCIAL INFORMATION

ITEM 1.

~~ITEM 1.~~FINANCIAL STATEMENTS

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

December 29,

March 31,

2013

2013

ASSETS

Current assets:

Cash and cash equivalents
$ 21,070 $ 14,718
Short-term marketable securities
154,702 190,587
Accounts receivable (net of allowances of $570 and $944)
21,699 12,614
Accounts receivable, related party (net of allowances of $462 and $346)
1,685 3,374
Inventories
24,950 19,430
Assets held for sale
13,083 —
Other current assets
3,645 3,177
Total current assets
240,834 243,900

Property, plant and equipment, net
8,784 24,100
Goodwill
29,573 10,356
Intangible assets, net
28,063 13,338
Other non-current assets
1,442 1,474
Total assets
$ 308,696 $ 293,168

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable
$ 14,824 $ 9,455
Accrued compensation and related benefits
4,352 3,624
Deferred income and allowances on sales to distributors
1,861 2,399
Deferred income and allowances on sales to related party distributor
8,017 9,475
Other current liabilities
11,151 15,215
Total current liabilities
40,205 40,168

Long-term lease financing obligations
106 1,342
Other non-current obligations
11,530 11,204
Total liabilities
51,841 52,714

Commitments and contingencies (Notes 13, 14 and 15)

Stockholders' equity:

Common stock, $.0001 par value; 100,000,000 shares authorized; 47,501,051 and 46,607,246 shares outstanding
5 5
Additional paid-in capital
511,644 749,426
Accumulated other comprehensive loss
(980 ) (526 )
Treasury stock at cost, 0 and 19,924,369 shares
— (248,983 )
Accumulated deficit
(253,814 ) (259,468 )
Total stockholders' equity
256,855 240,454
Total liabilities and stockholders’ equity
$ 308,696 $ 293,168

	December 28,			March 30,
	2014			2014
ASSETS

Current assets:
Cash and cash equivalents	$	52,622		$	14,614
Short-term marketable securities		—			152,420
Accounts receivable (net of allowances of $1,215 and $1,178)		28,688			15,023
Accounts receivable, related party (net of allowances of $709 and $608)		865			3,309
Inventories		33,066			28,982
Other current assets		5,487			3,549
Total current assets		120,728			217,897

Property, plant and equipment, net		20,673			21,280
Goodwill		44,871			30,410
Intangible assets, net		89,888			31,390
Other non-current assets		1,306			1,240
Total assets	$	277,466		$	302,217

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	17,504		$	15,488
Accrued compensation and related benefits		6,283			4,174
Deferred income and allowances on sales to distributors		3,585			1,765
Deferred income and allowances on sales to distributors, related party		8,110			9,349
Other current liabilities		14,387			11,370
Total current liabilities		49,869			42,146

Long-term lease financing obligations		1,479			70
Other non-current obligations		5,405			6,626
Total liabilities		56,753			48,842

Commitments and contingencies (Notes 14, 15 and 16)

Stockholders' equity:
Common stock, $.0001 par value; 100,000,000 shares authorized; 47,261,975 and 47,336,005shares outstanding		5			5
Additional paid-in capital		516,456			508,116
Accumulated other comprehensive loss		(25	)		(1,079	)
Accumulated deficit		(295,723	)		(253,667	)
Total stockholders' equity		220,713			253,375
Total liabilities and stockholders’ equity	$	277,466		$	302,217

See Accompanying Notes to Condensed Consolidated Financial Statements.

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	December 29,			December 30,			December 29,			December 30,			December 28,			December 29,			December 28,			December 29,
	2013			2012			2013			2012			2014			2013			2014			2013
Sales:
Net sales	$	21,846		$	22,235		$	70,682		$	63,210		$	35,919		$	21,846		$	91,986		$	70,682
Net sales, related party		8,844			8,764			26,653			27,662			8,396			8,844			26,207			26,653
Total net sales		30,690			30,999			97,335			90,872			44,315			30,690			118,193			97,335

Cost of sales:
Cost of sales		12,393			11,922			36,576			34,846			20,113			12,393			52,127			36,576
Cost of sales, related party		3,556			4,005			11,619			12,897			3,099			3,556			10,408			11,619
Amortization of purchased intangible assets and inventory step-up		1,898			801			5,346			2,578			2,533			1,898			9,215			5,346
Warranty reserve		—			—			1,440			—
Restructuring charges and exit costs		17			79			122			160			2,052			17			6,384			122
Impairment of Intangibles														—			—			8,367			—
Warranty Reserve, net														(372	)		—			(286	)		1,440
Total cost of sales		17,864			16,807			55,103			50,481			27,425			17,864			86,215			55,103
Gross profit		12,826			14,192			42,232			40,391			16,890			12,826			31,978			42,232

Operating expenses:
Research and development		6,929			5,376			20,263			16,598			10,035			6,929			28,647			20,245
Selling, general and administrative		9,086			8,645			26,407			24,066			11,793			8,829			33,467			25,559
Restructuring charges and exit costs		74			524			1,389			1,619			1,418			74			4,052			1,389
Net change in fair value of contingent consideration		58			—			(2,437	)		—
Merger and acquisition costs														179			257			6,955			866
Impairment of Intangibles														—			—			3,917			—
Net change in fair value of contingentconsideration														—			58			(4,343	)		(2,437	)
Total operating expenses		16,147			14,545			45,622			42,283			23,425			16,147			72,695			45,622

Loss from operations		(3,321	)		(353	)		(3,390	)		(1,892	)		(6,535	)		(3,321	)		(40,717	)		(3,390	)

Other income and expense, net:
Interest income and other, net		321			586			980			1,906			53			321			520			980
Interest expense		(39	)		(56	)		(117	)		(128	)		(46	)		(39	)		(1,026	)		(117	)
Total other income and expense, net		282			530			863			1,778			7			282			(506	)		863

Income (Loss) before income taxes		(3,039	)		177			(2,527	)		(114	)
Benefit from income taxes		(1,405	)		(1,346	)		(8,181	)		(1,324	)
Loss before income taxes														(6,528	)		(3,039	)		(41,223	)		(2,527	)
(Benefit) Provision for income taxes														71			(1,405	)		870			(8,181	)
Net income (loss)	$	(1,634	)	$	1,523		$	5,654		$	1,210			(6,599	)		(1,634	)		(42,093	)		5,654
Less: Net loss attributable to non-controlling interests														—			—			(37	)		—
Net income (loss) attributable to ExarCorporation													$	(6,599	)	$	(1,634	)	$	(42,056	)	$	5,654

Net income (loss) per share:
Basic	$	(0.03	)	$	0.03		$	0.12		$	0.03		$	(0.14	)	$	(0.03	)	$	(0.89	)	$	0.12
Diluted	$	(0.03	)	$	0.03		$	0.12		$	0.03		$	(0.14	)	$	(0.03	)	$	(0.89	)	$	0.12

Shares used in the computation of net income (loss) per share:
Basic		47,529			45,925			47,277			46,228			47,119			47,529			47,165			47,277
Diluted		47,529			46,438			48,815			46,623			47,119			47,529			47,165			48,815

See Accompanying Notes to Condensed Consolidated Financial Statements.

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 28,			December 29,			December 28,			December 29,
	2014			2013			2014			2013
Net income (loss)	$	(6,599	)	$	(1,634	)	$	(42,093	)	$	5,654
Changes in market value of investments:
Changes in unrealized gain (loss)		—			(77	)		199			(495	)
Reclassification adjustment for net realized gains		—			67			26			41
Release of tax provision for unrealized gains		—			—			828			—
Net change in market value of investments		—			(10	)		1,053			(454	)
Comprehensive income (loss)	$	(6,599	)	$	(1,644	)	$	(41,040	)	$	5,200
Less: comprehensive loss attributable to non-controlling interests		—			—			(37	)		—
Comprehensive income (loss) attributable to Exar Corporation	$	(6,599	)	$	(1,644	)	$	(41,003	)	$	5,200

Three Months Ended

Nine Months Ended

December 29,

December 30,

December 29,

December 30,

2013

2012

2013

2012

Net income (loss)
$ (1,634 ) $ 1,523 $ 5,654 $ 1,210
Changes in market value of investments, net of tax:

Changes in unrealized gain on investments
(77 ) (305 ) (495 ) (42 )
Reclassification adjustment for net realized gains (losses)
67 4 41 (149 )
Net change in market value of investments
(10 ) (301 ) (454 ) (191 )
Comprehensive income (loss)
$ (1,644 ) $ 1,222 $ 5,200 $ 1,019

See Accompanying Notes to Condensed Consolidated Financial Statements.

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended						Nine Months Ended
	December 29,			December 30,			December 28,			December 29,
	2013			2012			2014			2013
Cash flows from operating activities:
Net income	$	5,654		$	1,210
Reconciliation of net income to net cash provided by (used in) operating activities:
Net income (loss)							$	(42,093	)	$	5,654
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		9,386			8,333			13,325			9,386
Gain on sale of intangible asset		—			(223	)
Impairment of Intangibles								12,284			—
Restructuring charges and exit costs								6,732			(1,279	)
Stock-based compensation expense		7,267			3,010			10,949			7,267
Release of deferred tax asset valuation allowance		(6,770	)		—
Release of deferred tax valuation allowance								828			(6,770	)
Net change in fair value of contingent consideration		(2,437	)		—			(4,343	)		(2,437	)
Changes in operating assets and liabilities, net of effect of acquisition:
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable and accounts receivable, related party		(7,155	)		(3,669	)		(1,125	)		(7,155	)
Inventories		(3,764	)		(346	)		(3,506	)		(3,764	)
Other current and non-current assets		(558	)		47			(1,087	)		(558	)
Accounts payable		4,849			2,256			(2,945	)		4,849
Accrued compensation and related benefits		659			182			(231	)		659
Deferred income and allowance on sales to distributors and related party distributor		(1,996	)		(1,848	)
Other current and non-current liabilities		(5,992	)		(5,298	)		(5,380	)		(4,713	)
Net cash provided by (used in) operating activities		(857	)		3,654
Deferred income and allowance to distributors including related party								581			(1,996	)
Net cash used in operating activities								(16,011	)		(857	)

Cash flows from investing activities:
Purchases of property, plant and equipment and intellectual property, net		(1,675	)		(1,253	)		(2,447	)		(1,675	)
Purchases of short-term marketable securities		(166,738	)		(132,955	)		(9,296	)		(166,738	)
Proceeds from maturities of short-term marketable securities		24,410			37,563			3,997			24,410
Proceeds from sales of short-term marketable securities		178,167			97,190			158,412			178,167
Acquisition, net of cash acquired		(23,111	)		—
Acquisition of Integrated Memory Logic Limited, net of cash acquired								(91,542	)		—
Acquisition of Cadeka Microcircuits, LLC, net of cash acquired								—			(23,111	)
Other disposal activities		125			235			—			125
Net cash provided by investing activities		11,178			780			59,124			11,178

Cash flows from financing activities:
Proceeds from issuance of common stock		3,971			4,699			4,530			3,971
Purchase of stock for withholding taxes on vested restricted stock		(1,042	)		—			(629	)		(1,042	)
Proceeds from issuance of debt								91,000			—
Repayment of debt								(91,000	)		—
Repurchase of common stock		(4,000	)		—			(7,999	)		(4,000	)
Payments of lease financing obligations		(2,898	)		(2,513	)		(1,007	)		(2,898	)
Net cash provided by (used in) financing activities		(3,969	)		2,186
Net cash used in financing activities								(5,105	)		(3,969	)

Net increase in cash and cash equivalents		6,352			6,620			38,008			6,352
Cash and cash equivalents at the beginning of period		14,718			8,714			14,614			14,718
Cash and cash equivalents at the end of period	$	21,070		$	15,334		$	52,622		$	21,070


Supplemental disclosure of non-cash investing activities:
Supplemental disclosure of cash flow and non-cash information:
Cash paid for income tax							$	104		$	119
Cash paid for interest								1,041			863
Engineering design tool acquired under capital lease								2,924			—
Release of restricted stock upon vesting								408			—
Issuance of common stock in connection with Cadeka acquisition	$	5,177		$	—			—			5,117

See Accompanying Notes to Condensed Consolidated Financial Statements.

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.

ORGANIZATION AND BASIS OF PRESENTATION

~~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,~~designs, develops and markets ~~high performance analog mixed-signal~~high-performance integrated circuits and ~~advanced sub-system~~system solutions for the ~~Networking & Storage,~~High-End Consumer, Industrial & Embedded Systems, and ~~Communications~~ Infrastructure markets. Exar's broad product portfolio includes analog, display, LED lighting, mixed-signal, power management, connectivity, data management, and ~~connectivity components, high-performance analog and mixed-signal products, communications products and data compression and storagesolutions.~~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 ~~31, 2013~~30, 2014 as filed with the ~~SEC~~.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~~presentation of Exar’s financial position as of December ~~29, 2013~~28, 2014 and our results of operations for the three and nine months ended December ~~29, 2013~~28, 2014 and December ~~30, 2012,~~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.

Ourfiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2015 and 2014 ~~and 2013 consisted~~both consist of 52 weeks. ~~The third quarter of fiscal years 2014 and 2013 both consisted of 13 weeks.~~

NOTE 2.

~~NOTE 2.~~ RECENT ACCOUNTING PRONOUNCEMENTS

In ~~July 2013,~~May 2014, theFinancial Accounting ~~Standards~~Standard Board (“FASB”) issued ~~amended standards~~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 ~~provided explicit guidance on the financial statement presentation~~would (1) provide a more robust framework for addressing revenue recognition; (2) improve comparability of ~~an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. Under the amended standards, the unrecognized tax benefit, or a portion~~revenue recognition practice across entities, industries, jurisdictions, and capital markets; and (3) provide more useful information to users of ~~an unrecognized tax benefit, should be presented in the~~ financial statements ~~as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. These amended~~through improved disclosure requirements. This standard ~~updates will be~~is effective for our interim period beginning after December 15, 2013 and applied prospectively with early adoption permitted. We are currently evaluating the impact of this guidance on the presentation of our financial positions, results of operations and cash flows.

~~In February 2013, the FASB issued amended standards to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to~~provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts~~. These amended standards are effective for interim and~~ annual reporting periods beginning after December 15, ~~2012. The~~2016. Exar is currently evaluating the effect adoption of this ~~guidance did not~~standard will have, if any, ~~material impact~~ 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 periodsbeginning 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.

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~~

BUSINESS COMBINATIONS

We periodically evaluate potential strategic acquisitions ~~or arrangements~~ 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 ~~noncontrolling~~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 ~~to sell~~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 returnof 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 $14.5 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.

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 preliminary allocation of total 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
962
Property, plant and equipment
480
Other assets
308
Current liabilities
(12,356 )
Long-term liabilities
(3,595 )
Total identifiable tangible assets (liabilities), net
133,597
Identifiable intangible assets
80,060
Total identifiable assets, net
213,657
Goodwill
14,461
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 valuingspecific 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 nine months ended December 28, 2014 and were approximately $0.1 and $7.3 million, respectively.

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

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Net sales
$ 44,315 $ 45,243 $ 128,923 $ 143,544
Net income (loss)
$ (6,834 ) $ 306 $ (34,260 ) $ 5,646
Earnings (loss) per share

Basic
$ (0.15 ) $ 0.01 $ (0.73 ) $ 0.12
Diluted
$ (0.15 ) $ 0.01 $ (0.73 ) $ 0.12
Three Months Ended December 28, 2014 Compared with Three Months Ended December 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 $0.4 million and $0.2 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 $0.2 million, respectively, as a result of the cancellation of all outstanding options on the acquisition date; (5) the elimination of acquisition related costs of $0.1 million and $0, respectively; and (6) the related tax provision of $0 for both periods.
Nine Months Ended December 28, 2014 Compared with Nine Months Ended December 29, 2013
The pro forma financial information includes (1) amortization charges from acquired intangible assets of $2.4 million and $7.3 million, respectively; (2) the estimated stock-based compensation expense related to the stock options assumed of $0.7 million and $0.8 million, respectively; (3) the elimination of historical intangible assets of $0.1 million and $0.3 million, respectively; (4) the elimination of historical stock-based compensation charges recorded by iML of $0.6 million and $0.3 million, respectively, as a result of the cancellation of all outstanding options on the acquisition date; (5) the elimination of acquisition related costs of $11.3 million and $0, respectively; and (6) the related tax provision of $0.6 million and tax benefit of $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 goodwillis deductible over 15 years for tax purposes.

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 6,5, 2013. The pro forma effects of the portion of the Cadeka operations assumed through the transaction on our results of operations during fiscal ~~years~~ 2014 ~~and 2013~~ were considered immaterial.

~~Consideration~~
The purchase consideration includes approximately 454,000 shares of our common stock issued to the shareholders of Cadeka (valued at $5.2 million) and a cash payment of $25.0 million (less an amount of $1.0 million, inclusive of 15,000 shares, held back temporarily to satisfy potential indemnity claims). An additional purchase price consideration earn-out (up to $5.0 million) may be earned over the next two fiscal years contingent upon achieving certain revenue targets, and may be paid in the form of cash, stock or both. The $5.2 million worth of shares issued at closing were valued on the date of the acquisition, and the fair value of contingent earn-outs was derived using a probability-based approach on various revenue assumptions and discounted to a present value. Final determination of the earn-out liability can range from zero to $5.0 million based on the actual achievement of the revenue targets. Fair value of contingent consideration is subject to periodic revaluation and any change in the fair value of contingent consideration from the events after the acquisition date will be recognized in earnings of the period in which the fair value changes. The probability–based approach used to fair value contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The significant unobservable inputs include projected revenues, percentage probability of occurrence and a discount rate to present value the future payments. The summary of the preliminary purchase consideration is as follows (in thousands):

Amount

Cash
$ 25,000
Equity instruments
5,177
Estimated fair value of earn-out payments
4,660
Total consideration paid
$ 34,837
In accordance with ASC 805, Business Combinations, the ~~acquisition of~~total consideration paid for Cadeka was ~~recorded as a purchase business~~first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition ~~since Cadeka was considered a business. Under the purchase method~~date. The excess of ~~accounting,~~ the fair value of the consideration was allocated to net assets acquired at their fair values. The fair value of purchased identifiable intangible assets and contingent earn-outs were derived from model-based valuations from significant unobservable inputs (“Level 3 inputs”) determined by management. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return ranging from 15% to 23%. The fair value of the contingent earn-out was a probability-based approach that includes significant Level 3 inputs.~~See Note 4 —“Fair Value,”~~ ~~for additional details of the inputs used to determine~~paid over the fair value of ~~the contingent earn-out. The excess of the preliminary fair value of consideration paid over the preliminary fair values of~~Cadeka’s net ~~assets acquired~~tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of ~~approximately $12.4~~$19.4 million ~~prior~~primarily related to ~~considering the impact on deferred tax assets and liabilities. The goodwill results largely of~~ 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. ~~After considering~~
The table below shows the impact of deductible and taxable temporary tax differences on the acquired business, a deferred tax liability of $6.8 million was established primarily related to identified intangible asset basis differences, which resulted in a total goodwill amount recorded as partallocation of the ~~acquisition of $19.2 million.Additionally, in accordance with ASC 805, Business Combinations,~~w~~e also evaluated the impact~~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 ~~acquisition on Exar’s valuation allowance, the impact of which is recorded outside of purchase accounting, resulting in a release~~following as of the ~~valuation allowance~~dates indicated (in thousands):

December 28,
2014

March 30,
2014

Work-in-process and raw materials
$ 21,177 $ 13,555
Finished goods
11,889 15,427
Total inventories
$ 33,066 $ 28,982
Our property, plant and ~~an income tax benefit~~equipment consisted of ~~$6.8 million.~~the following as of the dates indicated below (in thousands):

December 28,
2014

March 30,
2014

Land
$ 6,660 $ 6,660
Building
17,462 16,787
Machinery and equipment
41,356 40,675
Software and licenses
22,323 17,549
Property, plant and equipment, total
87,801 81,671
Accumulated depreciation and amortization
(67,128 ) (60,391 )
Total property, plant and equipment, net
$ 20,673 $ 21,280

~~Preliminary Purchase Price Allocation~~
~~The allocation~~Our other current liabilities consisted of the ~~total preliminary purchase price to Cadeka’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~~following as of the ~~major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the Cadeka acquisition was as follows~~dates indicated (in thousands):

Amount

Identifiable tangible assets (liabilities)

Cash
$ 1,055
Accounts Receivable
241
Inventories
1,756
Property, plant and equipment
231
Other assets
3
Accounts payable and accruals
(7,400
)
Other short-term liabilities
(520
)
Long-term liabilities
(126
)
Total identifiable tangible assets (liabilities), net
(4,760
)
Identifiable intangible assets
20,380
Total identifiable assets, net
15,620
Goodwill
19,217
Fair value of total consideration transferred
$ 34,837

December 28,
2014

March 30,
2014

Short-term lease financing obligations
$ 2,837 $ 2,671
Accrued retention bonus
2,725 —
Accrued income tax
1,556 74
Accrued restructuring charges and exit costs
1,390 2,214
Accrued manufacturing expenses, royalties and licenses
1,284 1,639
Purchase consideration holdback
1,006 1,256
Accrued legal and professional services
849 1,453
Other
2,740 2,063
Total other current liabilities
$ 14,387 $ 11,370

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

Fair Value

Developed technologies
$ 15,720
In-process research and development
2,280
Customer relations
2,170
Trade name
210
Total identifiable intangible assets
$ 20,380
~~In valuingspecific components~~Our other non-current obligations consisted of the ~~acquisition, that includes deferred taxes, and intangibles required us to make estimates that may be adjusted in the future, if new information is obtained about circumstances that existed~~following (in thousands) 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.dates indicated:

~~Acquisition Related Costs~~

December 28,
2014

March 30,
2014

Long-term taxes payable
$ 4,313 $ 794
Deferred tax liability
1,059 614
Accrued restructuring charges and exit costs
15 155
Fair value of earn out liability – long-term
— 3,853
Accrued retention bonus
— 1,181
Other
18 29
Total other non-current obligations
$ 5,405 $ 6,626

NOTE 5.
Acquisition related costs, or deal costs, relating to Cadeka are included in the selling, general and administrative line on the condensed consolidated statement of operations for the nine months ended December 29, 2013 were approximately $0.4 million.
~~Acquisition of Altior~~
On March 22, 2013, we completed the acquisition of substantially all of the assets of Altior Inc. (“Altior”), a developer of data management solutions in Eatontown, New Jersey. Altior’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 23, 2013. The pro forma effects of the portion of the Altior operations assumed through the transaction on our results of operations during fiscal years 2013 and 2012 were considered immaterial.

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

Amount

Cash
$ 1,000
Equity instruments
3,740
Estimated fair value of earn-out payments
10,138
Total consideration paid
$ 14,878
In accordance with ASC 805, Business Combinations, the acquisition of Altior was recorded as a purchase business acquisition since Altior was considered a business. Under the purchase method of accounting, the fair value of the consideration was allocated to assets and liabilities assumed at their fair values. The fair value of purchased identifiable intangible assets and contingent earn-outs were derived from model-based valuations from significant Level 3 inputs determined by management. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return ranging from 12% to 19%. The fair value of the contingent earn-outs was a probability-based approach that includes significant Level 3 inputs.~~See Note 4 —“Fair Value,”~~ for additional details of the inputs used to determine the fair value of the contingent earn-out. The excess of the fair value of consideration paid over the fair values of net assets and liabilities acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $7.2 million. The goodwill consists largely of expected synergies from combining the operations of Altior with that of Exar and is deductible over 15 years for tax purposes.
~~Purchase Price Allocation~~
~~The allocation of the purchase price to Altior’s tangible and identifiable intangible assets and liabilities assumed was based on their estimated fair values at the date of acquisition.~~
~~The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the Altior acquisition was as follows (in thousands):~~

Amount

Identifiable tangible assets

Inventories
$ 126
Property, plant and equipment
140
Other assets
36
Accounts payable and accruals
(24
)
Other short-term liabilities
(51
)
Long-term liabilities
(61
)
Total identifiable tangible assets, net
166
Identifiable intangible assets – existing technology
7,540
Total identifiable assets, net
7,706
Goodwill
7,172
Fair value of total consideration transferred
$ 14,878
~~Acquisition Related Costs~~
Acquisition related costs, or deal costs, relating to Altior are included in the selling, general and administrative line on the consolidated statement of operations for fiscal year 2013, which were immaterial.

~~NOTE 4.~~    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 isare 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 significant decrease in revenue projections, 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 Telecom Fund II (US), LP. (“Skypoint Fund”) 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 December 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 December ~~29, 2013.~~28, 2014.

~~Our investment~~As of June 29, 2014, we sold all of our short term investments to fund the iML acquisition. The following table summarizes our other investments assets ~~measured at fair value on a recurring basis,~~and liabilities as ~~of the dates indicated below were as follows~~December 28, 2014 (in ~~thousands, except for percentages)~~thousands):

December 29, 2013

Level 1

Level 2

Level 3

Total

Assets:

Money market funds
$ 13,961 $ — $ — $ 13,961
U.S. government and agency securities
11,537 21,254 — 32,791
State and local government securities
— 2,798 — 2,798
Corporate bonds and securities
4 72,721 — 72,725
Asset-backed securities
— 30,354 — 30,354
Mortgage-backed securities
— 16,034 — 16,034
Total investment assets
$ 25,502 $ 143,161 $ — $ 168,663

Liabilities:

Acquisition-related contingent consideration – Altior
$ — $ — $ 7,741 $ 7,741
Acquisition-related contingent consideration – Cadeka
$ — $ — $ 4,620 $ 4,620
Total liabilities
$ — $ — $ 12,361 $ 12,361

March 31, 2013

Level 1

Level 2

Level 3

Total

Assets:

Money market funds
$ 5,042 $ — $ — $ 5,042
U.S. government and agency securities
22,460 19,261 — 41,721
State and local government securities
— 2,935 — 2,935
Corporate bonds and securities
274 91,955 — 92,229
Asset-backed securities
— 30,966 — 30,966
Mortgage-backed securities
— 22,736 — 22,736
Total investment assets
$ 27,776 $ 167,853 $ — $ 195,629

Liabilities:

Acquisition-related contingent consideration – Altior
$ — $ — $ 10,138 $ 10,138

December 28, 2014

Level 1

Level 2

Level 3

Total

Assets:

Money market funds
$ 6 $ — $ — $ 6
Common shares of CounterPath
— 56 — 56
Total investment assets
$ 6 $ 56 $ — $ 62

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.
The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of December 29, 2013.

Fair Value
(in thousands)

Valuation
Technique

Significant
Unobservable Input

As of December 29, 2013

Acquisition-related contingent consideration – Altior
$ 7,741
Combination of income and marketable approach

Revenue and Probability of Achievement

Acquisition-related contingent consideration – Cadeka
$ 4,620
Combination of income and marketable approach

Revenue and Probability of Achievement

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 second quarter of fiscal 2015, 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 as of September 28, 2014.

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

December 29,
2013

As of March 31, 2013
$ 10,138
Less: Adjustment to purchase consideration
(2,397 )
As of December 29, 2013
$ 7,741

Amount

As of March 30, 2014
$ 2,973
Fair value adjustment
(2,973 )
As of December 28, 2014
$ —

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

December 29,
2013

As of March 31, 2013
$ —
Purchase contingent consideration
4,660
Less: Adjustment to purchase consideration
(40 )
As of December 29, 2013
$ 4,620

Amount

As of March 30, 2014
$ 1,370
Fair value adjustment
(1,370 )
As of December 28, 2014
$ —

~~We have focused~~As of March 30, 2014, our ~~resources on developing~~investment assets and marketing our coprocessor products with the Altior software technology incorporated. These products, when compared to the Altior legacy FPGA-based products, will earn credit under the asset purchase agreementliabilities, measured at ~~a lower rate, resulting in a lower probability of meeting certain near-term earn-out targets. As a result, the~~ fair value of the contingent consideration for Altior acquisition was reduced by $2.5 million and credited to operating expense in the three months ended September 29, 2013. In the third quarter of fiscal year 2014, the fair value of the contingent consideration was increased by $98,000 related to present value of the amount payable due to passage of time.on a recurring basis, were as follows (in thousands):

In the third quarter of fiscal year 2014 the fair value of the contingent consideration for the Cadeka was decreased by $40,000 related to changes in probability of achieving revenue targets and impact of change in present value of the amount payable due to passage of time.

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):

December 29,
2013

March 31,
2013

December 28,
2014

March 30,
2014

Cash and cash equivalents

Cash at financial institutions
$ 7,109 $ 9,676 $ 52,616 $ 9,978

Cash equivalents

Money market funds
13,961 5,042 6 4,636
Total cash and cash equivalents
$ 21,070 $ 14,718 $ 52,622 $ 14,614

Available-for-sale securities

U.S. government and agency securities
$ 32,791 $ 41,721 $ — $ 22,512
State and local government securities
2,798 2,935 — 2,772
Corporate bonds and securities
72,725 92,229 — 71,253
Asset-backed securities
30,354 30,966 — 27,635
Mortgage-backed securities
16,034 22,736 — 28,248
Total short-term marketable securities
$ 154,702 $ 190,587 $ — $ 152,420

Our marketable securities include U.S. government and agency securities, state and local government securities, corporate bonds and securities, ~~and~~ asset-backed and mortgage-backed ~~securities.~~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.

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 ~~(loss)~~ 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. ~~There have been no such impairment charges in any of the periods presented.~~

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.

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

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Gross realized gains
$ 136 $ 233 $ 518 $ 617 $ — $ 136 $ 264 $ 518
Gross realized losses
(69 ) (229 ) (477 ) (766 ) — (69 ) (238 ) (477 )
Net realized income (losses)
$ 67 $ 4 $ 41 $ (149 ) $ — $ 67 $ 26 $ 41
We did not have any unrealized gain (loss) as ofDecember 28, 2014.

The following table summarizes our investments in marketable securities as of ~~the dates indicated below~~March 30, 2014 (in thousands):

December 29, 2013

Amortized
Cost

Unrealized
Gross
Gains⁽¹⁾

Unrealized
Gross
Losses⁽¹⁾

Fair
Value

Money market funds
$ 13,961 $ — $ — $ 13,961
U.S. government and agency securities
32,840 1 (50 ) 32,791
State and local government securities
2,797 5 (4 ) 2,798
Corporate bonds and securities
72,730 60 (65 ) 72,725
Asset-backed securities
30,396 14 (56 ) 30,354
Mortgage-backed securities
16,064 19 (49 ) 16,034
Total investments
$ 168,788 $ 99 $ (224 ) $ 168,663

March 31, 2013

March 30, 2014

Amortized
Cost

Unrealized
Gross
Gains⁽¹⁾

Unrealized
Gross
Losses⁽¹⁾

Fair
Value

Amortized
Cost

Unrealized
Gross
Gains⁽¹⁾

Unrealized
Gross
Losses⁽¹⁾

FairValue

Money market funds
$ 5,042 $ — $ — $ 5,042 $ 4,636 $ — $ — $ 4,636
U.S. government and agency securities
41,694 27 — 41,721 22,550 1 (39 ) 22,512
State and local government securities
2,927 10 (2 ) 2,935 2,762 10 — 2,772
Corporate bonds and securities
92,059 215 (45 ) 92,229 71,309 32 (88 ) 71,253
Asset-backed securities
30,932 61 (27 ) 30,966 27,661 22 (48 ) 27,635
Mortgage-backed securities
22,646 194 (104 ) 22,736 28,362 24 (138 ) 28,248
Total investments
$ 195,300 $ 507 $ (178 ) $ 195,629 $ 157,280 $ 89 $ (313 ) $ 157,056
—————

(1)
Gross of tax impact of $828

Our asset-backed securities ~~are~~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 dodid not own auction rate securities nor dodid we own securities that ~~are~~were classified as subprime. As of December 29, 2013, we have sufficient liquidity and do not intend to sell these securities to fund normal operations or realize any significant losses in the short term; however, these securities are available for use, if needed, for current operations.

Management determines the appropriate classification of cash equivalents or short-term marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and accretion of discounts to maturity and such accretion/amortization, which is immaterial for ~~all periods~~the period presented, is included in the interest income and other, net line in the condensed ~~consolidated~~ statements of operations. Cash equivalents and short-term marketable securities are reported at fair value with the related unrealized gains and losses included in the accumulated other comprehensive losses line in the 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~~basis.For the three and nine months ~~ended December 29, 2013 and December 30, 2012, respectively, there were~~endedDecember 28, 2014, no investments were identified with ~~other than temporary~~other-than-temporary declines in value. All investments were redeemed in the first quarter of fiscal 2015.

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

December 29, 2013

March 31, 2013

March 30, 2014

Amortized
Cost

Fair Value

Amortized
Cost

Fair Value

Amortized
Cost

Fair Value

Less than 1 year
$ 61,616 $ 61,615 $ 61,011 $ 61,029 $ 49,539 $ 49,504
Due in 1 to 5 years
107,172 107,048 134,289 134,600 107,741 107,552
Total
$ 168,788 $ 168,663 $ 195,300 $ 195,629 $ 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 ~~the dates indicated below,~~March 30, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

December 29, 2013

March 30, 2014

Less than 12 months

12 months or greater

Total

Less than 12 months

12 months or greater

Total

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

U.S. government and agency securities
$ 28,772 $ (50 ) $ — $ — $ 28,772 $ (50 ) $ 18,245 $ (39 ) $ — $ — $ 18,245 $ (39 )
State and local government securities
1,516 (4 ) — — 1,516 (4 )
Corporate bonds and securities
35,179 (65 ) — — 35,179 (65 ) 48,379 (87 ) 596 (1 ) 48,975 (88 )
Asset-backed securities
15,301 (25 ) 3,467 (31 ) 18,768 (56 ) 7,118 (12 ) 5,478 (36 ) 12,596 (48 )
Mortgage-backed securities
8,249 (22 ) 2,174 (27 ) 10,423 (49 ) 19,682 (120 ) 983 (18 ) 20,665 (138 )
Total
$ 89,017 $ (166 ) $ 5,641 $ (58 ) $ 94,658 $ (224 ) $ 93,424 $ (258 ) $ 7,057 $ (55 ) $ 100,481 $ (313 )

March 31, 2013

Less than 12 months

12 months or greater

Total

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

State and local government securities
$ — $ — $ 404 $ (2 ) $ 404 $ (2 )
Corporate bonds and securities
29,609 (42 ) 497 (3 ) 30,106 (45 )
Asset-backed securities
10,008 (17 ) 1,241 (10 ) 11,249 (27 )
Mortgage-backed securities
2,911 (39 ) 3,263 (65 ) 6,174 (104 )
Total
$ 42,528 $ (98 ) $ 5,405 $ (80 ) $ 47,933 $ (178 )
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 second quarter of fiscal 2015, 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 as of September 28, 2014.
NOTE 6.
GOODWILL AND INTANGIBLE ASSETS

~~NOTE 5.~~    ~~GOODWILL AND INTANGIBLE ASSETS~~
Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Estimations and assumptions regarding the number of reporting units, future performances, results of our operations and comparability of our market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one ~~reporting unit,~~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.~~ Asimpairment.As of December ~~29, 2013,~~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 ~~fiscal years 2014 and 2013~~the dates indicated below were as follows (in thousands):

December 29,
2013

March 31,
2013

December 28,
2014

March 30,
2014

Beginning balance
$ 10,356 $ 3,184 $ 30,410 $ 10,356
Goodwill additions
19,217 7,172 14,461 20,054
Ending balance
$ 29,573 $ 10,356 $ 44,871 $ 30,410

~~The goodwill~~Goodwill additions during the nine months ended December ~~29, 2013~~28, 2014 consisted of $14.5 million residual allocation from the iML acquisition purchase price accounting. The goodwill additions during fiscal 2014 consist of ~~$19.2~~$19.4 million and $0.7 million residual allocation from the Cadeka and Stretch acquisition purchase price ~~accounting. Goodwill additions during the fiscal year ended March 31, 2013 consisted of $7.2 million residual allocation from the Altior acquisition purchase price accounting.~~accounting, respectively.

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

December 29, 2013

March 31, 2013

December 28, 2014

March 30, 2014

Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Carrying Amount

Accumulated Amortization

Impairment charge

Net Carrying Amount

Carrying Amount

Accumulated Amortization

Net Carrying Amount

Amortized intangible assets:

Existing technology
$ 58,588 $ (35,647
)
$ 22,941 $ 42,858 $ (30,668
)
$ 12,190 $ 120,026 $ (44,745 ) $ (9,134 ) $ 66,147 $ 63,043 $ (37,510 ) $ 25,533
Customer relationships
5,075 (2,539
)
2,536 2,905 (2,079
)
826 15,165 (4,067 ) (870 ) 10,228 6,095 (2,762 ) 3,333
Distributor relationships
7,254 (1,759 ) — 5,495 1,264 (1,260 ) 4
Patents/Core technology
3,459 (3,328
)
131 3,459 (3,182
)
277 3,459 (3,429 ) — 30 3,459 (3,378 ) 81
Distributor relationships
1,264 (1,264
)
— 1,264 (1,219
)
45
Tradenames
210 (35
)
175 — — —
Trade names
1,330 (210 ) — 1,120 210 (51 ) 159
Total intangible assets subject to amortization
68,596 (42,813
)
25,783 50,486 (37,148
)
13,338 147,234 (54,210 ) (10,004 ) 83,020 74,071 (44,961 ) 29,110
In-process research and development
2,280 — 2,280 — — — 9,148 — (2,280 ) 6,868 2,280 — 2,280
Total
$ 70,876 $ (42,813
)
$ 28,063 $ 50,486 $ (37,148
)
$ 13,338 $ 156,382 $ (54,210 ) $ (12,284 ) $ 89,888 $ 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. ~~Distributor relationships are amortized over six years. Customer relationships are amortized over five to seven years. Tradenames~~Trade names are amortized over three to six years. WeIn-process Research & Development ("IPR&D") is reclassified as existing technology upon completion or written off upon abandonment. During the three months ended December 28, 2014, $1.2 million of IPR&D was reclassified as existing technology upon completion and started amortization.We expect the amortization of ~~in-process research and development~~the remaining IPR&D projects to start in fiscal ~~year 2015.~~2016. 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 anthe assets (or asset group) may not be fully recoverable. ~~If an indicator of impairment exists, we compare~~Whenever events or changes in circumstances suggest that the carrying ~~value~~amount of long-lived assets ~~to our projection of~~may not be recoverable, we estimate the future ~~undiscounted~~ cash flows ~~attributable~~expected to ~~such~~be generated by the assets ~~and, in~~(or asset group) from its use or eventual disposition. If the ~~event that~~sum of the expected future cash flows is less than the carrying ~~value exceeds the future undiscounted cash flows,~~amount of those assets, we ~~record~~recognize an impairment ~~charge equal to~~loss based on the excess of the carrying ~~value~~amount over the ~~asset’s~~ fair ~~value. Although~~value of the ~~assumptions~~assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in ~~projecting future revenues~~the discounted cash flow method of valuation. If our actual results, or the plans and ~~gross margins are consistent with those~~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.
Exar completed a significant strategic restructuring process that began in the second quarter of fiscal 2015 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 ~~annual~~Hangzhou, China; Loveland, Colorado; and Ipoh, Malaysia locations. We believe this restructuring allows us to achieve meaningful synergies and operating efficiencies and focus our resources on strategic ~~planning process,~~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 ~~asset~~assets that were acquired in prior business combinations. Consequently, we performed an intangible assets impairment review during the second quarter of fiscal year 2015 and recorded $12.3 million of impairment charges ~~might be required in future periods if our assumptions are not achieved.~~
to acquired intangibles. As of December ~~29, 2013,~~28, 2014, there were no i~~ndicators~~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

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Amortization expense
$ 1,991 $ 994 $ 5,665 $ 3,155

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Amortization expense
$ 3,248 $ 1,991 $ 9,249 $ 5,665


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

Amortization Expense (by fiscal year)
Amortization Expense (by fiscal year)

Amortization Expense (by fiscal year)

2014 (3 months remaining)
$ 1,991
2015
6,039
2015 (3 months remaining)
$ 3,206
2016
4,863 12,787
2017
3,449 12,819
2018
3,255 12,882
2019 and thereafter
6,186
2019
12,652
2020 and thereafter
28,674
Total future amortization
$ 25,783 $ 83,020

NOTE 7.
LONG-TERM INVESTMENT

~~NOTE 6.~~    ~~LONG-TERM INVESTMENT~~
~~Our long-term investment consists of our investment~~In July 2001, Exar became a Limited Partner in the Skypoint Telecom Fund II (US), ~~L.P.~~LP. (“Skypoint Fund”)~~. Skypoint Fund is~~, a venture capital fund ~~that invested primarily~~focused on investments in ~~private companies in the telecommunications and/or networking industries.~~communications infrastructure companies. We ~~account~~accounted for this non-marketable equity investment under the cost ~~method.~~ 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 ~~periodically~~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):

December 29,
2013

March 31,
2013

December 28,
2014

March 30,
2014

Beginning balance
$ 1,288 $ 1,273 $ 946 $ 1,288
Contributions
— 15
Distributions
(25 ) —
Net distributions
(8 ) (19 )
Impairment charges
(35 ) (323 )
Ending balance
$ 1,263 $ 1,288 $ 903 $ 946

The carrying amount of ~~$1.3~~approximately $0.9 million as of December ~~29, 2013~~28, 2014 reflects the net of the capital contributions, capital distributions and $0.4 million cumulative impairment charges. WeDuring 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. ~~During the first quarter of fiscal year 2013, we contributed $15,000 to the fund.~~
In the three months ended December 29, 2013, Skypoint Fund informed us of the sale of one of the portfolio companies in the fund. Exar’s distribution from the sale was approximately $25,000. In accordance with the standard related to accounting for cost method investments, we recorded the distribution on the cost basis and reduced the carrying value of our investment in the Skypoint Fund.
T~~he Partnership is currently in the dissolution phase.~~As of December ~~29, 2013,~~28, 2014, we do not have any further capital commitments.

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 ~~annual~~ impairment analysis ~~in the fourth quarter of each fiscal year~~ by comparing the carrying amount to the fair value of the underlying investments. If the carrying amount exceeds its fair value, ~~the~~ 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, no$35,000 and $323,000 impairment charge was ~~recorded during~~recordedduring the ~~third fiscal~~nine months ended December 28, 2014 and in the fourth quarter of ~~2014.~~fiscal year 2014, respectively.
NOTE 8.
~~NOTE 7.~~    RELATED PARTY TRANSACTIONS

Alonim Investments Inc. (“Alonim”), owns approximately 7.6 million shares, or approximately 16%, of our outstanding common stock as of December ~~29, 2013.~~28, 2014. As such, Alonim is our largest ~~stockholder and any sales made to Alonim or its affiliates are considered related party transactions.~~stockholder.

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

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Alonim
29% 28% 27% 30%

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Alonim
19% 29% 22% 27%


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

~~December~~ ~~29,~~
~~2013~~
~~March 31,~~
~~2013~~
~~Alonim~~
* ~~21%~~

December 28,
2014

March 30,
2014

Alonim
3% 18%

~~—————~~
*     Related party receivables for this period were less than 10% of the net account balance.
Related party expenses for marketing promotional materials reimbursed were not significant for the three and nine months endedDecember 28, 2014 andDecember 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.
CTBC
On June 9, 2014 we entered into a Business Loan Agreement with CTBC to provide a loan for $26.0 million. This loan bore an interest rate of 3.25% and had maturity date of December 9, 2014. Interest payments were due monthly with the entire principal due not later than December 9, 2014.
All obligations of Exar under the Business Loan Agreement were unconditionally guaranteed by iML through a $26.0 million short-term certificate deposit with the same institution which had been recorded as restricted cash as of September 28, 2014. As of October 2014, the CTBC business loan has been completely paid off.
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 accrued, 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” was 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 was subject to a floor of 2.5%, and LIBOR was subject to a floor of 1.5%.
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 nine months ended December ~~29, 2013~~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):

December 28, 2014

Three months
ended

Nine months
ended

CTBC
$ 9 $ 265
Stifel
— 646
Total interest on short-term debt
$ 9 $ 911
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 ~~December 30, 2012, respectively.~~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.


~~We rent our Loveland, Colorado office from~~On July 9, 2013, we announced the approval of a share repurchase program under which we were authorized to repurchase an ~~entity, which is partially-owned by one of the founders of Cadeka, who is now one~~additional $50.0 million of our ~~employees.~~common stock. The repurchase program does not have a termination date, and may be modified, extended or terminated at any time. We ~~have recorded $34,000 and $103,000 in related party rent expense~~intend to retire all shares repurchased under the stock repurchase plan. The purchase price for the ~~three~~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.
Stock repurchase activities during nine months ended December ~~29, 2013, respectively.~~
~~NOTE 8.~~    ~~RESTRUCTURING CHARGES AND EXIT COSTS~~
28, 2014 ~~Restructuring Charges~~ and ~~Exit Costs~~
During the three and nine months ended December 29, 2013, we incurred restructuring charges and exit costs of $0.1 million and $1.5 million, respectively. The charges include $1.4 million of severance benefits and $0.2 million of lease termination and other costs. In the fourth quarter of fiscal 2014 we have started to implement an additional restructuring in order to reduce costs. The total charges from this restructuring have not yet been determined.
~~2013 Restructuring Charges and Exit Costs~~
~~In the fourth quarter of~~ fiscal year 2013, we recorded $0.3 million restructuring charges and exit costs and released a $0.5 million liability related to Industrial Research Assistance Program with Canadian governmental agency. In the third, second and first quarters of fiscal year 2013, we recorded restructuring charges and exit costs of $0.6 million, $0.3 million and $0.9 million, respectively. Of the totalrestructuring charges and exit costs recorded in fiscal year 2013, $0.3 million was reflected in cost of sales and $1.3 million was reflected in operating expenses within our consolidated statements of operations.
~~Our restructuring liabilities~~2014 were included in the accounts payable, 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):~~

December 29, 2013

Beginning
balance

Additions/
adjustments

Non-cash
charges

Payments

Ending
balance

Lease termination and other costs
$ 2,860 $ 158 $ (4 ) $ (1,581 ) $ 1,433
Severance
426 1,353 — (1,205 ) 574
Balance atDecember 29, 2013
$ 3,286 $ 1,511 $ (4 ) $ (2,786 ) $ 2,007

March 31, 2013

Beginning
balance

Additions/
adjustments

Non-cash
charges

Payments

Ending
balance

Lease termination costs and others
$ 5,235 $ 6 $ (56 ) $ (2,325 ) $ 2,860
Severance
2,806 1,548 — (3,928 ) 426
Balance at March 31, 2013
$ 8,041 $ 1,554 $ (56 ) $ (6,253 ) $ 3,286
~~NOTE 9.~~    ~~BALANCE SHEET DETAIL~~
~~Our inventories consisted of the following as of the dates indicated below (in thousands):~~

December 29,
2013

March 31,
2013

Work-in-process and raw materials
$ 14,454 $ 9,981
Finished goods
10,496 9,449
Total inventories
$ 24,950 $ 19,430
~~Our property, plant and equipment consisted of the following as of the dates indicated below (in thousands):~~

December 29,
2013

March 31,
2013

Land
$ — $ 6,660
Building
860 16,224
Machinery and equipment
40,736 42,258
Software and licenses
17,377 17,566
Property, plant and equipment, total
58,973 82,708
Accumulated depreciation and amortization
(50,189 ) (58,608 )
Total property, plant and equipment, net
$ 8,784 $ 24,100

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

December 29,
2013

March 31,
2013

Fair value of earn-out liability–short-term
$ 2,230 $ 2,599
Accrued restructuring charges and exit costs
1,957 2,020
Short-term lease financing obligations
1,700 3,189
Accrued manufacturing expenses, royalties and licenses
1,669 2,370
Purchase consideration holdback
1,256 250
Accrued legal and professional services
866 746
Accrued sales and marketing expenses
573 576
Accrual for dispute resolution
— 2,727
Other
900 738
Total other current liabilities
$ 11,151 $ 15,215
~~Our other non-current obligations consisted of the following (in thousands) as of the dates indicated:~~

December 29,
2013

March 31,
2013

Fair value of earn-out liability – long–term
$ 10,131 $ 7,539
Long-term taxes payable
749 2,225
Accrued restructuring charges and exit costs
14 1,266
Other
636 174
Total other non-current obligations
$ 11,530 $ 11,204
~~NOTE 10.    NET INCOME (LOSS) PER SHARE~~
Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the applicable period. Diluted earnings per share reflects the potential dilution that would occur if outstanding stock options or warrants to purchase common stock were exercised for common stock, using the treasury stock method, and the common stock underlying outstanding restricted stock units (“RSUs”) was issued.
~~The following table summarizes our net income (loss) per share for theperiods indicated~~ below (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Net income (loss)
$ (1,634 ) $ 1,523 $ 5,654 $ 1,210

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

Basic
47,529 45,925 47,277 46,228
Effect of options and awards
— 513 1,538 395
Diluted
47,529 46,438 48,815 46,623
Net income (loss) per share

Basic
$ (0.03 ) $ 0.03 $ 0.12 $ 0.03
Diluted
$ (0.03 ) $ 0.03 $ 0.12 $ 0.03

Total number of
Shares Purchased

Average Price Paid
PerShare
(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
Repurchases – September 29 to December 28, 2014
125 9.08 1,135
As ofDecember 28, 2014
11,110 $ 9.47 $ 105,188
—————
All outstanding stock options and restricted stock units (“RSUs”) are potentially dilutive securities. In the three months ended December 29, 2013, all shares attributable to outstanding options and RSUs were excluded from the computation of diluted net lossNote: The average price paid per share ~~as inclusion of such shares would have an anti-dilutive effect. In~~is based on the ~~nine months ended December 29, 2013, approximately 1.1 million shares were excluded from the computation of diluted net income per share because they were determined to be anti-dilutive.~~total price paid by Exar, which includes applicable broker fees.

In the three and nine months ended December 30, 2012, approximately 3.2 million shares and 3.8 million shares, respectively, were excluded from the computation of diluted net income per share because they were determined to be anti-dilutive.

NOTE 11.
RESTRUCTURING CHARGES AND EXIT COSTS

~~NOTE 11.~~    ~~COMMON STOCK REPURCHASES~~2015 Restructuring Charges and Exit Costs

~~From time to time, we acquire outstanding common stock~~Exar completed a significant strategic restructuring process that began in the ~~open market~~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; Loveland, Colorado; and Ipoh, Malaysia locations. We believe this restructuring allows us to ~~partially offset dilution from~~achieve meaningful synergies and operating efficiencies and focus our ~~equity award programs, to increase~~resources on strategic priorities that we expect will yield the highest incremental return for Exar’s stockholders. During the three and nine months ended December 28, 2014, we incurred $3.5 million and $10.4 million restructuring charges and exit costs, respectively. The charges consisted primarily of reduction of our ~~return on invested capital~~workforce, the impairment of certain fixed assets, licensed technologies and ~~to bring our cash to a more appropriate level for our organization.~~write-off of related inventory.
2014 Restructuring Charges and Exit Costs

~~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. 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.
~~As of December 29, 2013, we had repurchased shares valued at $92.2 million under the August 2007 repurchase program.~~ During the three and nine months ended December 29, 2013, we ~~repurchased $2.0~~incurred restructuring charges and exit costs of $0.1 million and ~~$4.0~~$1.5 million, respectively. The charges include $1.3 million of severance benefits, net of adjustments in other costs and $0.2 million of costs related to efforts to sell and market our common stock under the July 2013 repurchase program, respectively. The repurchased shares were retired immediately. The remaining authorized amount for the stock repurchase under the repurchase programs is $57.8 million.campus in Fremont, California.

~~Stock repurchase~~
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 ~~during~~affecting the ~~nine months ended December 29, 2013 were~~liabilities as of the dates indicated below (in ~~thousands, except per share amounts)~~thousands):

Total number of
Shares Purchased

Average Price Paid
Per Share
(or Unit)

Amount Paid for
Purchase

Balances, March 31, 2013
9,564 $ 9.22 $ 88,189
Repurchases for nine months
309 $ 12.94 4,000
Balances,December 29, 2013
9,873 $ 9.34 $ 92,189

March 30,
2014

Additions/
adjustments

Non-cash
charges

Payments

December 28,
2014

Lease termination costs and others
$ 1,615 $ 294 $ (164 ) $ (1,485 ) $ 260
Impairment of fixed assets, licensed technologies and write down of inventory
— 6,568 (6,568 ) — —
Severance
754 3,574 — (3,183 ) 1,145
Total
$ 2,369 $ 10,436 $ (6,732 ) $ (4,668 ) $ 1,405

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
~~—————~~
~~Note: The average price paid per share is based on the total price paid by Exar, which includes applicable broker fees.~~
NOTE 12.
~~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
December 29,2013

Nine Months Ended
December 29,2013

As of
December 28, 2014

Nine Months Ended
December 28, 2014

Shares of Common
Stock

Shares of Common
Stock

Weighted
Average
Price per Share

Shares of Common
Stock

Shares of Common
Stock

Weighted
Average
Price per Share

Authorized to issue
4,500 4,500
Reserved for future issuance
1,379 1,352
Issued
13 $ 11.47 21 $ 10.11

Equity Incentive Plans

~~We currently have two equity incentive plans, in which shares are available for future issuance,~~At the annual meeting of stockholders on September 18, 2014 (the “Annual Meeting”), our stockholders approved the Exar Corporation ~~2006~~2014 Equity Incentive Plan (“~~2006~~2014 Plan”) ~~and the Sipex Corporation (“Sipex”) 2006 Equity Incentive Plan (“Sipex Plan”), the latter of which was assumed in connection with the August 2007 acquisition of Sipex.~~

. The ~~2006~~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. ~~RSUs~~
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 Planand 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 ~~RSU~~award issued. ~~The 2006 Plan allows for performance-based vesting and partial vesting based upon the level~~As of performance. Grants under the Sipex Plan are only available to former Sipex’s employees or employees we hired after the Sipex acquisition. At our annual meeting on September 15, 2010, our stockholders approved an amendment to the 2006 Plan to increase the aggregate share limit under the 2006 Plan by an additional 5.5 million shares to 8.3 million shares. At December ~~29, 2013,~~28, 2014, there were ~~2.0~~4.8 million shares available for future grant under ~~all our equity incentive plans.~~the 2014 Plan.

Stock Option Activities

Our stock option transactions during the nine months endedDecember ~~29, 2013~~ 28, 2014 were indicated below:

Outstanding

Weighted
Average
Exercise
Price per
Share

Weighted
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)

In-the-money
Options
Vested and Exercisable
(in thousands)

Outstanding

Weighted
Average
Exercise
Price per
Share

Weighted
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)

In-the-money
Options
Vested and
Exercisable
(in thousands)

Balance at March 31, 2013
6,212,333 $ 7.48 5.04 $ 19,199 $ 1,481
Balance at March 30, 2014
7,213,848 $ 8.98 5.02 $ 21,301 2,170
Granted
1,460,300 12.38 2,517,178 8.64
Exercised
(535,832 ) 7.12 (523,193 ) 6.85
Cancelled
(183,895 ) 12.76
Forfeited
(522,341 ) 7.89 (981,008 ) 10.49
Cancelled
(10,834 ) 10.92
Balance atDecember 29, 2013
6,603,626 $ 8.56 5.07 $ 21,985 $ 2,062
Balance atDecember 28, 2014
8,042,840 $ 8.74 4.97 $ 15,344 2,959

Vested and expected to vest,December 29, 2013
6,184,803 $ 8.46 5.00 $ 21,073
Vested and exercisable,December 29, 2013
2,197,258 $ 7.40 3.67 $ 9,544
Vested and expected to vest, December 28, 2014
7,487,866 $ 8.66 4.88 $ 14,864
Vested and exercisable, December 28, 2014
3,361,788 $ 7.64 3.81 $ 9,629

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stockof ~~$11.63~~$10.29 and ~~$10.50~~$11.71 as of~~December 29, 2013andMarch 31, 2013~~,ofDecember 28, 2014 andMarch 30, 2014, respectively. These are the values which would have been received by option holders if all option holders exercised their options on that date.

In January 2012, we granted 480,000 performance-based stock options to our ~~Chief Executive Officer, President and Director (“CEO”).~~CEO. The options are scheduled to vest in four equal annual installments at the end of fiscal years 2013 through 2016 if certain predetermined market based financial measures are met. If the financial measures are not met, each installment will be rolled over to the subsequent fiscal ~~year for vesting except for the last installment. If the financial measures~~year. In January 2014, we granted 140,000 performance-based stock options to our CEO. The options are ~~not met for two consecutive years, the options will be forfeited except for the last installment which will be forfeited~~scheduled to vest at the end of fiscal year ~~2016.~~2017 if certain predetermined financial measures are met. We recorded $~~65,000~~$75,000 and $262,000 of compensation expense for these options in the three and nine months ended December 28, 2014, respectively. We recorded $65,000 and $195,000of compensation expense for these options in the three and nine months ended December 29, 2013, respectively. ~~We recorded $65,000~~ ~~and $195,000~~ ~~of compensation expense for these options in the three and nine months ended December 30, 2012, respectively.~~

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

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Intrinsic value of options exercised
$ 805 $ 304 $ 2,699 $ 879

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Intrinsic value of options exercised
$ 668 $ 805 $ 1,524 $ 2,699

RSU Activities
Our RSU transactions during the nine months endedDecember ~~29, 2013~~ 28, 2014 are summarized as follows:

Shares

Weighted
Average
Grant-
Date
Fair Value

Weighted
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)

Shares

Weighted
Average
Grant-
Date
Fair Value

Weighted
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)

Unvested at March 31, 2013
732,204 $ 7.73 1.72 $ 7,688
Unvested at March 30, 2014
1,177,126 $ 10.94 1.62 $ 13,784
Granted
469,995 11.83 337,022 9.27
Issued and released
(311,406 ) 9.48 (230,553 ) 10.65
Cancelled
(33,666 ) 9.55 (178,663 ) 12.05
Unvested atDecember 29, 2013
857,127 $ 9.27 1.65 $ 9,968
Unvested at December 28, 2014
1,104,932 $ 10.31 1.40 $ 11,370

Vested and expected to vest,December 29, 2013
761,615 1.60 $ 8,858
Vested and expected to vest, December 28, 2014
962,572 1.32 $ 9,905

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

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

In March 2012, we granted 300,000 performance-based RSUs (“PRSUs”) to our CEO. The ~~RSUs are~~PRSUs were scheduled to ~~start vesting~~vest in three equal ~~annual~~ installments at the end of fiscal ~~year~~ 2013 through 2015 with three year vesting periods if certain predetermined financial measures are met. If the financial measures are not met, each installment will be forfeited at the end of its respective fiscal year. We recorded $146,000 and $1,026,000 of compensation expense for these awards in the three and nine months ended December 28, 2014, respectively. We recorded $119,000 and $641,000 of compensation expense for these awards in the three and nine months ended December 28, 2013, respectively.
In December 2013, we granted 100,000 RSUs to our CEO. The RSUs were scheduled to vest in two equal installments at the end of fiscal 2016 and 2017. In October 2014, the second installment of 50,000 RSUs was modified to 50,000 PRSUs. These modified PRSUs were scheduled to vest at the end of fiscal 2017 if certain predetermined financial measures are met. For the three and nine months ended December 28, 2014, we did not record compensation expense for these modified PRSUs as a result of low probability of achieving performance goals measured by management.
In the first quarter of fiscal 2014, we granted 50,000 PRSUs to certain executives. The PRSUs were scheduled to vest in three equal installments at the end of fiscal year 2014 with a three-year vesting period if certain performance measures are met. We recorded stock compensation net recovery of $53,000 and $151,000 in the three and nine months ended December 28, 2014, respectively as a result of the termination of one executive. We recorded $91,000 and $239,000 of stock compensation expense for these awards in the three and nine months ended December 29, 2013, respectively.
In July 2013, as part of the acquisition of Cadeka, we agreed to pay retention bonuses to certain former Cadeka employees and the bonuses will be settled in RSUs subject to fulfillment of the service period. We recorded ~~$119,000~~$506,000 and ~~$641,000, respectively,~~$1,519,000 of compensation expense for these ~~awards. In~~awards in the three and nine months ended December ~~30, 2012, we recorded $112,000and $336,000, respectively,~~28, 2014, respectively. The expense is reported in the other current obligations line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense ~~for these awards.~~
~~During fiscal year 2014, we granted 50,000 performance-based RSUs to certain executives. The RSUs are scheduled to start vesting~~is recorded as part of stock compensation expense in the ~~three equal annual installments at the end~~condensed consolidated statements of fiscal 2014 through 2017 with three year vesting periods if certain predetermined financial measures are met. In addition, the annual vesting requires continued service through each of the vesting dates. During the three and nine months ended December 29, 2013, we recorded $91,000 and $239,000 of compensation expense for these awards, respectively.operations.

In August 2013, we announced the Fiscal Year 2014 Management Incentive Program (“2014 Incentive Program”). Under this program, each participant’s award is denominated in stock and subject to achievement of certain financial performance goals and the participant’s annual Management by Objective goals. The expense is reported in the other current liabilities line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense is recorded as part of stock compensation expense in the condensed consolidated statements of operations. Due to only partially achieving the financial performance goals and the participant’s annual Management by Objectives goals, we reversed the previously recorded stock compensation of $295,000 in the second quarter of fiscal year 2015 which resulted in a net stock compensation recovery of $290,000 for the nine months ended December 28, 2014.

In October 2013, we granted 70,000 PRSUs to certain executives. The first 50% of the PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2015 with a three-year vesting period if certain performance measures are met. The second 50% of the PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2016 with a three-year vesting period if certain performance measures are met. We recorded stock compensation net recovery of $78,000 and $208,000 of compensation expense for these awards in the three and nine months ended December ~~29, 2013,~~28, 2014, respectively, as a result of termination of one of our executives.
In January 2014, we granted 82,500 PRSUs to certain former Stretch employees. The PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2015 with a three-year vesting period if certain performance measures are met. We recorded ~~$0.2 million~~stock compensation recovery of $47,000 and ~~$1.5 million~~$122,000 of compensation expense in the three and nine months ended December 28, 2014, respectively, as a result of lower probability of achieving performance goals measured by management.
In August 2014, we announced the Fiscal Year 2015 Management Incentive Program (“2015 Incentive Program”). Under this program, each participant’s award is denominated in shares of our common stock and is subject to attainment of Exar’s performance goals as established by the Compensation Committee of the Board of Directors for Fiscal Year 2015. We recorded a stock compensation expense ~~related~~of $679,000 and $1,256,000 in the three and nine months ended December 28, 2014, respectively.
In January 2015, two of our executives were terminated. As part of their termination agreements, we extended the vesting periods of their outstanding stock awards and exercise periods of their vested stock awards for an additional thirteen and twenty-five months periods, respectively. We also granted total of 60,000 shares RSUs with a vesting period of twelve months. In addition, we granted RSUs valued at $479,000 to one of the ~~2014 Incentive Program, respectively.~~executives which will be fully vested in February 2015. We recorded stock compensation expense of $1,519,000 for these awards in the three and six months ended December 28, 2014.
Stock-Based Compensation Expense

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

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Cost of sales
$ 165 $ 175 $ 519 $ 289 $ 496 $ 165 $ 983 $ 519
Research and development
566 328 1,395 437 442 566 2,124 1,395
Selling, general and administrative
1,826 986 5,353 2,284 3,284 1,826 7,842 5,353
Total Stock-based compensation expense
$ 2,557 $ 1,489 $ 7,267 $ 3,010 $ 4,222 $ 2,557 $ 10,949 $ 7,267

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

Unrecognized Stock-Based Compensation Expense

The following table summarizes unrecognized stock-based compensation expense related to stock options and ~~RSUsfor~~RSUsfor the period indicated below as follows:

December 29, 2013

December 28, 2014

Amount
(in thousands)

Weighted Average
Expected
Remaining
Period (in years)

Amount
(in thousands)

Weighted Average
Expected Remaining
Period (in years)

Options
$ 8,180 2.7 $ 10,338 2.45
Performance Options
456 1.69
RSUs
5,322 2.3 7,051 1.89
Total Stock-based compensation expense
$ 13,502
PRSUs
1,329 1.98
Total Unrecognized Stock-based compensation expense
$ 19,174
Valuation Assumptions

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

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

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Expected term of options (years)
4.5 4.4 4.4
–
4.5 4.2
–
4.5 4.67 4.50 4.53 – 4.70 4.40– 4.50
Risk-free interest rate
1.01 % 0.5 % 0.60%
–
1.12% 0.5%
–
0.6% 1.28% 1.01% 1.25% – 1.34% 0.6% – 1.12%
Expected volatility
32 % 41 % 32%
–
35% 41%
–
42% 33% 32% 32% –33% 32% –35%
Expected dividend yield

–

–

–

–
— — — —
Weighted average estimated fair value
$ 3.74 $ 2.81 $
3.56
$ 2.76 $ 2.65 $ 3.74 $ 2.79 $ 3.56
NOTE 13.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to Exar by the weighted average number of common shares outstanding for the applicable period. Diluted earnings per share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for common stock, using the treasury stock method, and the common stock underlying outstanding RSUs was issued.
The following table summarizes our net income (loss) per share for theperiods indicated below (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Net income (loss) attributable to Exar Corporation
$ (6,599 ) $ (1,634 ) $ (42,056 ) $ 5,654

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

Basic
47,119 47,529 47,165 47,277
Effect of options and awards
─ ─ ─ 1,538
Diluted
47,119 47,529 47,165 48,815
Net income (loss) per share
��
Basic
$ (0.14 ) $ (0.03 ) $ (0.89 ) $ 0.12
Diluted
$ (0.14 ) $ (0.03 ) $ (0.89 ) $ 0.12
All outstanding stock options and RSUs are potentially dilutive securities. In the three months and nine months ended December 28, 2014 and the three months ended December 29, 2013, all outstanding stock options and RSUs were excluded from the computation of diluted net loss per share as inclusion of such shares would have an anti-dilutive effect. In the nine months ended December 29, 2013, 1.1 million shares were excluded from the computation of diluted net income per share because they were determined to be anti-dilutive.
NOTE 14.
~~NOTE 13.~~    LEASE FINANCING OBLIGATIONS

We have acquired engineering design tools (“Design Tools”) under capital leases. We acquired Design Tools of ~~$0.2~~$4.4 million in ~~July 2013~~October 2014 under a ~~29-month~~three-year license with a prepayment of $1.5 million for the first year license, $0.9 million in July 2012 under a three-year license, $4.5 million in December 2011 under a three-year license and $5.8 million in October 2011 ~~under a three-year license, $1.0 million in June 2010 under a three-year license, $1.3 million in December 2009 under a 28-month license, and $1.1 million in July 2009~~ under a three-year license all of which were accounted for as capital leases and recorded in the property, plant and equipment, net line item in the condensed consolidated balance sheets. The obligations related to the Design Tools were included in other current liabilities and long-term lease financing obligations in our condensed consolidated balance sheets as of December ~~29, 2013~~28, 2014 and March ~~31, 2013,~~30, 2014, respectively. The effective interest rates for the Design Tools range from 2.0% to 7.25%.

Amortization expense related to the Design Tools, which was recorded using the straight-line method over the remaining useful life for the periods indicated below, was as follows (in thousands):

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Amortization expense
$ 800 $ 818 $ 2,494 $ 2,659

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Amortization expense
$ 848 $ 800 $ 2,448 $ 2,494

Future minimum lease and sublease income payments for the lease financing obligations as ofDecember ~~29, 2013~~ 28, 2014 are as follows (in thousands):

Fiscal Years

Design Tools

Design Tools

2014 (3 months remaining)
$ 370
2015
1,456
2015 (3 months remaining)
$ 1,323
2016
59 1,583
2017
10 1,534
2018 and thereafter
6
2018
6
Total minimum lease payments
1,901 4,446
Less: amount representing interest
95 130
Present value of minimum lease payments
1,806 4,316
Less: short-term lease financing obligations
1,700 2,837
Long-term lease financing obligations
$ 106 $ 1,479

Interest expense for the lease financing obligation for the periods indicated below was as follows (in thousands):

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Interest expense
$ 39 $ 35 $ 115 $ 107

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Interest expense
$ 37 $ 39 $ 115 $ 115

In the course of our business, we enter into arrangements accounted for as operating leases related to rental of office space. Rent expenses for all operating leases for the periods indicated below were as follows (in thousands):

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Rent expense
$ 229 $ 149 $ 658 $ 456

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Rent expense
$ 266 $ 229 $ 1,162 $ 658

Our future minimum lease payments for the lease operating obligations as ofDecember ~~29, 2013~~ 28, 2014 are as follows (in thousands):

Fiscal Years

Facilities

Facilities

2014(3 months remaining)
$ 200
2015
552
2015 (3 months remaining)
$ 252
2016
461 775
2017
150 214
2018 and thereafter
20
Total minimum lease payments
$ 1,383 $ 1,241
~~NOTE 14.    COMMITMENTS AND CONTINGENCIES~~
NOTE 15.
COMMITMENTS AND CONTINGENCIES

In 1986, Micro Power Systems Inc. (“MPSI”), a subsidiary that we acquired in June 1994, identified low-level groundwater contamination at its principal manufacturing site. The area and extent of the contamination appear to have been defined. MPSI previously reached an agreement with a prior tenant to share in the cost of ongoing site investigations and the operation of remedial systems to remove subsurface chemicals and well closure activities. In April 2012, the San Francisco Bay Regional Water Quality Control Board (“RWQCB”) approved our application for low-threat closure and rescinded the previous cleanup order. All monitoring well closure activities on the site and adjacent/neighboring sites have been completed. We have finalized and executed access, environmental indemnity and tolling agreements and deed restriction covenants with the property owner. The ~~parties have agreed that onsite well closure activities can commence.~~required deed restriction has been recorded. In October 2014, we received a No Further Action letter and Case Closure summary from RWQCB. The matter is considered closed at this time.

Outstanding liabilities for remediation activities ~~net of payments, consisted of the following as of the dates indicated (in thousands):~~were immaterial for all periods presented.

December 29,
2013

March 31,
2013

Liabilities for remediation activities
$ 31 $ 76

In early 2012, we received correspondences from the California Department of Toxic Substance Control (“DTSC”) regarding its ongoing investigation of hazardous wastes and hazardous waste constituents at a former regulated treatment facility in San Jose, California. In 1985, MPSI made two separate permitted hazmat deliveries to a licensed and regulated site for treatment. DTSC has requested that former/current property owners and companies, currently in excess of 50, that had hazardous waste treated at the site participate in further site assessment and limited remediation activities. We have entered into various agreements with other named generators, former property owners and DTSC limited to the investigation of the sites’ condition and evaluation, and selection of appropriate remedial measures. The designated environmental consulting firm ~~is moving forward with the agreed~~has prepared and submitted to DTSC its preliminary site ~~assessment and periodic status reporting.~~profile for review. Given that this matter is in the early stages of investigation and discussions are ongoing with respect to various related considerations, we are unable to ascertain our exposure, if any. In the opinion of management, after consulting with legal counsel, and taking into account insurance coverage, any ultimate liability related to current outstanding claims and lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our financial statements, as a whole.

In a letter dated March 27, 2012, Exar was notified by the Alameda County Water District (“ACWD”) of the recent detection of volatile organic compounds at a site adjacent to a facility that was previously owned and occupied by Sipex. The letter was also addressed to prior and current property owners and tenants (collectively “Property Owners”). ACWD requested that the ~~property owners~~Property Owners carry out further site investigation activities to determine if the detected compounds are emanating from the site or simply flowing under it. In June 2012, the Property Owners filed with ACWD a report of its investigation/characterization activities and analytical data obtained. Accumulated data suggests that compounds of concern in groundwater appear to be from an offsite source. ACWD is investigating alternative upgradient sites. Given that this investigation is ongoing and Exar has not received any recent communications from ACWD, we are unable to ascertain our exposure, if any. In the opinion of management, after consulting with legal counsel, and taking into account insurance coverage, any ultimate liability related to current outstanding claims and lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our financial statements, as a whole.

We warrant all custom products and application specific products, including cards and boards, against defects in materials and workmanship for a period of 12 months, and occasionally we may provide an extended warranty from the delivery date. We warrant all of our standard products against defects in materials and workmanship for a period of 90 days from the date of delivery. Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty, historical warranty costs incurred and customer/product specific circumstances. Our liability is generally limited, at our option, to replacing, repairing, or issuing a credit (if it has been paid for). Our warranty does not cover damage which results from accident, misuse, abuse, improper line voltage, fire, flood, lightning or other damage resulting from modifications, repairs or alterations performed other than by us, or resulting from failure to comply with our written operating and maintenance instructions.
Warranty expense has historically been immaterial for our products. ~~The remaining balance~~A warranty liability of ~~warranty liabilities~~$1.4 million was established~~for~~ during the year ended March 30, 2014for the return ~~and replacement~~ of certain older generation data compression products shipped in prior ~~years was $1.2~~years. In June, 2014, we assumed $0.4 million ~~as of December 29, 2013,and~~ warranty liability asfrom our acquisition of ~~March 31, 2013 was immaterial.~~iML.

As of the dates indicated below, our warranty reserve balance, which is included in the “Other current liabilities” line item on the condensed consolidated balance sheets, consisted of the following (in thousands):

December 29,
2013

March 31,
2013

December 28,
2014

March 30,
2014

Beginning balance
$ 50 $ 90 $ 1,074 $ 50
Provisions for warranties issued
1,440
─
458 1,480
Settlements/adjustments
(328 ) (40 ) (918 ) (456 )
Ending balance
$ 1,162 $ 50 $ 614 $ 1,074

In the ordinary course of business, we may provide for indemnification of varying scope and terms to customers, vendors, lessors, business partners, purchasers of assets or subsidiaries, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us, services to be provided by us, intellectual property infringement claims made by third parties or, matters related to our conduct of the business. In addition, we have entered into indemnification agreements with our directors and certain of our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or executive officers. We maintain director and officer liability insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers, and former directors and officers of acquired companies, in certain circumstances.

It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement and claims. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our condensed consolidated financial statements.
NOTE 16.
~~NOTE 15.~~    LEGAL PROCEEDINGS

From time to time, we are involved in various claims, legal actions and complaints arising in the normal course of business. ~~Although~~We are not a named party to any ongoing lawsuit or formal proceeding that, in the ~~ultimate outcome~~opinion of ~~the matters discussed below and other matters~~our management, is ~~not presently determinable, management currently believes that the resolution of all such pending matters will not~~likely to have a material adverse effect on our financial position, results of operations or cash flows.

~~Two~~In fiscal year 2014, two former employees of Exar’s French subsidiary ~~have filed~~asserted claims against that ~~French~~ subsidiary for alleged unfair dismissal in the French Labor Courts. We believe that the former employees were terminated in accordance with the requirements of French law and that the former employees’ claims are not supported by ~~any relevant~~ evidence. ~~One matter is scheduled for trial in February, 2014.~~ The ~~other matter is in~~two matters were heard on October 10, 2014 and October 22, 2014, respectively. We dispute the ~~early procedural stages. We~~claims and we intend to vigorously ~~defend~~protect our ~~positions.~~interests. On December 22, 2014, Exar and one former employee entered into a settlement agreement resolving all claims made in the litigation. The industrial court in the other matter rendered a judgment on January 21, 2015 that we intend to appeal. We continue to dispute the claims and intend to continue to vigorously protect our interests. We do not believe an adverse outcome will have a material impact on our financial position, results of operations or cash flow.

NOTE 17.
~~NOTE 16.~~    INCOME TAXES

During the three months and nine months ended December 28, 2014, we recorded an income tax expense of approximately $0.1 million and $0.9 million, respectively. The income tax expense was primarily related to the allocation of tax expense between continuing operations and other comprehensive income when applying the exception to ASC 740 intraperiod allocation rule upon liquidation of our available for sale security portfolio. During the three and nine months ended December 29, 2013, we recorded an income tax benefit of approximately $1.4 million ~~which~~and $8.2 million, respectively. The income tax benefit was primarily due to the lapsing of statute of ~~limitations in federal~~limitation and ~~state jurisdictions, offset by income tax expense in certain~~the release of ~~our non-US operations. During the nine months ended December 29, 2013, we recorded an income tax benefit of approximately $8.2 million. The income tax benefit was primarily due to the impact of the~~valuation allowance from Exar’s acquisition of Cadeka on Exar’s valuation allowance, the impact of which is recorded outside of purchase accounting, resulting in a release of the valuation allowance and an income tax benefit of $6.8 million. In the three and nine months ended December 30, 2012, we recorded $1.3 million each of income tax benefit which mainly resulted from the release of a $1.3 million reserve for uncertain tax positions related to an NOL carryback refund. The reserve was released due to the expiration of the statute of limitations in U.S. tax jurisdictions.Microcircuits, LLC.

During the three ~~and nine~~ months ended December ~~29, 2013,~~28, 2014, the unrecognized tax benefits ~~each decreased~~increased by ~~$1.4~~$0.3 million to ~~$14.0 million. The current unrecognized tax benefit was~~$17.2 million primarily related to the ~~release of foreign liabilities and interest due to the lapse of statute of limitations and R&D credits.~~reserve on California net operating losses (“NOL”). If recognized, ~~$11.4~~$14.4 million of these unrecognized tax benefits (net of federal benefit) would be recorded as a reduction of future income tax provision before consideration of changes in ~~the~~ valuation ~~allowance for deferred tax assets.~~allowance.

Estimated interest and penalties related to the income taxes are classified as a component of the provision for income taxes in the condensed consolidated statement of operations. Accrued interest and penalties consisted of the following as of the dates indicated (in thousands):

December 29,
2013

March 31,
2013

Accrued interest and penalties
$ 97 $ 228

December 28,
2014

March 30,
2014

Accrued interest and penalties
$ 1,327 $ 83

Our major tax jurisdictions are the United States federal and various states, Canada, China, Hong Kong, Taiwan, the Cayman Islands and certain other foreign jurisdictions. The fiscal years 2003 through 2013 remain open and subject to examinations by the appropriate governmental agencies in the United States and over varying periods in certain of our foreign jurisdictions.

On November 6, 2012, California passed Proposition 39, which mandates most taxpayers to apportion their California income by using a single sales factor and requires all taxpayers to use market-based sourcing for sale receipts for tax years beginning or after January 1, 2013.~~The enacted law did not have a material impact on our financial position, results of operations or cash flows.~~
Per the 2012 Tax Relief Act enacted in January 2013, the federal R&D credit is retroactively extended through 2013. No R&D credit and related reserve is considered in the third quarter of fiscal year 2014 tax provision pending improvement in our future visibility of the incremental R&D expenses. However, as a full valuation allowance is placed on the deferred tax assets, there is no impact on the statement of operations.
NOTE 18.
~~NOTE 17.~~    SEGMENT AND GEOGRAPHIC INFORMATION

We operate in one reportable segment, which is comprised of one operating segment. We design, develop and market high performance analog mixed-signal integrated circuits and advanced sub-system solutions for the ~~Networking & Storage,~~ Industrial & Embedded Systems, High-End Consumer, and Communications Infrastructure markets. Our product portfolio includes power management and connectivity components, communications products, high precision or high speed analog ICs, and data compression and storage solutions.Infrastructure.

Our net sales by end market were summarized as follows as of the dates indicated below (in thousands):

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

Industrial & Embedded Systems
$ 18,429 $ 16,119 $ 52,870 $ 48,130
Networking & Storage
7,104 9,300 27,284 23,391
Communications Infrastructure
5,089 5,270 16,762 18,735
Other
68 310 419 616
Total net sales
$ 30,690 $ 30,999 $ 97,335 $ 90,872

Three Months Ended

Nine Months Ended

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Industrial & Embedded Systems
$ 20,506 $ 18,429 $ 59,029 $ 52,870
High-End Consumer
16,202 68 35,825 419
Infrastructure
7,607 12,193 23,339 44,046
Total net sales
$ 44,315 $ 30,690 $ 118,193 $ 97,335

Our foreign operations are conducted primarily through our wholly-owned subsidiaries in Canada, China, France, Germany, Japan, Malaysia, South Korea, Taiwan and the United Kingdom. Our principal markets include North America, Europe and the Asia Pacific region. Net sales by geographic areas represent direct sales principally to original equipment manufacturers (“OEM”), or their designated subcontract manufacturers, and to distributors (affiliated and unaffiliated) who buy our products and resell to their customers.

Our net sales by geographic area for the periods indicated below were as follows (in thousands):

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

China
$ 11,566 $ 10,749 $ 33,860 $ 31,458 $ 17,089 $ 11,566 $ 44,586 $ 33,860
United States
9,285 8,711 31,325 22,987 6,070 9,285 17,309 31,325
Taiwan
5,496 413 12,732 2,206
Korea
4,666 1,038 11,920 2,564
Singapore
3,138 3,245 10,068 10,561 4,076 3,138 11,271 10,068
Germany
2,456 2,662 8,124 8,865 2,008 2,456 8,020 8,124
Japan
1,575 1,499 4,415 4,367
Europe (excluding Germany)
907 1,111 2,431 3,654
Rest of world
1,763 3,022 7,112 8,980 4,910 2,794 12,355 9,188
Total net sales
$ 30,690 $ 30,999 $ 97,335 $ 90,872 $ 44,315 $ 30,690 $ 118,193 $ 97,335

Substantially all of our long-lived assets at each of December ~~29, 2013~~28, 2014 and ~~March 31,~~December 29, 2013 were located in the United States.

The following distributors ~~and customer~~ accounted for 10% or more of our net sales in the periods indicated:

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 29,
2013

December 30,
2012

December 28,
2014

December 29,
2013

December 28,
2014

December 29,
2013

Distributor A
26 % 28 % 26 % 30 % 19% 26% 22% 26%
Distributor B
21 % 10 % 23 % 10 % * 21% * 23%
Distributor C
13 % 10 % 11 % 10 % * 13% * 11%
Customer A
* 12 % * *

—————
*
*     Net sales for this distributor or customer for this period were less than 10% of our net sales.

No other distributor or customer accounted for 10% or more of the net sales for the three and nine months ended December 28, 2014 or December 29, 2013, ~~and December 30, 2012,~~ respectively.

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

December 29,
2013

March 31,
2013

Distributor A
* 21%
Distributor B
45% 20%
Distributor D
* 11%

December 28,
2014

March 30,
2014

Distributor A
* 16%
Distributor B
12% 17%
Distributor C
11% 12%
Distributor D
* 14%
Distributor F
13% *
—————
*     Accounts receivable for this distributor for this period were less than 10% of ~~the net~~total account balance.

No other distributor or customer accounted for 10% or more of the net accounts receivable as of December ~~29, 2013 and~~28, 2014 or March ~~31, 2013,~~30, 2014, respectively.
~~NOTE 18.    ASSETS HELD FOR SALE~~
During fiscal year 2013, we started actively looking for potential buyers for our Fremont campus. In the first quarter of our fiscal year 2014, we reclassified the related property and land as held for sale as of June 30, 2013, as we met all criteria to classify these assets as held for sale as of that date. These assets have been recorded at their carrying amount since it is lower than their estimated fair value, less estimated selling costs (in thousands). As required under current accounting guidance, depreciation of the building ceased upon reclassification as an asset held for sale.

December 29,
2013

Land
$ 6,660
Building
6,423
Total assets held for sale
$ 13,083
On July 9, 2013, we entered into a Purchase and Sale Agreement (“Purchase Agreement”) with Ellis Partners LLC (“Ellis”). The Purchase Agreement provided for the sale of Exar’s Fremont campus to Ellis Partners and the leaseback by Exar of the building located at 48760 Kato Road. The Purchase Agreement was anticipated to close by the end of September 2013. Prior to closing, Ellis requested certain modifications to the Purchase Agreement that Exar deemed unacceptable. As a result, the Purchase Agreement terminated as of September 30, 2013. The Company intends to continue pursuing options to optimize its operating efficiency, including continuing to market the facilities for sale.
~~NOTE 19.    SUBSEQUENT EVENTS~~
On January 14, 2014, we acquired Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market. The transaction will provide 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 was acquired via a reverse triangular merger for which the purchase consideration was $10,000 in cash. By acquiring Stretch, Exar acquired all of Stretch’s assets,~~consisting principally intellectual property, accounts receivable and inventory, as well as~~ ~~assumed all of Stretch’s liabilities and contractual obligationsof approximately $10.0 million of which approximatetly $7.2 million has been paid subsequent to quarter-end~~.
~~Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed will be included in our condensed consolidated financial statements beginning January 14, 2014.~~

ITEM 2.     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 “Part II, Item 1A. Risk Factors,” below and elsewhere in thisQuarterly Report on Form 10-Q,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 Quarterly Report include, among others, statements made in this Part ~~II,~~I, Item 7—2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations— Second Quarter of Fiscal 2015 Executive Summary” and elsewhere regarding (1) our future strategies and target ~~market;~~markets, (2) our future revenues, gross profits and ~~margins;~~margins, (3) our future research and development (“R&D”) efforts and related ~~expenses;~~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;~~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;~~securities, (7) the possibility of future acquisitions and ~~investments;~~investments, (8) our ability to accurately estimate our assumptions used in valuing stock-based ~~compensation;~~compensation, (9) our ability to estimate and reconcile distributors’ reported inventories to their ~~activities;~~activities, (10) our ability to estimate future cash flows associated with long-lived ~~assets;~~assets, and (11) the volatile global economic and financial market conditions. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our business, operating results and financial condition to differ materially and adversely from what is projected or implied by any forward- looking statement included in this Quarterly Report. Factors that could cause actual results to differ materially from those stated herein include, but are not limited to: the information contained under the caption “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 1A. Risk Factors,” as well as those risks discussed in our Annual Report on Form 10-K for the fiscal year ended March ~~31, 2013.~~30, 2014. We disclaim any obligation to update information in any forward-looking statement, except as required by law.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto, included in this Quarterly Report and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedMarch ~~31, 2013~~,30, 2014, as filed with the Securities and Exchange Commission (“SEC”). Our results of operations for the three and nine months ended December ~~29, 2013~~28, 2014 are not necessarily indicative of results to be expected for any future period.

Business Overview

Exar Corporation (“Exar” or “we”)designs, develops and markets ~~high performance analog mixed-signal~~high-performance integrated circuits and ~~advanced sub-system~~system solutions for the ~~Networking & Storage,~~following end markets: Industrial & Embedded Systems, High-End Consumer, and ~~Communications Infrastructure markets. Exar’s~~Infrastructure.Exar's broad product portfolio includes analog, display, LED lighting, mixed-signal, power management, connectivity, data management, and ~~connectivity components,high-performance analog and mixed-signal products,communications products, anddata compression and storage~~video processing 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, displays, mobile systems, set top boxes, ~~and~~ digital video ~~recorders.~~recorders, and lighting systems. 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~~manufacturers’ representatives. Globally, these channel partners are assisted and managed by our regional sales teams. In addition to our regional sales teams, we also employ a worldwide team of field application engineers to work directly with our customers.

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 II, Item 1A. Risk Factors—Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control.”

~~Ourfiscal years consist~~ThirdQuarter of ~~52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks.~~ Fiscal years 2014 and 2013 both consist of 52 weeks. The third quarter of fiscal years 2014 and 2013 both consist of 13 weeks. All references to quarterly, three or nine months ended financial results are references to the results of the relevant fiscal period.
Prior to July 29, 2013, our common stock was principally 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.

~~Third Quarter Fiscal 2014 Overview~~2015 Executive Summary

Quarterly revenues of ~~$30.7~~$44.3 million for the third quarter of fiscal ~~2014 decreased $3.3~~2015 increased $1.1 million or ~~10%~~3% from the previous quarter’s revenue of ~~$34.0~~$43.2 million and ~~remained consistent with revenue~~increased $13.6 million or 44% over $30.7 million reported in the third quarter of fiscal year ~~2013.~~ 2014. The increase was primarily due to inclusion of revenue generated by the newly acquired Integrated Memory Logic Limited (“iML”) business which has been included in our condensed consolidated financial statements beginning June 2014 and strength in High-Performance Analog and Video Processor Product line sales.
Net loss of ~~$1.6~~$6.6 million decreased ~~$8.1~~$16.8 million from ~~net income in~~ the second quarter of fiscal ~~year 2014~~2015. The decrease in net loss was primarily due to impairment of acquired intangible assets, impairment of fixed assets and ~~decreased $3.2~~related inventory write down in the prior quarter. Net loss increased $5.0 million from the third quarter of fiscal ~~year 2013.~~2014. The ~~previous quarter included a $6.8 million tax benefit as a result of the reversal of a portion of our valuation on deferred tax assets~~increase in net loss was primarily due to amortization of acquired intangible assets from the ~~assumption of a deferred tax liability~~iML acquisition in fiscal 2015 and restructuring charges incurred in the ~~Cadeka acquisition. Basic~~current quarter. Loss per share of $0.14 in current quarter decreased by $0.36 per share from the $0.50 loss per share in the second quarter of fiscal 2015 and increased by $0.11 per share from the $0.03 loss per share in the third quarter of fiscal ~~year 2014 decreased $0.17 per share from the earnings per share~~2014. We believe we are effectively managing our operating expenses while continuing to invest an appropriate amount in ~~the second quarter of fiscal year 2014 due to reduced revenue~~research and ~~decreased $0.06 per share from the earnings per share reported in the third quarter of fiscal year 2013 due to increased operating expenses.~~development projects for future products.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during thethree and nine months endedDecember ~~29, 2013~~,28, 2014, as compared to the previous disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year endedMarch ~~31, 2013~~.30, 2014.

Results of Operations

Our Statements of Operations data and percentage of revenue were as follows for the periods presented (in thousands, except percentages):

Three months

Three Months Ended

December 29,
2013

December 30,
2012

Change

December 28,
2014

December 29,
2013

Change

Net Sales
$ 30,690 $ 30,999 $ (309 ) (1
)%
$ 44,315 $ 30,690 $ 13,625 44
%
Cost of sales:

Cost of sales
12,393 11,922 471 4
%
20,113 12,393 7,720 62
%
Cost of sales-related party
3,556 4,005 (449 ) (11
)%
3,099 3,556 (457 ) (13
)%
Amortization of purchased intangible assets and inventory step-up
1,898 801 1,097 137
%
Amortization of purchased intangible assets and inventory step-up costs
2,533 1,898 635 33
%
Restructuring charges and exit costs
17 79 (62 ) (78
)%
2,052 17 2,035 11971
%
Warranty Reserve
(372 ) — (372 ) 100
%
Total cost of sales
17,864 16,807 1,057 6
%
27,425 17,864 9,561 54
%
Gross profit
12,826 14,192 (1,366 ) (10
)%
16,890 12,826 4,064 32
%
Operating expenses:

Research and development
6,929 5,376 1,553 29
%
10,035 6,929 3,106 45
%
Selling, general and administrative
9,086 8,645 441 5
%
11,793 8,829 2,964 34
%
Restructuring charges and exit costs
74 524 (450 ) (86
)%
1,418 74 1,344 1816
%
Merger and acquisition costs
179 257 (78 ) (30
)%
Net change in fair value of contingent consideration
58 — 58 — — 58 (58 ) (100
)%
Total operating expenses
16,147 14,545 1,602 11
%
23,425 16,147 7,278 45
%
Loss from operations
(3,321 ) (353 ) (2,968 ) (841
)%
(Loss) from operations
(6,535 ) (3,321 ) (3,214 ) 97
%
Interest income and other, net
321 586 (265 ) (45
)%
53 321 (268 ) (83
)%
Interest expense
(39 ) (56 ) (17 ) (30
)%
(46 ) (39 ) (7 ) 18
%
Income (Loss) before income taxes
(3,039 ) 177 (3,216 ) (1,817
)%
(Benefit from) Provision for income taxes
(1,405 ) (1,346 ) (59 ) (4
)%
Net income (loss)
$ (1,634 ) $ 1,523 $ (3,157 ) (207
)%
(Loss) before income taxes
(6,528 ) (3,039 ) (3,489 ) 115
%
Provision for income taxes
71 (1,405 ) 1,476 (105
)%
Net loss
$ (6,599 ) $ (1,634 ) $ 4,965 (304
)%

Nine months

December 29,
2013

December 30,
2012

Change

Net Sales
$ 97,335 $ 90,872 $ 6,463 7
%
Cost of sales:

Cost of sales
36,576 34,846 1,730 5
%
Cost of sales-related party
11,619 12,897 (1,278 ) (10
)%
Amortization of purchased intangible assets and inventory step-up
5,346 2,578 2,768 107
%
Warranty reserve
1,440 — 1,440 —
Restructuring charges and exit costs
122 160 (38 ) (24
)%
Total cost of sales
55,103 50,481 4,622 9
%
Gross profit
42,232 40,391 1,841 5
%
Operating expenses:

Research and development
20,263 16,598 3,665 22
%
Selling, general and administrative
26,407 24,066 2,341 10
%
Restructuring charges and exit costs
1,389 1,619 (230 ) (14
)%
Net change in fair value of contingent consideration
(2,437 ) — (2,437 ) —
Total operating expenses
45,622 42,283 3,339 8
%
Loss from operations
(3,390 ) (1,892 ) (1,498 ) (79
)%
Interest income and other, net
980 1,906 (926 ) (49
)%
Interest expense
(117 ) (128 ) (11 ) (9
)%
Income (Loss) before income taxes
(2,527 ) (114 ) (2,413 ) (2,117
)%
(Benefit from) Provision for income taxes
(8,181 ) (1,324 ) (6,857 ) (518
)%
Net income (loss)
$ 5,654 $ 1,210 $ 4,444 367
%

Nine Months Ended

December 28,
2014

December 29,
2013

Change

Net Sales
$ 118,193 $ 97,335 $ 20,858 21
%
Cost of sales:

Cost of sales
52,127 36,576 15,551 43
%
Cost of sales-related party
10,408 11,619 (1,211 ) (10
)%
Amortization of purchased intangible assets and inventory step-up costs
9,215 5,346 3,869 72
%
Impairment of Intangibles
8,367 — 8,367 100
%
Restructuring charges and exit costs
6,384 122 6,262 5133
%
Warranty reserve
(286 ) 1,440 (1,726 ) (120
)%
Total cost of sales
86,215 55,103 31,112 56
%
Gross profit
31,978 42,232 (10,254 ) (24
)%
Operating expenses:

Research and development
28,647 20,245 8,402 42
%
Selling, general and administrative
33,467 25,559 7,908 31
%
Merger and acquisition costs
6,955 866 6,089 703
%
Restructuring charges and exit costs
4,052 1,389 2,663 192
%
Impairment of Intangibles
3,917 — 3,917 100
%
Net change in fair value of contingent consideration
(4,343 ) (2,437 ) (1,906 ) 78
%
Total operating expenses
72,695 45,622 27,073 59
%
Loss from operations
(40,717 ) (3,390 ) (37,327 ) 1101
%
Interest income and other, net
520 980 (460 ) 47
%
Interest expense
(1,026 ) (117 ) (909 ) 777
%
Loss before income taxes
(41,223 ) (2,527 ) (38,696 ) 1531
%
Provision for (benefit from) income taxes
870 (8,181 ) 9,051 (111
)%
Net income (loss)
(42,093 ) 5,654 (47,747 ) (844
)%
Less: Net loss attributable to non-controlling interests
(37 ) — (37 ) 100
%
Net income (loss) attributable to ExarCorporation
$ (42,056 ) $ 5,654 $ (47,710 ) (844
)%

Revenue
Our net sales by end market in dollars and as a percentage of net sales were as follows for the periods presented (in thousands, except percentages):

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

Change

December 29,
2013

December 30,
2012

Change

December 28,
2014

December 29,
2013

Change

December 28,
2014

December 29,
2013

Change

Net Sales:

Industrial & Embedded Systems
$ 18,429 60
%
$ 16,119 52
%
14 %

$ 52,870 55
%
$ 48,130 53
%
10 %

$ 20,506 46
%
18,429 60
%
11
%
$ 59,029 50
%
$ 52,870 55
%
12
%
Networking & Storage
7,104 23
%
9,300 30
%
(24) %

27,284 28
%
23,391 26
%
17 %

Communications Infrastructure
5,089 17
%
5,270 17
%
(3) %

16,762 17
%
18,735 20
%
(11) %

Other
68 — 310 1
%
(78) %

419 — 616 1
%
(32) %

High-End Consumer
16,202 37
%
68 —
%
23726
%
35,825 30
%
419 —
%
8450
%
Infrastructure
7,607 17
%
12,193 40
%
(38
)%
23,339 20
%
44,046 45
%
(47
)%
Total
$ 30,690 100
%
$ 30,999 100
%
$ 97,335 100
%
$ 90,872 100
%
$ 44,315 100
%
$ 30,690 100
%
$ 118,193 100
%
$ 97,335 100
%

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):

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

Change

December 29,
2013

December 30,
2012

Change

December 28,
2014

December 29,
2013

Change

December 28,
2014

December 29,
2013

Change

Net Sales:

Asia
$ 17,899 58
%
$ 18,326 59
%
(2) %

$ 54,884 56
%
$ 54,867 60
%
— $ 33,004 74
%
$ 17,899 58
%
84
%
$ 85,772 73
%
$ 54,884 56
%
56
%
Americas
9,428 31
%
8,900 29
%
6 %

31,896 33
%
23,486 26
%
36 %

7,082 16
%
9,428 31
%
(25
)%
19,437 16
%
31,896 33
%
(39
)%
Europe
3,363 11
%
3,773 12
%
(11) %

10,555 11
%
12,519 14
%
(16) %

4,229 10
%
3,363 11
%
26
%
12,984 11
%
10,555 11
%
23
%
Total
$ 30,690 100
%
$ 30,999 100
%
$ 97,335 100
%
$ 90,872 100
%
$ 44,315 100
%
$ 30,690 100
%
$ 118,193 100
%
$ 97,335 100
%

~~Revenue for the three months ended~~Three Months Ended December 28, 2014 Compared with Three Months Ended December 29, 2013 ~~remained consistent~~
Total revenue increased by $13.6 million or 44%. The increases in Industrial & Embedded Systems, High-End Consumer and Asia markets were primarily due to business obtained through recent acquisitions and strength in High-Performance Analog and Video Processor product line sales. The increase in Europe market was mainly due to revenue generated from the new processor product line in fiscal 2015 which was partially offset by decreased sales volume and average selling price erosion of our high performance analog products. The decreases in Infrastructure and Americas markets were primarily due to significantly lower sales volume of our data compression products which resulted in lower sales of $3.7 million.
Nine Months Ended December 28, 2014 Compared with ~~the same period a year ago. Revenue for the nine months ended~~Nine Months Ended December 29, 2013
Total revenue increased ~~$6.5~~by $20.9 million ~~compared to the same period a year ago.~~or 21%. The ~~increase was~~increases in Industrial & Embedded Systems, High-End Consumer and Asia markets were primarily due to ~~overall demand~~business obtained through recent acquisitions and strength in High-Performance Analog and Video Processor product line sales. The increase ~~from customers and distributors~~ in ~~our major end markets, with the exception of the Communication Infrastructure end market. The revenue decrease in Communication Infrastructure~~Europe market was mainly due to revenue generated from the new processor product line in fiscal 2015 which was partially offset by decreased sales volume and average selling price erosion of our high performance analog products. The decreases in Infrastructure and Americas markets were primarily due to ~~decrease~~significantly lower sales volume of our data compression products which resulted in ~~average selling prices.~~
Revenue from Americas for the three and nine months ended December 29, 2013 increased $0.5 million and $8.4 million, respectively, as compared to the same period a year ago. The increase was primarily due to increased shipment volume in the Network & Storage market. Revenue from Europe for the three and nine months ended December 29, 2013 decreased $0.4 million and $2.0 million, respectively, as compared to the same period a year ago. The decrease was primarily due to decrease in average selling price in the Communication Infrastructure market.lower sales of $16.4 million.

Gross Profit

Gross profit as a percentage of net sales for the three months ended December ~~29, 2013~~28, 2014 decreased by approximately 4% as compared to the same period a year ago. The decrease was primarily due to inclusion of $2.1 million amortization expense related to ~~Altior and Cadeka~~the purchased intangible assets ~~for the three months ended December 29, 2013.~~ from our recent acquisitions and $2.1 million restructuring charges incurred from our recent restructuring activities. The decrease was offset by overall cost saving as a result of our reduction in workforce whichwas aimed at right-sizing our direct labor and overhead areas.
Gross profit as a percentage of net sales for the nine months ended December ~~29, 2013 remained consistent with~~28, 2014 decreased by approximately 16% as compared to the same period a year ago. The decrease was primarily due to inclusion of $5.0 million amortization expense related to the purchased intangible assets from our recent acquisitions, $6.4 million increase in restructuring charges and $8.4 million impairment of purchased intangible assets in the second quarter of fiscal 2015.

We believe that gross profit will fluctuate as a percentage of ~~net~~ sales and in absolute dollars due to, among other factors, the inclusion of the amortization of the costs of acquired intangibles, product and manufacturing costs, ~~warranty costs related to our product sales, provision for excess and obsolete inventory,~~ our ability to leverage fixed operational costs, shipment volumes, competitive pricing pressure on our products, and currency fluctuations.

Research and Development (“R&D”)

R&D expenses for the three and nine months ended December ~~29, 2013~~28, 2014 increased ~~$1.6~~by $3.1 million and ~~$3.7~~$8.4 million, respectively, as compared to the same ~~period~~periods a year ago. The increase was primarily ~~a result of the~~due to inclusion of operations from recent acquisitions since the ~~former Altior and Cadeka operations.~~fourth quarter of fiscal 2014.

We have a contractual agreement under which certain of our R&D costs are eligible for reimbursement. Reimbursements under this arrangement are offset against R&D expenses. For ~~both~~ the ~~third quarter of fiscal years~~three and nine months ended December 28, 2014, ~~and 2013,~~ we offset ~~$0.5~~$0 and $0.3 million of R&D expenses in connection with this agreement, respectively. For ~~both~~ the three and nine months ~~of fiscal years 2014 and~~ended December 29, 2013, we offset $0.5 million and $1.5 million of R&D ~~expenses~~expense in connection with this agreement, respectively.

We believe that R&D expenses will ~~slightly~~ increase in absolute dollars due to, among other factors, the inclusion of costs associated with acquired operations, increased investment in software development, variable compensation, incentives, annual merit increases and fluctuations in reimbursements under a research and development contract.

Selling, General and Administrative (“SG&A”)

SG&A expenses for the three ~~and nine~~ months ended December ~~29, 2013~~28, 2014 increased ~~$0.4~~by $3.0 million ~~and $2.3 million, respectively, as~~ compared with the same period a year ~~ago~~ago. The increase was mainly due to ~~change~~increased headcount, $0.6 million amortization expense of acquired intangible assets from recent acquisitions since the fourth quarter of fiscal 2014 and $1.5 million increase in stock compensation expense.
SG&A expenses for the nine months ended December 28, 2014 increased by $7.9 million compared with the same period a year ago. The increase was mainly due to increased headcount, $1.5 million amortization expense of acquired intangible assets from recent acquisitions since the fourth quarter of fiscal 2014 and $2.5 million increase in stock based compensation expense. This increase was partially offset by a $1.9 million reduction in the estimated fair value of contingent consideration liabilities related to the acquisitions of Cadeka Microcircuits LLC and Altior ~~and Cadeka earn-out liabilities and the inclusion of the former Altior and Cadeka operations.~~Inc.See“Note 5 – Fair Value.”

We believe that SG&A expenses will ~~slightly~~ increase in absolute dollars due to, among other factors, the inclusion of costs associated with acquired operations, variable commissions, legal costs, variable compensation, incentives and annual merit increases.

Merger and Acquisition Costs
Merger and acquisition costs for the three months ended December 28, 2014 remained consistent as compared to the three months ended December 29, 2013. Merger and acquisition costs for the nine months ended December 28, 2014 increased by $6.1 million as compared with the same period a year ago. The increase was primarily due to transaction costs incurred for the acquisition of iML which was finalized in September 2014.
Restructuring Charges and Exit Costs

~~Restructuring charges and exit costs for~~During the three and nine months ended December ~~29, 2013 decreased $0.5~~28, 2014, we recorded $3.5 million and ~~$0.3~~$10.4 million ~~respectively~~restructuring charges and exit costs, respectively. The charges were mainly due to ~~effect~~the strategic restructuring resulting in a reduction of ~~efforts~~our workforce, the impairment of certain intangible and fixed assets, and write-off of related inventory. We believe this restructuring allows us to ~~sell~~achieve meaningful synergies and ~~market our campus in Fremont, California, offset by decrease in severance fees, as compared to~~operating efficiencies.See ~~the same period a year ago.~~~~See~~“Note 6 – Goodwill and Intangible Assets” and “Note 811 – Restructuring Charges and Exit Costs.”

Interest Income and Other, Net

Interest income and other, net primarily consists of interest ~~income;~~income, foreign exchange gains or ~~losses; and~~losses, realized gains or losses on marketable securities.

~~The decrease in interest~~Interest income and other, net during the three and nine months ended December ~~29, 2013,~~28, 2014 decreased by $0.3 million and $0.5 million, respectively, as compared to the same periods a year ago. The decrease is primarily due to sales of our short-term investments in the first quarter of fiscal 2015.

Interest Expense
Interest expense during the three months ended December 28, 2014 remained consistent as compared to the same period a year ~~ago~~ago. Interest expense for the nine months ended December 28, 2014 increased by $0.9 million as compared to the same period a year ago. The increase was primarily ~~attributable~~due to ~~the decrease in~~ interest ~~income~~expenses incurred as a result of ~~lower yield related~~$65.0 million of short term debt borrowed from Stifel Financial Corporation (“Stifel”) and CTBC Bank Corporation (USA) (“CTBC”) forthe acquisition of iML. We expect the interest expense to ~~our cash and short-term investments.~~
~~Interest Expense~~be immaterial for future periods.

We have acquired engineering design tools (“Design Tools”) under capital leases recorded in the property, plant and equipment, net line item in the condensed consolidated balance sheets. The obligations related to the Design Tools were included in other current liabilities and long-term lease financing obligations in our condensed consolidated balance sheets. The effective interest rates for the Design Tools range from 2.0% to 7.25%.~~See “Note 13 – Lease Financing Obligations.”~~
~~Interest expenses recorded for the Design Tools capital lease obligationswere $39,000 and $115,000 for the three and~~nine months ended December 29, 2013, respectively. Interest expenses recorded for the Design Tools capital lease obligations were $35,000 and $107,000 for the three and nine months ended December 30, 2012, respectively.
Provision for Income Taxes

During the three and nine months ended December 28, 2014, we recorded an income tax expense of approximately $0.1 million and $0.9 million, respectively. The income tax expense was primarily related to the allocation of tax expense between continuing operations and other comprehensive income when applying the exception to the ASC 740 intraperiod allocation rule upon liquidation of our available for sale security portfolio. During the three and nine months ended December 29, 2013, we recorded an income tax benefit of approximately $1.4 million ~~which was primarily due to the lapsing of statute of limitations in federal~~ and ~~state jurisdictions, offset by income tax expense in certain of our non-US operations. During the nine months ended December 29, 2013, we recorded an income tax benefit of approximately~~ $8.2 ~~million.~~million, respectively. The income tax benefit was primarily due to the ~~impact~~release of ~~the~~valuation allowance from Exar’s acquisition of Cadeka ~~on Exar’s valuation allowance, the impact of which is recorded outside of purchase accounting, resulting in a release of the valuation allowance and an income tax benefit of $6.8 million.~~Microcircuits, LLC.

Liquidity and Capital Resources

Nine Months Ended

Nine Months Ended

December 29,
2013

December 30,
2012

December 28,
2014

December 29,
2013

(dollars in thousands)

(dollars in thousands)

Cash and cash equivalents
$ 21,070 $ 15,334 $ 52,622 $ 21,070
Short-term investments
154,702 185,784
Short-term marketable securities
— 154,702
Total cash, cash equivalents and short-term investments
$ 175,772 $ 201,118 $ 52,622 $ 175,772
Percentage of total assets
57 % 73 % 19 % 57 %

Net cash provided by (used in) operating activities
$ (857 ) $ 3,654
Net cash used in operating activities
$ (16,011 ) $ (857 )
Net cash provided by investing activities
11,178 780 59,124 11,178
Net cash provided by (used in) financing activities
(3,969 ) 2,186
Net cash used in financing activities
(5,105 ) (3,969 )
Net increase in cash and cash equivalents
$ 6,352 $ 6,620 $ 38,008 $ 6,352
Fiscal Year 2015
Our net loss was approximately $42.1 million for the nine months ended December 28, 2014. After adjustments for non-cash items and changes in working capital, we used $16.0 million of cash in operating activities.
Significant non-cash charges and credits included:
●
depreciation and amortization expenses of $13.3 million;
●
intangibles impairment of $12.3 million;
●
restructuring charges and exit costs of $6.7 million resulting from reduction of our workforce, impairment of certain intangible and fixed assets,
●
stock-based compensation expense of $10.9 million;
●
reduction in estimated fair value of contingent consideration liabilities of $4.3 millionrelated to the acquisitions of Cadeka Microcircuits LLC and Altior Inc; and
●
release of $0.8 million of the deferred tax valuation allowance due to liquidation of our short term investments.
Working capital changes included:
●
a $1.1 million increase in accounts receivable primarily due to timing of shipments made and timing of collections from customers;

●
a $3.5 million increase in inventory to avoid shortage of supplies in the future primarily related to the Display Products and Processor Product lines;
●
a $1.1 million net increase in other current and noncurrent assets primarily due to estimated tax payments made;
●
a $2.9 million net decrease in accounts payable and $0.2 million decrease in accrued compensation and related benefits primarily due to timing of payments made;
●
a $5.4 million net decrease in other current and noncurrent liabilities mainly due to payments made for liabilities acquired through acquisitions and offset by additional accrued liability for a three-year license of design tool acquired; and
●
a $0.6 million increase in deferred income due to timing of products selling through the distribution channels.
In the nine months ended December 28, 2014, net cash provided by investing activities was $59.1 million. Proceeds of $162.4 million from sales and maturities of investments was offset by $9.3 million purchase of investments, net $91.5 million used for the acquisition of iML and $2.5 million used for purchases of property, plant and equipment.
In the nine months ended December 28, 2014, net cash used by financing activities reflects $91.0 million of proceeds received from Stifel and CTBC short-term financing agreements, receipt of $3.9 million net proceeds associated with our employee stock plans offset by $91.0 million repayment of Stifel short-term financing agreements, $8.0 million repurchase of our common stock and $1.0 million repayment of lease financing obligations.

Fiscal Year 2014

Our net income was approximately $5.7 million for the nine months endedDecember 29, 2013. After adjustments for non-cash items and changes in working capital, we used $0.9 million of cash from operating activities.

Significant non-cash charges included:

●
●
depreciation and amortization expenses of $9.4 ~~million~~;million;

●
●
stock-based compensation expense of $7.3 ~~million~~;million;

●
●
release of deferred tax asset valuation of $6.8 million; and

●
●
net change in fair value of contingent consideration for Altior acquisition of $2.4 million.

Working capital changes included:

●
●
a $7.2 million increase in accounts receivable primarily due to the increase in shipments in the latter part of the quarter and timing on cash collection;and

●
●
a $3.8 million increase in inventory due to demand change for the future quarter.

In the nine months ended December 29, 2013, net cash provided by investing activities was $11.2 million. Proceeds of $202.6 million from sales and maturities of investments and $0.1 million from sale of intellectual property were offset by $166.7 million purchase of investments, $23.1 million acquisition of Cadeka and $1.7 million used for purchases of property, plant and equipment and intellectual property.

In the nine months ~~endedDecember~~endedDecember 29, 2013,, net cash used in financing activities reflects $4.0 million ~~repurchased~~repurchase of our common ~~stocks~~stock and $2.9 million repayment of lease financing obligations offset by $2.9 million of net proceeds received from our employee stock plans.
~~Fiscal Year 2013~~
Our net income was approximately $1.2 million for the nine months ended December 30, 2012. After adjustments for non-cash items and changes in working capital, we generated $3.7 million of cash from operating activities.
~~Significant non-cash charges included:~~
●
~~depreciation and amortization expenses of $8.3 million; and~~
●
~~stock-based compensation expense of $3.0 million.~~

~~Working capital changes included:~~
●
~~a $3.7 million increase in accounts receivable primarily due to the timing of shipments and certain large customer payments;~~
●
~~a $0.3 million increase in inventory due to expected increase in future shipments; and~~
●
~~a $4.1 million decrease in accrued restructuring charges and exit costs, primarily due to payments made.~~
In the nine months ended December 30, 2012, net cash provided by investing activities was $0.8 million. Proceeds of $134.8 million from sales and maturities of investments were offset by $133.0 million purchase of investments and $1.3 million used for purchases of property, plant and equipment and intellectual property.
~~In the nine months endedDecember 30, 2012, net cash provided by financing activities reflects $4.7 million of proceeds associated with our employee stock plans partially offset by the $2.5~~ ~~million repayment of lease financing obligations.~~
~~To date, inflation has not had a significant impact on our operating results.~~
~~We anticipate that we will continue to finance our operations with cash flows from operations, existing cash and investment balances.~~
We believe that our cash and cash equivalents, short-term marketable securities and expected cash flows from operations will be sufficient to satisfy working capital requirements, capital equipment, intellectual property, and stock repurchase needs for at least the next 12 months. However, should the demand for our products decrease in the future, the availability of cash flows from operations may be limited, which could have a material adverse effect on our financial condition and results of operations. From time to time, we evaluate potential acquisitions, strategic arrangements and equity investments that we believe are complementary to our design expertise and market strategy. To the extent that we pursue or position ourselves to pursue these transactions, we could consume a significant portion of our capital resources or choose to seek additional equity or debt financing. Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity or convertible debt could result in dilution to our stockholders.

Recent Accounting Pronouncements

Please refer to “Part I, Item 1. Financial Statements” and “Notes to Condensed Consolidated Financial Statements, Note 2 – Recent Accounting Pronouncements.”

Off-Balance Sheet Arrangements

We have not utilized special purpose entities to facilitate off-balance sheet financing arrangements. However, we have, in the normal course of business, entered into agreements which impose warranty obligations with respect to our products or which obligate us to provide indemnification of varying scope and terms to customers, vendors, lessors and business partners, our directors and executive officers, purchasers of assets or subsidiaries, and other parties with respect to certain matters. These arrangements may constitute “off-balance sheet transactions” as defined in ~~Section~~Item 303(a)(4) of Regulation S-K. Please see“Note ~~14–~~15–Commitments and Contingencies” to the condensed consolidated financial statements for further discussion of our product warranty liabilities and indemnification obligations.

As discussed in“Note ~~14–~~15–Commitments and Contingencies,” during the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable.

Contractual Obligations and Commitments

Our contractual obligations and commitments atDecember ~~29, 2013~~ 28, 2014 were as follows (in thousands):

Payments due by period

Payments due by period

Contractual Obligations

Total

Less than
1 year

1-3
years

3-5
years

More than
5 years

Total

Less than
1 year

1-3
years

3-5
years

More than
5 years

Purchase commitments (1)
$ 29,736 $ 26,305 $ 700 $ 700 $ 2,031 $ 34,391 $ 31,345 $ 700 $ 718 $ 1,628
Operating lease commitments (2)
1,383 635 707 41 —
Lease obligations (2)
1,241 840 400 — —
Total
$ 31,119 $ 26,940 $ 1,407 $ 741 $ 2,031 $ 35,632 $ 32,185 $ 1,100 $ 718 $ 1,628

—————
(1)
~~Our~~We place purchase orders with wafer foundries, back end suppliers and other vendors as part of our normal course of business. We expect to receive and pay for wafers, capital equipment and various service contracts ~~with~~over the next 12 months from our ~~suppliers generally require us to provide purchase order commitments that are generally binding and cannot be canceled.~~existing cash balances.
(2)
WeOperating lease ~~many of~~payments including real property leases for our ~~office facilities for various terms under operating lease agreements. The leases expire at various dates from fiscal year 2014 through fiscal year 2018.~~worldwide offices.

Other commitments

As of December ~~29, 2013,~~28, 2014, our unrecognized tax benefits were ~~$14.0~~$17.2 million, of which ~~$0.7~~$4.3 million was classified as other non-current obligations. We believe that it is reasonably possible that the amount of gross unrecognized tax benefits related to the resolution of income tax matters could be reduced by approximately $1.4 million during the next 12 months as the statute of limitations expires.See “Note 1617 – Income Taxes.”

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are interest rate risk and foreign currency exchange rate risk.
Foreign Currency ~~Fluctuations.~~ Fluctuations. We are exposed to foreign currency fluctuations primarily through our foreign operations. This exposure is the result of foreign operating expenses and cash balances being denominated in foreign ~~currency.~~currencies. Operational currency requirements are typically forecasted for a one-month period. If there is a need to hedge this risk, we may enter into transactions to purchase currency in the open market or enter into forward currency exchange contracts.

~~If our~~Except for the foreign operations forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. At December 29, 2013 and December 30, 2012, we did not have significant foreign currency denominated net assets or net liabilities positions and had no foreign currency contracts outstanding.
~~Investment Risk and Interest Rate Sensitivity.~~ We maintain investment portfolio holdings of various issuers, types, and maturity dates with two professional management institutions. The fair value of these investments on any given day during the investment term may vary as a result of market interest rate fluctuations. Our investment portfolio consisted of cash equivalents, money market funds and fixed income securities of $168.7 million as December 29, 2013 and $195.6 million as of March 31, 2013. These securities, like all fixed income instruments, are subject to interestexchange rate risk, and will vary in value as market interest rates fluctuate. If market interest rates were to increase or decline immediately and uniformly by 10% or less from levels as of December 29, 2013, the increase or declinethere have been no material changes in the ~~fair value~~quantitative or qualitative aspect of our market risk profile since March 30, 2014.  For additional information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the ~~portfolio would not be material. At December 29, 2013, the difference between the fair value and the underlying cost of the investments portfolio was an unrealized loss of $1.0 million, net of taxes.~~year ended March 30, 2014.

Our short-term investments are classified as “available-for-sale” securities and the cost of securities sold is based on the specific identification method. At December 29, 2013, short-term investments consisted of corporate bonds and securities, asset and mortgage-backed securities, U.S. government agency securities, U.S. Treasury securities and state and local government securities of $154.7 million.
ITEM 4.
~~ITEM 4.~~     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures (“Disclosure Controls”)

Disclosure Controls, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ~~(“Exchange~~(the “Exchange Act”), are controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods as specified in the SEC’s rules and forms. In addition, Disclosure Controls are designed to ensure the accumulation and communication of information required to be disclosed in reports filed or submitted under the Exchange Act to our management, including the Chief Executive Officer (our principal executive officer) ~~(“CEO”~~(the “CEO”) and Chief Financial Officer (our principal financial and accounting officer) ~~(“CFO”~~(the “CFO”), to allow timely decisions regarding required ~~disclosure.~~disclosures.

We evaluated the effectiveness of the design and operation of our Disclosure Controls, as defined by the rules and regulations of the SEC ~~(“Evaluation”~~(the “Evaluation”), as of the end of the period covered by this Quarterly Report on Form 10-Q. This Evaluation was performed under the supervision and with the participation of management, including our CEO, as principal executive officer, and CFO, as principal financial and accounting officer.

Attached as Exhibits 31.1 and 31.2 of this Quarterly Report on Form 10-Q are the certifications of the CEO and the CFO, respectively, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ~~(“Certifications”~~(the “Certifications”). This section of the Quarterly Report on Form 10-Q provides information concerning the Evaluation referred to in the Certifications and should be read in conjunction with the Certifications.

Based on the Evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at the reasonable assurance level as of December ~~29, 2013.~~28, 2014.

Inherent Limitations on the Effectiveness of Disclosure Controls

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all errors and all fraud. Disclosure Controls, no matter how well conceived, managed, utilized and monitored, can provide only reasonable assurance that the objectives of such controls are met. Therefore, because of the inherent limitation of Disclosure Controls, no evaluation of such controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION
ITEM 1.
~~ITEM 1.~~     LEGAL PROCEEDINGS

The disclosure in “Notes to Condensed Consolidated Financial Statements, Note ~~15–~~16– Legal Proceedings” contained in “Part I, Item 1. Financial Statements” is hereby incorporated by reference.

ITEM 1A.      RISK FACTORS

~~We are subject to the~~The following factors describe risks ~~as well as others,~~and uncertainties that could ~~materially and~~ adversely affect our business, financial condition, results of operations, and ~~financial condition. The following risk factors and other information included in this Quarterly Report on Form 10-Q and in~~the market price of our ~~Annual Report on Form 10-K for our fiscal year ended March 31, 2013 should be carefully considered.~~common stock. The risks and uncertainties described below ~~in the Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2013~~should not be considered to be a complete statement of all potential risks and ~~September 29, 2013 and in our Annual Report on Form 10-K for our fiscal year ended March 31, 2013 are not the only ones~~uncertainties that we face. Additional risks and uncertainties not presently known to us or that we do not currently ~~deem immaterial~~consider material may also ~~may impair our business operations if circumstances change. If any of the following risks occur,~~harm our business, financial condition, ~~operating~~ 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 ~~cash flows could be materially adversely affected.~~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:

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the continuing effects of economic uncertainty;
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the cyclical nature of the general economy and the semiconductor industry;
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difficulty in predicting revenues and ordering the correct mix of components from suppliers due to limited visibility into customers and channel partners;
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changes in the mix of product sales as our margins vary by product;
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fluctuations in the capitalization and amortization of unabsorbed manufacturing costs;

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the impact of our revenue recognition policies on reported ~~results and~~ results;
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warranty costs related to our product sales;
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the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channel ~~partners due to, among others, the following factors:~~partners;
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management of customer, subcontractor, logistic provider and/or channel inventory;
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delays in shipments from our foundries and subcontractors causing supply shortages;
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inability of our foundries and subcontractors to provide quality products, in adequate quantities and in a timely manner;
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dependency on ~~a single product~~products with ~~a single customer~~few customers and/or ~~distributor;~~distributors;
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volatility of demand for ~~equipment~~systems sold by our large customers, which in turn, introduces demand volatility for our products;
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demand disruption if customers change or modify their complex subcontract manufacturing supply chain;
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~~demand~~ disruption in customer demand due to technical or quality issues with our devices or components in their system;
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the inability of our customers or their sub-contract manufacturers to obtain components from their other suppliers;
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disruption in sales or distribution channels;
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our ability to maintain and expand distributor relationships;
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changes in sales, design and implementation cycles for our products;
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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;
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risks associated with entering new or mature markets;
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the announcement or introduction of products by ~~our~~ existing competitors or new competitors;
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loss of market share by us or by our customers;
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competitive pressures on selling prices or product availability;
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pressures on selling prices overseas due to foreign currency exchange fluctuations;

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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;
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delays in product releases;
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market and/or customer acceptance of our products;
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consolidation among our competitors, our customers and/or our customers’ customers;
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changes in our customers’ end user concentration or requirements;
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loss of one or more major customers;
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significant changes in ordering pattern by major customers;
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our or our channel partners’ or logistic providers’ ability to maintain and manage appropriate inventory levels;

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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;
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disruptions in our or our customers’ supply chain due to natural disasters, fire, outbreak of communicable diseases, labor disputes, civil unrest or other such reasons;
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delays in successful transfer of products or manufacturing processes to or between our subcontractors;
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fluctuations in the product quality or manufacturing output, yields, and capacity of our suppliers;
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fluctuation in suppliers’ capacity due to reorganization, relocation or shift in business focus, financial constraints, or other reasons;
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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;
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our ability to successfully introduce and transfer into production new products and/or integrate new technologies;
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excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize or inventory becomes obsolete;
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increased manufacturing costs;
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higher mask tooling costs associated with advanced technologies; ~~and/or~~
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the amount and timing of our investment in research and development;
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costs and business disruptions associated with stockholder or regulatory issues;
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the timing and amount of employer payroll tax to be paid on our employees’ gains on the exercise of ~~stock options;~~equity grants;
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an inability to generate profits to utilize ~~net operating losses;~~NOLs prior to their statutory expiration;
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increased costs and time associated with compliance with new accounting rules or new regulatory requirements;
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changes in accounting or other regulatory rules, such as the requirement to record assets and liabilities at fair value;
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write-off of some or all of our goodwill and other intangible assets;
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fluctuations in interest rates and/or market values of our marketable securities;

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

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

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change in fair value of contingent consideration; and/or
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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 18eighteen months. If we fail to grow and convert a significant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materially and adversely impacted. Under continued uncertain global economic conditions, our design wins could be delayed even longer than the typical lag period and our eventual revenue could be less than anticipated from products that were introduced within the last eighteen to thirty-six months, which would likely materially and adversely affect our business, financial condition and results of operations.

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

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

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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;

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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;

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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;

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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;

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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;

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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;

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

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

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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

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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:

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changing or disruptive technologies;
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evolving and competing industry standards;
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changing customer requirements;
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increasing price pressure from lower priced solutions;
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increasing product development costs;
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finite market windows for product introductions;
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design-to-production cycles;
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increasing functional integration;
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competitive solutions, or competitors with stronger customer engagement or broader product offering;
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fluctuations in capital equipment spending levels and/or deployment;
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rapid adjustments in customer demand and inventory;
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moderate to slow growth;
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frequent product introductions and enhancements; and/or
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changing competitive landscape (due to consolidation, financial viability, etc.).

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

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

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:
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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;
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revenues or synergies could fall below projections or fail to materialize as assumed;
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failure to satisfy or set effective strategic objectives;
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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;
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the possibility of planned acquisitions failing to materialize and not realizing anticipated benefits; and/or
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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:
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consequences associated with the recordation or application of various domestic and/or foreign tax regulations;
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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;
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difficulties in incorporating or leveraging acquired technologies and intellectual property rights in new products;
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difficulties or delays in the transfer of product manufacturing flows and supply chains of acquired businesses;
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failure to retain and integrate key personnel;
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failure to retain and maintain relationships with existing customers, distributors, channel partners and other parties;
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failure to manage and operate multiple geographic locations both effectively and efficiently;
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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;
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difficulties in creating uniform standards, controls (including internal control over financial reporting), procedures, policies and information systems;
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unexpected capital equipment outlays and continuing expenses related to technical and operational integration;
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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;
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insufficient revenues to offset increased expenses associated with acquisitions;
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under-performance problems with an acquired company;
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issuance of common stock that would dilute our current stockholders’ percentage ownership;
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reduction in liquidity and interest income on lower cash balances;
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recording of goodwill and intangible assets that will be subject to periodic impairment testing and potential impairment charges against our future earnings;
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incurring amortization expenses related to certain intangible assets; and/or
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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.
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.

Our acquisition of iML may significantly impact our business and operations.
On September 15, 2014, we completed our transaction with Integrated Memory Logic Limited. (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market in Taipei, Taiwan.
We may not successfully utilize or integrate the acquired products, technologies or personnel, or accurately forecast the financial impact of the acquisition, including accounting charges or the impact on our existing business. For example, customers of Exar and iML may not continue to use Exar and iML to the same extent as they would have if iML had remained an independent company, or they may cancel existing agreements. Accordingly, we may not realize the potential benefits of the acquisition.
In addition to these risks, the integration of iML into Exar will be a time-consuming and expensive process and will require us to bear ongoing costs associated with maintaining and supporting the existing iML technology platforms. We may lose key iML employees as a result of the acquisition, which would increase our costs and challenges in supporting the acquired technology. If our integration effort is not successful, if we do not estimate associated costs accurately or if we cannot effectively manage costs, we may not realize anticipated synergies or other benefits of the iML acquisition, or it may take longer to realize these benefits than we currently expect, either of which could materially harm our business or results of operations.
Furthermore, operating decisions may impact existing products and platforms. If any of these decisions are expected to potentially result in the limitation or discontinuation of use of certain assets, we would expect accelerated depreciation and potential impairment of assets including property and equipment, software and website development costs, intangible assets or goodwill.
Finally, any changes in the operating structure of the business post acquisition may result in changes in asset groups, segments, or reporting units which could also result in certain asset impairments.
As a result of our acquisition of iML, we are now subject to additional risks related to iML’s business.
As a result of acquiring iML, we are subject to additional risks specific to iML’s business, including the following:
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if iML fails to maintain or increase its base of customers who purchase its products, iML’s business, results of operations and financial condition would be materially and adversely affected;
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iML may not be able to expand into new geographical markets, adjacent markets in the flat panel display industry or new industry verticals as a result of restrictions in its existing contracts;
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if iML’s security measures are compromised, customers may curtail or stop using iML’s products;
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iML utilizes certain key technologies third parties and may be unable to replace those technologies if they become obsolete, unavailable or incompatible with its products;
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the software underlying iML’s products may be subject to undetected errors, defects or bugs which could adversely affect its business;
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iML may be unable to maintain or grow its base of customers or increase its revenue from its existing customers, in which case its business, results of operations and financial condition will be harmed; and
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iML may not timely and effectively scale and adapt its existing technologies and infrastructure to ensure that its products remain competitive.
We depend on third-party subcontractors to manufacture our products. We utilize wafer foundries for processing our wafers and assembly and test subcontractors for manufacturing and testing our integrated circuit products and board assembly subcontractors for our board-level products. Any disruption in or loss of our subcontractors’ capacity to manufacture and test our products subjects us to a number of risks, including the potential for an inadequate supply of products and higher materials costs. These risks may lead to delayed product delivery or increased costs, which could materially and adversely impact our business, financial condition and results of operations.

We do not own or operate a semiconductor fabrication facility or a foundry. We utilize various foundries for different processes. Our products are based on ~~complementary metal oxide semiconductor (“CMOS”)~~CMOS processes, bipolar processes, BiCMOS and ~~bipolar-CMOS (“BiCMOS”)~~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 ~~or bugs~~ could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition and results of operations.

Our foundries and test 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 ~~elimination~~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 on competitive terms and in the requested quantities 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:

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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;
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disruption of manufacturing or assembly or test services due to vendor transition, relocation or limited capacity of the foundries or subcontractors;
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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;
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failure of our foundries or subcontractors to obtain raw materials and equipment;
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increasing cost of commodities, such as gold, raw materials and energy resulting in higher wafer or package costs;
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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;

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

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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;
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manufacturing quality control or process control issues, including reduced control over manufacturing yields, production schedules and product quality;
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potential misappropriation of our intellectual property;
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disruption of transportation to and from Asia where most of our foundries and subcontractors are located;
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political, civil, labor or economic instability;
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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
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compliance with U.S., local or international regulatory requirements.

Other additional risks associated with subcontractors include:

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subcontractors imposing higher minimum order quantities for substrates;
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potential increase in assembly and test costs;
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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;
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difficulties in selecting, qualifying and integrating new subcontractors;
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inventory and delivery management issues relating to hub arrangements;

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entry into “take-or-pay” ~~agreements;~~agreements subjecting us to high fixed costs; and/or
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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.

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

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

Competition for skilled employees having specialized technical capabilities and industry-specific expertise is intense and continues to be a considerable risk inherent in the markets in which we compete. At times, competition for such employees has been particularly notable in California and the People’s Republic of China ~~(“PRC”~~(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.

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

Stock-based awards are critical to our ability to recruit, retain and motivate highly skilled talent. In making employment decisions, particularly in the semiconductor industry and the geographies where our employees are located, a key consideration of current and potential employees is the value of the equity awards they receive in connection with their employment. If we are unable to offer employment packages with a competitive equity award component, our ability to attract highly skilled employees would be harmed. In addition, volatility in our stock price could result in a stock option’s exercise price exceeding the market value of our common stock or a deterioration in the value of restricted stock units granted, thus lessening the effectiveness of stock-based awards for retaining and motivating employees. Similarly, decreases in the number of unvested in-the-money stock options held by existing employees, whether because our stock price has declined, options have vested, or because the size of follow-on option grants has decreased, may make it more difficult to retain and motivate employees. ~~Consequently, we may not continue to successfully attract and retain key employees, which could have an adverse effect on our business, financial condition and results of operations.~~
We have made, and in the future may make, acquisitions and significant strategic equity investments, which may involve a number of risks. If we are unable to address these risks successfully, such acquisitions and investments could have a material adverse effect on our business, financial condition and results of operations.
We have undertaken a number of strategic acquisitions, have made strategic investments in the past, and may make further strategic acquisitions and investments from time to time in the future. The risks involved with these acquisitions and investments include:
•
~~the possibility that we may not receive a favorable return on our investment or incur losses from our investment or the original investment may become impaired;~~
•
~~revenues or synergies could fall below projections or fail to materialize as assumed;~~
•
~~failure to satisfy or set effective strategic objectives;~~
•
~~the possibility of litigation arising from or in connection with these acquisitions;~~
•
~~our assumption of known or unknown liabilities or other unanticipated events or circumstances; and/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:~~
•
~~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.
~~Our business may be materially and adversely impacted if we fail to effectively utilize and incorporate acquired technologies.~~
We have acquired and may in the future acquire intellectual property in order to expand our serviceable markets, accelerate our time to market, and to accelerate to gain market share for new and existing products. Acquisitions of intellectual property may involve risks relating to, among other things, valuation of innovative capabilities, successful technical integration into new products, loss of key technical personnel, compliance with contractual obligations, market acceptance of new product features or capabilities, and achievement of planned return on investment. Successful technical integration in particular requires a variety of capabilities that we may not currently have, such as available technical staff with sufficient time to devote to integration, the requisite skills to understand the acquired technology and the necessary support tools to effectively utilize the technology. The timely and efficient integration of acquired technology may be adversely impacted by inherent design deficiencies or application requirements. The potential failure of or delay in product introduction utilizing acquired intellectual property could lead to an impairment of capitalized intellectual property acquisition costs, which could materially and adversely impact our business, financial condition and results of operations.

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

A significant portion of the purchase price for any business combination may be allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of consummation. As required by U.S. ~~Generally Accepted Accounting Principles (“GAAP”),~~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 ~~typically~~ conduct our annual analysis of our goodwill at the reporting unit level in the fourth quarter of our fiscal year.

The assessment of goodwill and other intangible assets impairment is a subjective process. Estimations and assumptions regarding the number of reporting units, future performance, results of our operations and comparability of our market capitalization and net book value will be used. Changes in estimates and assumptions could impact fair value resulting in an impairment, which has in the past and could again in the future materially and adversely impact our business, financial condition and results of operations.
Because some of our integrated circuit and board level products have lengthy sales cycles, we may experience substantial delays between incurring expenses related to product development and the revenue derived from these products.

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

If ~~defects~~errors or ~~bugs~~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;
•
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;~~

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 December ~~29, 2013,~~28, 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 ~~13%~~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, ~~Alonim~~Future, our largest distributor, is an affiliate of ~~Future, our largest distributor,~~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.
Earthquakes and other natural disasters, may damage our facilities or those of our suppliers and customers.

The occurrence of natural disasters in certain regions, such as the ~~recent~~ natural disasters in Asia, could adversely impact our manufacturing and supply chain, our ability to deliver products on a timely basis (or at all) to our customers and the cost of or demand for our products. Our corporate headquarters in Fremont, California is located near major earthquake faults that have experienced seismic activity and is approximately 170 miles from a nuclear power plant. In addition, some of our other offices, customers and suppliers are in locations which may be subject to similar natural disasters. In the event of a major earthquake or other natural disaster near our offices, our operations could be disrupted. Similarly, a major earthquake or other natural disaster, such as the 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~~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~~partners’ competitiveposition. 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.~~enforce or there may not be an effective judicial remedy. Moreover, our competitors may independently develop technology that is substantially similar or superior to our technology.

More specifically, our pending patent applications or any future applications may not be approved, and any issued patents may not provide us with competitive advantages or may be challenged by third parties. If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.
We could be required to pay substantial damages or could be subject to various equitable remedies if it were proven that we infringed the intellectual property rights of others.

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

•
stop selling, incorporating or using our products that use the infringed intellectual property;
•
obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable terms, if at all; and/or
•
redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible.

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

Our results of operations could vary as a result of the methods, ~~estimations~~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 or modification using the Black-Scholes option-pricing model. We estimate the fair value of performance based stock awards base on stock price on the measurement date. 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 condensed consolidated financial statements. Actual results could differ from these estimates and material effects on operating results and financial position may result.
The final determination of our income tax liability may be materially different from our income tax provision, which could have an adverse effect on our results of operations.

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

•
the jurisdictions in which profits are determined to be earned and taxed;
•
the resolution of issues arising from tax audits with various tax authorities;
•
changes in the valuation of our deferred tax assets and liabilities;
•
adjustments to estimated taxes upon finalization of various tax returns;
•
increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;
•
changes in available tax credits;
•
changes in stock-based compensation expense;
•
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles; and/or
•
the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

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

We have acquired significant ~~Net Operating Loss (“NOL”)~~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.
We may be exposed to additional credit risk as a result of ~~the addition of significant direct customers through acquisitions.~~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”)~~SEC issued final rules for compliance with Section 1502 of the Dodd-Frank Act, and outlined what U.S. publicly-traded companies ~~in the U.S.~~ have to disclose regarding their use of conflict minerals in their products. According to the rule, companies that utilize any of the 3TG (tin, tantalum, tungsten and gold) and other listed minerals in their products need to conduct a reasonable country of origin inquiry to determine if the minerals ~~arecoming~~arecoming from the conflict zones in and around the Democratic Republic of ~~Congo. The first filings are due May 31, 2014 for calendar year 2013.~~Congo. 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 mineral 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. Furthermore, on September 15, 2014 we completed our merger with iML and are evaluating iML’s use, if any, of conflict minerals in its products. We may suffer reputational harm with our customers and other stakeholders if our products(including iML’s products) are not conflict mineral 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 6.
~~ITEM 6.~~       EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K

See the Exhibit Index, which follows the signature page to this Quarterly Report on Form 10-Q.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q of Exar Corporation to be signed on its behalf by the undersigned thereunto duly authorized.

EXAR CORPORATION
(Registrant)

February 6 ~~2014~~, 2015
By
/s/ Ryan A. Benton

Ryan A. Benton
Senior Vice President, General and Administration Services
and Chief Financial Officer
(On the Registrant’s Behalf and as Principal Financial and Accounting Officer)


INDEX TO EXHIBITS

Incorporated by Reference

Incorporated by Reference

Exhibit
Number

Exhibit

Form

File No.

Exhibit

Filing Date
Filed
Herewith
Exhibit

Form

File No.

Exhibit

Filing Date
Filed
Herewith
3.1
Restated Certificate of Incorporation of Exar Corporation
8-K
0-14225
3.3
9/17/2010

3.2
Bylaws of Exar Corporation
8-K
0-14225
3.1
3/16/2012

3.3
Amendment to Employment Agreement between the Company and Louis DiNardo, dated December 31, 2013

X
2.1
Form of Merger Agreement
8-K
0-14225
2.1
4/30/2014

2.2
Form of Tender Agreement
8-K
0-14225
2.2
4/30/2014

10.1
Bridge Credit Agreement, dated May 27, 2014
8-K
0-14225
10.1
5/30/2014

10.2
Form of Parent Agreement
8-K
0-14225
10.1
4/30/2014

10.3
Form of Tender Agreement
8-K
0-14225
10.2
4/30/2014

10.4
2014 Equity Incentive Plan
8-K
0-14225
10.1
9/22/2014

10.5
Form of Restricted Stock Unit Agreement
10-Q
001-36012
10.5
11/7/2014

10.6
Form of Performance Stock Unit Agreement
10-Q
001-36012
10.6
11/7/2014

10.7
Form of NQSO Agreement
10-Q
001-36012
10.7
11/7/2014

10.8
Form of ISO Agreement
10-Q
001-36012
10.8
11/7/2014

10.9 Separation and Release Agreement between Exar Corporation and Parviz Ghaffaripour 8-K 0-14425 10.1 11/23/2014
10.10
Termination and Release Agreement between Exar Corporation and Robert Todd Smathers

X
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)

X
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)

X
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)

X
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)

X
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X
101.INS
XBRL Instance Document

X
XBRL Instance Document

X
101.SCH
XBRL Taxonomy Extension Schema Document

X
XBRL Taxonomy Extension Schema Document

X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document

X
XBRL Taxonomy Extension Calculation Linkbase Document

X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document

X
XBRL Taxonomy Extension Definition Linkbase Document

X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document

X
XBRL Taxonomy Extension Label Linkbase Document

X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

X
XBRL Taxonomy Extension Presentation Linkbase Document

X

58
54

	December 29,			March 31,
	2013			2013
ASSETS

Current assets:
Cash and cash equivalents	$	21,070		$	14,718
Short-term marketable securities		154,702			190,587
Accounts receivable (net of allowances of $570 and $944)		21,699			12,614
Accounts receivable, related party (net of allowances of $462 and $346)		1,685			3,374
Inventories		24,950			19,430
Assets held for sale		13,083			—
Other current assets		3,645			3,177
Total current assets		240,834			243,900

Property, plant and equipment, net		8,784			24,100
Goodwill		29,573			10,356
Intangible assets, net		28,063			13,338
Other non-current assets		1,442			1,474
Total assets	$	308,696		$	293,168

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	14,824		$	9,455
Accrued compensation and related benefits		4,352			3,624
Deferred income and allowances on sales to distributors		1,861			2,399
Deferred income and allowances on sales to related party distributor		8,017			9,475
Other current liabilities		11,151			15,215
Total current liabilities		40,205			40,168

Long-term lease financing obligations		106			1,342
Other non-current obligations		11,530			11,204
Total liabilities		51,841			52,714

Commitments and contingencies (Notes 13, 14 and 15)

Stockholders' equity:
Common stock, $.0001 par value; 100,000,000 shares authorized; 47,501,051 and 46,607,246 shares outstanding		5			5
Additional paid-in capital		511,644			749,426
Accumulated other comprehensive loss		(980	)		(526	)
Treasury stock at cost, 0 and 19,924,369 shares		—			(248,983	)
Accumulated deficit		(253,814	)		(259,468	)
Total stockholders' equity		256,855			240,454
Total liabilities and stockholders’ equity	$	308,696		$	293,168

	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

	Amount
Identifiable tangible assets (liabilities)
Cash	$	133,752
Accounts receivable		10,096
Inventories		3,950
Other current assets		962
Property, plant and equipment		480
Other assets		308
Current liabilities		(12,356	)
Long-term liabilities		(3,595	)
Total identifiable tangible assets (liabilities), net		133,597
Identifiable intangible assets		80,060
Total identifiable assets, net		213,657
Goodwill		14,461
Fair value of total consideration transferred	$	228,118

	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

	Three Months Ended					Nine Months Ended
	December 28, 2014			December 29, 2013		December 28, 2014			December 29, 2013
Net sales	$	44,315		$	45,243	$	128,923		$	143,544
Net income (loss)	$	(6,834	)	$	306	$	(34,260	)	$	5,646
Earnings (loss) per share
Basic	$	(0.15	)	$	0.01	$	(0.73	)	$	0.12
Diluted	$	(0.15	)	$	0.01	$	(0.73	)	$	0.12

	Amount
Tangible assets	$	2,937
Intangible assets		7,010
Goodwill		667
Liabilities assumed		(10,604	)
Fair value of total consideration transferred	$	10

	Amount
Cash	$	25,000
Equity instruments		5,177
Estimated fair value of earn-out payments		4,660
Total consideration paid	$	34,837

	Amount
Tangible assets	$	3,286
Intangible assets		20,380
Goodwill		19,387
Liabilities assumed		(8,216	)
Fair value of total consideration transferred	$	34,837

	December 28, 2014		March 30, 2014
Work-in-process and raw materials	$	21,177	$	13,555
Finished goods		11,889		15,427
Total inventories	$	33,066	$	28,982

	December 28, 2014			March 30, 2014
Land	$	6,660		$	6,660
Building		17,462			16,787
Machinery and equipment		41,356			40,675
Software and licenses		22,323			17,549
Property, plant and equipment, total		87,801			81,671
Accumulated depreciation and amortization		(67,128	)		(60,391	)
Total property, plant and equipment, net	$	20,673		$	21,280

	Amount
Identifiable tangible assets (liabilities)
Cash	$	1,055
Accounts Receivable		241
Inventories		1,756
Property, plant and equipment		231
Other assets		3
Accounts payable and accruals		(7,400	)
Other short-term liabilities		(520	)
Long-term liabilities		(126	)
Total identifiable tangible assets (liabilities), net		(4,760	)
Identifiable intangible assets		20,380
Total identifiable assets, net		15,620
Goodwill		19,217
Fair value of total consideration transferred	$	34,837

	December 28, 2014		March 30, 2014
Short-term lease financing obligations	$	2,837	$	2,671
Accrued retention bonus		2,725		—
Accrued income tax		1,556		74
Accrued restructuring charges and exit costs		1,390		2,214
Accrued manufacturing expenses, royalties and licenses		1,284		1,639
Purchase consideration holdback		1,006		1,256
Accrued legal and professional services		849		1,453
Other		2,740		2,063
Total other current liabilities	$	14,387	$	11,370

	Fair Value
Developed technologies	$	15,720
In-process research and development		2,280
Customer relations		2,170
Trade name		210
Total identifiable intangible assets	$	20,380

	December 28, 2014		March 30, 2014
Long-term taxes payable	$	4,313	$	794
Deferred tax liability		1,059		614
Accrued restructuring charges and exit costs		15		155
Fair value of earn out liability – long-term		—		3,853
Accrued retention bonus		—		1,181
Other		18		29
Total other non-current obligations	$	5,405	$	6,626

	December 29, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	13,961	$	—	$	—	$	13,961
U.S. government and agency securities		11,537		21,254		—		32,791
State and local government securities		—		2,798		—		2,798
Corporate bonds and securities		4		72,721		—		72,725
Asset-backed securities		—		30,354		—		30,354
Mortgage-backed securities		—		16,034		—		16,034
Total investment assets	$	25,502	$	143,161	$	—	$	168,663

Liabilities:
Acquisition-related contingent consideration – Altior	$	—	$	—	$	7,741	$	7,741
Acquisition-related contingent consideration – Cadeka	$	—	$	—	$	4,620	$	4,620
Total liabilities	$	—	$	—	$	12,361	$	12,361

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	5,042	$	—	$	—	$	5,042
U.S. government and agency securities		22,460		19,261		—		41,721
State and local government securities		—		2,935		—		2,935
Corporate bonds and securities		274		91,955		—		92,229
Asset-backed securities		—		30,966		—		30,966
Mortgage-backed securities		—		22,736		—		22,736
Total investment assets	$	27,776	$	167,853	$	—	$	195,629

Liabilities:
Acquisition-related contingent consideration – Altior	$	—	$	—	$	10,138	$	10,138

	December 28, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	6	$	—	$	—	$	6
Common shares of CounterPath		—		56		—		56
Total investment assets	$	6	$	56	$	—	$	62

	Fair Value (in thousands)		Valuation Technique	Significant Unobservable Input
As of December 29, 2013

Acquisition-related contingent consideration – Altior	$	7,741	Combination of income and marketable approach	Revenue and Probability of Achievement

Acquisition-related contingent consideration – Cadeka	$	4,620	Combination of income and marketable approach	Revenue and Probability of Achievement

	December 29, 2013
As of March 31, 2013	$	10,138
Less: Adjustment to purchase consideration		(2,397	)
As of December 29, 2013	$	7,741

	Amount
As of March 30, 2014	$	2,973
Fair value adjustment		(2,973	)
As of December 28, 2014	$	—

	December 29, 2013
As of March 31, 2013	$	—
Purchase contingent consideration		4,660
Less: Adjustment to purchase consideration		(40	)
As of December 29, 2013	$	4,620

	Amount
As of March 30, 2014	$	1,370
Fair value adjustment		(1,370	)
As of December 28, 2014	$	—

	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

	December 29, 2013		March 31, 2013		December 28, 2014		March 30, 2014
Cash and cash equivalents
Cash at financial institutions	$	7,109	$	9,676	$	52,616	$	9,978

Cash equivalents
Money market funds		13,961		5,042		6		4,636
Total cash and cash equivalents	$	21,070	$	14,718	$	52,622	$	14,614

Available-for-sale securities
U.S. government and agency securities	$	32,791	$	41,721	$	—	$	22,512
State and local government securities		2,798		2,935		—		2,772
Corporate bonds and securities		72,725		92,229		—		71,253
Asset-backed securities		30,354		30,966		—		27,635
Mortgage-backed securities		16,034		22,736		—		28,248
Total short-term marketable securities	$	154,702	$	190,587	$	—	$	152,420

	December 29, 2013
	Amortized Cost		Unrealized Gross Gains⁽¹⁾		Unrealized Gross Losses⁽¹⁾			Fair Value
Money market funds	$	13,961	$	—	$	—		$	13,961
U.S. government and agency securities		32,840		1		(50	)		32,791
State and local government securities		2,797		5		(4	)		2,798
Corporate bonds and securities		72,730		60		(65	)		72,725
Asset-backed securities		30,396		14		(56	)		30,354
Mortgage-backed securities		16,064		19		(49	)		16,034
Total investments	$	168,788	$	99	$	(224	)	$	168,663

	December 29, 2013															March 30, 2014
	Less than 12 months					12 months or greater					Total					Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government and agency securities	$	28,772	$	(50	)	$	—	$	—		$	28,772	$	(50	)	$	18,245	$	(39	)	$	—	$	—		$	18,245	$	(39	)
State and local government securities		1,516		(4	)		—		—			1,516		(4	)
Corporate bonds and securities		35,179		(65	)		—		—			35,179		(65	)		48,379		(87	)		596		(1	)		48,975		(88	)
Asset-backed securities		15,301		(25	)		3,467		(31	)		18,768		(56	)		7,118		(12	)		5,478		(36	)		12,596		(48	)
Mortgage-backed securities		8,249		(22	)		2,174		(27	)		10,423		(49	)		19,682		(120	)		983		(18	)		20,665		(138	)
Total	$	89,017	$	(166	)	$	5,641	$	(58	)	$	94,658	$	(224	)	$	93,424	$	(258	)	$	7,057	$	(55	)	$	100,481	$	(313	)

	December 29, 2013		March 31, 2013		December 28, 2014		March 30, 2014
Beginning balance	$	10,356	$	3,184	$	30,410	$	10,356
Goodwill additions		19,217		7,172		14,461		20,054
Ending balance	$	29,573	$	10,356	$	44,871	$	30,410

Amortization Expense (by fiscal year)	Amortization Expense (by fiscal year)			Amortization Expense (by fiscal year)
2014 (3 months remaining)		$	1,991
2015			6,039
2015 (3 months remaining)					$	3,206
2016			4,863			12,787
2017			3,449			12,819
2018			3,255			12,882
2019 and thereafter			6,186
2019						12,652
2020 and thereafter						28,674
Total future amortization		$	25,783		$	83,020

	December 28, 2014
	Three months ended		Nine months ended
CTBC	$	9	$	265
Stifel		—		646
Total interest on short-term debt	$	9	$	911

	December 29, 2013
	Beginning balance		Additions/ adjustments		Non-cash charges			Payments			Ending balance
Lease termination and other costs	$	2,860	$	158	$	(4	)	$	(1,581	)	$	1,433
Severance		426		1,353		—			(1,205	)		574
Balance atDecember 29, 2013	$	3,286	$	1,511	$	(4	)	$	(2,786	)	$	2,007