Note 3 - Business Combinations

3 Months Ended

Jun. 29, 2014

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

NOTE 3.    BUSINESS COMBINATIONS

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

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

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

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

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

Acquisition of Integrated Memory Logic

On June 3, 2014, we acquired approximately 92% of outstanding shares of  Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. 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 outstanding shares for $206.4 million in cash. We expect to pay an additional $17.9 million in cash in exchange for the remaining approximately 8% of outstanding shares, at which time iML will become a wholly owned subsidiary. When iML becomes a wholly owned subsidiary of Exar, it is anticipated that we will assume iML’s employee then outstanding options, preliminarily valued at approximately $3.3 million, and will be converted into an option to purchase a number of Exar’s common stock. The number of shares of Exar’s common stock, as well as the exercise price of the options will be determined based upon an agreed upon option exchange ratio outlined in the merger agreement by and between IML and Exar’s subsidiary, Image Sub Limited dated April 26, 2014. The option exchange ratio is calculated based upon (i) the ratio of the purchase price per share of iML’s stock and Exar’s stock price, and (ii) for those options denominated in Taiwanese dollars, the then currency exchange rates.

In accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations, the acquisition of approximately 92% of iML’s outstanding shares was recorded as a purchase business acquisition since iML was considered a business. Under the purchase method of accounting, the fair value of the consideration was allocated to net assets acquired. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return of 16.9%. The excess of the preliminary fair value of consideration paid over the preliminary fair values of net assets acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $14.6 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 total purchase consideration for iML will be approximately $227.6 million and will be comprised of the following items (in thousands):

Acquisition of approximately 68.3 million shares of iML at NT$91.00 per share in cash	$	206,411
Fair value of non-controlling interest shares		17,872
Fair value of iML employee options to be assumed		3,327
Total purchase price	$	227,610

Preliminary Purchase Price Allocation

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

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

	Amount
Identifiable tangible assets (liabilities)
Cash	$	133,752
Accounts receivable		10,096
Inventories		3,950
Other current assets		608
Property, plant and equipment		480
Other assets		308
Accrued expenses		(8,137	)
Accounts payable		(4,219	)
Long-term liabilities		(3,595	)
Total identifiable tangible assets (liabilities), net		133,243
Identifiable intangible assets		79,760
Total identifiable assets, net		213,003
Goodwill		14,607
Fair value of total consideration transferred	$	227,610

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

	Fair Value
Developed technologies	$	55,570
In-process research and development		8,040
Distributor relationships		5,980
Customer relationships		9,050
Trade names		1,120
Total identifiable intangible assets	$	79,760

In valuing specific components 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 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 first fiscal quarter of 2015 and were approximately $4.2 million.

Unaudited Pro Forma Financial Information

The following unaudited pro forma condensed financial information presents the combined revenue of Exar and iML as if the acquisition had occurred as of March 31, 2014 (in thousands).

	Three months ended June 29, 2014			Three months ended June 30, 2013
Net sales		41,286			49,177
Net loss	$	(7,675	)	$	(722	)
Less: Net loss attributable to non-controlling interests		(105	)		(122	)
Net loss attributable to Exar Corporation	$	(7,570	)	$	(600	)
Earnings per share
Basic	$	(0.16	)	$	(0.01	)
Diluted	$	(0.16	)	$	(0.01	)

The pro forma financial information includes (1) amortization charges from acquired intangible assets of $2.4 million for the three months ended June 29, 2014 and June 30, 2013, respectively; (2) amortization charges from inventory fair value adjustment of $1.5 million and $2.5 million for the three months ended June 29, 2014 and June 30, 2013, respectively; (3) the estimated stock-based compensation expense related to the stock options assumed of $0.2 million and $0.1 million for the three months ended June 29, 2014 and June 30, 2013, respectively; (4) the elimination of historical intangible assets of $92,000 for the three months ended June 29, 2014 and June 30, 2013, respectively; (5) the elimination of historical stock-based compensation charges recorded by iML of $0.2 million and $0.5 million for the three months ended June 29, 2014 and June 30, 2013, respectively, as a result of the cancellation of all outstanding options on the acquisition date; (6) the elimination of acquisition related costs of $8.2 million for the three months ended June 29, 2014; (7) the elimination of $1.8 million revenue and the related $0.9 million costs released from deferred margin for the three months ended June 29, 2014; (8) the elimination of $2.0 million revenue and the related $0.9 million costs released from the deferred margin for the three months ended June 30, 2013; and (9) the related tax provision of $0.2 million and $0.9 million for the three months ended June 29, 2014 and June 30, 2013, 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 Accounting Standard Codification (“ASC”) 805, Business Combinations, the total consideration paid for Stretch was first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition date. The excess of the fair value of the consideration paid over the fair value of Stretch’s net tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of $0.7 million primarily related to expected synergies to be achieved in connection with the acquisition. The goodwill is deductible over 15 years for tax purposes. The table below shows the allocation of the purchase price to tangible and intangible assets acquired and liabilities assumed (in thousands):

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

Acquisition of Cadeka

On July 5, 2013, we completed the acquisition of substantially all of the assets of Cadeka Technologies (Cayman) Holding Ltd., a privately held company organized under the laws of the Cayman Islands and all the outstanding stock of the subsidiaries of Cadeka, including the equity of its wholly owned subsidiary Cadeka Microcircuits, LLC, a Colorado limited liability company (“Cadeka”). With locations in Loveland, Colorado, Shenzhen and Wuxi, China, Cadeka designs, develops and markets high precision analog integrated circuits for use in industrial and high reliability applications. Cadeka’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our condensed consolidated financial statements beginning July 5, 2013. The pro forma effects of the portion of the Cadeka operations assumed through the transaction on our results of operations during fiscal 2014 were considered immaterial.

In accordance with ASC 805, Business Combinations, the total consideration paid for Cadeka was first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition date. The excess of the fair value of the consideration paid over the fair value of Cadeka’s net tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of $19.4 million primarily related 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.

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

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