-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TKMQ7oXnRI8aPkMxl/BVmMinxZBxsTC9XwsA92uybczXhaiDOoRACtYUftCzOw/Q 9vbGl0G8v64oWIgvC9ElUw== 0000912057-01-004612.txt : 20010213 0000912057-01-004612.hdr.sgml : 20010213 ACCESSION NUMBER: 0000912057-01-004612 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXAR CORP CENTRAL INDEX KEY: 0000753568 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 941741481 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14225 FILM NUMBER: 1533921 BUSINESS ADDRESS: STREET 1: 2222 QUME DR STREET 2: PO BOX 49007 CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 5106687000 MAIL ADDRESS: STREET 1: 48720 KATO RD CITY: FREMONT STATE: CA ZIP: 94538-1167 10-Q 1 a2038035z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______ Commission File No. 0-14225 EXAR CORPORATION (Exact Name of Registrant as specified in its charter) Delaware 94-1741481 - -------------------------------------------------------------------------------- (State or other jurisdiction of ( I.R.S. Employer incorporation or organization) Identification No.) 48720 Kato Road, Fremont, California 94538 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 668-7000 - -------------------------------------------------------------------------------- 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 X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 2001 - -------------------------------------------------------------------------------- Common Stock, .0001 par value 38,856,176 shares net of treasury shares TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements..................................... 3-5 Notes to Condensed Consolidated Financial Statements............................ 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 10-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 23 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................ 24 Signatures...................................................................... 24 EXHIBITS
2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EXAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
DECEMBER 31, MARCH 31, 2000 2000 (UNAUDITED) -------------- -------------- ASSETS CURRENT ASSETS: Cash and equivalents $ 362,903 $ 377,158 Short-term investments 37,896 3,000 Accounts receivable, net 16,911 11,550 Inventories 8,832 8,299 Prepaid expenses and other 4,032 3,012 Deferred income taxes 4,831 3,369 -------------- -------------- Total current assets 435,405 406,388 PROPERTY AND EQUIPMENT, Net 27,711 26,653 OTHER ASSETS 3,331 5,392 LONG-TERM INVESTMENTS 21,224 - -------------- -------------- TOTAL ASSETS $ 487,671 $ 438,433 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,117 $ 3,497 Accrued compensation and related benefits 7,685 7,060 Accrued sales commissions 1,611 1,096 Other accrued expenses 1,857 1,165 Income taxes payable 12,150 - -------------- -------------- Total current liabilities 28,420 12,818 -------------- -------------- LONG-TERM LIABILITIES 498 574 -------------- -------------- STOCKHOLDERS' EQUITY: Preferred stock; $.0001 par value; 2,250,000 shares authorized; no shares outstanding - - Common stock; $.0001 par value; 100,000,000 and 25,000,000 shares authorized; 38,672,870 and 37,158,363 shares outstanding 362,871 352,614 Accumulated other comprehensive income 255 188 Retained earnings 95,627 72,239 -------------- -------------- Total stockholders' equity 458,753 425,041 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 487,671 $ 438,433 ============== ==============
See notes to condensed consolidated financial statements 3 EXAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------- ------------- -------------- ------------- NET SALES $ 32,515 $ 20,708 $ 91,356 $ 55,509 COSTS AND EXPENSES: Cost of sales 12,993 8,947 37,385 24,409 Research and development 5,739 4,151 17,293 13,041 Selling, general and administrative 6,804 5,408 19,538 16,605 Goodwill amortization - 126 - 378 ------------- ------------- -------------- ------------- Total costs and expenses 25,536 18,632 74,216 54,433 ------------- ------------- -------------- ------------- OPERATING INCOME 6,979 2,076 17,140 1,076 OTHER INCOME (EXPENSE): Interest income, net 7,025 1,485 19,753 3,766 Gain on sale of investment - - - 7,003 Other, net 248 (62) 233 (6) ------------- ------------- -------------- ------------- Total other income, net 7,273 1,423 19,986 10,763 ------------- ------------- -------------- ------------- INCOME BEFORE INCOME TAXES 14,252 3,499 37,126 11,839 INCOME TAXES 5,273 1,124 13,737 3,788 ------------- ------------- -------------- ------------- NET INCOME $ 8,979 $ 2,375 $ 23,389 $ 8,051 ============= ============= ============== ============= NET INCOME PER SHARE: BASIC $ 0.23 $ 0.08 $ 0.62 $ 0.29 ============= ============= ============== ============= DILUTED $ 0.21 $ 0.07 $ 0.54 $ 0.26 ============= ============= ============== ============= SHARES USED IN COMPUTATION OF NET INCOME PER SHARE: BASIC 38,503 28,615 37,859 28,248 ============= ============= ============== ============= DILUTED 43,138 32,819 43,039 31,112 ============= ============= ============== =============
See notes to condensed consolidated financial statements. 4 EXAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
NINE MONTHS ENDED DECEMBER 31, 2000 1999 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,389 $ 8,051 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 2,904 2,999 Deferred income taxes 1,459 (294) Gain on sale of equipment - (474) Gain on sale of investment - (7,003) Changes in operating assets and liabilities: Accounts receivable (5,361) 482 Inventories (533) (1,841) Prepaid expenses and other (1,819) (172) Accounts payable 1,620 17 Accrued compensation and related benefits 625 2,804 Other accrued expenses 1,207 (331) Income taxes payable 12,150 2,144 ------------ ----------- Net cash provided by operating activities 35,641 6,382 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (3,971) (1,905) Proceeds from sale of equipment and leasehold improvements 9 548 Purchases of short-term investments (56,038) (21,340) Proceeds from maturities of short-term investments 21,142 3,710 Purchases of long-term investments (28,557) - Proceeds from maturities of long-term investments 7,450 - Proceeds from sale of investments - 13,080 Other assets (61) (344) ------------ ----------- Net cash used in investing activities (60,026) (6,251) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term liabilities (77) (104) Proceeds from issuance of common stock 10,257 8,442 Acquisition of common stock - (3,392) ------------ ----------- Net cash provided by financing activities 10,180 4,946 ------------ ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (50) (33) NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (14,255) 5,044 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 377,158 79,154 ------------ ----------- CASH AND EQUIVALENTS AT END OF PERIOD $ 362,903 $84,198 ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 218 $ 920 ============ =========== Cash paid for interest $ - $ 725 ============ ===========
See notes to condensed consolidated financial statements. 5 EXAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999 NOTE 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Exar Corporation and its wholly owned subsidiaries (collectively "Exar" or the "Company"). Such financial statements have been prepared in conformity with generally accepted accounting principles consistent with those reflected in the Company's 2000 annual report on Form 10-K, and include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows. The results of operations for the three months and nine months ended December 31, 2000 are not necessarily indicative of the results of operations to be expected for the full year. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these accompanying financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2000. Certain prior period amounts have been reclassified to conform to the current period presentation. Exar designs, develops and markets high-performance, high-bandwidth analog and mixed-signal silicon solutions for the worldwide communications infrastructure. The Company utilizes its high-speed, analog and mixed-signal design expertise, system-level knowledge and standard CMOS process technologies to offer integrated circuits, or ICs, for the communications markets that address transmission standards, such as T/E carrier, ATM and SONET/SDH. Additionally, Exar provides solutions for the serial communications markets as well as the video and imaging markets. For the nine months ended December 3, 2000, Exar's largest customers' included Alcatel, Cisco, Hewlett-Packard, Lucent, Nokia and Tellabs. NOTE 2. INVENTORIES Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31, 2000 2000 ------------- ------------- Work-in-process $ 4,911 $ 5,064 Finished goods 3,921 3,235 ------------- ------------- $ 8,832 $ 8,299 ============= =============
NOTE 3. GAIN ON SALE OF INVESTMENT The gain on investment of $7.0 million in the first quarter of fiscal 2000 was related to the Company's minority equity investment in IC Works, Inc. ("IC Works"), which had a net book value of $6.1 million. In April 1999, the Company received in excess of 1.1 million shares of common stock in Cypress Semiconductor, Inc. ("Cypress") in exchange for the Company's investment in IC Works due to the merger of Cypress and IC Works. The Company sold this stock at a fair market value of $13.1 million during the 6 first quarter of fiscal 2000 resulting in a pre-tax gain of $7.0 million in other income and a related employee benefits expense of $3.0 million in Costs and Expenses. NOTE 4. NET INCOME PER SHARE Statement of Financial Accounting Standards ("SFAS") No. 128 requires a dual presentation of basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is computed by dividing net income by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. All common share amounts for each period reported have been adjusted for the tow-for-one stock split effected October 19, 2000. A summary of the Company's EPS is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------- NET INCOME $ 8,979 $ 2,375 $ 23,389 $ 8,051 ============ ============ ============ ============= SHARES USED IN COMPUTATION: Weighted average common shares outstanding used in computation of basic net income per share 38,503 28,615 37,859 28,248 Dilutive effect of stock options 4,635 4,204 5,180 2,864 ------------ ------------ ------------ ------------- Shares used in computation of diluted net income per share 43,138 32,819 43,039 31,112 ============ ============ ============ ============= BASIC NET INCOME PER SHARE $ 0.23 $ 0.08 $ 0.62 $ 0.29 ============ ============ ============ ============= DILUTED NET INCOME PER SHARE $ 0.21 $ 0.07 $ 0.54 $ 0.26 ============ ============ ============ =============
Options to purchase 1,762,561 and 40,500 shares of common stock at prices ranging from $41.55 to $60.75 and $16.21 were outstanding as of December 31, 2000 and 1999, respectively, but not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares as of such dates and, therefore, would be anti-dilutive under the treasury stock method. 7 NOTE 5. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income," requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. For the three months and nine months ended December 31, 2000 and 1999, comprehensive income, which was comprised of the Company's net income for the periods, unrealized gain or loss on long-term investments and changes in cumulative translation adjustments is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ----------- ----------- ---------- ---------- NET INCOME $ 8,979 $ 2,375 $23,389 $ 8,051 ACCUMULATED OTHER COMPREHENSIVE INCOME: Cumulative translation adjustments (34) 25 (50) (33) Unrealized gain or loss on long-term investments 95 - 117 ----------- ----------- ---------- ---------- Total Other Comprehensive Income (Loss) 61 25 67 (33) COMPREHENSIVE INCOME $ 9,040 $ 2,400 $23,456 $ 8,018 =========== =========== ========== ==========
Accumulated other comprehensive income presented in the accompanying condensed consolidated balance sheets consists of the accumulated net unrealized gain (loss) on available-for-sale investments and foreign currency translation adjustments. NOTE 6. INDUSTRY AND SEGMENT INFORMATION In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that certain selected information about operating segments be reported in interim financial reports. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Under SFAS No. 131, the Company operates in one reportable segment and is engaged in the design, development and marketing of a variety of analog and mixed-signal application-specific integrated circuits for use in communications and in video and imaging products. The nature of the Company's products and production processes as well as type of customers and distribution methods are consistent among all of the Company's devices. The Company's foreign operations are conducted primarily through its wholly owned subsidiaries in Japan, the United Kingdom, France and Taiwan. The Company's principal markets include North America, Asia, and Europe. The following table sets forth net income by product line revenue:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ----------- ------------ Communications $ 24,636 $ 15,328 $ 68,900 $ 41,424 Video and Imaging 6,324 3,578 18,033 9,858 Other 1,555 1,802 4,423 4,227 ------------ ------------ ----------- ------------ $ 32,515 $ 20,708 $ 91,356 $ 55,509 ============ ============ =========== ============
8 Identifiable assets represent assets used in the Company's operations in each geographic area. Geographic financial information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ----------------------- ----------------- ----------------------- ------------------ Net sales: United States $ 22,273 $ 14,480 $ 62,900 $ 37,650 Export sales to Japan and Asia 5,801 2,986 14,952 8,989 Export sales to Western Europe 3,931 2,910 12,363 7,661 Export sales to rest of world 510 146 1,141 615 Japan - 186 - 594 ----------------------- ----------------- ----------------------- ------------------ $ 32,515 $ 20,708 $ 91,356 $ 55,509 ======================= ================== ======================= ==================
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ----------------------- ----------------- ----------------------- ------------------ Income (Loss) from operations: United States $ 7,391 $ 2,444 $ 18,386 $ 2,338 Japan (137) (133) (433) (395) Western Europe (275) (235) (813) (867) ----------------------- ----------------- ----------------------- ------------------ $ 6,979 $ 2,076 $ 17,140 $ 1,076 ======================= ================== ======================= ==================
AT DECEMBER 31, AT MARCH 31, 2000 2000 ----------------------- ----------------- Long-lived assets: United States $ 27,294 $ 26,621 Japan 270 526 Western Europe 456 402 ----------------------- ----------------- $ 28,020 $ 27,549 ======================= ==================
NOTE 7. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1999, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We do not believe the adoption of this statement has will have a material impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant of the SEC in administering the disclosure requirements of the Federal securities laws in applying generally accepted accounting principles to revenue recognition in financial statements. As amended by SAB 101, applications of the accounting and disclosures desired in the bulletin is required by the fourth quarter of fiscal 2001. Management does not believe that the adoption of SAB No. 101 will have a significant impact on our consolidated financial position, results of operations or cash flows. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AND WITH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THAT ARE INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2000 FOR EXAR CORPORATION. THIS QUARTERLY REPORT ON FORM 10-Q, AND IN PARTICULAR THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN THE "RISK FACTORS" DISCUSSED BELOW. ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS DUE TO SUCH RISKS AND UNCERTAINTIES. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS OR CHANGES IN FACTORS OR ASSUMPTIONS AFFECTING SUCH FORWARD-LOOKING ASSUMPTIONS. OVERVIEW We design, develop and market analog and mixed-signal ICs for the communications markets that address Wide Area Network ("WAN") transmission standards, such as T/E carrier, ATM and SONET/SDH. Additionally, we provide solutions for the serial communications markets as well as the video and imaging markets. Our primary customers are large communications OEMs. In 1997 we chose to refocus our business strategy and developmental efforts on the communications markets. At that time, our communications products represented 43.2% of our net sales. For the three months and nine months ended December 31, 2000, our communications product sales increased to 75.8% and 75.4%, respectively, of our net sales. Our international sales represented 31.5% and 31.2%, respectively, of our net sales for the three months and nine months ended December 31, 2000, compared to 30.1% and 32.2%, respectively, of net sales for the same period in fiscal 2000. Our international sales consist of export sales from the United States denominated in United States dollars. Such international operations give rise to exposures from changes in currency exchange rates due to the result of our foreign operating expenses being denominated in foreign currency. We have adopted a set of practices to minimize our foreign currency risk, which include the occasional use of foreign currency exchange contracts to hedge operating results from our foreign subsidiaries. Although foreign sales may be subject to tariffs in certain countries or with regard to certain products, our profit margin on international sales of ICs, adjusted for differences in product mix, is not significantly different from that realized on our sales to domestic customers. We recognize revenue from the sale of products when shipped to customers and distributors. Our distributor agreements generally permit the return of up to 10% of their purchases annually for purposes of stock-rotation and also provide for credits to distributors in the event that we reduce the price of any product. We record an allowance at the time revenue is recognized based on authorized and historical patterns of returns, price protection and other concessions. Our gross margins vary depending on product mix, competition, the volume of products manufactured and sold, our suppliers' ability to achieve certain manufacturing efficiencies and the cost of materials procured from our suppliers. Our newer analog and mixed-signal products, especially our communications products, generally have higher gross margins than our more mature products, and margins of any particular product may erode over time. 10 RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage relationship to net sales of certain cost, expense and income items. The table and subsequent discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------- ---------- ------------- ---------- Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 40.0 43.2 40.9 44.0 ------------- ---------- ------------- ---------- Gross profit 60.0 56.8 59.1 56.0 Research and development 17.7 20.0 18.9 23.5 Selling, general and administrative 20.9 26.1 21.4 29.9 Goodwill amortization - 0.6 - 0.7 ------------- ---------- ------------- ---------- Operating income (loss) 21.4 10.1 18.8 1.9 Other income, net 22.4 6.9 21.9 19.4 ------------- ---------- ------------- ---------- Income before income taxes 43.8 17.0 40.7 21.3 Income taxes 16.2 5.4 15.0 6.8 ------------- ---------- ------------- ---------- Net income 27.6 % 11.6 % 25.7 % 14.5 % ============= ========== ============= ==========
PRODUCT LINE SALES AS A PERCENTAGE OF NET SALES The following table sets forth product line revenue information as a percentage of net sales. The table and subsequent discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 --------- --------- --------- --------- Communications 75.8% 74.0% 75.4% 74.6% Video and Imaging 19.4% 17.3% 19.8% 17.8% Other 4.8% 8.7% 4.8% 7.6% --------- --------- --------- --------- 100.0% 100.0% 100.0% 100.0%
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1999 NET SALES. Net sales for the three months ended December 31, 2000 were $32.5 million compared to $20.7 million for the three months ended December 31, 1999, an increase of 57.0%. This increase was primarily due to an increase in the revenue composition of communications products, which increased 60.7% or $9.3 million when compared to the corresponding period in fiscal 2000. Net sales for the nine months ended December 31, 2000 were $91.4 million compared to $55.5 million for the nine months ended December 31, 1999. Fueling this increase was the continued growth in sales of our communications products, which increased 66.3% or $27.5 million when compared to the corresponding period in fiscal 2000. Communications products represented 75.8% and 75.4%, respectively, of our net sales for the three months 11 and nine months ended December 31, 2000. This continued growth in communications product sales resulted primarily from market acceptance and previous design wins going into production of our transmission products. Design wins in the reference period would not have significant revenue contribution. For the three months ended December 31, 2000, sales to domestic customers increased by 53.8% to $22.3 million and international sales increased by 64.5% to $10.2 million. For the nine months ended December 31, 2000, sales to domestic customers increased by 67.1% to $62.9 million and international sales increased by 59.3% to $28.5 million. For the three months ended December 31, 2000 we have experienced a slow-down in on quarter-on-quarter revenue growth due to what we believe are inventory channel adjustments. Additionally, the Company experienced bookings for future revenue at a lower rate than current shipments. COST OF SALES. Cost of sales as a percentage of net sales for the three months ended December 31, 2000 decreased to 40.0% compared to 43.2% for the corresponding period in fiscal 2000. For the nine months ended December 31, 2000, cost of sales as a percentage of net sales decreased to 40.9% compared to 44.0% for the corresponding period in fiscal 2000. The resulting increase in gross margins is related to the shift in product to higher margin products resulting from the growth in communications revenue, primarily from transmission product sales. Gross margins from sales of ICs vary depending on product mix, price competition, the volume of products manufactured and sold, the ability of our suppliers to achieve certain manufacturing efficiencies and the cost of materials procured from our suppliers. Margins on any particular product may erode over time. RESEARCH AND DEVELOPMENT. Research and development expenses for the three months ended December 31, 2000 represented 17.7% of net sales compared to 20.0% of net sales for the corresponding period in fiscal 2000, an increase of 38.3%. Research and development expenses for the nine months ended December 31, 2000 represented 18.9% of net sales compared to 23.5% of net sales for the corresponding period in fiscal 2000, resulting in a 32.6% spending increase generated by our continued investment in the development of our communications products. Our increased spending in research and development included the addition of staff in the communications product line area coupled with increases in expenditures for supplies, services and equipment used in the development activities of communications products. A decrease in benefits expenses related to a pre-tax gain recognized in Other Income in the first quarter of fiscal 2000 (see Other Income below) partially offset these increases in the first quarter of fiscal 2001. In the future, we expect to continue to increase spending on research and development activities, particularly for communications products. We expect research and development expenses to continue to fluctuate as a percentage of net sales as a result of the timing of expenditures and changes in the level of net sales. However, we intend to spend approximately 20% of net sales on research and development activities to support our growth. We do not intend to increase funding of development efforts relating to our video and imaging products, and as a result, we expect that revenues from these products will decline in future periods as a percentage of net sales. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the three months ended December 31, 2000 represented 20.9% of net sales compared to 26.1% of net sales for the corresponding period in fiscal 2000, an increase of 25.8%. Selling, general and administrative expenses for the nine months ended December 31, 2000 represented 21.4% of net sales compared 29.9% of net sales in the corresponding period in fiscal 2000, an increase of 9.0%. This spending increase was due to growth in our communications product sales and increases in employee compensation. A decrease in benefits expenses related to a pre-tax gain recognized in Other Income in the first quarter of fiscal 2000 (see Other Income below) partially offset these increases in the first quarter of fiscal 2001. In the short-term, many of the selling, general, and administrative expenses are fixed, causing a decline as a percentage of net sales in 12 periods of rapidly rising sales and an increase as a percentage of net sales when sales growth is slower or declining. OTHER INCOME. Other income for the three months and nine months ended December 31, 2000 includes interest income of $7.0 million and $19.8 million, respectively, compared to $1.5 million and $3.8 million for the three months and nine months ended December 31, 1999, respectively. The increase in other income was the result of increased cash and equivalents, short-term investment and long-term investment balances resulting from $260.8 million in net proceeds received from the public sale of 6,900,000 common shares in March 2000. Other income for the nine months ended December 31, 1999 includes a pre-tax $7.0 million gain on the sale of our minority equity investment in IC Works. In April 1999, we received approximately 1.1 million shares of common stock in Cypress Semiconductor, Inc. in exchange for our investment in IC Works due to the merger of Cypress Semiconductor and IC Works. We sold the majority of this stock during the three months ended June 30, 1999, resulting in a pre-tax gain of $7.0 million in other income and related employee compensation and benefits expense of $3.0 million. PROVISION FOR INCOME TAXES. The effective tax rate for the three months and nine months ended December 31, 2000 was approximately 37% compared with the federal statutory rate of 35%. The difference is due to non-deductible expenses, state income taxes and foreign income, which is taxed at rates different from U.S. income, partially offset by utilization of capital loss carry-forwards and tax savings generated from our foreign sales corporation. NET INCOME PER BASIC AND DILUTED SHARE. The increase in basic and diluted net income per share for the three months and nine months ended December 31, 2000 compared to the corresponding periods in fiscal 2000 is due to the increased net income for the period partially offset by the increase in the weighted average common shares outstanding primarily resulting from the public sale of 6,900,000 common shares in March 2000. To date, inflation has not had a significant impact on our operating results. LIQUIDITY AND CAPITAL RESOURCES During the three months and nine months ended December 31, 2000, our operations were financed primarily with cash flows from operations in conjunction with existing cash. At December 31, 2000, total cash, equivalents and both short-term and long-term investments, was approximately $422.0 million, comprised of $362.9 million of cash and equivalents, $37.9 million of short-term investments and $21.2 million of long-term investments. We have a credit facility agreement with a domestic bank under which we may execute up to $15.0 million in foreign currency transactions. At December 31, 2000, we had no foreign currency contracts outstanding. For the nine months ended December 31, 2000, we generated $35.6 million of cash from our operating activities, the result of net income of $23.4 million, a net increase in working capital of $7.9 million and non-cash items of $4.4 million. Net capital and other asset expenditures for the nine months ended December 31, 2000 totaled $4.0 million, including purchases of computer equipment and software used for product development. Other investing activities for the nine months ended December 31, 2000 included purchases of $56.0 million of short-term investments and $28.6 million of long-term investments offset by proceeds of $21.1 from maturities of short-term investments and $7.5 from maturities of long-term investments. During the nine months ended December 31, 2000, we received $10.3 million from the issuance of 1,514,507 common shares upon the exercise of stock options under our stock option plans. 13 We have no material firm capital commitments. We anticipate that we will continue to finance our operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capital will be determined by management based on needs and prevailing market conditions. We believe that our cash and cash equivalents, short-term investments, long-term investments and cash flows from operations will be sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months. From time to time, we evaluate potential acquisitions and equity investments complementary to our design expertise and market strategy, including investments in wafer fabrication foundries. To the extent that we pursue or position ourselves to pursue these transactions, we could choose to seek additional equity or debt financing. There can be no assurance that additional financing could be obtained on terms acceptable to us. The sale of additional equity or convertible debt could result in dilution to our stockholders. RISK FACTORS THIS 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS ABOUT FUTURE PLANS, OBJECTIVES, INTENTIONS AND EXPECTATIONS. MANY FACTORS, INCLUDING THOSE DESCRIBED BELOW, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN ANY FORWARD-LOOKING STATEMENT. OUR OPERATING RESULTS MAY FLUCTUATE BECAUSE OF A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL. Our operating results may fluctuate significantly. Some of the factors that affect our quarterly and annual results, many of which are difficult to control or predict, are: - the reduction, rescheduling or cancellation of orders by customers; - fluctuations in the timing and amount of customer requests for product shipments; - fluctuations in the manufacturing output, yields and inventory levels of our suppliers; - changes in the mix of products that our customers purchase; - our ability to introduce new products on a timely basis; - the announcement or introduction of products by our competitors; - the availability of external foundry capacity and raw materials; - competitive pressures on selling prices; - the amounts and timing of costs associated with warranties and product returns; - the amounts and timing of investments in research and development; - market acceptance of our products; - costs associated with acquisitions and the integration of acquired operations; 14 - the ability of our customers to obtain components from their other suppliers and customers; - general conditions in the communications and semiconductor industries; - fluctuations in interest rates; - inventory build-up in channel; and - general economic conditions. OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND OUR SUCCESS, THEREFORE, DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS. The markets for our products are characterized by: - rapidly changing technologies; - evolving and competing industry standards; - changing customer needs; - frequent new product introductions and enhancements; - increased integration with other functions; and - rapid product obsolescence. To develop new products for our target markets we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. In addition, we must have our products designed into our customers' future products and maintain close working relationships with key customers in order to develop new products that meet our customers changing needs. In addition, products for communications applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. We may not be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins or respond effectively to new technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. Failure in any of these areas could harm our operating results. WE MAY FAIL TO ATTRACT OR RETAIN KEY PERSONNEL. Our future success depends, in part, on the continued service of our key design engineering, sales, marketing and executive personnel and our ability to identify, hire and retain additional personnel. 15 We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our Company. There is intense competition, particularly in Silicon Valley, where our headquarters are located, for qualified personnel in the semiconductor industry, in particular the highly skilled design, process, software application support, and test engineers involved in the development of new communications ICs. Our anticipated growth is expected to place increased demands on our resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Loss of the services of, or failure to recruit key design engineers or other technical and management personnel, could harm our business. WE DEPEND ON THIRD-PARTY FOUNDRIES TO MANUFACTURE OUR ICS. We do not own or operate a semiconductor fabrication facility. A single foundry manufactures the majority of our products. Two foundries manufacture our products based on CMOS processes, and one foundry manufactures all of our BiCMOS products. Most of our products are based on CMOS processes. We do not have long-term wafer supply agreements with our CMOS foundries that guarantee wafer or product quantities, prices, or delivery lead times, and our CMOS foundries manufacture our products on a purchase order basis. We may not be able to maintain strong relationships with our foundries. In addition, we cannot be certain that we will continue to do business with our foundries on terms as favorable as our current terms. Other significant risks associated with our reliance on outside foundries include: - the lack of assured semiconductor wafer supply and control over delivery schedules; - the unavailability of, or delays in obtaining access to, key process technologies; - limited control over quality assurance, manufacturing yields and production costs; and - potential misappropriation of our intellectual property. We do not have a guaranteed level of production capacity at either of our CMOS foundries. We provide these foundries with rolling forecasts of our production requirements; however, the ability of each foundry to provide wafers to us is limited by the foundry's available capacity. Therefore, our CMOS foundries could choose to prioritize capacity for other customers or reduce or eliminate deliveries to us on short notice. Accordingly, these foundries may not allocate sufficient capacity to satisfy our requirements. WE COULD EXPERIENCE A SUBSTANTIAL DELAY OR INTERRUPTION IN THE SHIPMENT OF OUR PRODUCTS OR AN INCREASE IN OUR COSTS DUE TO THE FOLLOWING: - a sudden demand for an increased amount of semiconductor devices; - a manufacturing disruption, due to a natural disaster or other factors, experienced by one or more of our foundries or sudden reduction or elimination of any existing source or sources of semiconductor devices; - the need to find or qualify alternative manufacturing sources for an existing or new product; or - failure of our suppliers to obtain the raw materials and equipment used in the production of our ICs. 16 TO SECURE FOUNDRY CAPACITY, WE MAY BE REQUIRED TO ENTER INTO FINANCIAL AND OTHER ARRANGEMENTS WITH FOUNDRIES, AND SUCH AGREEMENTS MAY RESULT IN THE DILUTION OF OUR EARNINGS OR OF THE OWNERSHIP OF OUR STOCKHOLDERS. A customer's size or the existence of a long-term agreement with the foundry may influence allocation of a foundry's manufacturing capacity. To address foundry capacity constraints, we and other semiconductor companies that rely on third-party foundries have utilized various arrangements, including equity investments in or loans to foundries, in exchange for guaranteed production capacity, joint ventures to own and operate foundries, or "take or pay" contracts that commit a company to purchase specified quantities of components over extended periods. While we are not currently a party to any of these arrangements, we may decide to enter into such arrangements in the future. We cannot be sure, however, that these arrangements will be available on acceptable terms or at all. Any of these arrangements could require that we commit substantial capital. The need to commit substantial capital could require that we obtain additional debt or equity financing, which could result in the dilution of our earnings or the ownership of our stockholders, or otherwise harm our operating results. IF OUR FOUNDRIES DISCONTINUE THE MANUFACTURING PROCESSES NEEDED TO MEET OUR DEMANDS, OR FAIL TO UPGRADE THE TECHNOLOGIES NEEDED TO MANUFACTURE OUR PRODUCTS, WE MAY FACE PRODUCTION DELAYS. Our wafer and product requirements typically represent a small portion of the total production of the foundries that manufacture our products. As a result, we are subject to the risk that a foundry will cease production on an older or lower-volume process that it uses to produce our devices. Additionally our foundries may not continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products is based. Each of these events could increase our costs and negatively impact our ability to deliver products on time. THE MARKETS IN WHICH WE PARTICIPATE ARE INTENSELY COMPETITIVE. Our target markets are intensely competitive. Our ability to compete successfully in these target markets depends on the following factors: - designing new products that implement new technologies; - sub-contracting the manufacture of new products and delivering them in a timely manner; - product quality and reliability; - customer support; - time-to-market; - product performance; - price; - end-user acceptance of our customers' products; and - market acceptance of competitors' products. In addition, our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace or 17 provide lower-cost or higher-performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable. In addition, our competitors and customers may introduce products that integrate the functions performed by our ICs on a single IC, thus eliminating the need for our products. Because the IC markets are highly fragmented, we generally encounter different competitors in our various market areas. Competitors with respect to our communications products include Conexant Systems, PMC-Sierra, Inc. and TranSwitch Corporation. In addition, the expansion of our communications product portfolio may, in the future, bring us into competition with other established communications IC companies, such as Applied MicroCircuits Corporation and Vitesse Semiconductor Corporation. Competitors in our other markets include Analog Devices, Philips Semiconductor and Texas Instruments. Many of our competitors have greater financial, technical and management resources than we have. Some of these competitors may be able to sell their products at prices that are below those at which it would be financially feasible to sell our products. IF WE FAIL TO FURTHER PENETRATE THE MARKETS FOR COMMUNICATIONS ICS OR IF THESE MARKETS FAIL TO GROW AS EXPECTED, OUR REVENUES COULD STOP GROWING AND MAY DECLINE. A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales of communications ICs, particularly products based on the T1/E1, T3/E3 and ATM transmission standards. To be successful, we must continue to penetrate these markets. Furthermore, if these markets fail to grow as expected our revenues could stop growing and may decline. WE EXPECT THAT REVENUES CURRENTLY DERIVED FROM NON-COMMUNICATIONS PRODUCTS WILL DECLINE IN FUTURE PERIODS, AND OUR BUSINESS WILL BE HARMED IF OUR COMMUNICATIONS PRODUCTS FAIL TO MAKE UP FOR THIS DECLINE. We do not intend to increase funding of development efforts relating to our serial communications and video and imaging products, and as a result, we expect that revenues from these products will decline in future periods. In addition, the markets for these products are subject to extreme price competition and we may not be able to reduce our costs in response to declining average selling prices. Even if we reduce costs, our customers in these markets may not purchase these products. Moreover, these markets may decrease in size in the future. If our communications products fail to make up for any revenue shortfall, our business may be harmed. OUR DEPENDENCE ON THIRD-PARTY SUB-CONTRACTORS TO ASSEMBLE AND TEST OUR PRODUCTS INCREASES THE RISK THAT WE WILL NOT HAVE AN ADEQUATE SUPPLY OF PRODUCTS TO MEET DEMAND OR THAT OUR COST OF MATERIALS WILL BE HIGHER THAN EXPECTED. We depend on independent sub-contractors for the assembly and testing of our products. Such reliance on these sub-contractors involves the following significant risks: - reduced control over delivery schedules and quality; - the potential lack of adequate capacity during periods of increasing demand; - difficulties selecting, qualifying and integrating new sub-contractors; - limited warranties on products supplied to us; - potential increases in prices due to capacity shortages and other factors; and 18 - potential misappropriation of our intellectual property. These risks may lead to increased costs or delayed product delivery, which would harm our profitability and customer relationships. OUR RELIANCE UPON FOREIGN SUPPLIERS EXPOSES US TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. We use semiconductor assembly and test sub-contractors throughout Asia for most of our products, and we intend to continue utilizing testing and shipping operations of offshore subcontractors. Our dependence on these subcontractors involves the following substantial risks: - political and economic instability; - disruption of transportation to/from Asia; - embargo affecting the availability of raw materials, equipment or services; - changes in tax laws, tariffs and freight rates; and - compliance with local or foreign regulatory requirements. These risks may lead to increased costs or delayed product delivery, which would harm our profitability and customer relationships. OUR RELIANCE ON FOREIGN CUSTOMERS COULD CAUSE FLUCTUATIONS IN OPERATING RESULTS. International sales accounted for 31.5% and 31.2% of our net sales for the three months and nine months ended December 31, 2000, respectively, compared to 30.1% and 32.2% of net sales for the three months and nine months ended December 31, 1999, respectively. Our reliance on foreign customers could cause our operating results to fluctuate due to the following factors: - changes in regulatory requirements; - tariffs and other barriers; - timing and availability of export licenses; - political and economic instability; - difficulties in accounts receivable collections; - difficulties in staffing and managing foreign subsidiary and branch operations; - difficulties in managing distributors; - difficulties in obtaining governmental approvals for communications and other products; - limited intellectual property protection; - foreign currency exchange fluctuations; 19 - the burden of complying with and the risk of violating a wide variety of complex foreign laws and treaties; and - potentially adverse tax consequences. In addition, because sales of our products have been denominated, to date, primarily in United States dollars, increases in the value of the United States Dollar could increase the relative price of our products so that they become more expensive to customers in the local currency of a particular country. Future international activity may result in increased foreign currency denominated sales which could have a negative impact on margins. Furthermore, because some of our customer purchase orders and agreements that are governed by foreign laws, we may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded. WE RELY ON OUR DISTRIBUTORS AND SALES REPRESENTATIVES TO SELL MANY OF OUR PRODUCTS. We sell many of our products through distributors and sales representatives. Such distributors and sales representatives could reduce or discontinue sales of our products. Distributors and sales representatives may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives. If some or all of these distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business could be harmed. BECAUSE OUR COMMUNICATIONS ICS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND DEVELOPMENT AND THE GENERATION OF SALES REVENUE. Due to the communications IC product cycle, it usually takes more than 12 months for us to realize volume shipments of our communications ICs after we first contact a customer. We commence by working with our customers to achieve a design win, which may take nine months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period which typically lasts an additional three months or longer. As a result, a significant period of time may elapse between our research and development and sales efforts and the realization of revenue, if any, from volume purchasing of our communications products by our customers. OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE. Due to possible customer-driven changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period or the failure of our backlog to result in future revenue could harm our business. OUR OPERATING EXPENSES ARE RELATIVELY FIXED, AND MATERIALS MAY BE ORDERED IN ADVANCE OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, WE MAY HAVE LIMITED ABILITY TO REDUCE EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE SHORTFALLS. We may experience revenue shortfalls due to the following reasons: 20 - significant pricing pressures that occur because of declines in average selling prices over the life of a product; - sudden shortages of raw materials or fabrication, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers and, in turn, harm our ability to meet sales obligations; and - the reduction, rescheduling or cancellation of customer orders. In addition, we typically plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we may order materials in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. PERIODS OF RAPID GROWTH AND EXPANSION COULD CONTINUE TO PLACE A SIGNIFICANT STRAIN ON OUR LIMITED PERSONNEL AND OTHER RESOURCES. To manage our possible future growth effectively, we will be required to continue to improve our operational, financial, and management systems and to successfully hire, train, motivate and manage our employees. In addition, the integration of past and future potential acquisitions and the evolution of our business plan will require significant additional management, technical and administrative resources. We cannot be certain that we will be able to manage the growth and evolution of our current business effectively. WE HAVE, IN THE PAST AND MAY IN THE FUTURE, MAKE ACQUISITIONS, WHICH WILL INVOLVE NUMEROUS RISKS. WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO ADDRESS THESE RISKS SUCCESSFULLY WITHOUT SUBSTANTIAL EXPENSE, DELAY OR OTHER OPERATIONAL OR FINANCIAL PROBLEMS. The risks involved with acquisitions include: - diversion of management's attention; - failure to retain key personnel; - amortization of acquired intangible assets; - customer dissatisfaction or performance problems with an acquired company; - the cost associated with acquisitions and the integration of acquired operations; and - assumption of unknown liabilities, or other unanticipated events or circumstances. We may not be able to address these risks successfully without substantial expense, delay, or other operational or financial problems. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY ADEQUATELY. Our ability to compete is affected by our ability to protect our proprietary information. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secret laws, confidentiality 21 procedures and non-disclosure and licensing arrangements to protect our intellectual property. Despite these efforts, we cannot be certain that the steps taken to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure you that our pending patent applications or any future applications will be approved, or that any issued patents will provide us a competitive advantage or will not be challenged by third parties, or that if challenged, will be found to be valid or enforceable, or that the patents of others will not 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 HARMED BY LITIGATION INVOLVING PATENTS AND PROPRIETARY RIGHTS. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We may be accused of infringing the intellectual property rights of third parties. Furthermore, we have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products. We cannot be certain that infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not harm our business. Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or which we settle, would, at a minimum, be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all. EARTHQUAKES AND OTHER NATURAL DISASTERS MAY DAMAGE OUR FACILITY OR THOSE OF OUR SUPPLIERS. Our corporate headquarters in Fremont, California are located near major earthquake faults, which have experienced earthquakes in the past. In addition, some of our suppliers are located near areas with seismic activity. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed. Similarly, a major earthquake or other natural disaster near one or more of our major suppliers, like the one that occurred in Taiwan in September 1999, could disrupt the operations of those suppliers, which could limit the supply of our products and harm our business. OUR STOCK PRICE IS VOLATILE. The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in: - our anticipated or actual operating results; - announcements or introductions of new products; - technological innovations or setbacks by us or our competitors; - conditions in the communication and semiconductor markets; 22 - the commencement of litigation; - changes in estimates of our performance by securities analysts; - announcements of merger or acquisition transactions; and - general economic and market conditions. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies, and that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions may harm the price of our common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY FLUCTUATIONS. We are exposed to foreign currency fluctuations primarily through our foreign operations. This exposure is the result of the foreign operating expenses being denominated in foreign currency. Operational currency requirements are typically forecasted for a three-month period. If there is a need to hedge this risk, we will enter into transactions to purchase currency in the open market; or enter into forward currency exchange contracts which are currently available under our bank lines of credit. While it is expected that this method of hedging foreign currency risk will be utilized in the future, the hedging methodology and/or usage may be changed to manage exposure to foreign currency fluctuations. If our foreign operations forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. For the three months and nine months ended December 31, 2000, we did not have significant foreign currency denominated net assets or net liabilities positions, and had no foreign currency contracts outstanding. INTEREST RATE SENSITIVITY. We maintain investment portfolio holdings of various issuers, types, and maturity dates with various banks and investment banking institutions. The market value of these investments on any given day during the investment term may vary as a result of market interest rate fluctuations. This exposure is not hedged because a hypothetical 10% movement in interest rates during the investment term would not likely have a material impact on investment income. The actual impact on investment income in the future may differ materially from this analysis, depending on actual balances and changes in the timing and the amount of interest rate movements. Both short-term and long-term investments are classified as "available-for-sale" securities and the cost of securities sold is based on the specific identification method. At December 31, 2000, short-term investments consisted of auction rate securities, government and corporate securities of $37.9 million and long-term investments consisted of government and corporate securities of $22.2 million. At December 31, 2000, the difference between the fair market value and the underlying cost of such investments was attributable to the unrealized gain of $117,000. 23 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description of Document -------------- ----------------------- 10.1 Executive Employment Agreement between Exar Corporation and Donald L. Ciffone, Jr. 10.2 Letter Agreement Regarding Change of Control for each of the following: Frank P. Carrubba, Raimon L. Conlisk, James E. Dykes, Richard Previte, Donald L. Ciffone, Jr., Michael J. Class, Roubik Gregorian, Ronald W. Guire, Susan J. Hardman, Thomas W. Jones, Thomas R. Melendrez, Stephen W. Michael, John Sramek.
(b) During the quarter for which this report is filed, the Registrant filed no reports on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXAR CORPORATION By /s/ DONALD L. CIFFONE, JR. Date: February 12, 2001 ------------------------------------------ Donald L. Ciffone, Jr. President Chief Executive Officer By /s/ RONALD W. GUIRE Date: February 12, 2001 ------------------------------------------ Ronald W. Guire Executive Vice President, Chief Financial Officer, Secretary 24 EXHIBIT INDEX
Exhibit - ------- 10.1 Executive Employment Agreement between Exar Corporation and Donald L. Ciffone, Jr. 10.2 Letter Agreement Regarding Change of Control for each of the following: Frank P. Carrubba, Raimon L. Conlisk, James E. Dykes, Richard Previte, Donald L. Ciffone, Jr., Michael J. Class, Roubik Gregorian, Ronald W. Guire, Susan J. Hardman, Thomas W. Jones, Thomas R. Melendrez, Stephen W. Michael, John Sramek.
25 EX-10.1 2 a2038035zex-10_1.txt EX-10.1 EXHIBIT 10.1 EXECUTIVE EMPLOYMENT AGREEMENT This EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the _____ day of December, 2000 (the "Effective Date"), by and between EXAR CORPORATION, a Delaware corporation (the "Company"), and DONALD L. CIFFONE, JR. ("Executive"). WHEREAS, the Company desires to continue to employ Executive to provide executive management services to the Company and wishes to provide Executive with certain compensation and benefits in return for Executive's continued services; and WHEREAS, Executive wishes to continue to be employed by the Company and provide executive management services to the Company in return for certain compensation and benefits; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the parties hereto as follows: ARTICLE 1 DEFINITIONS For purposes of the Agreement, the following terms are defined as follows: 1.1 "BOARD" means the Board of Directors of the Company. 1.2 "CAUSE" means misconduct, including: (i) conviction of any felony or any crime involving moral turpitude or dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful breach of the Company's policies; (iv) intentional damage to the Company's property; (v) a material breach of the Proprietary Rights and Nondisclosure Agreement dated October 21, 1996, between the Company and Executive; or (vi) conduct which in the good faith and reasonable determination of the Board demonstrates unacceptable job performance or unfitness to serve. Physical or mental disability shall not constitute "Cause." 1.3 "CHANGE OF CONTROL" means (i) a merger or consolidation in which the Company is not the surviving corporation; (ii) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; (iv) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, excluding in each case a capital reorganization in which the sole purpose is to change the state of incorporation of the Company, and in each case Executive is not offered a similar executive level position with the surviving entity. 1.4 "CHANGE OF CONTROL PLAN" means the Exar Corporation Executive Officers' Change of Control Severance Benefit Plan, adopted effective as of June 24, 1999 by the Company for the benefit of certain of its eligible executive employees. 1.5 "CODE" means the Internal Revenue Code of 1986, as amended. 1. 1.6 "COMMON STOCK" means the common stock of the Company. 1.7 "COMPANY" means Exar Corporation, a Delaware corporation, or, following a Change of Control, the surviving entity resulting from such transaction. 1.8 "CONSULTING AGREEMENT" means the Consulting Agreement entered into by and between the Company and Executive, substantially in the form attached hereto as Exhibit A. Service under the Consulting Agreement shall commence as of the termination of Executive's employment with the Company, provided that such termination is not for Cause, and further provided that such termination is not covered by Section 4.2 hereof. 1.9 "EXECUTIVE INCENTIVE PROGRAM" means the Executive Incentive Compensation Program maintained by the Company for the benefit of its eligible executive employees. 1.10 "FISCAL YEAR" means the twelve (12) month period ending on each March 31. 1.11 "GOOD REASON" means any one of the following events which occurs within thirteen (13) months after the effective date of a Change of Control: (i) any reduction of Executive's rate of total compensation (including base salary and stock options); (ii) any material reduction in the package of welfare benefit plans, taken as a whole, provided to Executive (except that the terms of benefits, including without limitation employee contributions, may be changed to the extent required by third party providers) or any action by the Company that would materially adversely affect Executive's participation or materially reduce Executive's benefits under any of such plans; (iii) any material change in Executive's responsibilities, duties, authority, title, reporting relationship or offices resulting in any diminution of position (including, but not limited to, a change of responsibility from company-wide responsibility to division-level responsibility); (iv) request that Executive relocate to a worksite that is both more than thirty-five (35) miles from Executive's prior worksite and more than thirty-five (35) miles from Executive's personal residence (as of the Effective Date), unless Executive accepts such relocation opportunity; (v) failure or refusal of a successor to the Company to assume the Company's obligations under this Agreement; or (vii) material breach by the Company or any successor to the Company of any of the material provisions of this Agreement. ARTICLE 2 EMPLOYMENT BY THE COMPANY 2.1 POSITION AND DUTIES. Subject to the terms set forth herein, the Company agrees to continue to employ Executive in the position of President and Chief Executive Officer, and Executive hereby accepts such employment. Executive shall serve in an executive capacity, shall continue to perform such duties as are customarily associated with the position of President and Chief Executive Officer and such other duties as are assigned to Executive by the Board, and shall report solely and directly to the Board. During the term of this Agreement, Executive shall devote his best efforts and substantially all of his business time and attention (except for vacation periods as set forth herein and reasonable periods of illness or other incapacities permitted by the Company's general employment policies or as otherwise set forth in this Agreement) solely to the business of the Company. 2. 2.2 TERM. The term of this Agreement shall commence on the Effective Date and shall continue until the earlier of (i) the termination of Executive's employment with the Company or (ii) March 31, 2004. Within a reasonable period of time prior to September 30, 2003, provided that Executive's employment has not then terminated, Executive and the Company shall commence negotiations in order to determine, no later than September 30, 2003, whether to renew this Agreement immediately following its scheduled termination date on March 31, 2004 or to continue Executive's employment without a written agreement; PROVIDED, HOWEVER, that a failure to renew this Agreement shall in no way prevent either the continuation of this Agreement through March 31, 2004 or the continuation of the employment relationship beyond such date without a written agreement. Executive's service under the Consulting Agreement shall commence as of the termination of Executive's employment with the Company, provided that his employment is not terminated for Cause, and further provided that such termination is not covered by either Section 4.1 or 4.2 hereof. 2.3 EMPLOYMENT AT WILL. Executive's employment is at will, and both the Company and Executive shall have the right to terminate, with written notice, Executive's employment with the Company at any time, and for any reason, with or without Cause. If Executive's employment with the Company is terminated, Executive shall be eligible to receive severance benefits only to the extent provided in Article 4 of this Agreement. 2.4 EMPLOYMENT POLICIES. The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company, including those relating to protection of confidential information and assignment of inventions, except that to the extent that the terms of this Agreement differ from or are in conflict with the Company's general employment policies or practices, this Agreement shall control. ARTICLE 3 COMPENSATION 3.1 BASE SALARY. Executive shall receive for continued employment with the Company, during the term of this Agreement, a base salary at an annual (July 1 - June 30) rate of six hundred fifteen thousand dollars ($615,000), payable in equal installments on the regular payroll dates of the Company, which payroll dates shall occur at least twice monthly, subject to applicable tax withholding. Such base salary (the "Annual Base Salary") shall be subject to increase as determined by the Board during the annual focal review period. 3.2 INCENTIVE COMPENSATION PAYMENT. During the term of this Agreement, Executive shall be eligible to receive an annual target incentive compensation payment for each Fiscal Year, beginning with the Fiscal Year ending March 31, 2002, and continuing through and including the Fiscal Year ending March 31, 2004, the amount of which incentive compensation payment shall be determined pursuant to the terms and conditions of the Company's Executive Incentive Program based on a target award percentage equal to seventy-five percent (75%). 3.3 STOCK OPTION GRANT. The Board shall grant to Executive (i) on the Effective Date an option to purchase three hundred thousand (300,000) shares of Common Stock with an exercise price to be determined by the Board equal to the fair market value of Common Stock on 3. the Effective Date, which option shall vest on each monthly anniversary date of the Effective Date as to 1/36 of the shares of Common Stock, and (ii) on each April 1 following the Effective Date, beginning with April 1, 2001, and continuing through and including April 1, 2003, an option to purchase one hundred thousand (100,000) shares of Common Stock with an exercise price to be determined by the Board equal to the fair market value of Common Stock on the relevant April 1, which option shall vest on each monthly anniversary date of the relevant April 1 as to 1/36 of the shares of Common Stock subject to the option. Grants pursuant to the preceding clause (ii) shall be subject to appropriate adjustment in the event of a change to the Company's Common Stock without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transactions not involving the receipt of consideration by the Company). Options granted pursuant to this Section 3.3 shall be granted under, and shall be subject to the terms of, the Company's 2000 Equity Incentive Plan and Executive's Stock Option Agreement thereunder. 3.4 PROFESSIONAL SERVICES. The Company shall, during the term of this Agreement, reimburse Executive in an amount not to exceed ten thousand dollars ($10,000) per Fiscal Year for documented costs incurred by Executive for obtaining professional services, including, but not limited to, legal, tax planning, accounting and investment services. 3.5 STANDARD COMPANY BENEFITS. During the term of this Agreement, Executive shall be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits and compensation practices that may be in effect from time to time and are provided by the Company to its executive employees generally, including health, disability, life and accidental death insurance coverage. In addition, Executive shall be entitled to receive the following benefits during the term of this Agreement: (a) the Company shall provide Executive with four (4) weeks' paid vacation for each Fiscal Year (plus paid holidays), which Executive may take in accordance with the Company's standard policy regarding vacation time; (b) the Company shall provide Executive with life insurance coverage pursuant to a term life insurance policy in an amount equal to one million dollars ($1,000,000). (c) the Company shall provide Executive with a monthly automobile allowance equal to three thousand dollars ($3,000); and (d) the Company, pursuant to the terms and conditions of the Company's Executive Health Plan, shall reimburse Executive up to ten thousand dollars ($10,000) for each Fiscal Year for the documented cost of covered medical expenses, without the need for any contribution by Executive. 3.6 EMPLOYMENT BEYOND TERMINATION DATE OF THIS AGREEMENT. Sections 3.4 and 3.5 shall continue to apply to Executive for so long as he is employed by the Company, whether or not pursuant to this Agreement. 4. ARTICLE 4 SEVERANCE AND CHANGE OF CONTROL BENEFITS 4.1 SEVERANCE BENEFITS FOR CERTAIN TERMINATIONS WITHOUT REGARD TO CHANGE OF CONTROL. If Executive's employment is terminated by the Company without Cause during the term of this Agreement and prior to the effective date of a Change of Control, Executive shall, within thirty (30) days following the date on which the Release described in Section 4.3 becomes effective in accordance with its terms, receive the following severance benefits: (i) a lump sum payment equal to the sum of Executive's Annual Base Salary as in effect during the last regularly scheduled payroll period immediately preceding the termination of Executive's employment plus an additional amount equal to (A) if Executive's employment is terminated prior to October 1, the greater of the incentive compensation payment actually paid to Executive under the Executive Incentive Program for the last Fiscal Year ending with or prior to the termination date of Executive's employment or the target incentive compensation payment for such last Fiscal Year, or (B) if Executive's employment is terminated on or after October 1, the greater of the target incentive compensation payment that Executive could become entitled to receive under the Executive Incentive Program for the Fiscal Year in which Executive's employment is terminated or the incentive compensation payment actually paid to Executive under the Executive Incentive Program for the last Fiscal Year ending with or prior to the termination date of Executive's employment, such lump sum payment to be subject to applicable tax withholding; and (ii) Executive shall be credited with twelve (12) months of additional vesting under all unvested outstanding options to purchase Common Stock then held by Executive, and all options held by Executive shall be exercisable for up to fifteen (15) months following the termination of Executive's employment. For purposes of clause (ii) in the preceding sentence, Executive shall receive the option vesting credit and continued option exercisability therein provided only if Executive has executed the Consulting Agreement, and in the event of termination of the Consulting Agreement for any reason, such vesting credit shall cease and continued option exercisability shall be determined solely in accordance with the terms of grant of the then outstanding vested options. 4.2 SEVERANCE BENEFITS FOR CERTAIN TERMINATIONS WITHIN THIRTEEN (13) MONTHS FOLLOWING CHANGE OF CONTROL. (a) SEVERANCE BENEFITS. If Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, in either case within thirteen (13) months following the effective date of a Change of Control and during the term of this Agreement, Executive shall, within thirty (30) days following the date on which the Release described in Section 4.3 becomes effective in accordance with its terms, receive the following severance benefits: (i) a lump sum payment equal to two (2) times the sum of Executive's Annual Base Salary as in effect during the last regularly scheduled payroll period immediately preceding the termination date of Executive's employment plus an additional amount equal to (A) if Executive's employment is terminated prior to October 1, the greater of the incentive compensation payment actually paid to Executive under the Executive Incentive Program for the last Fiscal Year ending with or prior to the termination date of Executive's employment or the target incentive compensation payment for such last Fiscal Year, or (B) if Executive's employment is terminated on or after October 1, the greater of the target incentive compensation 5. payment that Executive could become entitled to receive under the Executive Incentive Program for the Fiscal Year in which Executive's employment is terminated or the incentive compensation payment actually paid to Executive under the Executive Incentive Program for the last Fiscal Year ending with or prior to the termination date of Executive's employment, such lump sum payment to be subject to applicable tax withholding; and (ii) the vesting and exercisability of all unvested outstanding options to purchase Common Stock then held by Executive shall be fully accelerated. (b) TAX GROSS-UP PAYMENT. In the event it shall be determined, either by the Company or by a final determination of the Internal Revenue Service, that any payment, distribution or benefit by or from the Company to or for the benefit of Executive pursuant to Section 4.2(a) or otherwise (the "Payment") would cause Executive to become subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Company shall pay to or for the benefit of Executive, within the later of ninety (90) days of the termination date of Executive's employment or ninety (90) days of the date of determination referred to above, an additional amount (the "Gross-Up Payment") in an amount that shall fund the payment by Executive of any Excise Tax on the Payment, as well as any income taxes imposed on the Gross-Up Payment, any Excise Tax imposed on the Gross-Up Payment and any interest or penalties imposed with respect to taxes on the Gross-Up Payment or any Excise Tax. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal, state and local income taxes at the highest nominal marginal rate of such federal, state and local income taxation in the calendar year in which the Gross-Up Payment is due, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account to determine the amount of the Gross-Up Payment, then Executive shall repay to the Company at that time the portion of the Gross-Up Payment attributable to such reduction (plus an amount equal to any tax reduction, whether of the Excise Tax, any applicable income tax, or any applicable employment tax, which Executive has received as a result of such initial repayment). In the event that the Excise Tax is subsequently determined, whether by the Company or by a final determination of the Internal Revenue Service, to be more than the amount taken into account to determine the amount of the Gross-Up Payment, then the Company shall pay to Executive an additional amount, which shall be determined using the same methods as were used for calculating the Gross-Up Payment, with respect to such excess. For purposes of this Section 4(b), a determination of the Internal Revenue Service as to the amount of Excise Tax for which an Executive is liable shall not be treated as final until the time that either (i) the Company agrees to acquiesce to the determination of the Internal Revenue Service or (ii) the determination of the Internal Revenue Service has been upheld in a court of competent jurisdiction and the Company decides not to appeal such judicial decision or such decision is not appealable. If the Company chooses to contest the determination of the Internal Revenue Service, then all costs, attorneys' fees, charges assessed and other expenses shall be borne and paid when due by the Company. 4.3 RELEASE. Upon the occurrence of a termination that would entitle Executive to receive severance benefits pursuant to Sections 4.1 or 4.2 that are conditioned upon the execution of an effective release, and prior to the receipt of such severance benefits, Executive shall execute a release (the "Release") in the form attached hereto as Exhibit B or Exhibit C, as appropriate. Such Release shall specifically relate to all of Executive's rights and claims in 6. existence at the time of such execution and shall confirm Executive's obligations under the Company's standard form of proprietary information agreement. It is understood that Executive has a certain period to consider whether to execute such Release, and Executive may revoke such Release within seven (7) days after execution. In the event Executive does not execute such Release within the applicable period, or if Executive revokes such Release within the subsequent seven (7) day period, none of the aforesaid benefits shall be payable under this Agreement. 4.4 MITIGATION. Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or otherwise. 4.5 OTHER TERMINATIONS. Only terminations of employment described in the foregoing provisions of this Article 4 shall entitle Executive to severance benefits pursuant to the terms of this Agreement. Accordingly, terminations for any reason not so described (such as, without limitation, on account of Executive's disability or death) shall not entitle Executive to such severance benefits; PROVIDED, HOWEVER, that the provisions of this Article 4 shall continue to apply to Executive with respect to terminations of employment with the Company described in Sections 4.1 and 4.2 even if, at the time of such termination, Executive is not employed pursuant to this Agreement. ARTICLE 5 OUTSIDE ACTIVITIES During the term of Executive's employment by the Company and continuing through the term of the Consulting Agreement, except on behalf of the Company, Executive shall not directly or indirectly, whether as an officer, director, employee, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever that was known by Executive to compete directly with the Company, throughout the world, in any line of business engaged in (or planned to be engaged in) by the Company. Notwithstanding the foregoing, Executive may own, as a passive investor, securities of any competitor corporation, so long as Executive's direct holdings in any one such corporation shall not in the aggregate constitute more than 1% of the voting stock of such corporation. In addition, Executive may, with approval of the Board, serve as a director on the boards of directors of other corporations and business entities so long as such corporations or business entities do not compete directly with the Company, in any area of the world, in any line of business engaged in (or planned to be engaged in) by the Company, and so long as such service does not materially interfere with the performance of Executive's duties hereunder. Executive also may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of Executive's duties hereunder. 7. ARTICLE 6 NONINTERFERENCE While employed by the Company, and for one (1) year immediately following the date on which Executive terminates employment or otherwise ceases providing services to the Company, Executive agrees not to interfere with the business of the Company by soliciting or attempting to solicit any employee of the Company to terminate such employee's employment in order to become an employee of or a consultant or independent contractor to or for any person, corporation, firm, partnership or other entity whatsoever. Executive's duties under this Article 6 shall survive termination of Executive's employment with the Company and the termination of this Agreement. ARTICLE 7 GENERAL PROVISIONS 7.1 NOTICES. Subject to the remaining provisions of this Section 7.1, any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by telex) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at Executive's address as listed on the Company payroll. Any termination by the Company, whether or not for Cause, or by Executive for Good Reason, shall be communicated by a Notice of Termination to the other party hereto given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, if to the Executive, then to Executive at his address as set forth in the Company's records, and, if to the Company, to Exar Corporation, 48720 Kato Road, Fremont, California 94538 Attention: Law Department. For purposes of this Agreement, a Notice of Termination means a written notice which (i) indicates the specific termination provision in the Agreement relied upon and (ii) if the termination date of Executive's employment is other than the date of receipt of such notice, specifies such termination date (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by the Company or Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or of Good Reason shall not waive any right of the Company or of Executive, respectively, or preclude the Company or Executive, respectively, from asserting such fact or circumstance in enforcing its or his rights under this Agreement. 7.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 7.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they shall not thereby be deemed to have waived any preceding or succeeding 8. breach of the same or any other provision of this Agreement, unless such waiver is agreed to in writing by both parties. 7.4 COMPLETE AGREEMENT. As of the Effective Date, this Agreement wholly supersedes and renders without further force or effect the letters dated September 9, 1996 and September 10, 1996 from the Company to Executive (which letters set forth, respectively, the terms of Executive's employment by the Company and Executive's severance benefits following either a Change of Control or the termination of his employment without cause), the Change of Control Plan, to the extent that it may apply to Executive, and all other agreements relating to compensation and benefits between the Company and Executive, constitutes the entire agreement between Executive and the Company and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. This Agreement is entered into without reliance on any promise or representation other than those expressly contained herein or therein, and it cannot be modified or amended except in a writing signed by Executive and by an officer of the Company. 7.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 7.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 7.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that (i) Executive may not assign any of Executive's duties hereunder and Executive may not assign any of Executive's rights hereunder, without the written consent of the Company, which shall not be withheld unreasonably and (ii) the Company may assign its rights and duties hereunder only to a parent or subsidiary of the Company or to a corporation or other entity that will become the Company's successor in interest due to a merger, consolidation, acquisition or similar transaction. 7.8 ARBITRATION. Unless otherwise prohibited by law or specified below, all disputes, claims and causes of action, in law or equity, arising from or relating to this Agreement or its enforcement, performance, breach, or interpretation shall be resolved solely and exclusively by final and binding arbitration held in Santa Clara County, California through Judicial Arbitration & Mediation Services/Endispute ("JAMS") under the then existing JAMS arbitration rules. However, nothing in this section is intended to prevent either party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Each party in any such arbitration shall be responsible for its own attorneys' fees, costs and necessary disbursement; PROVIDED, HOWEVER, that if one party refuses to arbitrate and the other party seeks to compel arbitration by court order, if such other party prevails, it shall be entitled to recover reasonable attorneys' fees, costs and necessary disbursements. Pursuant to California Civil Code Section 1717, each party warrants that it was represented by counsel in the negotiation and execution of this Agreement, including the attorneys' fees provision herein. 9. 7.9 ATTORNEYS' FEES. If either party hereto brings any action to enforce rights hereunder, each party in any such action shall be responsible for its own attorneys' fees and costs incurred in connection with such action. 7.10 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California without regard to its principles of conflicts of law. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. EXAR CORPORATION By: ----------------------- Date: ---------------------- ACCEPTED AND AGREED THIS _____ DAY OF DECEMBER, 2000 - ---------------------------- DONALD L. CIFFONE, JR. Exhibit A: Consulting Agreement Exhibit B: Release (Individual Termination) Exhibit C: Release (Group Termination) 10. EXHIBIT A CONSULTING AGREEMENT This CONSULTING AGREEMENT (the "Agreement") is made as of the ____ day of __________, 200_, by and between EXAR CORPORATION, including its affiliates and wholly owned subsidiaries, a Delaware corporation, with its principal place of business at 48720 Kato Road, Fremont, California 94538 (the "Company"), and DONALD L. CIFFONE, JR., an individual residing at _____________________________________________________ (the "Consultant"). FOR AND IN CONSIDERATION of the mutual promises and conditions set forth below, the Company and Consultant agree as follows: 1. SERVICES The Company agrees to retain Consultant for the term specified in Section 2 to render services to the Company in the field of Consultant's expertise for the purpose of providing executive management services. Consultant shall exercise his best skill and judgment in performing such services under this Agreement. 2. TERM The Effective Date of this Agreement shall be the date on which Consultant's employment with the Company is terminated pursuant to the Executive Employment Agreement entered into as of December 6, 2000 between the Company and Executive (the "Employment Agreement"); provided, however, that the Effective Date shall not occur and this Agreement shall have no force or effect in the event that Consultant's employment with the Company is terminated by the Company for Cause, as such term is defined in the Employment Agreement, or on account of Consultant's death or disability. Consultant's service under this Agreement shall continue until the one (1) year anniversary of the Effective Date, unless terminated earlier as provided in Section 5, although the parties hereto may agree in writing to extend the term of Consultant's service under this Agreement. Consultant's commencement and continuation of service under this Agreement shall constitute continuous service with the Company for purposes of continued vesting and exercisability of any outstanding Company stock options or Company restricted stock held by Consultant as of the Effective Date. 3. CONSULTING FEES The Company will pay Consultant consulting fees in an amount equal to one thousand dollars ($1,000) per month during the term of this Agreement, payable within thirty (30) days of the Company's receipt from Consultant of an invoice for the relevant month, which invoice shall be in a form acceptable to the Company. Payment to Consultant shall be mailed to his address, as listed in Section 10. 1. 4. RELATIONSHIP Consultant's relationship with the Company during the term of this Agreement is that of an independent contractor, and nothing stated or implied herein shall be construed to make Consultant an employee (common law or otherwise) of the Company (or any affiliated company) within the meaning or application of any national or state unemployment insurance law, old age benefit law, workmen's compensation or industrial accident law, or other industrial or labor law, any tax law, or any employee benefit plan maintained by the Company. Consultant hereby acknowledges his status as an independent contractor, and not as an employee (common law or otherwise), of the Company during the term of this Agreement. Consultant hereby waives, during the term of this Agreement, any claim for benefits or rights extended to employees of the Company to the extent that such benefits or rights are not provided to Consultant under this Agreement. While Consultant shall control the detail, manner, and method of performing the services to be rendered, it is understood that all services performed under this Agreement shall be subject to inspection by and approval of the Company. 5. TERMINATION (a) Either party may, at its option, terminate this Agreement if the other party: (i) defaults in the performance of a material obligation hereunder, provided such default has not been corrected within thirty (30) days after receipt of notice describing such default; (ii) becomes a party to any proceeding involving his or its bankruptcy or other insolvency; or (iii) ceases to be actively engaged in business or financially incapable of fulfilling its obligations under this Agreement. (b) Nothing contained herein shall limit any other remedies that either party may have for the default of the other party under this Agreement. 6. CONFIDENTIALITY The nature of the work performed and any information belonging to the Company or any third party with which Consultant may become familiar will be treated as confidential and may not be disclosed without the written consent of the Company, except as provided herein. Consultant agrees to keep in strictest confidence all information relating to the business affairs of the Company which may be acquired in connection with or as a result of this Agreement. During the term of this Agreement and at any time thereafter, without the prior written consent of the Company, Consultant will not publish, communicate, divulge, disclose or use any of such information which has been designated as secret, confidential or proprietary, or from the surrounding circumstances of which ought to be treated as secret or confidential. 7. NON-SOLICITATION/HIRE During the term of this Agreement, and for one (1) year following the date on which Consultant's services under this Agreement are terminated, Consultant agrees not to interfere with the business of the Company by soliciting or attempting to solicit any employee of the Company to terminate such employee's employment in order to become an employee of or a 2. consultant or independent contractor to or for any person, corporation, firm, partnership or other entity whatsoever. Consultant's duties under this Section 7 shall survive termination of Consultant's services for the Company and the termination of this Agreement. 8. NONCOMPETE During the term of this Agreement, except on behalf of the Company, Consultant shall not directly or indirectly, whether as an officer, director, employee, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever that was known by Consultant to compete directly with the Company, throughout the world, in any line of business engaged in (or planned to be engaged in) by the Company. Notwithstanding the previous sentence, Consultant may own, as a passive investor, securities of any competitor corporation, so long as Consultant's direct holdings in any one such corporation shall not in the aggregate constitute more than 1% of the voting stock of such corporation. In addition, Consultant may, with approval of the Board of Directors of the Company, serve as a director on the boards of directors of other corporations and business entities so long as such corporations or business entities do not compete directly with the Company, in any area of the world, in any line of business engaged in (or planned to be engaged in) by the Company, and so long as such service does not materially interfere with the performance of Consultant's duties hereunder. 9. TAXES Consultant shall be solely responsible for the payment, wherever payable, of any income taxes or other taxes, contributions or insurance premiums that pertain to the compensation received hereunder. 10. NOTICES Any notice or other communication required to be given under the terms of this Agreement shall be deemed to have been given upon personal delivery or upon the lapse of three (3) days following deposit for delivery by certified or registered United States mail, postage fully prepaid and addressed to the party at the Company's or Consultant's respective address as shown herein (or at such other address to which one party gives the other by the same means of notice). Notice and payment to Consultant shall be sent to the following address: ------------------------- ------------------------- ------------------------- ------------------------- 3. Notice to the Company shall be sent to the following address: EXAR CORPORATION 48720 Kato Road Fremont, California 94538 Attn: Legal Department 11. GENERAL (a) This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings between them relating to the subject matter hereunder (with the exception of the Employment Agreement, certain provisions of which, by their terms, may continue in effect during the term of this Agreement), and no modification of this Agreement shall be binding on either party unless it is in writing and signed by both parties. (b) The rights and obligations of the parties to this Agreement shall be governed by and construed in accordance with the laws of the State of California. The parties hereto subject themselves to the jurisdiction of the state and federal courts of the State of California residing within the County of Alameda with respect to any dispute, disagreement or claim arising hereunder, and agree that any such dispute, disagreement or claim shall be exclusively resolved by such California state or federal court. (c) The prevailing party in any legal, arbitration or dispute resolution action brought by one party against the other regarding the performance, interpretation, enforcement or with respect to any matter arising out of or in connection with this Agreement shall be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses incurred thereby, including court costs and reasonable attorneys' fees. (d) Neither party shall assign this Agreement or any rights hereunder without the prior written consent of the other. Subject to this restriction, this Agreement shall benefit and bind the successors and assigns of the parties. The parties hereto have caused this Agreement to be executed as of the date first above written. EXAR CORPORATION DONALD L. CIFFONE, JR. By: By: ------------------------- ----------------------------- Title: Title: ------------------------- ----------------------------- Date: Date: ------------------------- ----------------------------- 4. EXHIBIT B RELEASE (INDIVIDUAL TERMINATION) Certain capitalized terms used in this Release are defined in the Executive Employment Agreement (the "Agreement") which I have executed and of which this Release is a part. I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. Except as otherwise set forth in this Release, in consideration of benefits I will receive under the Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company or any claim to severance benefits pursuant to the terms of the Agreement), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date I execute this Release, including, but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including, but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Employee Retirement Income Security Act of 1974, as amended; the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; statutory law; common law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; PROVIDED, HOWEVER, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to the Company's indemnification obligation pursuant to agreement or applicable law. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given under the Agreement for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been 1. advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Release; (B) I have the right to consult with an attorney prior to executing this Release; (C) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following my execution of this Release to revoke the Release; and (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth (8th) day after this Release is executed by me. DONALD L. CIFFONE, JR. ----------------------------- Date: ----------------------- 2. EXHIBIT C RELEASE (GROUP TERMINATION) Certain capitalized terms used in this Release are defined in the Executive Employment Agreement (the "Agreement") which I have executed and of which this Release is a part. I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. Except as otherwise set forth in this Release, in consideration of benefits I will receive under the Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company or any claim to severance benefits pursuant to the terms of the Agreement), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date I execute this Release, including, but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including, but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Employee Retirement Income Security Act of 1974, as amended; the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; statutory law; common law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; PROVIDED, HOWEVER, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to the Company's indemnification obligation pursuant to agreement or applicable law. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given under the Agreement for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been 1. advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Release; (B) I have the right to consult with an attorney prior to executing this Release; (C) I have forty-five (45) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following my execution of this Release to revoke the Release; (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day (8th) after this Release is executed by me; and (F) I have received with this Release a detailed list of the job titles and ages of all employees who were terminated in this group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated. DONALD L. CIFFONE, JR. -------------------------------- Date: -------------------------- 2. EX-10.2 3 a2038035zex-10_2.txt EX-10.2 EXHIBIT 10.2 [Date] [Name] [Title] Exar Corporation 48720 Kato Road Fremont, CA 94538 Dear [First Name]: This letter agreement (the "Agreement") between you and Exar Corporation (the "Company") is made with respect to each of the outstanding stock options granted to you by the Company under any of its stock option plans (each an "Option," and collectively, the "Options"), including each Option that is held by you as of the date of this Agreement and any Option that may be granted to you by the Company after such date. 1. The term of this Agreement will commence on the date hereof and continue until the latest date on which any of your Options expire under the terms of the stock option agreements pursuant to which such Options were granted. 2. For purposes of this Agreement, the following definitions shall apply: (i) "Cause" mean: (A) conviction of any felony or conviction of any crime involving moral turpitude or dishonesty; (B) participation in a fraud or act of dishonesty against the Company; (C) conduct by which, based upon a good faith and reasonable factual investigation and determination by the Company, demonstrates gross incompetence; or (D) intentional, material violation of any contract between you and the Company or any statutory duty to the Company that is not corrected within thirty (30) days after written notice to you thereof. Physical or mental disability shall not constitute "Cause." (ii) "Change of Control" means (1) a merger or consolidation in which the Company is not the surviving corporation; (2) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (3) any other capital reorganization, in each case in which the stockholders of the Company immediately prior to the closing of such transaction beneficially own less than fifty percent (50%) of the voting power of the acquiring entity. 1. (iii) "Restriction Period" means the continuous period of time during which you are, in connection with a Change in Control and as a result of state or federal securities laws or "pooling of interests" accounting rules applicable to a Change of Control, restricted from selling, transferring or otherwise disposing of stock of the Company. 3. If your employment or service with the Company is terminated during a Restriction Period for any reason other than Cause or your death, and such Restriction Period ends after the latest date on which, under the terms of the stock option agreements pursuant to which your Options were granted, you may exercise any of your Options, then the total exercise price of the Options that are not exercisable after the last day of the Restriction Period, or any portion of such purchase price, shall, at your election, be payable with a Promissory Note substantially in the form set forth in Exhibit A. The Promissory Note shall also include the amount of any state or Federal taxes payable by you on Options exercised pursuant to such Promissory Note, provided that such payment of taxes is due on or before the last day of the Restriction Period. Except to the extent prohibited by state or federal securities laws or "pooling of interests" accounting rules, shares purchased pursuant to such Promissory Note shall be subject to a pledge substantially in the form of the Pledge Agreement set forth in Exhibit B. If required, the Pledge Agreement shall be modified or eliminated entirely, as agreed by the parties, in order to comply with such laws and rules. The outstanding principal amount of the Promissory Note shall be payable in full no later than three (3) months after the date on which the Restriction Period ends, or on such earlier date(s) as agreed upon between you and the Company, together with interest accrued from the date of the Promissory Note on the unpaid principal at a rate equal to the lower of (i) the short-term applicable Federal rate in effect on the date of the Promissory Note, or (ii) the return earned by the Company on its cash investments for the fiscal year ending with or prior to the date of the Promissory Note. 4. You represent that you have not entered into any agreements, understandings, or arrangements with any other person or entity that would be breached by you as a result of, or that would in any way preclude or prohibit you from entering into this Agreement, the Promissory Note and the Pledge Agreement. 5. Any successor to the Company as a result of the occurrence of a Change of Control shall assume the obligations under this Agreement to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets that assumes the obligation of this Agreement or that becomes bound by the obligations of this Agreement by operation of law, and this Agreement shall be binding upon any such successor. 6. The terms of this Agreement and all of your rights hereunder shall inure to the benefit of, and be enforceable by, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees or legatees. 2. 7. This Agreement, including any Exhibits thereto, constitutes the sole agreement of the parties and supersedes all negotiations and prior agreements with respect to the subject matter hereof. 8. Any term of this Agreement may be amended or waived only with the written consent of the parties. 9. Any notice required or permitted by this Agreement will be in writing and will be deemed sufficient upon receipt, when delivered personally, by facsimile or by a nationally-recognized delivery service (such as Federal Express or Express Mail), or 72 hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. 10. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws. Please indicate your agreement with the above terms by signing below. Sincerely, Exar Corporation Ronald W. Guire Executive Vice President Chief Financial Officer Address: 48720 Kato Road Fremont, CA 94538 Fax No.: 510 668-7002 Agreed and Accepted: ----------------------------------------------------- [Name] Date: -------------------------------------------- Address: -------------------------------------------- -------------------------------------------- Fax No.: -------------------------------------------- 3. EXHIBIT A PROMISSORY NOTE $______________ [City and State] [Date] FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay in full on _______________ to the order of Exar Corporation, a Delaware corporation (the "Company"), at 48720 Kato Road, Fremont, California, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of _______________ Dollars ($_______________) together with interest accrued (and compounded annually) from the date hereof on the unpaid principal at the rate of _____% per annum. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company, and is subject to all of the terms and provisions of the Stock Pledge Agreement of even date herewith between the undersigned and the Company; PROVIDED, HOWEVER, that the obligation of the undersigned to make payments of principal, interest and all other amounts pursuant to this Note shall be with full recourse against the undersigned. The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. 1. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws. Signed ---------------------------------- 2. EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT ("Pledge Agreement") is made by ______________________________ ("Pledgor"), in favor of Exar Corporation, a Delaware corporation with its principal place of business at 48720 Kato Road, Fremont, California ("Pledgee"). WHEREAS, Pledgor has concurrently herewith executed that certain Promissory Note (the "Note") in favor of Pledgee in the amount of _______________ Dollars ($_______________) in payment of the purchase price of _______________ (_______________) shares of the Common Stock of Pledgee; and WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only upon the condition, among others, that Pledgor shall have executed and delivered to Pledgee this Pledge Agreement and the Collateral (as defined below): NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Pledgor hereby agrees as follows: 1. As security for the full, prompt and complete payment and performance when due (whether by stated maturity, by acceleration or otherwise) of all indebtedness of Pledgor to Pledgee created under the Note (all such indebtedness being the "Liabilities"), together with, without limitation, the prompt payment of all expenses, including, without limitation, reasonable attorneys' fees and legal expenses, incidental to the collection of the Liabilities and the enforcement or protection of Pledgee's lien in and to the collateral pledged hereunder, Pledgor hereby pledges to Pledgee, and grants to Pledgee, a first priority security interest in all of the following (collectively, the "Pledged Collateral"): (a) _______________ (_______________) shares of Common Stock of Pledgee represented by Certificates numbered _______________ (the "Pledged Shares"), and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) all voting trust certificates held by Pledgor evidencing the right to vote any Pledged Shares subject to any voting trust; and (c) all additional shares and voting trust certificates from time to time acquired by Pledgor in any manner (which additional shares shall be deemed to be part of the Pledged Shares), and the certificates representing such additional shares, and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such shares. 1. The term "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and Liabilities heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether recovery upon such indebtedness may be or hereafter becomes unenforceable. 2. At any time, without notice, and at the expense of Pledgor, Pledgee in its name or in the name of its nominee or of Pledgor may, but shall not be obligated to: (1) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said Pledged Collateral; (2) enter into any extension, reorganization, deposit, merger or consolidation agreement, or any agreement in any wise relating to or affecting the Pledged Collateral, and in connection therewith may deposit or surrender control of such Pledged Collateral thereunder, accept other property in exchange for such Pledged Collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such Pledged Collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (3) insure, process and preserve the Pledged Collateral; (4) cause the Pledged Collateral to be transferred to its name or to the name of its nominee; (5) exercise as to such Pledged Collateral all the rights, powers and remedies of an owner, except that so long as no default exists under the Note or hereunder Pledgor shall retain all voting rights as to the Pledged Shares. 3. Pledgor agrees to pay prior to delinquency all taxes, charges, liens and assessments against the Pledged Collateral, and upon the failure of Pledgor to do so, Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. 4. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of Pledgor shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (1) failure to keep or perform any of the terms or provisions of this Pledge Agreement; (2) failure to pay any installment of principal or interest on the Note when due; (3) the levy of any attachment, execution or other process against the Pledged Collateral; or (4) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11 of the United States Code of, by, or against Pledgor. 5. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding section, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the Pledged Collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is at private sale, then the purchase price of the Pledged Collateral shall be equal to the public 2. market price then in effect, or, if at the time of sale no public market for the Pledged Collateral exists, then, in recognition of the fact that the sale of the Pledged Collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and Pledgor hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and Pledgor or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by Pledgor within ten (10) days after written request by the Pledgee to do so, one named by Pledgee within such 10-day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within thirty (30) days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all Pledged Collateral so sold and hold the same thereafter in its own right free from any claim of Pledgor or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any officer or agent of Pledgee may conduct any sale hereunder. 6. The proceeds of the sale of any of the Pledged Collateral and all sums received or collected by Pledgee from or on account of such Pledged Collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or delivery of the Pledged Collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall then pay any balance to Pledgor. 7. Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the Pledged Collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such Pledged Collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such Pledged Collateral so transferred; but with respect to any Pledged Collateral not so transferred Pledgee shall retain all rights and powers hereby given. 8. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Pledgor may have ceased. 9. Pledgee agrees that so long as no default exists under the Note or hereunder, the Pledged Shares shall, upon request of Pledgor, be released from the pledge (i) as the indebtedness is paid at the rate of one share for each ($_________) of principal amount of indebtedness paid, or (ii) prior to the payment of the indebtedness for the purpose of effecting a sale of Pledged Shares by Pledgor, provided that such sale shall occur immediately following such release, and the proceeds of such sale shall be paid to Pledgee in an amount equal to the lesser of the full proceeds of such sale or the Liabilities. 3. 10. Pledgee may at any time deliver the Pledged Collateral or any part thereof to Pledgor and the receipt of Pledgor shall be a complete and full acquittance for the Pledged Collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 11. The rights, powers and remedies given to Pledgee by this Pledge Agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. 12. If any provision of this Pledge Agreement is held to be unenforceable for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Pledge Agreement shall be deemed valid and enforceable to the full extent possible. 13. The validity, interpretation, construction and performance of this Pledge Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws. Dated: PLEDGOR ----------------------- -------------------------------- Printed Name: ------------------- 4. -----END PRIVACY-ENHANCED MESSAGE-----