SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2669985
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2975 Stender Way,
Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 727-6116
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
5.5% Convertible Subordinated Notes due 2002
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant was approximately $878,416,000 as of April 27,
1997, based upon the closing sale price of $11.50 per share on the nasdaq
National Market for that date. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
There were 79,682,667 shares of the Registrant's Common Stock issued and
outstanding as of April 27, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, and 13 of Part III incorporate information by reference from
the Proxy Statement for the 1997 Annual Meeting of Stockholders to be held on
August 28, 1997.
<PAGE>
PART I
ITEM 1. BUSINESS
Integrated Device Technology, Inc. "IDT" or the "Company" designs, develops,
manufactures and markets a broad range of high-performance semiconductor
products and modules for its target market segments: communications equipment,
such as routers, hubs, switches, cellular base stations and other devices;
desktop and distributed computing systems, such as workstations and servers,
desktop and notebook personal computers; and office automation equipment, such
as laser printers and color copiers. IDT enhances the opportunity for its
customers to optimize the cost and performance of their systems with product
offerings which include specialty memory, high-speed SRAM (static random access
memories), logic, embedded control and other semiconductor products. In its
manufacturing processes, IDT uses advanced CMOS (complimentary metal oxide
silicon) process technology.
The Company markets its products on a worldwide basis primarily to OEMs
(original equipment manufacturers) through a variety of channels, including a
direct sales force, distributors and independent sales representatives. The
Company's end-user customers include Alcatel, Apple Computer, Bay Networks,
Cabletron, Celestica, Cisco Systems, Compaq Computer, Dell Computer, Digital
Equipment, Electronics For Imaging, EMC, Ericsson, FORE Systems, Fujitsu,
Hewlett Packard, IBM, Intel, Lucent Technologies, Motorola, NEC, Nokia, Siemens
Nixdorf, Silicon Graphics and Solectron. The Company attempts to differentiate
itself from competitors through unique architecture, enhanced performance,
reduced system cost, and packaging options.
IDT was incorporated in California in 1980 and reincorporated in Delaware in
1987. The terms "the Company" and "IDT" refer to Integrated Device Technology,
Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
PRODUCTS AND MARKETS
The Company offers over 5,000 product configurations to its target markets in
four primary product families: specialty memory products, including FIFO (first
in first out) memories, multiport memories and asynchronous transfer mode (ATM)
products; SRAM components and modules; logic circuits and high performance logic
circuits; and RISC (reduced instruction set computing) microprocessors,
primarily used in embedded control applications. During fiscal 1997, these
product families accounted for 35.6%, 31.8%, 20.4% and 12.2%, respectively, of
total revenues of $537.2 million. The Company markets its products primarily to
OEMs in the communications, desktop and distributed computing, and office
automation markets. IDT's product design efforts are focused on differentiated
components and integration of its components into single devices, modules or
subsystems to meet the needs of its customers.
Specialty Memory Products. The Company's proprietary specialty memory products
include FIFO memories, multi-port memories, and ATM products that offer
high-performance features which allow communications and computer systems to
operate more effectively. FIFO memories are used as rate buffers to transfer
large amounts of data at high speeds between separate devices or pieces of
equipment operating at different speeds within a system. Multi-port memory
products are used to speed data transfers and act as the link between multiple
microprocessors or between microprocessors and peripherals when the order of the
data to be transferred needs to be controlled. These products are currently used
primarily in peripheral interface, communications and networking products,
including bridges, hubs, routers and switches. ATM communications is an emerging
network technology designed to support faster transmission, higher quality
images, audio and data. ATM products are used in networks that interconnect
computers and facilitate data transmission in uniform size packets between
locations.
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IDT is a leading supplier of both synchronous and asynchronous FIFO memories and
has increasingly focused its resources on the design of synchronous FIFO
memories. Synchronous FIFO memories have been gaining greater market acceptance
because they are faster and provide an easier user interface. IDT's family of
9-bit, 18-bit and 36-bit Sync FIFO memories are being used in many newer
networking products. IDT has added SuperSync(1) FIFO memories to the FIFO
product family, which add additional features at reduced cost.
The Company is also a leading supplier of multi-port memory products. IDT's
family of multi-port memories is composed of dual-port asynchronous devices,
four-port products, synchronous dual-port devices and products that combine the
flexibility of a multi-port product with the ease of a FIFO product.
The Company introduced products for the emerging ATM market in fiscal 1996, and
the Company continues its efforts to expand this product family. The first
member of the ATM product family, a SAR (segmentation and reassembly) chip, is a
highly integrated, low cost interface device for ATM network cards. Other
members of the ATM family will include low-cost physical media interface
devices, as well as more highly-integrated SAR devices for ATM networks.
SRAMs. SRAMs are memory circuits used for storage and retrieval of data during a
computer system's operation. SRAMs do not require electrical refreshment of the
memory contents to ensure data integrity, allowing them to operate at high
speeds. SRAMs include substantially more circuitry than DRAMs (dynamic random
access memories), resulting in higher production costs for a given amount of
memory, and generally command higher selling prices than the equivalent density
traditional DRAM products. The market for SRAMs is fragmented by differing
demands for speed, power, density, organization and packaging. As a result,
there are a number of niche markets for SRAMs.
Historically, the Company has focused primarily on the cache memory segment of
the SRAM market. In the cache memory segment, the Company's SRAM product
strategy is to offer high-performance 5 volt and 3.3 volt SRAM components and
modules that have differentiated features optimized to work with specified
microprocessors, such as Intel Pentium, PowerPC and MIPS computer system
("MIPS") RISC microprocessors. Increasing emphasis, however, is being placed by
the Company today upon communications oriented applications which are less
competitive than the cache memory market and where design innovation allows IDT
to add greater value to its customer's products.
Cache memory provides intermediate storage between fast microprocessors and
relatively slow traditional DRAM main memory. Cache memory operates at the speed
of the microprocessor and increases the microprocessor's efficiency by
temporarily storing the most frequently used instructions and data. The
Company's cache SRAM components are often integrated into cache memory modules.
These modules typically include a cache controller, cache tag SRAM and cache
SRAM components and are ready to plug into sockets on a computer system's
motherboard. IDT offers a series of standard and custom cache memory modules for
IBM and IBM-compatible PCs and PowerPC-based personal computers as well as for
certain RISC microprocessor-based systems.
While the Company continues to develop its next generation SRAM products to meet
the growing cache memory needs of increasingly faster microprocessors, much of
IDT's efforts are geared towards solving memory issues unique to the
communications market. In fiscal 1997 IDT announced the first of a family of
Zero Bus Turnaround (ZBT) SRAMs which eliminate wait states between read and
write cycles. A focus on proprietary SRAMs serving communications customers is
coupled with ongoing programs to reduce the manufacturing cost of SRAMs in those
segments of the market where the Company faces significant competition. As
capacity becomes more fully utilized, IDT expects to reduce that portion of its
SRAM product mix that is commodity-like in nature. IDT's new products are being
designed to operate at higher speeds and provide greater levels of integration.
In order to provide SRAM products that meet the varying needs of its customers,
IDT uses CMOS process technology and offers 16K, 64K, 256K and 1 Megabit SRAMs
in a number of speed, organization, power and packaging configurations. Higher
density SRAM products are planned.
- --------
(1) SuperSync is a trademark of Integrated Device Technology, Inc.
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In fiscal 1997, SRAM revenue declined principally due to significant average
selling price erosion for industry standard SRAM components. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Logic Circuits. IDT is a leading manufacturer of high-speed, byte-wide and
double-density 16-bit CMOS logic circuits for high-performance applications.
Logic circuits control data communication between various elements of electronic
systems, such as between a microprocessor and a memory circuit. IDT offers a
wide range of logic circuits products which support bus and backplane
interfaces, memory interfaces and other logic support applications where
high-speed, low power and high-output drive are critical. IDT's logic circuits
are used in a broad range of markets.
IDT's 16-bit logic products are available in small and thin and very small
packages, enabling board area to be reduced. These products are designed for
applications in which small size, low power and extra low noise are as important
as high speed. IDT also supplies a series of 8-bit and 16-bit, 3.3 volt logic
products and 3.3 volt to 5 volt translator circuits directed at 3.3 volt systems
in the notebook and laptop computer.
The Company also offers a family of clock drivers and clock generators. These
devices, placed at critical positions in a system, correct the degradation of
timing that occurs the further the impulses travel from the main system clock.
The Company also offers error correction and detection and phase lock loop
devices.
RISC Microprocessor Components. IDT is a licensed manufacturer of MIPS RISC
microprocessors. IDT manufactures both 32-bit and 64-bit MIPS designed
microprocessors and derivative products for the communications, desktop and
distributed computing and office automation market segments.
The Company focuses its RISC microprocessor marketing efforts primarily on the
embedded controller market. Embedded controllers are microprocessors that
control a single device such as a printer, copier or network router. The Company
sells several proprietary 32-bit embedded controllers, including devices with
on-circuit SRAM cache memory and floating point functions.
The Company's RISC microprocessor products include the R5000, IDT's first 64-bit
superscalar microprocessor, which is available with clock speeds up to 200 MHz
and the ORION(2) R4600(3) microprocessor, which is capable of clock speeds up to
150 MHz. The R5000 and R4600 are higher performance derivatives of the 64-bit
R4000 and R4400 microprocessors developed by MIPS. MIPS was acquired by Silicon
Graphics (SGI) in 1992. The R5000 was developed for SGI by Quantum Effect
Design, Inc. ("QED"), an approximately 36% equity owned affiliate of IDT.
Through agreements with SGI, IDT obtained a license to manufacture and sell the
R5000. The R4600 was developed for the Company by QED. Systems based on the
ORION family of microprocessors are targeted at both embedded and desktop
applications.
CUSTOMERS
The Company markets and sells its products on a worldwide basis primarily to
OEMs in the communications, desktop and distributed computing and office
automation markets. Customers often purchase products from more than one of the
Company's product families. In fiscal 1997, no one OEM customer accounted for
10% or greater of the Company's revenue. In fiscal 1996, one OEM customer, Apple
Computer Inc., accounted for 12% of the Company's revenue.
- --------
(2) ORION is a trademark of Integrated Device Technology, Inc.
(3) R4600 is a trademark of Integrated Device Technology, Inc.
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<TABLE>
The following is an alphabetical listing of current representative end-user
customers of the Company, by market:
<CAPTION>
DESKTOP AND OFFICE
COMMUNICATIONS DISTRIBUTED COMPUTING AUTOMATION
- ------------------- -------------------------------------- -----------------------
<S> <C> <C> <C>
Alcatel Apple Computer Intel Electronics For Imaging
Bay Networks AST Research NEC Samsung
Cabletron Celestica Power Computing Texas Instruments
Cisco Systems Compaq Computer Siemens Nixdorf Toshiba
Ericsson Dell Computer Silicon Graphics Xerox
FORE Systems Digital Equipment Umax
Fujitsu EMC
Lucent Technologies Groupe Bull
Motorola Hewlett-Packard
Nokia IBM
Siemens ICL
WebTV
</TABLE>
MARKETING AND SALES
IDT markets and sells its products primarily to OEMs through a variety of
channels, including a direct sales force, distributors and independent sales
representatives.
The Company had 60 direct sales personnel in the United States at March 30,
1997. Such personnel are based at the Company's headquarters and in 18 sales
offices in Alabama, California, Colorado, Florida, Illinois, Maryland,
Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon and
Texas, and are primarily responsible for marketing and sales in those areas. IDT
also utilizes four national distributors, Hamilton Hallmark, Future Electronics,
Wyle Laboratories and Insight Electronics, Inc. and several regional
distributors in the United States. Hamilton Hallmark accounted for 14%, 11% and
13% of the Company's revenues in fiscal 1997, 1996 and 1995, respectively. In
addition, IDT uses independent sales representatives, which generally take
orders on an agency basis while the Company ships directly to the customer. The
representatives receive commissions on all products shipped to customers in
their geographic area.
In addition, the Company had 17 direct sales personnel and twelve sales offices
located outside of the United States at March 30, 1997. Sales activities outside
North America are generally controlled by IDT's subsidiaries located in France,
Germany, Hong Kong, Italy, Japan, Sweden and the United Kingdom. The Company
also has sales offices in Taiwan, Singapore, Korea, Israel and Finland. The
Company continues to emphasize its direct marketing efforts to OEMs in Europe
and to United States companies with operations in the Asia/Pacific area. A
significant portion of export sales continues to be made through international
distributors. During fiscal 1997, 1996 and 1995, export sales accounted for 38%,
40% and 39% of total revenues, respectively. Sales outside the United States are
generally denominated in local currencies. Sales and other financial information
for foreign operations is included in Note 12 of Notes to Consolidated Financial
Statements contained elsewhere in this Form 10-K. Export sales are subject to
certain risks, including currency controls and fluctuations, changes in local
economic and political conditions, import and export control, and changes in tax
laws, tariffs and freight rates.
The Company's distributors typically maintain an inventory of a wide variety of
products, including products offered by IDT's competitors, and often handle
small or rush orders. A portion of the Company's sales is made to distributors
under agreements which allow certain rights of return and price protection on
products unsold by the distributors. Related gross profits thereon are deferred
until the products are resold by the distributors.
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MANUFACTURING
IDT believes that maintaining its own wafer fabrication capability facilitates,
the implementation of advanced process technologies and new higher-performance
product designs, provides it with a reliable source of supply of semiconductors
and allows it to be more flexible in shifting production according to product
demand. The Company currently operates sub-micron wafer fabrication facilities
in Hillsboro, Oregon and San Jose and Salinas, California. Construction
commenced on the Oregon facility in August 1994 and was completed in 1996. The
Oregon facility contributed to revenues beginning in the second quarter of
fiscal 1997. The 192,000 square feet facility contains a 48,000 square foot,
class 1 (less than one particle 0.5 micron or greater in size per cubic foot),
eight-inch wafer fabrication line. The San Jose facility includes a 24,000
square foot, class 1, six-inch wafer fabrication line that was first placed in
production in March 1991. The Salinas facility, first placed in production in
fiscal 1986, includes a 24,000 square foot, class 3 (less than three particles
0.5 micron or greater in size per cubic foot), six-inch wafer fabrication line.
The Company believes the facility in Oregon reduces the Company's risk of a
natural disaster affecting all of its wafer fabrication facilities which,
excluding the Oregon facility, are all currently located in Northern California.
In fiscal 1997, as a result of current market conditions, the Company's
production volumes at its wafer fabrication facilities did not increase
sufficiently to take full advantage of the additional capacity resulting from
the completion of the Oregon facility, and, as a result, the Company's results
of operations were adversely affected. Further, the Company is unable to predict
whether demand for industry standard SRAM products or IDT's share of the
available market will improve. Should IDT's production volumes, especially at
its fabrication facilities, remain constant or decline and should the Company be
unable to otherwise decrease costs per unit sold, the Company's results of
operations would continue to be materially adversely impacted. The Company faces
a number of risks in order to accomplish its goals to increase production in its
existing plants, especially the Oregon and Philippines facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IDT also operates component assembly and test facilities which aggregate 145,000
square feet in Penang, Malaysia and a 176,000 square feet facility near Manila,
the Philippines. Substantially all of the Company's test operations and a
significant portion of its assembly operations are performed at its Malaysian
and Philippines facilities. The facility in the Philippines first contributed to
revenue during fiscal 1997. IDT also uses subcontractors, principally in Korea,
the Philippines and Malaysia, to perform certain assembly operations. If IDT
were unable to assemble or test products offshore, or if air transportation to
these locations were curtailed, the Company's operations could be materially
adversely affected. Additionally, foreign manufacturing exposes IDT to certain
risks generally associated with doing business abroad, including foreign
governmental regulations, currency controls and fluctuation, changes in local
economic and political conditions, import and export controls and changes in tax
laws, tariffs and freight rates. In addition to this offshore assembly and test
capability, the Company has the capacity for low-volume, quick-turn assembly in
Santa Clara, California as well as limited test capabilities in Santa Clara, San
Jose and Salinas. Assembly and test of memory modules takes place both
domestically and offshore.
In fiscal 1996 and 1995, the Company operated its wafer fabrication facilities
in Salinas and San Jose and its assembly operations in Malaysia at approximate
installed equipment capacity. To increase its wafer fabrication capacity, the
Company completed construction of the Oregon wafer fabrication facility in
fiscal 1997 and in fiscal 1996 the Company completed the conversion of its
Salinas wafer fabrication facility from five-inch to six-inch wafers. To
increase its assembly and test capacity requirements the Company completed
construction of the initially 176,000 square foot assembly and test facility
near Manila, the Philippines.
The Company is positioned to accommodate growth. In view of current and
anticipated capacity requirements, IDT anticipates capital expenditures of
approximately $145 million in fiscal 1998, principally in connection with
continued installation of equipment in the Oregon facility, the Philippines
facility and other capacity improvements.
The Company utilizes proprietary CMOS process technology permitting sub-micron
geometries in its fabrication facilities. The majority of IDT's current products
are manufactured using its proprietary 0.65 and 0.5 micron
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processes with limited 0.35 micron quantities released to production. The
Company is currently developing a sub-0.3 micron CMOS process.
Wafer fabrication involves a highly sophisticated, complex process that is
extremely sensitive to contamination. Integrated circuit manufacturing costs are
primarily determined by circuit size because the yield of good circuits per
wafer generally increases as a function of smaller die. Other factors affecting
costs include wafer size, number of process steps, costs and sophistication of
manufacturing equipment, packaging type, process complexity and cleanliness.
IDT's manufacturing process is complex, involving a number of steps including
wafer fabrication, plastic or ceramic packaging, burn-in and final test. The
Company continually makes changes to its manufacturing process to lower costs
and improve yields. From time to time, the Company has experienced manufacturing
problems that have caused delays in shipments or increased costs. Manufacturing
problems at the new facilities in Oregon or the Philippines or its existing
wafer fabrication, assembly or test facilities could materially adversely affect
the Company's results of operations.
The Company generally has been able to arrange for multiple sources of raw
materials, but the number of vendors capable of delivering certain raw
materials, such as silicon wafers, ultra-pure metals and certain chemicals and
gases is very limited. Some of the Company's packages, while not unique, have
very long lead times and are available from only a few suppliers. From time to
time, vendors have extended lead times or limited supply to the Company due to
capacity constraints. These circumstances could reoccur and could materially
adversely affect IDT.
BACKLOG
IDT manufactures and markets primarily standard products. Sales are generally
made pursuant to purchase orders, which are frequently revised to reflect
changes in the customer's requirements. The Company has also entered into master
purchase agreements with many of its OEM customers. These agreements do not
require the OEMs to purchase minimum quantities of the Company's products.
Product deliveries are scheduled upon the Company's receipt of purchase orders
under the related OEM agreements. Generally, these purchase orders and OEM
agreements also allow customers to reschedule delivery dates and cancel purchase
orders without significant penalties. Orders are frequently rescheduled, revised
or canceled. In addition, distributor orders are subject to price adjustments
both prior to and after shipment. For these reasons, IDT believes that its
backlog, while useful for scheduling production, is not necessarily a reliable
indicator of future revenues.
RESEARCH AND DEVELOPMENT
IDT's competitive position has been established, to a large extent, through its
emphasis on the development of proprietary and enhanced performance industry
standard product, and the development of advanced CMOS processes. IDT believes
that its focus on continually advancing its process technologies has allowed the
Company to achieve cost reductions in the manufacture of most of its products.
The Company believes that a continued high level of research and development
expenditures is necessary to retain its competitive position. The Company
maintains research and development centers in Northern California, Atlanta,
Georgia, Austin, Texas and Morrisville, North Carolina. In addition, the new
plant start-up costs associated with the Oregon wafer fabrication facility
significantly impacted research and development expenditures in fiscal 1997.
Research and development expenditures, as a percentage of revenues, were 28%,
20% and 19% in fiscal 1997, 1996 and 1995, respectively.
The Company's product development activities are focused on the design of new
circuits and modules that provide enhanced performance for growing applications.
In the SRAM family, IDT is utilizing its 5 volt and 3.3 volt SRAM and subsystem
design expertise to develop advanced SRAM cache memories and modules for
microcomputer systems based on Intel's Pentium, IBM and Motorola's PowerPC, and
SGI's MIPS RISC microprocessors. In the specialty memory products area, IDT's
efforts are concentrated on the development of advanced synchronous FIFO
memories and more sophisticated multi-port memory products for the
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communications market. The Company continues its research into applications of
Fusion Memory(4) technology, with the goal of expanding its product offerings.
Fusion Memory products use DRAM technology and function with comparable speed to
SRAM technology based products. Additionally, the Company continued its efforts
to develop a family of specialty memory products for the ATM market and a family
of lower voltage logic devices for a broad range of applications. The Company is
emphasizing the design of RISC microprocessors for embedded control
applications, such as printers and telecommunications switches, and the
development of microprocessors for use in general applications. The Company also
continues to refine its CMOS process technology to increase the speed and
density of circuits in order to provide customers with advanced products at
competitive prices. The Company continues to refine its CMOS process technology
focusing on sub-0.5 micron geometry processes, including a sub-0.3 micron
process, and converting the production of many products to newer generation
processes.
The Company has an equity interest in QED, a separate corporation. Pursuant to a
development agreement between QED and the Company, QED developed the ORION R4600
microprocessor for IDT. QED also designed the R5000 for SGI, and through
agreements with SGI, IDT obtained a license to manufacture and sell the R5000.
The R5000 is targeted at 3-D visualization, internetworking and office
automation applications. Except for the R5000, the Company owns such products,
subject to the payment of royalties and other fees to QED and SGI. IDT has
licensed Toshiba and NKK to manufacture and market certain of these products.
With respect to the R5000, SGI owns the intellectual property rights. In
addition, Centaur Technology, Inc., a wholly owned subsidiary of the Company, is
engaged in the development of microprocessors for use in general applications at
its research center in Austin, Texas.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological advances, cyclical market patterns, price erosion, evolving
industry standards, occasional shortages of materials, intellectual property
disputes, high capital equipment costs and availability and control of
manufacturing capacity. Many of the Company's competitors have substantially
greater technical, marketing, manufacturing and financial resources than IDT. In
addition, several foreign competitors receive assistance from their governments
in the form of research and development loans and grants and reduced capital
costs, which could give them a competitive advantage. The Company competes in
different product areas, to varying degrees, on the basis of technical
innovation and performance of its products, as well as quality, price and
product availability.
IDT's competitive strategy is to differentiate its products through
high-performance, innovative configurations and proprietary features or to offer
industry standard products with higher speeds or lower power consumption. Price
competition, introductions of new products by IDT's competitors, delays in
product introductions by IDT or other competitive factors could have a material
adverse effect on the Company in the future.
In markets where IDT competes to sell industry standard SRAM components, market
supply and pricing strategies of competitors significantly impact the price the
Company receives for its products. In fiscal 1997, a significant increase in
market supply of industry standard SRAM parts was attributable to IDT's
principally foreign competitors shifting additional production capacity to these
parts. The decline in average selling prices for industry standard SRAM parts in
fiscal 1997 was, therefore, attributable to increases in available SRAM supply
from competitors such as Samsung, Winbond, UMC, other Taiwanese and Korean
companies as well as companies with Taiwan and Korean sourced SRAM wafers, and
their market pricing strategies, at a time when market demand slowed as
customers reduced the level of inventories carried.
- --------
(4) Fusion Memory is a trademark of Integrated Device Technology
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INTELLECTUAL PROPERTY AND LICENSING
IDT has obtained 82 patents in the United States and 18 abroad and has 124
inventions in various stages of the patent application process. The Company
intends to continue to increase the breadth of its patent portfolio. The Company
also relies on trade secret, copyright and trademark laws to protect its
products. A number of the Company's circuit designs are registered pursuant to
the Semiconductor Chip Protection Act of 1984. This Act gives protection similar
to copyright protection for the patterns which appear on integrated circuits and
prohibits competitors from making photographic copies of such circuits. There
can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented, that the rights granted thereunder will
provide competitive advantages to the Company, or that the Company's efforts
generally to protect its intellectual property rights will be successful.
In recent years, there has been a growing trend of companies to resort to
litigation to protect their semiconductor technology from unauthorized use by
others. In the past, the Company has been involved in patent litigation which
adversely affected its operating results. Although the Company has obtained
patent licenses from certain semiconductor manufacturers, the Company does not
have licenses from a number of semiconductor manufacturers who have a broad
portfolio of patents.
IDT has been notified that it may be infringing patents issued to certain
semiconductor manufacturers and other parties, and is currently involved in
several license negotiations. There can be no assurance that additional claims
alleging infringement of intellectual property rights, including infringement of
patents that have been or may be issued in the future, will not be made against
the Company in the future or that licenses, to the extent required, will be
available. Should licenses from any such claimant be unavailable, or not be
available on terms acceptable to the Company, the Company may be required to
discontinue its use of certain processes or the manufacture, use and sale of
certain of its products, to incur significant litigation costs and damages, or
to develop non-infringing technology. If IDT is unable to obtain any necessary
licenses, pass any increased cost of patent licenses on to its customers or
develop non-infringing technology, the Company could be materially adversely
affected. In addition, IDT has received patent licenses from several companies
that expire over time, and the failure to renew or renegotiate certain of these
licenses as they expire or significant increases in amounts payable under these
licenses could have an adverse effect on the Company.
On May 1, 1992, IDT and AT&T entered into a five-year royalty-free patent
cross-license agreement. As part of this agreement, patent litigation instituted
by AT&T was settled and dismissed. Under the agreement, IDT made a lump sum
payment and issued shares of its Common Stock to AT&T, granted a discount on
future purchases, and gave credit for future purchases of technology on a
nonexclusive basis. In December 1995, the agreement with AT&T was modified to
reflect AT&T's restructure into three legal entities, extend the agreement for
five years beyond the original expiration date and include other agreed-upon
changes. On December 10, 1992, IDT and Texas Instruments ("TI") entered into a
five-year patent cross-license agreement, which expires in fiscal 1998. As part
of this agreement, patent litigation instituted by TI was dismissed. Under the
agreement, IDT granted to TI a license to certain IDT technology and products
and guaranteed that TI will realize certain revenues from the licensed
technology and products, and IDT will develop certain products which will be
manufactured and sold by both IDT and TI. Lump-sum amounts due at the end of the
license term are reduced by an amount of royalty income associated with TI's
sales of IDT's products. See Note 5 of Notes to Consolidated Financial
Statements.
ENVIRONMENTAL REGULATION
Federal, State and local provisions regulate the discharge and disposal into the
environment of certain materials used in the semiconductor manufacturing
process. The Company's manufacturing and assembly and test facilities are
designed to comply with existing regulations, and the Company believes that its
activities conform to present regulations. The Company has been conducting its
operations with all necessary permits and without material adverse impact
attributable to environmental regulation. However, there can be no assurance
that future additions or changes to environmental regulations will not impose
upon the Company the requirement for significant capital
9
<PAGE>
expenditure. Further, any failure by the Company to control the use of, or to
restrict adequately the discharge of hazardous materials under present or future
regulations could subject it to substantial liability or could cause its
manufacturing operations to be suspended. In addition, IDT could be held
financially responsible for remedial measures if its properties were found to be
contaminated whether or not the Company was responsible for such contamination.
EMPLOYEES
At March 30, 1997, IDT and its subsidiaries employed 4,236 people worldwide, of
whom 1,610 were in Penang, Malaysia and 477 were in the Philippines. IDT's
success depends in part on its ability to attract and retain qualified
personnel, who are generally in great demand. Since its founding, the Company
has implemented policies enabling its employees to share in IDT's success such
as participation in stock option, stock purchase, profit sharing and special
bonus plans for key contributors. IDT has never had a work stoppage. No
employees are represented by a collective bargaining agreement, and the Company
considers its employee relations to be good.
ITEM 2. PROPERTIES
<TABLE>
The Company presently occupies nine major facilities in California, Oregon,
Malaysia and the Philippines:
<CAPTION>
LOCATION FACILITY USE SQUARE FEET
- --------------------------- -------------------------------------------- -----------
<S> <C> <C>
Salinas Wafer fabrication, SRAM and multiport memory 98,000
operations
Santa Clara Logic operations 62,000
Santa Clara Administration and RISC microprocessor 43,700
operations
Santa Clara Administration and other operations 50,000
Santa Clara Administration 48,300
Penang, Malaysia Assembly and test operations 145,000
San Jose Wafer fabrication, process technology 135,000
development, FIFO and memory subsystems
operations, and research and development
Oregon Wafer fabrication 192,000
Canlubang, the Philippines Assembly and test operations 176,000
</TABLE>
Through the second quarter of fiscal 1997, the Company leased its Salinas
facility from Carl E. Berg, a director of the Company, under a lease expiring in
2005. In fiscal 1996, IDT entered into an agreement with Mr. Berg to acquire the
Salinas facility in a transaction structured as a tax free reorganization and
completed the transaction in fiscal 1997. IDT leases its Santa Clara facilities
under leases expiring in 1999 through 2015, including renewal options. The
Oregon facility is subject to a tax ownership operating lease. Additional
information about leased properties, including the purchase of the Salinas
facility, is provided in Note 8 of Notes to Consolidated Financial Statements.
The Company owns its Malaysian, Philippine and San Jose facilities, although the
Malaysian facilities are subject to long-term ground leases, the Company has an
interest in but does not own the Philippines land, and the San Jose facility is
subject to a mortgage. IDT leases offices for its sales force in 18 domestic
locations as well as Edinburgh, Helsinki, Hong Kong, London, Milan, Munich,
Paris, Seoul, Singapore, Stockholm, Taipei, Tel Aviv and Tokyo. IDT also leases
offices for its design centers in Georgia, North Carolina and Texas.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended March 30, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages as of April
30,1997, are as follows:
Name Age Position
- --------------------- --- ---------------------------------------------------
D. John Carey 60 Chairman of the Board
Leonard C. Perham 54 President & Chief Executive Officer
Raymond J. Farnham 49 Executive Vice President
William B. Cortelyou 41 Vice President, Oregon Wafer Operations
David Cote 42 Vice President, Corporate Marketing
Robin H. Hodge 57 Vice President, Assembly and Test Operations
Mike S. Hunter 45 Vice President, California Silicon Manufacturing
Daniel L. Lewis 48 Vice President, Sales
Chuen-Der Lien 41 Vice President, Chief Technical Officer
Jack Menache 53 Vice President, General Counsel and Secretary
William D. Snyder 52 Vice President, Finance and Chief Financial Officer
Jerry Taylor 48 Vice President, Manufacturing and Memory Products
Mr. Carey was elected to the Board of Directors in 1980 and has been Chairman of
the Board since 1982. He served as Chief Executive Officer from 1982 until his
resignation in April 1991 and was President from 1982 until 1986. Mr. Carey was
a founder of Advanced Micro Devices ("AMD") in 1969 and was an executive officer
there until 1978.
Mr. Perham joined IDT in October 1983 as Vice President and General Manager,
SRAM Division. In October 1986, Mr. Perham was appointed President and Chief
Operating Officer and a director of the Company. In April 1991, Mr. Perham was
elected Chief Executive Officer. Prior to joining IDT, Mr. Perham held executive
positions at Optical Information Systems Incorporated and Zilog Inc.
Mr. Farnham joined IDT in July 1996 as Executive Vice President. Previously, Mr.
Farnham spent 21 years at National Semiconductor and last served as president of
the company's communications and computing group through May, 1993. Mr. Farnham
also served as president and chief executive officer of OPTi, Inc. from March,
1994 through February 1995 before joining IDT.
11
<PAGE>
Mr. Cortelyou joined IDT in 1982. In January 1990, he was elected Vice
President, Wafer Operations, Salinas. In April, 1997, he was named Vice
President, Oregon Wafer Operations. Prior to joining IDT, Mr. Cortelyou was an
engineer at AMD.
Mr. Cote joined IDT in April 1997 as Vice President, Corporate Marketing. Prior
to joining IDT, he was VP of Marketing with Meridian Data from June 1996 through
December 1996 and Zeitnet, Inc. from January 1995 through June 1996. Mr. Cote
was also previously with Synoptics, Inc. from April 1991 through December 1994
where he achieved the level of Director of Marketing.
Mr. Hodge joined IDT as Director of Assembly and Test Operations in March 1989.
In January 1990, Mr. Hodge was elected Vice President, Assembly Operations. Mr.
Hodge currently serves as Vice President, Assembly and Test. From 1983 until
joining IDT, Mr. Hodge was Director of Assembly Operations for Maxim Integrated
Products.
Mr. Hunter was promoted to Vice President, California Silicon Manufacturing in
April 1997. He has been with IDT since January 1996. Prior to coming to IDT, Mr.
Hunter was Vice President of Fabrication Operations at Chartered Semiconductor
from July 1994 through January 1996 and achieved Executive Vice President level
at Fujitsu Persona while with that company from October 1989 through June 1994.
Mr. Lewis joined IDT in 1984 as Eastern Area Sales Manager. In June 1991, he was
elected Vice President, Sales. Prior to joining IDT, Mr. Lewis held management
positions at Avatar Technologies, Inc., Data General and Zilog.
Dr. Lien joined IDT in 1987 and was elected Vice President, Technology
Development in April 1992 and was elected Vice President, Chief Technical
Officer in 1996. Prior to joining the Company, he held engineering positions at
Digital Equipment Corporation and AMD.
Mr. Menache joined IDT as Vice President, General Counsel and Secretary in
September 1989. From April 1989 until joining IDT, he was General Counsel of
Berg & Berg Developers. From 1986 until April 1989, he was Vice President,
General Counsel and Secretary of The Wollongong Group Inc.
Mr. Snyder joined the Company as Treasurer in 1985. In May 1990, he was elected
Vice President, Corporate Controller, and in September 1990 Mr. Snyder was
elected Vice President, Finance and Chief Financial Officer. Prior to joining
the Company, Mr. Snyder held financial management positions at Actrix Computer,
Zilog and Digital Equipment Corporation.
Mr. Taylor joined the Company as Vice President, Manufacturing and Memory
Products in June, 1996. Prior to joining the Company, Mr. Taylor held
engineering positions at Mostek, Fairchild Semiconductor, Benchmarq
Microelectronics, Plano ISD and Lattice Semiconductor. Mr. Taylor was with
Benchmarq Microelectronics from December 1987 through December 1992, with Plano
ISD from October 1993 through April 1995 and with Lattice Semiconductor from
April 1995 through June 1996.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Common Stock of the Company is traded on the NASDAQ National Market under
the symbol "IDTI". The following table sets forth the high and low last reported
sales prices for the Common Stock as reported by the NASDAQ National Market
during the fiscal quarters indicated:
High Low
--------------------------------------------------------
Fiscal 1997
First Quarter 15 1/2 10 1/8
Second Quarter 11 7 3/8
Third Quarter 14 1/4 7 3/4
Fourth Quarter 14 1/16 9 3/8
Fiscal 1996
First Quarter 25 1/16 18 1/32
Second Quarter 33 1/4 22 9/16
Third Quarter 24 3/8 12 7/8
Fourth Quarter 14 7/8 9 1/4
In August 1995, the Company announced a two-for-one stock split in the form of a
stock dividend for stockholders of record on August 25, 1995. The distribution
of additional shares was on September 15, 1995. Price information for all
periods presented has been retroactively adjusted to reflect this stock
dividend.
As of April 27, 1997, there were approximately 1,378 record holders of the
Common Stock.
The Company intends to retain any future earnings for use in its business and,
accordingly, does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below are qualified in their entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes thereto included elsewhere in this Form 10-K.
<TABLE>
STATEMENT OF OPERATIONS DATA
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
MARCH 30, MARCH 31, APRIL 2, APRIL 3, MARCH 28,
1997 1996 1995 1994 1993
------------------------------------------------------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Revenues $ 537,213 $ 679,497 $ 422,190 $ 330,462 $ 236,263
Asset impairment and other 45,223 -- -- -- --
Income (loss) before
extraordinary item (42,272) 118,249 78,302 40,165 5,336
Net income (loss) (42,272) 120,170 78,302 40,165 5,336
Primary earnings per share:
Income (loss) before extraordinary (0.54) 1.44 1.05 0.61 0.09
Net (loss) income (0.54) 1.47 1.05 0.61 0.09
Fully diluted earnings per share:
Income (loss) before extraordinary item (0.54) 1.42 1.04 0.60 0.09
Net income (loss) (0.54) 1.44 1.04 0.60 0.09
Shares used in computing
net income (loss) per share:
Primary 78,454 81,897 74,765 66,232 59,402
Fully diluted 78,454 87,753 75,426 67,260 59,402
</TABLE>
<PAGE>
<TABLE>
BALANCE SHEET DATA
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
MARCH 30, MARCH 31, APRIL 2, APRIL 3, MARCH 28,
1997 1996 1995 1994 1993
------------------------------------------------------------
(In thousands, except per share data)
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Total assets $ 903,584 $ 939,434 $ 561,975 $ 349,571 $ 239,994
Long-term obligations,
excluding current portion 52,622 36,682 36,595 37,462 48,987
Convertible subordinated notes,
net of issuance costs 183,157 182,558 -- -- --
Stockholders' equity 524,238 549,727 414,531 224,367 117,760
Research & development expenses $ 151,420 $ 133,317 $ 78,376 $ 64,237 $ 53,461
Number of employees 4,236 3,828 2,965 2,615 2,414
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
The following table sets forth certain amounts, as a percentage of revenues,
from the Company's consolidated statements of operations for the three fiscal
years ended March 30, 1997, March 31, 1996 and April 2, 1995.
<CAPTION>
Fiscal Year Ended
----------------------------------
March 30, March 31, April 2,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 60.6 43.2 42.5
Asset impairment and other 8.4 -- --
----- ----- -----
Gross profit 31.0 56.8 57.5
Operating expenses:
Research and development 28.2 19.6 18.6
Selling, general and administrative 15.0 13.1 15.3
----- ----- -----
Total operating expenses 43.2 32.7 33.9
----- ----- -----
Operating income (loss) (12.2) 24.1 23.6
Interest income and other, net 0.7 1.5 1.2
----- ----- -----
Income (loss) before provision for income taxes (11.5) 25.6 24.8
Provision (benefit) for income taxes (3.7) 8.2 6.2
Income (loss) before extraordinary item (7.8) 17.4 18.6
----- ----- -----
Extraordinary item:
Gain from early extinguishment of debt, net of tax -- 0.3 --
===== ===== =====
Net income (loss) (7.8)% 17.7% 18.6%
===== ===== =====
</TABLE>
All references are to the Company's fiscal years ended March 30, 1997, March 31,
1996 and April 2, 1995, unless otherwise indicated. These fiscal year financial
results may not be indicative of the financial results of future periods. The
following discussion contains forward looking statements that involve a number
of risks and uncertainties, including but not limited to operating results,
capital expenditures and capital resources, SRAM market prices and manufacturing
capacity utilization. Factors that could cause actual results to differ
materially are included in, but are not limited to, those identified in "Factors
Affecting Future Results". The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof.
Overview
Fiscal 1997 was characterized by industry-wide excess SRAM capacity and low
selling prices. Additionally, IDT was not able to fully utilize capacity at its
older wafer fabrication plants, incurred new plant start up costs at both
Hillsboro, Oregon and the Philippines, and incurred significant research and
development (R&D) expense. In December 1996, IDT recorded a significant charge
to write down the carrying value of a number of assets principally related to
its Salinas fabrication facility. During fiscal 1997, revenue declined 21% to
$537.2 million, compared to $679.5 million during the immediately prior fiscal
year. As a result of the combination of these factors, IDT recorded a net loss
of $42.3 million in fiscal 1997, compared to net income of $120.2 million in the
prior fiscal year.
14
<PAGE>
Prices received for commodity SRAM products are highly dependent on supply and
demand dynamics in the marketplace. Low SRAM prices, increases in worldwide SRAM
manufacturing capacity, and customers' initiatives to reduce excess inventories,
led to dramatically reduced SRAM revenue and profits in fiscal 1997. SRAM
accounted for 32% of fiscal 1997 revenue, compared to 46% of revenue for fiscal
1996. When comparing the same periods, despite the decline in SRAM revenue, the
number of SRAM units and related modules shipped actually increased. In the last
half of fiscal 1997, commodity SRAM unit demand began to improve, but at prices
dramatically lower than recorded in fiscal 1996.
Both the Oregon wafer fabrication plant and the new Philippines assembly and
test facility came on line in fiscal 1997, and these two facilities accounted
for significant growth in both Company headcount and operating expenses. While
anticipated, these costs were not successfully absorbed through unit sales, as
both demand and prices for commodity SRAMs declined relative to initial
expectations. The Oregon factory's output was less than the original plan,
leading to higher fixed costs per unit of output.
Throughout fiscal 1997 IDT continued to consume significant R&D resources
related to new process technologies, bringing the Oregon wafer facility on line,
introducing new products in existing product areas and funding new product
development in certain markets traditionally not served by the Company.
Results of Operations
Revenues
During fiscal 1997, total units shipped increased 15.7% when compared to fiscal
1996; however, total revenues of $537.2 million were 20.9% below fiscal 1996
revenues of $679.5 million. Revenue in fiscal 1996 increased 61% over the prior
period reflecting a combination of improved selling prices on SRAM products
shipped during the first three quarters of the year, higher output as the
Company increased die production and generally increased demand across all of
IDT's other products. Fiscal 1995 revenue increased 28% over the prior period.
Fiscal 1997 revenue reflected growth in demand for the Company's products, but
average selling prices of certain products (principally SRAMs) were as much as
80% below the highest prices realized for comparable products in fiscal 1996.
In fiscal 1997, despite increased SRAM units and related modules shipped, SRAM
revenues decreased by 45.7% due to significant average selling price erosion for
industry standard SRAM components. The price decline was attributable to a
number of companies, principally foreign, shifting production capacity to SRAM
parts and therefore increasing available supply. This increase in supply came at
a time when growth in SRAM demand from IDT's desktop computing and other
customers slowed, as these customers sought to decrease the level of SRAM
inventories that they carried. In contrast, fiscal 1996 SRAM revenues increased
90.3% compared to fiscal 1995 because of strong demand for fast SRAMs for
secondary cache requirements in the PC market. Looking forward, the Company is
uncertain as to whether pricing for commodity SRAMs will change, primarily
because the Company cannot anticipate how its competitors will react to current
low market prices for SRAM components and to an anti-dumping investigation
associated with SRAMs imported from Taiwan and Korea, recently commenced by the
International Trade Commission.
Contrasting fiscal 1997 sales of other IDT products to fiscal 1996, net unit
sales of the RISC microprocessor family more than doubled while logic and
specialty memory units also increased. Partially offsetting the increase in unit
volume, microprocessor average selling prices declined as the product mix sold
in fiscal 1997 reflected a greater proportion of embedded controller products
which command lower average selling prices than standard RISC microprocessor
products. In the future, the RISC microprocessor product family mix sold is
expected to continue to include a greater proportion of embedded controllers
which have lower average selling prices compared to other microprocessor
products. The average selling price realized per unit for logic products also
decreased in fiscal 1997.
15
<PAGE>
Gross Profit
In the third quarter of fiscal 1997, the Company recorded asset impairment and
other charges of $45.2 million which reduced gross profit. The $45.2 million
charge principally relates to adjustments to the net asset carrying values of
manufacturing assets, including the Company's oldest wafer fabrication plant in
Salinas, California, and other items. Additionally, the Company recorded $9.7
million in charges which relate to the write off of certain technology
investments and other miscellaneous items, which have been classified in the
Company's Statement of Operations in accordance with the nature of the charge,
including cost of revenue. The charges recorded against manufacturing assets
were recorded in accordance with Statement of Financial Accounting Standards 121
(SFAS 121) "Accounting for the Impairment of Long Lived Assets". SFAS 121
requires that the Company analyze whether the cash flows attributable to an
asset support the value assigned to that asset in the financial statements.
Where estimated cash flow is not sufficient to recover the asset's net carrying
value, a fair value approach is taken towards reassigning a carrying value to
the asset. As a result of significant changes in the semiconductor industry,
such as the rapid erosion of SRAM average selling prices, and the Company's
emphasis on communication-oriented products, the Company has accelerated the use
of more advanced manufacturing processes to produce its products. The use of
these more advanced processes and available information on expected demand for
the Company's products indicated that the carrying value of these selected older
manufacturing assets would not be fully recovered. Therefore, adjustments were
recorded for the difference between net carrying value at historical costs and
estimates of the fair market value of the assets.
Including the above charge, and as a result of the decline in average selling
price per unit sold for the products described above, gross profit in fiscal
1997 decreased 57% or $219.5 million to $166.3 million or 31.0% of sales.
Excluding the $45.2 million charge for asset impairment and other reserves,
gross profit in fiscal 1997 decreased by $174.3 million to $211.5 million or
39.4% of sales. Also impacting fiscal 1997 gross margin were adjustments for
SRAM and other component inventories recorded because of changes in product
prices and market supply. Some markets, such as telecommunications and data
communications, remained robust throughout the year, but falling prices and
orders in the desktop computing and other markets offset strong performance for
the remainder of the Company's market segments. In fiscal 1996 gross profit
increased 59% to $385.8 million when compared to fiscal 1995. In fiscal 1996
IDT's gross profit as a percentage of revenue was 56.8% compared to 57.5% in
fiscal 1995.
Also adversely impacting gross profit during fiscal 1997 were costs associated
with the new eight-inch wafer fabrication facility located in Hillsboro, Oregon,
which were not fully offset by additional revenues. During fiscal 1997, as this
facility began its production ramp, the facility manufactured production wafers
and incurred operating costs. During the first quarter of fiscal 1997,
substantially all operating expenses associated with the new Oregon facility
were classified as process engineering research and development expense, as
production of salable die was not significant. In the second and third quarters
of fiscal 1997, costs associated with the Oregon facility negatively impacted
gross margins, as a majority of total facility operating costs were allocated to
the manufacture of products, the costs of which were charged to cost of goods
sold. The remainder of the operating costs were charged to process engineering
research and development expense, based on activities performed. In fiscal 1998,
the level of expense associated with the Oregon fabrication facility is expected
to increase on a quarterly basis over the levels of expense incurred during each
quarter of fiscal 1997. The anticipated increased costs are associated with
additional equipment to be installed and other costs incurred which are
necessary to achieve more effective utilization of the facility. Additionally,
in future quarters, the percentage of these costs recorded as cost of revenues
may increase, based upon production volumes and activities performed.
The Oregon facility provides the Company with significant additional available
production capacity, but, as a result of current market conditions, the
Company's production volumes at its wafer fabrication facilities have not
increased sufficiently to take full advantage of the additional capacity.
Further, the Company is unable to predict whether demand for industry standard
SRAM products or IDT's share of the available market will improve. Should IDT's
production volumes, especially at its fabrication facilities, remain constant or
decline and should the Company be unable to otherwise decrease costs per unit
sold, the Company's gross profit will continue to be adversely impacted.
Further, if prices on industry standard SRAM products and market demand for
production volumes do not improve and if a greater percentage of the Oregon
facility's operating costs are allocated to cost of goods sold, based on
activities performed, then it will be unlikely that gross profit in the first
quarter of fiscal 1998
16
<PAGE>
will improve. IDT's policy is to expense new plant startup costs to research and
development (R&D) expense until a facility is ready to begin commercial
production. In fiscal 1997, IDT also began the production ramp for its new
assembly and test facility located near Manila, the Philippines.
Throughout fiscal 1997, the Company continued its efforts to shift to smaller
die designs and its most advanced wafer fabrication processes, which result in
increased die per wafer and therefore lower unit costs. However, declining
average selling prices primarily for SRAM products and the inability of the
Company to take full advantage of additional manufacturing capacity more than
offset manufacturing efficiencies gained through these initiatives.
Research and Development
In fiscal 1997, R&D expenses increased 13.6% to $151.4 million from $133.3
million in fiscal 1996. In fiscal 1996, R&D expenses increased 70% as compared
to $78.4 million in fiscal 1995. As a percentage of revenue, R&D expense was
28.2% of fiscal 1997 revenue, 19.6% of fiscal 1996 revenue, and 18.6% of revenue
in fiscal 1995. The Company's policy is not to capitalize preoperating costs
associated with new manufacturing facilities, and in fiscal 1997 and 1996,
significant facility start-up and staffing expenses were incurred at the new
eight-inch wafer fabrication facility in Hillsboro, Oregon. The increase in R&D
expense in each of fiscal 1997 and 1996 is principally attributable to process
engineering research costs of approximately $32.7 million and $18.5 million,
respectively, incurred at the Oregon wafer fabrication plant. Additionally, in
fiscal 1997, the Company wrote off to R&D expense certain technology investments
and equipment with a carrying value of approximately $3.5 million. In fiscal
1997, operating expenditures associated with the start up of the Oregon
fabrication facility were classified in part as process engineering R&D expense
and, in part, cost of revenues, based upon the nature of the activities
performed. In fiscal 1996, substantially all Oregon plant expenses were charged
to R&D expense.
Other continuing R&D activities include conducting research into applications of
high speed DRAM technology for the communications market, developing RISC
microprocessors for primarily communications and embedded control applications,
developing an advanced SRAM architecture that significantly improves performance
of communications applications requiring frequent switches between reads and
writes, developing a family of specialty memory products for the ATM market and
developing microprocessors for use in general applications.
The Company anticipates that in fiscal 1998, total R&D expense as a percentage
of revenue will decline when compared to fiscal 1997. Based upon activities to
be performed at each location, the Company believes a greater proportion of its
manufacturing facility operating costs, including Oregon facility costs, will be
classified as cost of goods sold rather than process engineering R&D.
IDT believes that high levels of R&D investment are required to support its
strategy of providing products to its customers which are not readily available
from its competitors. However, there can be no assurance that additional
research and development investment will result in new product offerings or that
any new offerings will achieve market acceptance.
Selling, General and Administrative Expense
Selling, general and administrative (S, G & A) expenses decreased 9% to $80.8
million in fiscal 1997 from $88.8 million in fiscal 1996. In fiscal 1996, S, G &
A increased 37% as compared to $64.6 million in fiscal 1995. S, G & A expenses
as a percentage of revenues increased to 15.0% in fiscal 1997; declined to 13.1%
in fiscal 1996; and were 15.3% of fiscal 1995 revenue. The fiscal 1997 decrease
in absolute dollars and fiscal 1996 increase in absolute dollars in S, G & A
expenses were primarily attributable to variable selling expenses associated
with the year-over-year revenue changes, changes in employee profit sharing and
management bonuses which vary in relation to profitability, and changes in
provisions for bad debts. While S,G&A expenses in fiscal 1997 decreased in
absolute dollars, they increased as a percentage of sales because of the
magnitude of the sales decrease in fiscal 1997 and the fixed nature of a portion
of these costs. In addition, the decrease in S, G & A expenses was partially
offset by expenses associated with initiatives to implement enterprise-wide
management information systems. IDT
17
<PAGE>
plans to continue its installation of enterprise-wide management information
systems in fiscal 1998 but anticipates that S, G & A expenses will decrease
slightly as a percentage of revenues.
Interest Expense
Interest expense was $12.0 million in fiscal 1997 compared with $9.3 million in
fiscal 1996 and $3.3 million in fiscal 1995. Interest expense increased in 1997
and 1996 primarily due to the issuance of $201.3 million of 5 1/2% convertible
subordinated notes (the "Notes") issued in the first quarter of fiscal 1996. In
January 1996, the company repurchased approximately $15.0 million of the Notes,
resulting in an outstanding balance of approximately $186 million. In fiscal
1996, the notes were not outstanding for the entire year. Interest capitalized
during fiscal 1997, associated with the Oregon fabrication facility and the
Philippines assembly and test facility, amounted to approximately $1.7 million.
Further, fiscal 1996 gross interest expense of $12.3 million was reduced by $3.0
million in connection with capitalization of construction period interest for
the Oregon wafer fabrication plant. All interest capitalization in connection
with the construction of these facilities has now ceased. In September 1996, the
Company completed secured equipment financing agreements which totaled
approximately $21.0 million for equipment purchased for the Oregon fabrication
facility. With the cessation of interest capitalization for the Oregon and
Philippine projects and the addition of the secured lending facility, the
Company anticipates that fiscal 1998 interest expense in absolute dollars will
increase when compared to fiscal 1997.
Interest Income and Other
Interest income and other, net, decreased to $15.8 million for fiscal 1997
compared to $19.4 million for fiscal 1996. Interest income decreased primarily
as a result of the Company liquidating short-term investments to pay for
significant capital expenditures in fiscal 1997. Also included in interest
income and other for fiscal 1997 is a loss in the amount of $2.0 million
realized on the write-off of an equity investment. Management anticipates a
portfolio migration to higher yielding, non tax exempt, securities in the fourth
fiscal quarter of 1997 will be offset by slightly declining average short-term
investment balances in fiscal 1998, causing the interest income component of
interest income to be approximately flat in absolute dollars when compared to
fiscal 1997.
Taxes
The effective tax rates for fiscal 1997, 1996, and 1995 of (32%), 32%, and 25%,
respectively, differed from the US statutory rate of 35% primarily because of
changes in the valuation allowance for deferred tax assets, permanently
reinvested earnings of foreign subsidiaries being taxed at lower rates, and the
utilization of certain tax credits. Historically, income taxes in state
jurisdictions have not been significant due to available investment tax credits
and research and development credits. The Company has consumed substantially all
of the tax benefits associated with its Malaysian subsidiary.
Stock-based Compensation Plans
The Company accounts for its stock option plans and its employee stock purchase
plan in accordance with provisions of the Accounting Principles Board's Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995, the
Financial Accounting Standards Board released the Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
IDT's 1997 fiscal year. As permitted by SFAS 123, the Company continues to
account for its stock plans in accordance with APB 25. Consequently, SFAS 123
has no impact on IDT's financial condition or results of operations.
18
<PAGE>
Liquidity and Capital Resources
The Company generated $41.8 million of funds from operations in fiscal 1997,
down from $200.9 million of funds from operations during fiscal 1996. At March
30, 1997, cash and cash equivalents were $155.1 million, a decrease of $2.1
million from $157.2 at March 31, 1996. Cash provided by operating activities
primarily reflected a net loss offset by depreciation and amortization, non-cash
charges for asset impairment and other and changes to working capital. Increased
depreciation and amortization charges in fiscal 1997 were associated with new
facilities, improvements to existing facilities and new equipment. The non-cash
charges for asset impairment and other are described in the preceding
paragraphs. Significant changes in operating assets and liabilities resulted
from the timing of collection of accounts receivable, timing of payments for
accounts payable, accrued payroll and bonus, and an accrual of an income tax
refund receivable.
During fiscal 1997, the Company's net cash used in investing activities was
$67.2 million with $192.8 million used for capital equipment and property and
plant improvements. Cash proceeds from the equipment sale and lease back
arrangements in September 1996 and December 1996 amounted to $54.2 million. Cash
generated from the sale of short-term investments, net of purchases of
short-term investments, was $67.7 million. In addition, at March 30, 1997, the
Company had $57.1 million of restricted securities pledged as collateral under a
Tax Ownership Operating Lease entered into in January 1995 related to the
construction of the eight-inch wafer fabrication facility in Oregon. At March
31, 1996, the securities pledged as collateral amounted to 105% of the lessor's
construction costs, as required until the building was completed. During the
first quarter of fiscal 1997, the facility was completed, and in accordance with
the terms of the facility lease, the collateral requirement was reduced to
89.25% of the lessor's cost to construct the facility. Therefore, as the
facility was completed during the first quarter of fiscal 1997, the lessor
released as collateral $10.7 million of restricted securities.
The Company's total fiscal 1997 capital expenditures were approximately $138.6
million, net of assets purchased and then sold and leased back, which is a
reduction of approximately $116.4 million from the amount originally planned for
the fiscal year. Fiscal 1997 capital additions were principally in connection
with continued installation of equipment in the new Oregon facility plus
continued equipping of the new Philippine plant and other capacity improvements.
The reduction in planned capital spending primarily reflected a reduction in
planned equipment additions to support lower capacity requirements associated
with market conditions for industry standard SRAM parts, in addition to certain
assets sold and leased back by the Company.
In September 1996, the Company completed secured equipment financing agreements
which total approximately $21.0 million for equipment purchased for the Oregon
fabrication facility. The borrowing arrangements fully amortize over the 60
month terms of the loans. Additionally, in September 1996 and December 1996, the
Company completed equipment sale and lease back arrangements with several
leasing companies. Equipment purchased by the Company for the Oregon fabrication
facility with a net book value of $52.6 million was sold to the leasing
companies and leased back for use at the Oregon facility under leases classified
as operating leases.
In May 1995, the Company completed the sale of $201.3 million of the 5.5%
Convertible Subordinated Notes, netting $196.7 million in proceeds. The Notes
are convertible into shares of common stock at $28.625 per share. In January
1996, the Company completed the repurchase of approximately $15.0 million of the
Notes at a price of approximately $790 per bond. During fiscal 1998, the Company
does not anticipate making additional repurchases of debt.
In the third quarter of fiscal 1997, the Company completed the acquisition of
its Salinas wafer fabrication facility, which the Company had been leasing from
Baccarat Silicon, Inc. ("Baccarat"). Carl E. Berg, a director of the Company,
owned fifty percent of Baccarat at the time of the acquisition. The transaction
was a tax free reorganization in which the Company merged a newly-created,
wholly-owned subsidiary into Baccarat and issued an aggregate of 782,445 shares
of the Company's common stock in exchange for all the outstanding capital stock
of Baccarat. The issuance of these shares of common stock was not registered
under the Securities Act of 1933, as amended (the "Securities Act"), by virtue
of the exemption provided by Section 4(2) of the Securities Act.
In view of current and anticipated capacity requirements, IDT anticipates
capital expenditures of approximately $145 million in fiscal 1998, principally
in connection with continued installation of equipment in the Oregon facility,
the Philippines plant and other capacity improvements.
19
<PAGE>
The Company's ability to invest to satisfy its capacity requirements is in part
dependent on the Company's ability to generate cash from operations. Cash flow
from operations depends significantly on the average selling prices of the
Company's products, variable cost per unit and other industry conditions which
the Company cannot predict. Future declines in selling prices for industry
standard SRAM products or other products manufactured by the Company, which
cannot be otherwise offset, will adversely impact the Company's ability to
generate funds from operations. If the Company is not able to generate
sufficient funds from operations or other sources to fund its capacity and R&D
requirements, the Company's results from operations, cash flows and financial
condition will be adversely impacted.
The Company believes that existing cash and cash equivalents, cash flow from
operations and existing credit facilities will be sufficient to meet its working
capital, mandatory debt repayment and anticipated capital expenditure
requirements for the next twelve months. While the Company is reviewing all
operations with respect to cost savings opportunities, there can be no assurance
that the Company will not be required to seek other financing sooner or that
such financing, if required, will be available on terms satisfactory to the
Company. If the Company is required to seek other financing sooner, the
unavailability of financing on terms satisfactory to IDT could have a material
adverse effect on the Company.
Factors Affecting Future Results
The Company's results of operations and financial condition are subject to the
following risk factors:
Fluctuations in Operating Results
IDT's operating results have been, and in the future may be, subject to
fluctuations due to a wide variety of factors including the timing of or delays
in new product and process technology announcements and introductions by the
Company or its competitors, competitive pricing pressures, particularly in the
SRAM memory market, fluctuations in manufacturing yields, changes in the mix of
product sold, availability and costs of raw materials, the cyclical nature of
the semiconductor industry, industry-wide wafer processing capacity, economic
conditions in various geographic areas, and costs associated with other events,
such as underutilization or expansion of production capacity, intellectual
property disputes, or other litigation. Additionally, many of the preceding
factors also impact the recoverability of the cost of manufacturing and other
assets, and as business conditions change, future writedowns or abandonment of
these assets may occur. Further, there can be no assurance that the Company will
be able to compete successfully in the future against existing or potential
competitors or that the Company's operating results will not be adversely
affected by increased competition.
Cyclicality of the Semiconductor Industry
The semiconductor industry is highly cyclical. Early in fiscal 1996, markets for
some of the Company's SRAMs were characterized by excess demand relative to
supply and the resulting favorable pricing. During the later part of fiscal
1996, however, a number of companies, principally foreign, shifted manufacturing
capacity to SRAMs causing rapid adjustments to supply and consequently impacting
market prices. The resulting significant downward trend in prices in an
extremely short period negatively affected SRAM gross margins, and adversely
affected the Company's operating results which historically have been dependent
on SRAM revenues. Current market conditions characterized by excess supply of
SRAMs relative to demand and resultant pricing declines may continue. Although
some competitors have recently made adjustments to the rate at which they will
implement capacity expansion programs, the Company is unable to accurately
estimate the amount of worldwide production capacity dedicated to industry
standard products which it produces. A material increase in industry-wide
production capacity, shift in industry capacity toward products competitive with
the Company's products, reduced demand, or other factors could result in a
further decline in product pricing and could also materially adversely affect
the Company's operating results. The Company has taken measures to manage costs,
including deferral of capacity expansion plans and work force reductions, but
there can be no assurance that these measures will be sufficient to return to
and sustain profitability.
20
<PAGE>
The Company ships a substantial portion of its products in the last month of a
quarter. If anticipated shipments in any quarter do not occur, the Company's
operating results for that quarter could be adversely affected. In addition, a
substantial percentage of the Company's products are incorporated into computer
and computer-related products, which have historically been characterized by
significant fluctuations in demand. Furthermore, any decline in the demand for
advanced microprocessors which utilize SRAM cache memory or towards
microprocessors which incorporate on-chip primary SRAM cache could adversely
affect the Company's operating results. In addition, demand for certain of the
Company's products is dependent upon growth in the communications market. Any
slowdown in the computer and related peripherals or communications markets could
also materially adversely affect the Company's operating results.
In order to achieve more full and effective use of the facilities, the Company
continues to install new equipment at the Oregon and the Philippines plants.
Additional production capacity and future yield improvements by the Company's
competitors could dramatically increase the worldwide supply of products which
compete with the Company's products and could thereby create further downward
pressure on pricing.
Risks Associated with Planned Expansion; Manufacturing Risks
In fiscal 1997, the Company began producing salable products at the Oregon
fabrication and Philippines assembly and test facilities. Historically, the
Company has utilized subcontractors for the majority of its incremental assembly
requirements, typically at higher costs than its own Malaysian assembly and test
operations. The Company expects to continue utilizing subcontractors extensively
as its Philippines assembly and test plant ramps its production volumes. Due to
production lead times and current capacity constraints, especially in the
assembly and test production areas, any failure by the Company to adequately
forecast the mix of product demand could adversely affect the Company's sales
and operating results. These capacity expansion programs in Oregon and the
Philippines face a number of substantial risks including, but not limited to,
cost overruns, equipment delays or shortages, power interruptions or failures,
manufacturing start-up or process problems or difficulties in hiring key
managers, technical personnel or operators. In addition, before fiscal 1997, the
Company had never operated an eight-inch wafer fabrication facility.
Accordingly, the Company could incur unanticipated process or production
problems. From time to time, the Company has experienced production difficulties
that have caused delivery delays and quality problems. There can be no assurance
that the Company will not experience manufacturing problems and product delivery
delays in the future as a result of, among other things, changes to its process
technologies, ramping production and installing new equipment at its facilities,
including the facilities in Oregon and the Philippines. Further, the Company's
older wafer fabrication facilities are located relatively near each other in
Northern California. If the Company were unable to use these facilities, as a
result of a natural disaster or otherwise, the Company's operations would be
materially adversely affected until the Company was able to obtain other
production capability.
In response to reduced protection offered by the Company's insurance carrier at
economically justifiable rates, the Company eliminated earthquake insurance
coverage on all facilities.
The Company's capacity additions have resulted in a significant increase in
fixed and variable operating expenses which may not be fully offset by
additional revenues for some time. Historically, the Company has expensed the
operating expenses associated with bringing a new fabrication facility to
commercial production status as R&D in the period such expenses were incurred.
However, as commercial production at a new fabrication facility commences, the
operating costs are classified as cost of revenues, and the Company begins to
recognize depreciation expense relating to the facility. Accordingly, as the
Oregon fabrication and Manila assembly and test facilities now contribute to
revenues, the Company recognizes substantial operating expenses associated with
the facilities as cost of revenues, which, in the last three quarters of fiscal
1997, reduced gross margins. As commercial production continues in fiscal 1998,
the Company anticipates incurring substantial additional operating costs and
depreciation expenses relating to these facilities. Accordingly, if revenue
levels do not increase sufficiently to offset these additional expense levels,
or if the Company is unable to achieve gross margins from products produced at
the Oregon and Manila facilities that are comparable to the Company's current
products, the Company's future results of operations could be adversely
impacted.
21
<PAGE>
Dependence on New Products
New products and process technology costs associated with the Oregon wafer
fabrication facility will continue to require significant research and
development expenditures. However, there can be no assurance that the Company
will be able to develop and introduce new products in a timely manner, that new
products will gain market acceptance or that new process technologies can be
successfully implemented. If the Company is unable to develop new products in a
timely manner, and to sell them at gross margins comparable to the Company's
current products, the future results of operations could be adversely impacted.
Dependence on Limited Suppliers
The Company's manufacturing operations depend upon obtaining adequate raw
materials on a timely basis. The number of vendors of certain raw materials,
such as silicon wafers, ultra-pure metals and certain chemicals and gases, is
very limited. In addition, certain packages used by the Company require long
lead times and are available from only a few suppliers. From time to time,
vendors have extended lead times or limited supply to the Company due to
capacity constraints. The Company's results of operations would be adversely
affected if it were unable to obtain adequate supplies of raw materials in a
timely manner or if there were significant increases in the costs of raw
materials.
IDT has been significantly dependent on the design capabilities of Quantum
Effect Design, Inc., an equity affiliate, for the design and development of
derivatives of 64 bit MIPS RISC based microprocessors. Currently, there are no
development contracts in effect between QED and IDT. While the Company is now
designing and developing derivatives of MIPS RISC based microprocessors
in-house, there is significant risk that the Company will not do so
successfully. See "Business--Products and Markets" and "--Research and
Development."
Capital Needs
The semiconductor industry is extremely capital-intensive. To remain
competitive, the Company must continue to invest in advanced manufacturing and
test equipment. In fiscal 1998, the Company expects to expend approximately $145
million in capital expenditures, net of assets sold and leased back, and
anticipates significant continuing capital expenditures in the next several
years. There can be no assurance that the Company will not be required to seek
financing to satisfy its cash and capital needs or that such financing will be
available on terms satisfactory to the Company. If such financing is required
and if such financing is not available on terms satisfactory to the Company, its
operations could be materially adversely affected.
Intellectual Property Risks
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights, which have resulted in significant and often
protracted and expensive litigation. In recent years, there has been a growing
trend by companies to resort to litigation to protect their semiconductor
technology from unauthorized use by others. The Company in the past has been
involved in patent litigation, which adversely affected its operating results.
Although the Company has obtained patent licenses from certain semiconductor
manufacturers, the Company does not have licenses from a number of semiconductor
manufacturers who have a broad portfolio of patents. The Company has been
notified that it may be infringing patents issued to certain semiconductor
manufacturers and other parties and is currently involved in several license
negotiations. There can be no assurance that additional claims alleging
infringement of intellectual property rights will not be asserted in the future.
The intellectual property claims that have been made or that may be asserted
against the Company could require that the Company discontinue the use of
certain processes or cease the manufacture, use and sale of infringing products,
to incur significant litigation costs and damages and to develop non-infringing
technology. There can be no assurance that the Company would be able to obtain
such licenses on acceptable terms or to develop non-infringing technology.
Further, the failure to renew or renegotiate existing licenses, or significant
increases in amounts payable, or the inability to obtain a license, could have a
materially adverse effect on the Company.
22
<PAGE>
Risks of International Operations
A substantial percentage of the Company's revenues are derived from export
sales, which are generally denominated in local currencies. The Company's
offshore assembly and test operations and export sales are subject to risks
associated with foreign operations, including political instability, currency
controls and fluctuations, changes in local economic conditions and import and
export controls, as well as changes in tax laws, tariffs and freight rates.
Contract pricing for raw materials used in the fabrication and assembly
processes, as well as for subcontract assembly services, can be impacted by
currency exchange rate fluctuations.
Environmental Risks
The Company is subject to a variety of regulations related to hazardous
materials used in its manufacturing process. Any failure by the Company to
control the use of, or to restrict adequately the discharge of, hazardous
materials under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended.
Volatility of Stock and Notes Prices
The Company's Common Stock and the Notes have experienced substantial price
volatility and such volatility may occur in the future, particularly as a result
of quarter-to-quarter variations in the actual or anticipated financial results
of the Company, the companies in the semiconductor industry or in the markets
served by the Company, or announcements by the Company or its competitors
regarding new product introductions. In addition, the stock market has
experienced extreme price and volume fluctuations that have affected the market
price of many technology companies' stock in particular. These factors may
adversely affect the price of the Common Stock and the Notes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
Consolidated Financial Statements included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets at March 30, 1997 and March 31, 1996
Consolidated Statements of Operations for each of the three fiscal
years in the period ended March 30, 1997
Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended March 30, 1997
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years in the period ended March 30, 1997
Notes to Consolidated Financial Statements
Financial Statement Schedule II - Valuation and Qualifying Accounts and
Reserves
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
24
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Integrated Device Technology, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Integrated Device Technology, Inc. and its subsidiaries at March 30, 1997 and
March 31, 1996 and the results of their operations and their cash flows for each
of the three years in the period ended March 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
April 18, 1997
25
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<CAPTION>
March 30, 1997 March 31, 1996
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 155,149 $ 157,228
Short-term investments 35,747 104,046
Accounts receivable, net of allowance for returns and 77,600 85,026
doubtful accounts of $7,351 and $4,580
Inventory 47,618 46,630
Deferred tax assets 44,493 38,712
Income tax refund receivable 34,055 --
Prepayments and other current assets 19,148 15,658
---------------------------------
Total current assets 413,810 447,300
Property, plant and equipment, net 424,217 415,214
Other assets 65,557 76,920
---------------------------------
TOTAL ASSETS $ 903,584 $ 939,434
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,875 $ 78,821
Accrued compensation and related expense 15,612 29,237
Deferred income on shipments to distributors 42,084 31,325
Income taxes payable -- 5,747
Other accrued liabilities 25,022 12,171
Current portion of long term obligations 6,049 3,799
---------------------------------
Total current liabilities 133,642 161,100
Convertible subordinated notes, net of issuance costs 183,157 182,558
---------------------------------
Long term obligations 52,622 36,682
---------------------------------
Deferred tax liabilities 9,925 9,367
---------------------------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock; $.001 par value:
10,000,000 shares authorized; no shares issued
Common stock; $.001 par value: 200,000,000
shares authorized; 79,654,104 and
77,496,833 shares issued and outstanding 80 77
Additional paid-in capital 304,840 287,064
Retained earnings 220,717 262,989
Cumulative translation adjustment (886) (505)
Unrealized gain (loss) on available-for-sale
securities, net (513) 102
Total stockholders' equity ---------------------------------
524,238 549,727
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 903,584 $ 939,434
=================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
MARCH 30, MARCH 31, APRIL 2,
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Revenues $ 537,213 $ 679,497 $ 422,190
Cost of revenues 325,668 293,695 179,652
Asset impairment and other 45,223 -- --
--------------------------------------
Gross profit 166,322 385,802 242,538
--------------------------------------
Operating expenses:
Research and development 151,420 133,317 78,376
Selling, general and administrative 80,812 88,752 64,647
--------------------------------------
Total operating expenses 232,232 222,069 143,023
--------------------------------------
Operating income (loss) (65,910) 163,733 99,515
Interest expense (12,018) (9,269) (3,298)
Interest income and other, net 15,764 19,432 8,186
--------------------------------------
Income (loss) before income taxes (62,164) 173,896 104,403
Provision (benefit) for income taxes (19,892) 55,647 26,101
--------------------------------------
Income (loss) before extraordinary item (42,272) 118,249 78,302
Extraordinary item:
Gain from early extinguishment of debt (net of
tax provision of $904) -- 1,921 --
--------------------------------------
Net income (loss) ($ 42,272) $ 120,170 $ 78,302
======================================
Primary earnings per share:
Income (loss) before extraordinary item ($0.54) $1.44 $1.05
======================================
Net income (loss) ($0.54) $1.47 $1.05
======================================
Fully diluted earnings per share:
Income (loss) before extraordinary item ($0.54) $1.42 $1.04
======================================
Net income (loss) ($0.54) $1.44 $1.04
======================================
Weighted average shares of common stock
and common stock equivalents
Primary 78,454 81,897 74,765
======================================
Fully diluted 78,454 87,753 75,426
======================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
MARCH 30, MARCH 31, APRIL 2,
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ($ 42,272) $ 120,170 $ 78,302
Adjustments:
Depreciation and amortization 102,897 53,782 38,816
Provision for losses on doubtful accounts 532 2,536 299
Asset impairment and other 45,223 -- --
Gain from early extinguishment of debt -- (1,921) --
Changes in assets and liabilities:
Accounts receivable 6,893 (14,456) (31,630)
Inventory (1,618) (9,171) (7,604)
Net deferred tax assets (5,223) (7,719) 3,081
Income tax refund receivable (34,055) -- --
Other assets 1,718 (12,514) (6,226)
Accounts payable (31,295) 39,651 23,889
Accrued compensation and related expense (13,625) 6,348 6,361
Deferred income on shipments to distributors 10,759 8,977 4,756
Income taxes payable (5,747) 12,004 7,605
Other accrued liabilities 7,624 3,228 (1,846)
-------------------------------------
Net cash provided by operating activities 41,811 200,915 115,803
-------------------------------------
Investing activities:
Purchases of property, plant and equipment (192,747) (287,878) (95,192)
Proceeds from sale of property, plant and equipment 54,196 387 475
Purchases of short-term investments (22,639) (215,097) (96,499)
Proceeds from sales of short-term investments 90,323 200,618 38,425
Purchases of equity investments (6,960) -- --
Proceeds from sales of (purchases of) investments
collateralizing facility lease 10,662 (57,333) (10,449)
-------------------------------------
Net cash used for investing activities (67,165) (359,303) (163,240)
-------------------------------------
Financing activities:
Issuance of common stock, net 7,615 6,608 103,549
Proceeds from issuance of convertible subordinated notes,
net of issuance costs -- 196,721 --
Proceeds from secured equipment financing 20,959 -- --
Payments on capital leases and other debt (5,299) (17,924) (14,391)
-------------------------------------
Net cash provided by financing activities 23,275 185,405 89,158
-------------------------------------
Net increase (decrease) in cash and cash equivalents (2,079) 27,017 41,721
Cash and cash equivalents at beginning of period 157,228 130,211 88,490
-------------------------------------
Cash and cash equivalents at end of period $ 155,149 $ 157,228 $ 130,211
=====================================
Supplemental disclosure of cash flow information:
Interest paid $ 12,266 $ 7,457 $ 2,698
Income taxes paid 11,285 54,616 13,901
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
ADDITIONAL CUMULATIVE UNREALIZED TOTAL
COMMON STOCK PAID-IN RETAINED TRANSLATION GAIN (LOSS) ON STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SECURITIES, NET EQUITY
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 3, 1994 66,811,104 $ 66 $160,188 $ 64,517 $(404) $ -- $224,367
Issuance of common stock 1,778,164 2 5,986 5,988
Issuance of common stock at $12.8375 per --
share, pursuant to public offering, net --
of expenses of $261 7,620,000 8 97,553 97,561
Tax benefits of stock option transactions 7,853 7,853
Translation adjustment 460 460
Net income 78,302 78,302
--------------------------------------------------------------------------------------
Balance, April 2, 1995 76,209,268 76 271,580 142,819 56 -- 414,531
Issuance of common stock 1,287,565 1 6,607 6,608
Tax benefits of stock option transactions 8,877 8,877
Translation adjustment (561) (561)
Unrealized gain on available-for-sale --
securities, net 102 102
Net income 120,170 120,170
---------------------------------------------------------------------------------------
Balance, March 31, 1996 77,496,833 77 287,064 262,989 (505) 102 549,727
Issuance of common stock 2,157,271 3 16,121 16,124
Tax benefits of stock option transactions 1,655 1,655
Translation adjustment (381) (381)
Unrealized loss on available-for-sale --
securities, net (615) (615)
Net loss (42,272) (42,272)
---------------------------------------------------------------------------------------
Balance, March 30, 1997 79,654,104 $ 80 $304,840 $220,717 $(886) $(513) $524,238
=======================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. Integrated Device Technology, Inc. designs, develops, manufactures
and markets a broad range of high-performance semiconductor products and modules
primarily to manufacturers in the communications equipment, desktop and
distributed computing systems and office automation equipment industries
worldwide.
Fiscal Year. The Company's fiscal year ends on the Sunday nearest March 31.
Fiscal years 1997, 1996 and 1995 each included 52 weeks. The fiscal year-end of
certain of the Company's foreign subsidiaries is March 31, and the results of
their operations as of their fiscal year end have been combined with the
Company's. Transactions during the intervening periods in 1997 and 1995 were not
significant.
Consolidation. The consolidated financial statements include the accounts of
Integrated Device Technology, Inc. (IDT or the Company) and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Cash, Cash Equivalents and Short-term Investments. Cash equivalents are highly
liquid investments with original maturities of three months or less at the time
of acquisition or with guaranteed on-demand buy-back provisions. Short-term
investments are valued at amortized cost, which approximates market.
The Company's short-term investments are classified as available-for-sale at
March 30, 1997 and March 31, 1996. Investment securities classified as
available-for-sale are measured at market value and net unrealized gains or
losses are recorded as a separate component of stockholders' equity until
realized. Any gains or losses on sales of investments are computed based upon
specific identification. For the period ended March 30, 1997, realized gains and
losses on available-for-sale investments were not material. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates the classification at each reporting date.
Inventory. Inventory is stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market.
Property, Plant and Equipment. Property, plant and equipment are recorded at
cost. Depreciation is computed using the straight-line method over estimated
useful lives of the assets. Leasehold improvements and leasehold interests are
amortized over the shorter of the estimated useful lives of the assets or the
remaining term of the lease. Accelerated methods of depreciation are used for
tax computations.
Accounting for Long-lived Assets. In accordance with Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-lived
Assets" (SFAS 121), the Company reviews long-lived assets held and used by the
Company for impairment whenever events or changes in circumstances indicate that
the net book value of an asset will not be recovered through expected future
cash flows (undiscounted and before interest) from use of the asset. The amount
of impairment loss is measured as the difference between the net book value of
the assets and the estimated fair value of the related assets. In the third
quarter of fiscal 1997, the Company determined that changes in circumstances had
given rise to such an impairment (see Note 4).
30
<PAGE>
Revenue Recognition. Revenue from product sales is generally recognized upon
shipment and a reserve is provided for estimated returns and discounts. A
portion of the Company's sales is made to distributors under agreements which
allow certain rights of return and price protection on products unsold by the
distributors. Related gross profits thereon are deferred until the products are
resold by the distributors.
Income Taxes. The Company accounts for income tax in accordance with Statement
of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes".
SFAS 109 is an asset and liability approach which requires that the expected
future tax consequences of temporary differences between book and tax bases of
assets and liabilities be recognized as deferred tax assets and liabilities.
Net Income (Loss) Per Share. Primary net income (loss) per common share is
computed using the weighted average number of common shares and the dilutive
effects of common stock equivalent shares outstanding during the period. Common
stock equivalent shares include shares issuable under the Company's stock option
plans. Fully diluted net income per share is computed by adjusting the primary
shares outstanding and net income for the potential effect of the conversion of
the 5.5% Convertible Subordinated Notes (Note 6) outstanding during the period
and the elimination of the related interest and deferred issue costs (net of
income taxes). When the effect of including common stock equivalents or the
conversion of the Notes on primary or fully diluted net income (loss) per share
is antidilutive, as is the case in the twelve months ended March 30, 1997, these
securities are not included in the calculation of fully diluted net income
(loss) per share.
<TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This statement is
effective for the Company's fiscal quarter ending December 28, 1997. The
Statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. If the Company had adopted this Statement for each
of the three years ended March 30, 1997, the Company's net income (loss) per
share after extraordinary item would have been as follows:
<CAPTION>
March 30, 1997 March 31, 1996 April 2, 1995
-----------------------------------------------
<S> <C> <C> <C>
Basic net income (loss) per share $(.54) $1.56 $1.12
Diluted net income (loss) per share (.54) 1.44 1.05
</TABLE>
Translation of Foreign Currencies. Accounts denominated in foreign currencies
have been translated in accordance with SFAS 52. The functional currency for the
Company's sales operations is the applicable local currency, with the exception
of the Hong Kong sales subsidiary whose functional currency is the U.S. dollar.
For subsidiaries whose functional currency is the local currency, gains and
losses resulting from translation of these foreign currency financial statements
into U.S. dollars are accumulated in a separate component of stockholders'
equity. For the Malaysian and Philippines manufacturing subsidiaries and the
Hong Kong sales subsidiary, where the functional currency is the U.S. dollar,
gains and losses resulting from the process of remeasuring foreign currency
financial statements into U.S. dollars are included in income. The effect of
foreign currency exchange rate fluctuations have not been material.
Fair Value Disclosures of Financial Instruments. Fair values of cash and cash
equivalents and short-term investments approximate cost due to the short period
of time until maturity. Fair values of long-term investments, long-term debt and
currency forward contracts are based on quoted market prices or pricing models
using current market rates.
31
<PAGE>
Concentration of Credit Risk and Off-Balance-Sheet Risk. The Company markets
high-speed integrated circuits to OEMs and distributors primarily in the United
States, Europe and the Far East. The Company performs on-going credit
evaluations of its customers' financial condition and limits the amount of
credit extended when deemed necessary and generally does not require collateral.
Management believes that risk of significant loss is significantly reduced due
to the diversity of its products, customers and geographic sales areas. The
Company maintains a provision for potential credit losses and write-offs of
accounts receivable were insignificant in each of the three years ended March
30, 1997.
One distributor's receivable balance represented 15% and 10% of total accounts
receivable at March 30, 1997, and March 31, 1996, respectively. If the financial
condition and operations of this distributor deteriorates below critical levels,
the Company's operating results could be adversely affected.
Stock-Based Compensation Plans. The Company accounts for its stock options plans
and its employee stock purchase plan in accordance with provisions of the
Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees". In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company provides additional pro forma disclosures
in Note 9.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, although
such differences are not expected to be material to the financial statements.
Stock dividend and reclassifications. On August 2, 1995, the Company announced a
two-for-one stock split of its common stock in the form of a 100% stock dividend
payable to stockholders of record as of August 25, 1995. On or about September
15, 1995, stockholders received certificates representing one additional share
for every share held. The Company's par value of $0.001 per share remained
unchanged. Historical share and per share amounts have been restated to reflect
the stock dividend.
Industry Risk.
Products and Markets. The Company operates in predominantly one industry segment
(Note 12) within the semiconductor industry. Significant technological changes
in the industry could adversely affect operating results. The semiconductor
industry is highly cyclical and has been subject to significant downturns at
various times that have been characterized by diminished product demand,
production over capacity and accelerated erosion of average selling prices.
Therefore, the average selling price the Company receives for industry standard
products is dependent upon industry-wide demand and capacity, and such prices
have historically been subject to rapid change. While the Company considers
industry technological change and industry wide demand and capacity in
estimating necessary allowances, such estimates could change in the future.
Materials. The Company's manufacturing operations depend upon obtaining adequate
raw materials. The number of vendors of certain raw materials, such as silicon
wafers, ultra-pure metals and certain chemicals and gases, is very limited. The
Company's results of operations would be adversely affected if it were unable to
obtain adequate supplies of raw materials in a timely manner or if there were
significant increases in the costs of raw materials.
Certain reclassifications have been made to prior year balances, none of which
affected the Company's financial position or results of operations, to present
the financial statements on a consistent basis.
32
<PAGE>
NOTE 2 - BALANCE SHEET COMPONENTS
Inventory
March 30, 1997 March 31, 1996
-------------------------------
(in thousands)
Raw materials $ 4,800 $ 5,171
Work-in-process 29,375 22,538
Finished goods 13,443 18,921
===========================
$ 47,618 $ 46,630
===========================
Property, plant and equipment
March 30, 1997 March 31, 1996
-------------------------------
(in thousands)
Land $ 12,885 $ 11,920
Machinery and equipment 653,903 585,011
Building and leasehold improvements 91,845 48,820
Construction-in-progress 3,013 15,167
---------------------------
761,646 660,918
Less accumulated depreciation and amortization (337,429) (245,704)
===========================
$ 424,217 $ 415,214
===========================
In fiscal 1997, the Company capitalized $1,760,000 of interest expense
($2,983,000 in fiscal 1996) in connection with the construction of the
Hillsboro, Oregon plant.
33
<PAGE>
Available-for Sale Securities
March 30, 1997 March 31, 1996
---------------------------------
(in thousands)
U.S. Government agency securities $ 25,553 $ 47,096
State and local governments 30,723 142,933
Corporate securities 111,281 56,898
Others 19,642 10,969
---------------------------------
Total debt and equity securities 187,199 257,896
Less cash equivalents (151,452) (153,850)
=================================
Short-term investments $ 35,747 $ 104,046
=================================
Short-term investments of $27,660,000 mature in less than one year and
$8,087,000 have maturities between one and four years.
NOTE 3 - OTHER ASSETS--INTANGIBLES
During fiscal 1993, IDT entered into various royalty-free patent cross-license
agreements. The patent licenses granted to IDT under these agreements have been
recorded at their cost of approximately $8,200,000 and are being amortized on a
straight-line basis over five years. The amortization relating to patent
licenses was $1,647,000 in each of fiscal years 1997, 1996 and 1995.
NOTE 4 - IMPAIRMENT OF LONG-LIVED ASSETS
In the third quarter of fiscal 1997, the Company recorded charges related to the
impairment of certain older manufacturing assets and other adjustments of
approximately $45 million. These adjustments related primarily to the carrying
value of manufacturing assets, including the Company's oldest wafer fabrication
plant in Salinas, California. As a result of significant changes in the
semiconductor industry, such as the rapid erosion of SRAM average selling
prices, and the Company's emphasis on communication-oriented products, the
Company has accelerated the use of more advanced manufacturing processes to
produce its products. The use of these more advanced processes and available
information on future demand for the Company's products indicated that the
carrying value of these selected older manufacturing assets was not fully
recoverable. The fair value of manufacturing assets was based principally upon
third party estimates of fair values.
Separately, the Company recorded charges of approximately $10 million relating
to the writedown of certain technology investments and other miscellaneous
items.
34
<PAGE>
NOTE 5 - LONG-TERM DEBT AND LEASE OBLIGATIONS
The Company leases certain equipment under long-term leases or finances
purchases of equipment under bank financing agreements. Leased assets and assets
pledged under financing agreements which are included under property, plant and
equipment are as follows:
March 30, 1997 March 31, 1996
-------------------------------
(in thousands)
Machinery and equipment $ 30,755 $ 17,296
Less accumulated depreciation and amortization (11,952) (13,233)
==========================
$ 18,803 $ 4,063
==========================
The capital lease agreements and equipment financings are collateralized by the
related leased equipment and contain certain restrictive covenants.
Future minimum payments under capital leases and equipment financing agreements,
at varying interest rates (4.9-10.6%) are as follows:
Fiscal Year (in thousands)
--------------
1998 $ 6,800
1999 5,154
2000 5,154
2001 5,154
2002 and thereafter 2,783
--------------
Total minimum payments 25,045
Less interest (4,096)
--------------
Present value of net minimum payments 20,949
Less current portion (5,228)
==============
$ 15,721
==============
35
<PAGE>
Long-term debt consists of the following:
March 30, 1997 March 31, 1996
-------------------------------
(in thousands)
Mortgage payable bearing interest at 9.625%
due in monthly installments of $142 including
interest through April 1, 2005
The note is secured by property and
improvements in San Jose, California $ 9,551 $ 10,238
Less current portion (821) (752)
=============================
$ 8,730 $ 9,486
=============================
Principal payments required in the next five years and beyond are as follows (in
thousands): $821 (1998), $904 (1999), $995 (2000), $1,095 (2001) and $5,736
(2002 and beyond).
During fiscal 1993, IDT recorded a long-term obligation (reclassified to
short-term obligation in fiscal 1997) in connection with the dismissal of
certain litigation and entered into a patent cross-license agreement. The
present value of the amount due at the end of the license term in December 1997
was $6,254,000 and $7,073,000 at March 30, 1997 and March 31, 1996,
respectively. In both fiscal years, these amounts payable have been reduced by
an amount of royalty income pursuant to certain guaranteed revenues realized on
sales of IDT's products. The Company is accreting $679,000 in future interest
charges in fiscal 1998, reflecting an 8% discount rate, from the recorded amount
at March 30, 1997 to the amount due at the end of the term using the effective
interest method.
NOTE 6 - 5.5% CONVERTIBLE SUBORDINATED NOTES
In May 1995, the Company issued $201.3 million of 5.5% Convertible Subordinated
Notes (the "Notes"), due 2002. The Notes are subordinated to all existing and
future senior debt and are convertible into shares of the Company's common stock
at a conversion rate of $28.625 per share and are redeemable at the option of
the Company in whole or in part at any time on or after June 2, 1998 at 102.75%
initially and thereafter at prices declining to 100% at maturity plus accrued
interest. Each holder of these Notes has the right, subject to certain
conditions and restrictions, to require the Company to offer to repurchase all
outstanding Notes, in whole or in part, owned by such holder, at specified
repurchase prices plus accrued interest upon the occurrence of certain events
and in certain circumstances. The costs incurred in connection with the offering
($4,600,000) have been netted against the Notes balance in the consolidated
balance sheet and are being amortized over the 7-year term of the Notes using
the straight-line method which approximates the effective interest method.
Interest on the Notes is payable semi-annually on June 1 and December 1
commencing December 1, 1995. Based upon quoted market prices, the fair value of
the Notes was approximately $153.7 million at March 30, 1997.
In January 1996, the Company retired $15 million of the Notes at a cost of
approximately $12 million resulting in an extraordinary gain. The gain, net of
tax and deferred issue costs, has been recorded as an extraordinary item in the
Company's consolidated financial statements for the twelve months ending March
31, 1996. The per share amount of the gain on early retirement of debt, net of
related income tax effect, was $0.02 in fiscal 1996.
36
<PAGE>
NOTE 7 - LINES OF CREDIT
The Company's Malaysian subsidiary has unsecured revolving lines of credit that
allow borrowings up to approximately $2,600,000 with three local banks. These
lines have no expiration dates. At March 30, 1997 there were no outstanding
borrowings against these lines. The borrowing rates for these lines are incurred
at the local bank's cost of funds plus 0.75% to 1% (9.9% to 10.25% at March 30,
1997).
In fiscal 1997, the Company's Japanese subsidiary had a secured revolving line
of credit that allowed borrowings of up to approximately $1,600,000. The line of
credit automatically extends until the Company requests termination. As of March
30, 1997, no amounts were outstanding under this line of credit. The borrowing
rate for this line of credit is the local bank's short-term prime rate existing
at the borrowing date. At March 30, 1997 this short-term borrowing rate was
1.63%.
The Company also has foreign exchange facilities with several banks that allow
the Company to enter into foreign exchange contracts of up to $75,000,000, of
which $55,512,000 was available at March 30, 1997.
NOTE 8 - COMMITMENTS
Lease Commitments. The Company leases most of its administrative and some
manufacturing facilities under operating lease agreements which expire at
various dates through fiscal 2004. Through the second quarter of fiscal 1997,
one facility was leased from a shareholder and director. The Company recorded
rental expense for the facility leased from the shareholder and director of
$517,000, $1,058,000 and $1,527,000 in fiscal 1997, 1996 and 1995, respectively.
In fiscal 1996, the Company entered into an agreement to acquire this facility
for $8,509,000 in a transaction structured as a tax free reorganization and
completed the transaction in the third quarter of fiscal 1997, by issuing
782,445 unregistered shares of the Company's stock at $10.875 per share.
In fiscal 1995, the Company entered into a five-year $60 million (revised to $64
million in fiscal 1996) Tax Ownership Operating Lease transaction to lease the
wafer fabrication facility in Hillsboro, Oregon. This lease requires monthly
payments which vary based on the London Interbank Offered Rate (LIBOR) plus 0.3%
(6.05% at March 30, 1997). The aggregate minimum rent commitment under this
lease which began in January 1996 is approximately $3,700,000 per year at the
current LIBOR rate plus 0.3%. This lease also provides the Company with the
option of either acquiring the building at its original cost or arranging for
the building to be acquired at the end of the respective lease term. The
Company's obligations under the lease are secured by a trust deed on the
building and collateralized by cash and/or investments (restricted securities)
at 89.25% of the lessor's construction costs. Restricted securities, included in
other non-current assets, collateralizing this lease were $57,120,000 and
$67,782,000 at March 30, 1997 and March 31, 1996, respectively. The Company is
also contingently liable under a first-loss clause for up to 85% of the
construction costs of the building. In addition, the Company must maintain
compliance with certain financial covenants. Management believes that this
contingent liability will not have a material adverse effect on the Company's
financial position or results of operations.
In fiscal 1997, the Company completed several sale and leaseback transactions
with various leasing companies. The sale and leaseback transactions generated
financing proceeds of $53.0 million. The aggregate minimum rent commitments
under these leases were approximately $9,635,000 per year. Under these leasing
arrangements, equipment purchased for the Oregon fabrication facility with a net
book value at the time of the sale and leaseback transaction of $52.6 million
was sold to the leasing companies and leased back for use at the Oregon facility
under leases classified as operating leases.
37
<PAGE>
The aggregate minimum rent commitments under all operating leases, including the
Hillsboro facility, and the various sale and leaseback transactions entered in
fiscal 1997, are as follows:
Fiscal Year (in thousands)
--------------
1998 $ 17,126
1999 16,899
2000 16,067
2001 12,607
2002 11,767
2003 and thereafter 7,041
==============
$ 81,507
==============
Rent expense for the years ended March 30, 1997, March 31, 1996 and April 2,
1995 totaled approximately $7,750,000 $4,552,000 and $3,326,000 respectively.
As of March 30, 1997, three secured standby letters of credit were outstanding
totaling $9,108,000. One letter of credit is required for international
purchases and expires on June 10, 1997. The other two letters of credit secure a
license and development agreement, and expire July 21, 1997.
As of March 30, 1997, the Company had commitments of $24.3 million for equipment
purchases.
NOTE 9 - STOCKHOLDERS' EQUITY
Stock-Based Compensation Plans
At March 30, 1997, the Company had three stock-based compensation plans which
are described below. The Company has elected to apply APB Opinion 25 and related
Interpretations in accounting for these plans, and therefore recognizes no
compensation expense related to its two stock option plans and its stock
purchase plan.
Stock Option Plans
There are 10,750,000 shares of common stock reserved for issuance under the 1994
Employee Stock Option Plan, as amended, and 108,000 shares of common stock
reserved for issuance under the Company's 1994 Director Stock Option Plan. At
March 30, 1997, a total of 3,246,000 options were available but unissued under
the plans. Also outstanding and exerciseable at March 30, 1997, were shares
initially granted under previous stock option plans which have not been canceled
or exercised.
Under the plans, options are issued with an exercise price equal to the market
price of the Company's common stock on the date of grant, and the maximum option
term is 10 years. Plan participants typically receive an initial grant that
vests in annual and/or monthly increments over four years. Then on each
employment anniversary date with the Company, participants receive a smaller
grant, generally one-fourth the size of the initial grant, so that a constant
unvested position is maintained.
38
<PAGE>
<TABLE>
Following is a summary of the Company's stock option activity and exerciseable
options at and for the fiscal years ended 1997, 1996, and 1995:
<CAPTION>
Fiscal 1997 Fiscal 1996 Fiscal 1995
----------------------------------------------------------------------
Shares Price Shares Price Shares Price
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(shares in thousands)
Beginning options
outstanding 14,021 $ 7.42 10,938 $ 6.64 9,958 $ 3.96
Granted 3,556 10.90 10,907 14.30 3,024 13.75
Exercised (815) 3.49 (1,034) 2.86 (1,477) 2.39
Canceled (1,762) 10.56 (6,790) 17.92 (567) 8.64
----------------------------------------------------------------------
Ending options outstanding 15,000 $ 8.09 14,021 $ 7.42 10,938 $ 6.64
Ending options exerciseable 6,335 $ 5.16 4,120 $ 3.03 2,766 $ 2.53
<FN>
Note: Prices are weighted averages for each category.
</FN>
</TABLE>
During January 1996, employees and officers holding options to purchase
6,752,351 shares of the Company's common stock were offered the opportunity to
cancel options in exchange for grants of new options, with certain restrictions
and limitations, at the then current market price. Under the terms of the
program, 6,090,334 shares were exchanged and are reflected in the grant and
cancellation activity for fiscal 1996.
Under SFAS 123, the Company is required to estimate the fair value of each
option on the date of grant. Accepted option valuation models, such as the
Black-Scholes and Binomial models, were developed in order to value freely
traded options under ideal market conditions. The Company's stock option awards
differ significantly since they always have vesting restrictions and generally
are not transferable. Models such as Black-Scholes also require highly
subjective assumptions, including expected time until exercise and future stock
price volatility. The calculated fair value of an option on the grant date is
highly sensitive to changes in these subjective assumptions.
The Company has applied the Black-Scholes model to estimate the grant-date fair
value of stock option grants in fiscal 1997 and 1996, based upon the following
weighted-average assumptions: expected volatility of 60.0 to 62.5%, expected
time-to-exercise of 1.5 to 2.0 years from vest date, risk-free interest rates of
5.1 to 6.7% and dividend yield of 0%. The weighted-average fair value per stock
option granted in fiscal 1997 and 1996, as defined by SFAS 123, was $6.21 and
$6.63, respectively.
39
<PAGE>
<TABLE>
Following is summary information about stock options outstanding at March 30,
1997 (shares in thousands):
<CAPTION>
Options Outstanding Options Exerciseable
- ------------------------------------------------------------------------------------------------------------
Weighted Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Life Average Exerciseable Average
Exercise Prices (in years) Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.63 - $ 1.87 2,382 4.4 $ 1.83 2,382 $ 1.83
1.94 - 4.00 1,124 5.6 3.20 1,095 3.18
4.12 - 6.00 372 6.2 5.24 321 5.16
6.19 - 8.00 1,017 6.5 6.55 667 6.60
8.25 - 10.00 7,121 4.6 9.72 1,639 9.77
10.13 - 32.75 2,984 5.9 11.92 231 11.77
</TABLE>
Employee Stock Purchase Plan
The Company is authorized to issue up to 4,050,000 shares of its common stock
under its amended and restated 1984 Employee Stock Purchase Plan. All domestic
employees are eligible to participate, and approximately 50% of eligible
employees participated in fiscal 1997 (compared with 25-40% during fiscal 1996).
The purchase price of the stock is 85% of the lower of the closing price at the
beginning or at the end of each offering period (typically fiscal quarters).
Eligible employees can have up to 10% of base earnings withheld to purchase the
Company's common stock under the Plan.
Following is a summary of activity under the Employee Stock Purchase Plan in
fiscal years 1997, 1996, and 1995:
Fiscal 1997 Fiscal 1996 Fiscal 1995
---------------------------------------
(shares in thousands)
Number of shares issued 560 246 274
Average selling price $8.52 $14.32 $8.51
Number of shares available at year-end 54 614 860
Note: As of March 30, 1997, the then-current offering period commenced December
30, 1996, and ends September 28, 1997.
Under SFAS 123, the Company must estimate the fair value of employees' purchase
rights under the Employee Stock Purchase Plan ("ESPP rights"). Valuing ESPP
rights involves the use of option valuation models which are incapable of
addressing transferability and vesting restrictions inherent in the Company's
Employee Stock Purchase Plan. Estimating the value of ESPP rights requires that
the Company make highly subjective assumptions about future events, such as
stock price volatility, and the resulting estimates are quite sensitive to
changes in these assumptions.
40
<PAGE>
The Company has estimated the fair value of ESPP rights using the Black-Scholes
option valuation model with the following weighted-average assumptions: an
expected life equal to the offering period (typically one fiscal quarter);
expected volatility of 60.0 to 62.5%; risk-free interest rate of 5.1 to 5.9% and
a dividend yield of 0%. The weighted-average fair value per ESPP right granted
in fiscal 1997 and 1996, as defined by SFAS 123, was $3.84 and $5.02,
respectively.
During fiscal 1997, 1996, and 1995, respectively, the Company received tax
benefits of $1,655,000, $8,877,000, and $7,853,000, related to the exercise of
non-qualified stock options and on the disposition of stock acquired with
incentive stock options or through the Employee Stock Purchase Plan.
Pro Forma Net Income and Net Income Per Share
Following is a pro forma calculation of the amounts to which the Company's net
income and income per share would have been reduced, had the Company recorded
compensation costs based on the estimated grant-date fair value, as defined by
SFAS 123, of awards granted under its Stock Option Plans and Employee Stock
Purchase Plan. The pro forma amounts include compensation costs related to
fiscal 1997 and 1996 stock option grants only. In future years, the annual
compensation expense will increase relative to the fair value of stock options
granted in those future years.
Fiscal Fiscal
1997 1996
----------------------------
(in thousands, except per share amounts)
Pro Forma Net Income/(Loss)
Primary $(61,585) $ 109,317
Fully Diluted (61,585) 115,913
Pro Forma Net Income/(Loss) per Share:
Primary $(0.78) $ 1.36
Fully Diluted (0.78) 1.34
Stockholder Rights Plan
In February 1992, the Board approved certain amendments to the Company's
Stockholder Rights Plan. Under the plan, the Company declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of common
stock. As a result of a two-for-one stock dividend in September 1995, the number
of rights associated with each share of common stock was adjusted
proportionately to one-half of a Right per share of common stock. Each Right
entitles the holder, under certain circumstances, to purchase common stock of
the Company with a value of twice the exercise price of the Right. In addition,
the Board of Directors may, under certain circumstances, cause each Right to be
exchanged for one share of common stock or substitute consideration. The Rights
are redeemable by the Company and expire in 1998.
NOTE 10 - EMPLOYEE BENEFITS PLANS
The Profit Sharing Plan is available to all employees who have at least six
months of service with the Company. Under this plan, all eligible IDT employees
receive profit sharing contributions of 7% of pre-tax earnings in cash, and an
additional 1% of pre-tax earnings, is divided equally among all domestic
employees and contributed to the
41
<PAGE>
Company's 401(k) plan. Administrative expenses are netted against the Profit
Sharing Plan contribution. The cash contributions for the years ended March 31,
1996 and April 2, 1995 for this plan were $14,056,000, and $8,360,000
respectively. There was no cash contribution to this plan for the year ended
March 30, 1997.
The Company pays an annual cash bonus to certain executive officers and other
key employees based on the pre-tax earnings of the Company and the employee's
individual performance. Prior to fiscal 1996 the aggregate amount of all bonuses
paid for any single fiscal year was up to 6% of pre-tax profits for the year.
During fiscal 1996, the amount accrued under the bonus plan was 6% of operating
income less a factor for the percent change in the Company's income tax
provision rate over the prior year. The performance bonus recorded for the years
ended March 31, 1996 and April 2, 1995 for this plan were $9,136,000 and
$6,264,000 respectively. There was no performance bonus recorded for the year
ended March 30, 1997.
NOTE 11 - INCOME TAXES
<TABLE>
The components of income before provision (benefit) for income taxes are as
follows:
<CAPTION>
March 30, 1997 March 31, 1996 April 2, 1995
-------------------------------------------------
<S> <C> <C> <C>
(in thousands)
United States $ (75,138) $161,209 $ 96,524
Foreign 12,974 12,687 7,879
=========================================
$ (62,164) $173,896 $ 104,403
=========================================
</TABLE>
<TABLE>
The provisions (benefits) for income taxes consist of the following:
<CAPTION>
March 30, 1997 March 31, 1996 April 2, 1995
-------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Current income taxes (benefits):
United States $ (15,262) $ 63,829 $ 21,164
State (13) 1,517 3,902
Foreign 606d 2,293 668
------------------------------------------
$ (14,669) $ 67,639 $ 25,734
------------------------------------------
Deferred (prepaid) income taxes:
United States $ (9,357) $(11,340) $ (182)
State 4,134 (652) 549
------------------------------------------
$ (5,223) $(11,992) $ 367
==========================================
Provision (benefit) for income taxes $ (19,892) $ 55,647 $ 26,101
==========================================
</TABLE>
42
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities are as follows:
March 30, 1997 March 31, 1996
--------------------------------
(in thousands)
Deferred tax assets:
Deferred income on shipments to distributors $ 16,510 $ 12,289
Non-deductible accruals and reserves 27,676 16,208
Capitalized inventory and other expenses 7,687 9,694
Other (1,597) 521
Net operating loss & credit carryforwards 6,320 --
--------------------------------
Gross deferred tax assets 56,596 38,712
--------------------------------
Deferred tax liabilities:
Depreciation (11,564) (9,367)
--------------------------------
Gross deferred tax liabilities (11,564) (9,367)
--------------------------------
Valuation allowance (10,464) --
================================
Net deferred tax assets $ 34,568 $ 29,345
================================
As of March 30, 1997, management provided a valuation allowance for deferred tax
assets for which it is more likely than not that such assets will not be
realized. The valuation allowance is primarily attributable to state deferred
tax assets net of state deferred tax liabilities.
<TABLE>
The provision (benefit) for income taxes differs from the amount computed by
applying the U.S. statutory income tax rate of 35% to income before the
provision (benefit) for income taxes as follows:
<CAPTION>
March 30, 1997 March 31, 1996 April 2, 1995
--------------------------------------------------
<S> <C> <C> <C>
Provision at U.S. statutory rate $ (21,758) $ 60,864 $ 36,541
Earnings of foreign subsidiaries
considered permanently reinvested, less
foreign taxes (2,580) (2,327) (2,444)
General business credits (1,840) (1,994) (6,504)
Tax exempt interest (1,264) (1,982) (636)
State tax, net of federal benefit (6,342) 865 3,245
Valuation allowance 10,464 0 (2,337)
Other 3,428 221 (1,764)
-------------------------------------------------
Provision (benefit) for income taxes $ (19,892) $ 55,647 $ 26,101
=================================================
</TABLE>
43
<PAGE>
Management believes it is likely that expected additional depreciation grants
for the Company's Malaysian subsidiary will defer the time when the Malaysian
subsidiary will first begin to pay local income taxes on operating income until
after its year ended March 30, 1997.
The Company's intention is to permanently reinvest its earnings in all of its
foreign subsidiaries, except for its German subsidiary, Integrated Device
Technology, GmbH, and its U.K. subsidiary, IDT Europe Limited. Accordingly, U.S.
taxes have not been provided on approximately $50,592,000 of unremitted
earnings. Upon distribution of those earnings in the form of dividends or
otherwise, the Company will be subject to both U.S. income taxes and various
foreign country withholding taxes.
NOTE 12 - INDUSTRY SEGMENT, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
IDT operates predominantly in one industry segment (Note 1). The Company offers
products in four product families; specialty memory products, SRAM components
and modules, logic circuits and RISC microprocessors. Sales through a national
distributor accounted for 14%, 11% and 13% of net revenues for fiscal 1997, 1996
and 1995 respectively. Additionally, one OEM customer accounted for 12% of net
revenues in fiscal 1996.
Major operations outside the United States include manufacturing facilities in
Malaysia and the Philippines and sales subsidiaries in Japan, the Pacific Rim,
and throughout Europe. At March 30, 1997, and March 31, 1996 total liabilities
for operations outside of the United States were $70,832,000 and $34,475,000,
respectively.
<TABLE>
The following is a summary of IDT's foreign operations by geographic areas for
fiscal 1997, 1996 and 1995:
<CAPTION>
TRANSFERS
SALES TO BETWEEN OPERATING
UNAFFILIATED GEOGRAPHIC NET INCOME IDENTIFIABLE
CUSTOMERS AREAS REVENUES (LOSS) ASSETS
<S> <C> <C> <C> <C> <C>
Fiscal year ended March 30, 1997
United States $ 330,578 $ 130,014 $ 460,592 $ (61,512) $ 624,306
Europe 93,167 -- 93,167 12,949 64,687
Japan 73,385 -- 73,385 1,040 15,216
Asia-Pacific 40,083 72,029 112,112 12,448 109,130
Elimination -- (202,043) (202,043) 151 (137,790)
Corporate -- -- -- (30,986) 228,035
---------------------------------------------------------------
Consolidated $ 537,213 $ -- $ 537,213 $ (65,910) $ 903,584
===============================================================
Fiscal year ended March 31, 1996
United States $ 404,994 $ 150,769 $ 555,763 $ 149,206 $ 574,287
Europe 144,154 -- 144,154 39,274 28,478
Japan 72,530 -- 72,530 3,405 21,482
Asia-Pacific 57,819 46,870 104,689 8,466 72,703
Elimination -- (197,639) (197,639) 89 (42,633)
Corporate -- -- -- (36,707) 285,117
---------------------------------------------------------------
Consolidated $ 679,497 $ -- $ 679,497 $ 163,733 $ 939,434
===============================================================
Fiscal year ended April 2, 1995
United States $ 256,014 $ 60,266 $ 316,280 $ 111,394 $ 292,501
Europe 85,180 7,566 92,746 9,524 30,788
Japan 36,974 -- 36,974 582 11,973
Asia-Pacific 44,022 30,929 74,951 5,812 36,855
Elimination -- (98,761) (98,761) (217) (48,797)
Corporate -- -- -- (27,580) 238,655
---------------------------------------------------------------
Consolidated $ 422,190 $ -- $ 422,190 $ 99,515 $ 561,975
===============================================================
</TABLE>
44
<PAGE>
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company holds equity interest of approximately 36% in Quantum Effect Design,
Inc., (QED). A shareholder and director of the Company also holds equity
interest of approximately 3.6% in QED. The Company recorded royalty expense of
$2,624,000 to QED in fiscal 1997.
NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company has foreign subsidiaries which operate and sell or manufacture the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates. The Company primarily
utilizes forward exchange contracts to hedge against the short-term impact of
foreign currency fluctuations on certain assets or liabilities denominated in
foreign currencies. The total amount of these contracts is offset by the
underlying assets or liabilities denominated in foreign currencies. The gains or
losses on these contracts are included in income as the exchange rates change.
Management believes that these forward contracts do not subject the Company to
undue risk due to foreign exchange movements because gains and losses on these
contracts are offset by losses and gains on the underlying asset and
transactions being hedged. These forward exchange contracts are considered
identifiable hedges and realized and unrealized gains and losses are deferred
until settlement of the underlying commitments. At March 30, 1997, and March 31,
1996 deferred gains and losses were not material.
Foreign exchange hedge positions, which include buy and sell positions generally
with maturities of less than three months, are as follows:
March 30, 1997 March 30, 1996
------------------------------------------
Buy Sell Buy Sell
(in thousands of U.S. dollars)
Japanese Yen $ - $ 13,802 $ - $ 14,569
British Pound Sterling 945 4,054 - 2,561
Malaysian Ringgits 5,440 2,861 5,271 2,214
==========================================
$ 6,385 $ 20,717 $ 5,271 $ 19,344
==========================================
The Company is exposed to credit-related losses if counterparties to financial
instruments fail to perform their obligations. However, it does not expect any
counterparties, which presently have high credit ratings, to fail to meet their
obligations. The Company controls credit risk through credit approvals, limits
and monitoring procedures including the use of high credit quality
counterparties.
45
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY RESULTS OF OPERATIONS
(in thousands, except per share data)
Year ended March 30, 1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
Revenues $142,539 $120,485 $130,992 $143,197
Asset impairment and other -- -- 45,223 --
Gross profit 70,923 38,194 2,146 55,059
Income (loss) before
extraordinary item 8,869 (10,334) (42,918) 2,111
Net income (loss) 8,869 (10,334) (42,918) 2,111
Primary earnings per share:
Income (loss) before
extraordinary item 0.11 (0.13) (0.55) 0.03
Net income (loss) 0.11 (0.13) (0.55) 0.03
Fully diluted earnings per share:
Income (loss) before
extraordinary item 0.11 (0.13) (0.55) 0.03
Net income (loss) 0.11 (0.13) (0.55) 0.03
Year ended March 31, 1996
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
Revenues $152,195 $178,504 $188,545 $160,253
Gross profit 87,873 102,785 108,145 86,999
Income before
extraordinary item 28,791 34,336 35,535 19,587
Net income 28,791 34,336 35,535 21,508
Primary earnings per share:
Income before
extraordinary item 0.35 0.42 0.44 0.24
Net income 0.35 0.42 0.44 0.27
Fully diluted earnings per share:
Income before
extraordinary item 0.35 0.40 0.42 0.25
Net income 0.35 0.40 0.42 0.27
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's Directors is
incorporated herein by reference from the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended March 30, 1997, and the information required by this item with respect to
the Company's executive officers is incorporated herein by reference from the
section entitled "Executive Officers of the Registrant" in Part I, Item 4A of
this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in
Item 8:
- Consolidated Balance Sheets at March 30, 1997 and March 31, 1996
- Consolidated Statements of Operations for each of the three fiscal
years in the period ended March 30, 1997
- Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended March 30, 1997
- Consolidated Statements of Stockholders' Equity for each of the
three fiscal years in the period ended March 30, 1997
- Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedules,
or because the required information is included in the financial
statements or notes thereto.
(a) 3. Listing of Exhibits
48
<PAGE>
Exhibit No. Description
Page
2.1* Agreement and Plan of Reorganization dated as of October 1, 1996, by
and among the Company, Integrated Device Technology Salinas Corp. and
Baccarat Silicon, Inc. (previously filed as Exhibit 2.1 to the
Quarterly Report on Form 10-Q for the Fiscal Quarter Ended December 29,
1996).
2.2* Agreement of Merger dated as of October 1, 1996, by and among the
Company, Integrated Device Technology Salinas Corp. and Baccarat
Silicon, Inc. (previously filed as Exhibit 2.2 to the Quarterly Report
on Form 10-Q for the Fiscal Quarter Ended December 29, 1996).
3.1* Restated Certificate of Incorporation (previously filed as Exhibit 3A
to Registration Statement on Form 8-B dated September 23, 1987).
3.2* Certificate of Amendment of Restated Certificate of Incorporation
(previously filed as Exhibit 3(a) to the Registration Statement on Form
8 dated March 28, 1989).
3.3* Certificate of Amendment of Restated Certificate of Incorporation
(previously filed as Exhibit 4.3 to the Registration Statement on Form
S-8 (File Number 33-63133) filed on October 2, 1995).
3.4* Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock (previously filed as Exhibit 3(a) to the
Registration Statement on Form 8 dated March 28, 1989).
3.5* Bylaws dated January 25, 1993 (previously filed as Exhibit 3.4 to
Annual Report on Form 10-K for the Fiscal Year Ended March 28, 1993).
4.1* Amended and Restated Rights Agreement dated as of February 27, 1992,
between the Company and The First National Bank of Boston (previously
filed as Exhibit 4.1 to Current Report on Form 8-K dated February 27,
1992).
4.2* Amendment dated September 29, 1995 to the Rights Agreement (previously
filed as Exhibit 4.2 to Amendment No. 2 to the Registration Statement
on Form 8-A filed October 19, 1995).
4.3* Form of Indenture between the Company and The First National Bank of
Boston, as Trustee, including Form of Notes (previously filed as
Exhibit 4.6 to the S-3 Registration Statement (File number 33-59443).
10.1* Lease for 1566 Moffet Street, Salinas, California, dated June 28, 1985
between the Company and Carl E. Berg and Clyde J. Berg, dba Berg & Berg
Developers (previously filed as Exhibit 10.7 to Form S-1 Registration
Statement (File No. 33- 3189)).
10.2* Assignment of Lease dated October 30, 1985 between the Company and
Synertek Inc. relating to 2975 Stender Way, Santa Clara, California
(previously filed as Exhibit 10.4 to Annual Report on Form 10-K for the
Fiscal Year Ended April 1, 1990).
10.3* Assignment of Lease dated October 30, 1985 between the Company and
Synertek Inc. relating to 3001 Stender Way, Santa Clara, California
(previously filed as Exhibit 10.5 to Annual Report on Form 10-K for
Fiscal Year Ended April 1, 1990).
10.4* Lease dated October 23, 1989 between Integrated Device Technology
International Inc. and RREEF USA FUND - III relating to 2972 Stender
Way, Santa Clara, California (previously filed as Exhibit 10.6 to
Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990).
10.5* First Deed of Trust and Assignment of Rents, Security Agreement and
Fixture Filing dated March 28, 1990 between the Company and Santa Clara
Land Title Company for the benefit of The Variable Annuity Life
Insurance Company relating to 2670 Seeley Avenue, San Jose, California
(previously filed as Exhibit 10.7 to Annual Report on Form 10-K for the
Fiscal Year Ended April 1, 1990).
10.6* Amended and Restated 1984 Employee Stock Purchase Plan(previously filed
as Exhibit 10.16 to the Quarterly Report on Form 10-Q for the Fiscal
Quarter Ended October 2, 1994).**
10.7* 1994 Stock Option Plan, as amended through April 25, 1996 (previously
filed as Exhibit 4.5 to the Registration Statement on Form S-8 (File
Number 333-15871) filed on November 8, 1996).**
10.8* 1994 Directors Stock Option Plan and related documents(previously filed
as Exhibit 10.18 to the Quarterly Report on Form 10-Q for the Fiscal
Quarter Ended October 2, 1994).**
49
<PAGE>
10.9* Form of Indemnification Agreement between the Company and its directors
and officers (previously filed as Exhibit 10.68 to Annual Report on
Form 10-K for the Fiscal Year Ended April 2, 1989).**
10.10* Manufacturing, Marketing and Purchase Agreement between the Company and
MIPS Computer Systems, Inc. dated January 16, 1988 (previously filed as
Exhibit to Annual Report on Form 10-K for the Fiscal Year Ended March
29, 1992) (Confidential Treatment Granted).
10.11* Preferred Stock Purchase Agreement dated January 14, 1992 among the
Company, Berg & Berg Enterprises, Inc. and Quantum Effect Design, Inc.
(previously filed as Exhibit 10.13 to Annual Report on Form 10-K for
the Fiscal Year Ended March 29, 1992).
10.12* Patent License Agreement between the Company and American Telephone and
Telegraph Company ("AT&T") dated May 1, 1992 (previously filed as
Exhibit 19.1 to Quarterly Report on Form 10-Q for the Quarter Ended
June 28, 1992) (Confidential Treatment Granted).
10.13* Patent License Agreement dated September 22, 1992 between the Company
and Motorola, Inc. (previously filed as Exhibit 19.1 to Quarterly
Report on Form 10Q for the Quarter Ended September 27, 1992)
(Confidential Treatment Granted).
10.14* Agreement between the Company and Texas Instruments Incorporated
effective December 10, 1992, including all related exhibits, among
others, the Patent Cross-License Agreement and the OEM Purchase
Agreement (previously filed as Exhibit 19.1 to Quarterly Report on Form
10-Q for the Quarter Ended December 27, 1992) (Confidential Treatment
Granted).
10.15* Series A Preferred Stock Purchase Agreement dated July 16,1992 among
Monolithic System Technology, Inc. and certain purchasers (previously
filed as Exhibit 10.12 to the Quarterly Report on Form 10-Q for the
Fiscal Quarter Ended October 2, 1994).
10.16* Series B Preferred Stock Purchase Agreement dated March 1994 among
Monolithic System Technology, Inc. and certain purchasers (previously
filed as Exhibit 10.13 to the Quarter Report on Form 10-Q for the
Fiscal Quarter Ended October 2, 1994).
10.17* Series C Preferred Stock Purchase Agreement dated June 13,1994 among
Monolithic System Technology, Inc. and certain purchasers (previously
filed as Exhibit 10.14 to the Quarterly Report on Form 10-Q for the
Fiscal Quarter Ended October 2, 1994).
10.18* Domestic Distributor Agreement between the Company and Wyle
Laboratories, Inc. Electronic Marketing Group dated as of April 15,
1994 (previously filed as Exhibit 10.15 to the Quarterly Report on Form
10-Q for the Fiscal Quarter Ended October 2, 1994).
10.19* Lease Extension and Modification Agreement between the Company and
Baccarat Silicon, Inc. ("Baccarat") dated as of September 1, 1994,
relating to 1566 Moffet Street, Salinas, California (previously filed
as Exhibit 10.16 to the Quarterly Report on Form 10-Q for the Fiscal
Quarter Ended October 2, 1994).
10.20* Promissory Note dated April 28, 1995 between L. Robert Phillips and the
Company and related document (previously filed as Exhibit 10.20 to the
Annual report on Form 10-K for the Fiscal Year Ended April 2, 1995).**
10.21* Sublease of the Land and Lease of the Improvement by and between
Sumitomo Bank Leasing and Finance, Inc. and the Company dated January
27, 1995 and related agreements thereto (previously filed as Exhibit
10.21 to the Annual Report on Form 10-K for the Fiscal Year Ended April
2, 1995).
10.22* 1995 Executive Performance Plan (previously filed as Exhibit 10.22 to
the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October
1, 1995).**
10.23* Letter amending Patent License Agreement between the Company and AT&T
dated December 4, 1995 (previously filed as Exhibit 10.23 to the Annual
Report on Form 10-K for the Fiscal year Ended March 31, 1996)
(Confidential Treatment Granted).
50
<PAGE>
10.24* Lease dated July 1995 between Integrated Device Technology, Inc. and
American National Insurance Company relating to 3250 Olcott Street,
Santa Clara, California (previously filed as Exhibit 10.25 to the
Annual Report for the Fiscal Year Ended March 31, 1996).
10.25* Registration Rights Agreement dated as of October 1, 1996 among the
Company, Carl E. Berg and Mary Ann Berg (previously filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended
December 29, 1996).
11.1 Statement re: computation of earnings per share
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule (EDGAR version only)
* These exhibits were previously filed with the Commission as indicated
and are incorporated herein by reference.
** These exhibits are management contracts or compensatory plans or
arrangements required to be filed pursuant to Item 14 (c) of Form 10-K.
(b) Reports on Form 8-K
Not applicable.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTEGRATED DEVICE TECHNOLOGY, INC.
Registrant
May 19, 1997 By: /s/ Leonard C. Perham
--------------------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ D. John Carey Chairman of the Board May 19, 1997
(D. John Carey)
/s/ Leonard C. Perham Chief Executive Officer and Director May 19, 1997
(Leonard C. Perham) (Principal Executive Officer)
/s/ William D. Snyder Vice President, Chief Financial Officer May 19, 1997
(William D. Snyder) (Principal Financial and Accounting
Officer)
/s/ Carl E. Berg Director May 19, 1997
(Carl E. Berg)
/s/ John C. Bolger Director May 19, 1997
(John C. Bolger)
/s/ Federico Faggin Director May 19, 1997
(Federico Faggin)
52
<PAGE>
SCHEDULE II
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance at Additions Charged
Beginning of to Cost and Recoveries and Balance at End
Period Expenses Write-offs of Period
<S> <C> <C> <C> <C>
(in thousands)
Inventory Lower of Cost or Market
Reserve
Year ended April 2, 1995 $ 794 $ 603 $(760) $ 637
Year ended March 31, 1996 637 2,866 (191) 3,312
Year ended March 30, 1997 3,312 16,654 - 19,966
</TABLE>
53
EXHIBIT 11.1
<TABLE>
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
-----------------------------------
March 30, March 31, April 2,
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding 78,454 77,026 69,684
Net effect of dilutive stock options -- 4,871 5,081
-------- -------- -------
Total 78,454 81,897 74,765
======== ======== =======
Income (loss) before extraordinary item $(42,272) $118,249 $78,302
======== ======== =======
Net income (loss) $(42,272) $120,170 $78,302
======== ======== =======
Primary earnings per share:
Income (loss) before extraordinary item $(0.54) $1.44 $1.05
======== ======== =======
Net income (loss) $(0.54) $1.47 $1.05
======== ======== =======
Fully diluted:
Weighted average shares outstanding 78,454 77,026 69,684
Net effect of dilutive stock options -- 4,871 5,742
Assumed conversion of convertible subordinated notes -- 5,856 --
-------- -------- -------
Total 78,454 87,753 75,426
======== ======== =======
Income (loss) before extraordinary item $(42,272) $118,249 $78,302
Net income (loss) $(42,272) $120,170 $78,302
Add:
Convertible subordinated notes interest and related expenses,
net of taxes (if dilutive) 6,596
-------- -------- -------
Adjusted net income (loss) $(42,272) $126,766 $78,302
======== ======== =======
Fully diluted earnings per share:
Income (loss) before extraordinary item $ (0.54) $ 1.42 $ 1.04
======== ======== =======
Net income (loss) $ (0.54) $ 1.44 $ 1.04
======== ======== =======
</TABLE>
EX 21.1
<TABLE>
LIST OF REGISTRANTS SUBSIDIARIES
<CAPTION>
State or Other Jurisdiction Owned by
of Incorporation Registrant
<S> <C> <C>
Centaur Technology, Inc. California 100
Integrated Device Technology Asia, Ltd. Hong Kong 100
IDT Asia, Ltd. Hong Kong 100
IDT Europe Limited United Kingdom 100
IDT France S.A.R.L. France 100
IDT Foreign Sales Corporation Barbados 100
Integrated Device Technology, AB Sweden 100
Integrated Device Technology, Europe, Inc. California 100
Integrated Device Technology GmbH Germany 100
Integrated Device Technology Italia S.r.l. Italy 100
Integrated Device Technology (Malaysia) SDN. BHD Malaysia 100
Integrated Device Technology Realty Holdings, Inc. Philippines 40
Integrated Device Technology Holding, Inc. Philippines 40
Integrated Device Technology (Philippines), Inc. Philippines 100
Nippon IDT K.K. Japan 100
Baccarat Silicon, Inc. California 100
</TABLE>
54
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-46831, 33-34458, 33-54937, 33-63133 and
333-15871) of Integrated Device Technology, Inc. of our report dated April 18,
1997, listed in the index appearing under Item 8 of the Annual Report on Form
10-K.
PRICE WATERHOUSE LLP
San Jose, California
May 19, 1997
55
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> Mar-30-1997
<CASH> 155,149
<SECURITIES> 35,747
<RECEIVABLES> 84,951
<ALLOWANCES> 7,351
<INVENTORY> 47,618
<CURRENT-ASSETS> 413,810
<PP&E> 761,646
<DEPRECIATION> 337,429
<TOTAL-ASSETS> 903,584
<CURRENT-LIABILITIES> 133,642
<BONDS> 183,157
0
0
<COMMON> 80
<OTHER-SE> 524,158
<TOTAL-LIABILITY-AND-EQUITY> 903,584
<SALES> 537,213
<TOTAL-REVENUES> 537,213
<CGS> 325,668
<TOTAL-COSTS> 370,891
<OTHER-EXPENSES> 232,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,018
<INCOME-PRETAX> (62,164)
<INCOME-TAX> (19,892)
<INCOME-CONTINUING> (42,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,272)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
