SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 28, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File No. 0-12695
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
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of February 6, 1998, was 81,000,506.
<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Three Months Ended
December 28, 1997 December 29, 1996
-----------------------------------------
<S> <C> <C>
Revenues $ 144,235 $ 130,992
Cost of revenues 89,193 83,623
Asset impairment and other 0 45,223
--------------------------------------
Gross profit 55,042 2,146
--------------------------------------
Operating expenses:
Research and development 31,294 40,528
Selling, general and administrative 22,334 21,669
--------------------------------------
Total operating expenses 53,628 62,197
--------------------------------------
Operating income (loss) 1,414 (60,051)
Interest expense (3,515) (3,612)
Interest income and other, net 5,408 156
--------------------------------------
Income (loss) before income taxes 3,307 (63,507)
Provision (benefit) for income taxes 926 (20,589)
--------------------------------------
Net income (loss) $ 2,381 $ (42,918)
======================================
Net income (loss) per share:
Basic $ 0.03 $ (0.55)
Diluted $ 0.03 $ (0.55)
Weighted average shares:
Basic 80,578 78,527
Diluted 83,617 78,527
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Nine Months Ended Nine Months Ended
December 28, 1997 December 29, 1996
------------------------------------------
<S> <C> <C>
Revenues $ 436,915 $ 394,016
Cost of revenues 270,373 237,530
Asset impairment and other 0 45,223
-------------------------------------
Gross profit 166,542 111,263
-------------------------------------
Operating expenses:
Research and development 91,748 117,366
Selling, general and administrative 64,746 60,868
-------------------------------------
Total operating expenses 156,494 178,234
-------------------------------------
Operating income (loss) 10,048 (66,971)
Interest expense (10,770) (8,350)
Interest income and other, net 10,268 9,077
-------------------------------------
Income (loss) before income taxes 9,546 (66,244)
Provision (benefit) for income taxes 2,673 (21,861)
-------------------------------------
Net income (loss) $ 6,873 $ (44,383)
=====================================
Net income (loss) per share:
Basic $ 0.09 $ (0.57)
Diluted $ 0.08 $ (0.57)
Weighted average shares:
Basic 80,119 78,080
Diluted 83,614 78,080
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
<CAPTION>
December 28, 1997 March 30, 1997
-----------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 151,047 $ 155,149
Short-term investments 62,583 35,747
Accounts receivable, net 66,043 77,600
Inventory 54,121 47,618
Deferred tax assets 44,493 44,493
Income tax refund receivable 442 34,055
Prepayments and other current assets 18,972 19,148
------------------------------
Total current assets 397,701 413,810
Property, plant and equipment, net 453,391 424,217
Other assets 73,941 65,557
------------------------------
TOTAL ASSETS $ 925,033 $ 903,584
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 50,170 $ 44,875
Accrued compensation and related expenses 11,877 15,612
Deferred income on shipments to distributors 52,215 42,084
Other accrued liabilities 25,913 25,022
Current portion of long-term obligations 5,181 6,049
------------------------------
Total current liabilities 145,356 133,642
5.5% Convertible Subordinated Notes, net of issuance costs 183,606 183,157
Long-term obligations 47,084 52,622
Deferred tax liabilities 9,907 9,925
------------------------------
Total liabilities 385,953 379,346
Commitments and contingencies
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; 80,712,589 and
79,654,104 shares issued and outstanding 81 80
Additional paid-in capital 312,464 304,840
Retained earnings 227,590 220,717
Cumulative translation adjustment (1,074) (886)
Unrealized gain (loss) on available-for-sale securities, net 19 (513)
------------------------------
Total stockholders' equity 539,080 524,238
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 925,033 $ 903,584
==============================
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended Nine Months Ended
December 28, 1997 December 29, 1996
-------------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 6,873 $ (44,383)
Adjustments:
Depreciation and amortization 84,145 75,317
Asset impairment and other 0 45,222
Deferred tax assets 0 (20,634)
Changes in assets and liabilities:
Accounts receivable 11,557 9,677
Inventory (6,503) (1,825)
Income tax refund receivable 33,613 (12,503)
Prepayments and other assets 2,961 2,276
Accounts payable 5,295 (13,756)
Accrued compensation and related expense (3,735) (15,908)
Deferred income on shipments to distributors 10,131 375
Income taxes payable (195) (6,614)
Other accrued liabilities (1,035) 957
--------------------------------
Net cash provided by operating activities 143,107 18,201
--------------------------------
Investing activities:
Purchases of property, plant and equipment (112,218) (174,262)
Proceeds from sales of property, plant and equipment 269 53,010
Purchases of short-term investments (34,058) (22,037)
Proceeds from sales of short-term investments 7,754 49,198
Purchases of equity investments (12,090) (6,960)
Proceeds from sales of investments
collateralizing facility lease 0 10,662
--------------------------------
Net cash used for investing activities (150,343) (90,389)
--------------------------------
Financing activities:
Proceeds from issuance of common stock, net 7,625 5,670
Proceeds from secured equipment financing 0 20,959
Payments on capital leases and other debt (4,491) (4,241)
--------------------------------
Net cash provided by financing activities 3,134 22,388
--------------------------------
Net decrease in cash and cash equivalents (4,102) (49,800)
Cash and cash equivalents at beginning of period 155,149 157,228
--------------------------------
Cash and cash equivalents at end of period $ 151,047 $ 107,428
================================
Supplemental disclosures:
Interest paid $ 12,157 $ 11,785
Income taxes paid (refunded), net (31,924) 12,459
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of Integrated Device Technology, Inc. (IDT or the
Company), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information
included therein. These financial statements should be read in
conjunction with the audited consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K
for the year ended March 30, 1997. The results of operations for the
three and nine month periods ended December 28, 1997, are not
necessarily indicative of the results to be expected for the full year.
2. Inventory consisted of the following:
December 28, 1997 March 30, 1997
----------------------------------
(in thousands)
Raw materials $ 5,825 $ 4,800
Work-in-process 33,509 29,375
Finished goods 14,787 13,443
-----------------------------
$54,121 $47,618
=============================
3. The provision for income taxes reflects management's estimated
annualized effective tax rate of 28%, applied to earnings for the
interim periods. The rate used differs from the U.S. statutory rate of
35% primarily due to earnings of foreign subsidiaries, considered
permanently reinvested, being taxed at lower average rates than the
U.S. statutory rate. Income taxes in state jurisdictions are not
significant due to available state tax credits.
4. In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share," which the Company adopted for the third quarter of fiscal
1998. As required by the statement, all prior periods presented have
been restated, the effects of which were not material. 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. Basic net income per
common share is computed by dividing net income available to common
stockholders (numerator) by the weighted average number of common
shares outstanding during the period (denominator). Unlike the
computation for primary shares, the dilutive effects of potential
common shares outstanding during the period are not included in the
basic earnings per share computation. Diluted earnings per share
considers all potentially dilutive common shares outstanding. The
denominator is computed by adding to the weighted average number of
common shares, potential common shares outstanding during the period
and the potential effect of conversion of the 5.5% Convertible
Subordinated Notes (the Notes), when the effect of such potential
common shares or potential conversion would be dilutive. If the
potential effect of converting the notes is dilutive, net income (the
numerator) is also adjusted to omit related interest and deferred debt
issue costs (net of income taxes). When applicable, potential common
shares are computed using the Treasury Stock Method. SFAS No. 128
eliminates the Modified Treasury Stock Method which was previously used
when stock options granted and outstanding exceeded 20% of the
Company's total common stock shares issued and outstanding. For both
the three and the nine months ended December 28, 1997, and December 29,
1996, the potential effect of the conversion of the Notes has been
excluded in the diluted share calculation because the results are
anti-dilutive. For the three and the nine months ended December 29,
1996, potential common shares have not been included in the diluted
share calculation because the results are also anti-dilutive.
6
<PAGE>
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below:
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 28, December 29, December 28, December 29,
(In thousands except per share amounts) 1997 1996 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Weighted average shares outstanding 80,578 78,527 80,119 78,080
(denominator)
Net income (loss) (numerator) $ 2,381 $ (42,918) $ 6,873 $ (44,383)
----------------------------------------------------------
Net income (loss) per share $ .03 $ (.55) $ .09 $ (.57)
==========================================================
Diluted:
Weighted average shares outstanding 80,578 78,527 80,119 78,080
Net effect of dilutive stock options 3,039 -- 3,495 --
"If Converted" conversion of convertible -- -- -- --
subordinated notes
----------------------------------------------------------
Total shares (denominator) 83,617 78,527 83,614 78,080
==========================================================
Net income (loss) $ 2,381 $ (42,918) $ 6,873 $ (44,383)
Add:
Convertible subordinated notes interest, net -- -- -- --
of taxes
Expenses attributable to convertible notes -- -- -- --
issue
----------------------------------------------------------
Adjusted net income (loss) (numerator) $ 2,381 $ (42,918) $ 6,873 $ (44,383)
==========================================================
----------------------------------------------------------
Net income (loss) per share $ .03 $ (.55) $ .08 $ (.57)
==========================================================
</TABLE>
7
<PAGE>
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards. SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and
displaying comprehensive income within a financial statement. This
Statement requires the Company to report additional information on
comprehensive income to supplement the reporting of income. SFAS No.
130 is effective for both interim and annual periods beginning after
December 15, 1997. Comparative financial statements provided for
earlier periods are required to be reclassified so that comprehensive
income is displayed in a comparative format for all periods presented.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about
operating segments in annual and interim financial statements. This
Statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No.
131 is effective for financial statements for periods beginning after
December 15, 1997. The Company will adopt SFAS No. 130 for the first
quarter of fiscal year 1999 and does not expect its provisions to have
a material effect on the Company's presentation of its consolidated
financial statements. The Company will also adopt SFAS No. 131 in
fiscal year 1999 and is currently studying its provisions.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All references are to the Company's fiscal periods ended December 28, 1997, and
December 29, 1996, unless otherwise indicated. Quarterly 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, marketplace
competitive conditions, capital expenditures and capital resources,
manufacturing capacity utilization, customer demand, customer inventory levels
and intellectual property in the semiconductor industry. 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.
Results of Operations
Revenues
Revenues in the third quarter of fiscal 1998 of $144.2 million increased $13.2
million, or 10.1%, over the same fiscal quarter of last year. Revenues increased
primarily due to a 44% growth in product units shipped over the same quarter of
fiscal 1997, partially offset by a decrease in the weighted average selling
price (ASP) for all products over the same period last year. The largest
increase in revenues were in SRAM and specialty memory products driven by
increases in units shipped, offset by slightly lower ASPs. While logic units
shipped were also up significantly in the third quarter of fiscal 1998 compared
to the same fiscal quarter of 1997, the ASP declined sufficiently during the
same period such that related net revenue gains were minimal.
Revenues for the nine months ended December 28, 1997, of $436.9 million were up
$42.9 million, or 10.9%, over the $394.0 million reported for the comparable
fiscal 1997 period. Consistent with the trend for the third fiscal quarters
described above, revenues increased primarily due to a 59% growth in product
units shipped for the first nine months of fiscal 1998 over the comparable
period for fiscal 1997, partially offset by a decrease in the weighted average
selling price for all products. Increases in revenues were realized primarily in
SRAM, specialty memory and logic products.
Revenues in the third quarter of fiscal 1998 versus the second quarter of fiscal
1998 increased from $143.8 million to $144.2 million or .3%. Net units shipped
during the same periods increased 2.1%. The ASP realized across all products
declined slightly in the third quarter of fiscal 1998 when compared to the ASP
realized for the second quarter of fiscal 1998. Quarter over quarter increases
were realized primarily in SRAM and both RISC and x86 microprocessors. As noted
above, when comparing revenues for specialty memory products in current fiscal
periods with corresponding periods of the previous fiscal year, revenue
increases were realized. However, revenues realized from the sale of these
products in the third quarter of fiscal 1998 decreased when compared to revenues
for the second quarter of fiscal 1998. The Company believes this decline in
revenues is due to reduced demand associated with customers adjusting inventory
levels.
During late fiscal 1996 and into fiscal 1997, commodity SRAM average selling
prices experienced market price declines of as much as 80% over twelve months.
ASPs for other products also declined over the same period, although not as
significantly, as existing products matured. In fiscal 1998, average selling
prices have declined compared to fiscal 1997 and 1996, although not as
significantly. In the third quarter of fiscal 1998, prices in all major product
lines were relatively stable. In the future, market prices and customer demand
for the Company's products may change, especially during periods of over supply,
or seasonal demand weaknesses, or as a result of changed economic conditions in
other countries, especially in the Far East, where competitors produce
significant volumes of commodity semiconductor products and where demand for
semiconductors can be significantly price sensitive. See "Factors Affecting
Future Risks - Fluctuations in Operating Results, Cyclicality of Semiconductor
Industry and Risks of International Operations."
In the third quarter of fiscal 1998, the Company continued its production ramp
of the WinChip C6(TM) microprocessor and related quarterly revenues exceeded $1
million for the first time. The WinChip C6 microprocessor is IDT's first product
of a planned x86 microprocessor product family. The products shipped are
designed to be compatible with similar products manufactured and sold by Intel
Corporation, Advanced Micro Devices, Inc. and National
- ------------------------
(TM)WinChip and C6 are trademarks of Integrated Device Technology, Inc.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Semiconductor Corporation (which recently acquired Cyrix Corporation). Current
market demand for WinChip C6 microprocessors far exceeds IDT's current limited
ability to supply C6 units. The Company is taking steps to significantly
increase the available supply of the WinChip C6 product, including transferring
production to the Oregon facility and investigating third party foundry
relationships; however, there are risks, described in "Factors Affecting Future
Results," that the Company will not be successful in its efforts to do so, and
that the current level of market demand may change. The Company believes
revenues and aggregate costs associated with this product family will continue
to increase in future quarters as the Company executes its product introduction
strategy. Information on risks associated with this expansion of IDT's product
families is included below in "Factors Affecting Future Results." See "Risks
Associated with Expansion of Product Families - x86 Microprocessors and Risks
Associated with Planned Expansion; Manufacturing Risks."
The semiconductor industry is highly cyclical and is subject to significant
downturns. Such downturns are characterized by diminished product demand,
production over-capacity and accelerated average selling price erosion. The
price the Company receives for its industry standard SRAM and other products, is
therefore dependent upon industry-wide demand and capacity, and such prices have
been historically subject to rapid change. Low SRAM prices have and will likely
continue to adversely affect the Company's operating results. See "Factors
Affecting Future Risks - Cyclicality of Semiconductor Industry."
Gross Profit
Gross profit for the current quarter increased $52.9 million over the same
fiscal quarter last year to $55.0 million. As a percentage of revenues (gross
margin), gross margin improved in the third quarter of fiscal 1998, compared to
the third quarter of fiscal 1997, from 1.6% to 38.2%. In the third quarter of
fiscal 1997, the Company recorded asset impairment and other charges of $45.2
million which are specifically identified in the Company's Statements of
Operations as reducing gross profit. Additionally in the third quarter of fiscal
1997, the Company recorded $10 million in charges which related to the write off
of certain technology investments and other miscellaneous items, which were
classified in the Company's Statements of Operations in accordance with the
nature of the charge, including cost of revenues. The $45.2 million charge
related principally to recording reserves against the carrying value of
manufacturing assets, including the Company's oldest wafer fabrication plant in
Salinas, California, and other items. Excluding the $45.2 million charge for
asset impairment and other reserves in the third quarter of fiscal 1997, gross
profit in the third quarter of fiscal 1998 increased $7.6 million from $47.4
million and gross margin increased to 38.2% from 36.2% when compared to the
third fiscal quarter of 1997. Both gross profit and gross margin for the third
fiscal 1998 quarter were essentially flat compared to the second fiscal quarter
of 1998.
For the nine months ended December 28, 1997, gross profit of $166.5 million was
up $55.2 million over the $111.3 million reported for the same period in fiscal
1997. Gross margin of 38.1% for the first nine month period in fiscal 1998 was
9.9 percentage points higher than the 28.2% for the same period one year ago.
Excluding the $45.2 million charge for asset impairment and other reserves in
the third quarter of fiscal 1997, gross profit for the nine months ended
December 28, 1997, increased by $10.0 million from $156.5 million and gross
margin decreased 1.6 percentage points from 39.7%, when compared to the same
period one year ago.
The increase in gross profit in the third quarter and nine-month periods of
fiscal 1998 compared to the same fiscal 1997 periods was primarily attributable
to the charge for asset impairment and other reserves taken in the third quarter
of fiscal 1997. Additionally, the increase in gross profit and gross margin for
the third quarter of fiscal 1998 compared to the same period in fiscal 1997, is
the result of increased revenues associated with increased units produced and
shipped, without commensurate increases in manufacturing cost.
For fiscal 1998, gross margin for the nine months ended December 28, 1997, of
38.1% is consistent with the first and second fiscal 1998 quarters and is the
result of relatively stable operating conditions. However, for the nine months
ended December 29, 1996, excluding the charge for asset impairment and other
reserves, gross margin of 39.7% reflects fiscal 1997 quarterly margins which
ranged from 49.8% to 31.7% and result from the combined effect of declining SRAM
prices and increasing manufacturing costs associated with starting the
production ramp in the Oregon wafer fabrication plant.
Costs associated with the eight-inch wafer fabrication facility in Oregon
continued to adversely impact gross margin for both the current quarter and the
nine months ended December 28, 1997, as these costs were not fully absorbed by
additional revenues. Over the remainder of fiscal 1998 and into fiscal 1999, in
an effort to achieve more efficient and effective capacity utilization and
increase IDT's available supply of C6 microprocessors, the level of expense
10
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
associated with the Oregon fabrication facility is expected to increase on a
quarterly basis over the levels of each comparable previous quarter. The
anticipated increase in expenses is mostly associated with the installation of
new equipment. Additionally, in the third fiscal quarter of 1998 and in future
quarters, the percentage of these costs recorded as cost of revenues, versus
process engineering research and development, has and may continue to change
based upon production volumes and activities performed. See "Factors Affecting
Future Risks - Risks Associated with Planned Expansion; Manufacturing Risks."
The Oregon facility provides the Company with significant additional available
production capacity, but, to date, 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. The
WinChip C6 microprocessor product family provides an opportunity for IDT to
improve utilization of its Oregon facility; however, additional spending for
capital equipment and set up time is required to manufacture substantial volumes
of these products. Historically, SRAM products have been and will continue to be
produced at the Oregon facility, and 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 and
gross margin will continue to be adversely impacted. Further, if prices on
industry standard SRAM products do not improve, or recent improvements in market
demand for SRAM production volumes do not continue, or the Company is not able
to manufacture and sell other products at comparable or better margins, and if a
greater percentage of the Oregon facility's operating costs are allocated to
cost of goods sold based on activities performed, then gross margin may
decrease.
Research and Development
Research and development (R&D) expenses decreased in absolute spending and as a
percentage of revenues for the third quarter of fiscal 1998, and for the first
nine months then ended, when compared to the same periods for fiscal 1997. R&D
expenses for the current quarter of $31.3 million and for the first nine months
then ended of $91.7 million, were down $9.2 million and $25.7 million,
respectively, compared to $40.5 million and $117.4 million in the comparable
fiscal 1997 periods. As a percentage of revenues, R&D expenses were 21.7% in the
current quarter and 21.0% for the first nine months then ended. Respectively,
these percentages were down 9.2 and 8.8 percentage points from the same periods
one year ago. Third quarter fiscal 1998 R&D expenses were up $.7 million from
the second quarter in fiscal 1998 and also increased slightly as a percentage of
revenues from 21.3% to 21.7%.
The Company's policy is not to capitalize pre-operating costs associated with
new manufacturing facilities, and in fiscal 1997, significant facility start-up
and staffing expenses were incurred at the then new eight-inch wafer fabrication
facility in Hillsboro, Oregon. 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, as cost of revenues, based upon the nature
of the activities performed. In the third quarter of fiscal 1998 and for the
first nine months then ended, total R&D expense, both in absolute dollars and as
a percentage of revenues, declined principally because a greater proportion of
manufacturing facility operating costs, including Oregon facility costs, were
classified as cost of goods sold, rather than process engineering R&D.
Current R&D activities include developing the next generation of WinChip C6
microprocessors for use in personal computer applications, 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 communications and networking markets, and efforts to
introduce products into the 3D graphics market.
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, that
any new offerings can be manufactured at gross margins comparable to or better
than the Company's current products, or that new products will achieve market
acceptance.
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased by $.6 million
from $21.7 million in the third quarter of fiscal 1997, to $22.3 million in the
third quarter of fiscal 1998, but decreased as a percentage of revenues to 15.5%
from 16.5%. SG&A expenses increased 6.4% to $64.7 million for the first nine
months of fiscal 1998, but decreased as a percentage of revenues to 14.8% from
15.4% in the comparable period of the prior year. SG&A for the current fiscal
quarter increased $2.3 million, or 11.4%, from the second quarter of fiscal
1998.
A portion of SG&A expenses, such as sales commissions, management bonuses and
employee profit sharing, vary with sales and Company profitability and increase
or decrease as sales and profitability change. In addition, IDT continues with:
initiatives to implement and upgrade enterprise-wide management information
systems to increase the availability and quality of management information and
in an effort to remedy the year 2000 issue; and marketing efforts associated
with new products. See "Factors Affecting Future Risks - Impact of Year 2000 on
the Company's Operations." The $2.3 million increase in SG&A in the current
quarter over the immediately preceding quarter is mostly attributable to a $2
million recovery on bad debt expense recorded in the second 1998 fiscal quarter.
With the anticipated increased spending in connection with marketing and selling
new products, including the WinChip C6 x86 microprocessor product, the Company
anticipates SG&A expenses for the remainder of fiscal 1998 will increase
slightly both in absolute spending and as a percentage of revenues. Should
revenues decrease, SG&A as a percentage of revenues will likely increase more
significantly.
Interest Expense
Interest expense of $3.5 million for the third quarter of fiscal 1998 was
essentially flat relative to the second quarter of fiscal 1998 and down only $.1
million when compared to the $3.6 million for the same quarter a year ago. For
the nine months ended December 28, 1997, interest expense was up $2.4 million to
$10.8 million from $8.4 million reported in the same period in fiscal 1997.
Interest expense is primarily associated with the 5.5% Convertible Subordinated
Notes, due in 2002, (the "Notes") and $21.0 million of secured equipment
financing agreements completed in September 1996. The increase in interest
expense for the first nine months ended December 28, 1997, over the same period
one year ago is primarily attributable to the cessation of capitalizing interest
in the second quarter of fiscal 1997 in connection with the construction of the
eight-inch wafer fabrication plant in Oregon. Interest capitalized for the nine
months ended December 29, 1996, was $1.7 million. Additionally, interest expense
for the nine months ended December 28, 1997, increased over the same period one
year ago because of incremental interest associated with secured equipment
financing agreements, which were not completed until the third quarter of fiscal
1997. Management expects that, in the remainder of fiscal 1998, interest expense
will remain constant.
Interest Income and Other
Interest income and other, net, of $5.4 million in the third quarter of fiscal
1998 was up $5.2 million over the same period last fiscal year and up $2.8
million over the second quarter in fiscal 1998. For the nine months ended
December 28, 1997, interest income and other, net, was up $1.2 million to $10.3
million from $9.1 million reported in the same period in fiscal 1997.
Interest income and other, net, for the current quarter increased $5.2 million
from the third quarter of fiscal 1997 primarily due to recording a $2.3 million
insurance recovery in fiscal 1998 related to an incident which occurred in a
prior fiscal year and a $2 million loss recorded in the third quarter of fiscal
1997 on the write-off of an equity investment. Additionally, interest income was
up $1.2 million over the same quarter last fiscal year due to higher average
cash equivalent and short-term investments balances during the current quarter.
Also included in interest income and other, net, is the Company's share of net
earnings or losses of unconsolidated affiliates. Interest income and other, net,
increased $1.2 million in the nine months ended December 28, 1997, compared to
the same period last year due to those items discussed above, offset by an
increase of $2.1 million in IDT's share of net losses realized on affiliate
investments and a $1.9 million investment gain realized in the second fiscal
quarter of 1997.
12
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Taxes
Income taxes have been provided in the current quarter, and for the nine months
then ended, at a rate of 28% versus 32% for the entire year of fiscal 1997. The
provision for income taxes reflects management's estimated annualized effective
tax rate applied to earnings for the interim period. The fiscal 1998 effective
rate utilized is lower than the effective rate for fiscal 1997 primarily because
the earnings of foreign subsidiaries, taxed at a lower average rate, are
expected to comprise a proportionally higher percentage of the Company's
anticipated world-wide income for the current fiscal year. The rate used differs
from the U.S. statutory rate of 35% primarily due to earnings of foreign
subsidiaries, considered permanently reinvested, being taxed at lower average
rates than the U.S. statutory rate. Income taxes in state jurisdictions are not
significant due to available state tax credits.
Liquidity and Capital Resources
At December 28, 1997, cash and cash equivalents were $151.0 million, a decrease
of $4.1 million from $155.1 million at March 30, 1997 and a decrease of $26.7
million from September 28, 1997. During the third fiscal quarter of 1998, a
change in investments mix resulted in a greater proportion of IDT's available
cash balances being classified as short-term investments. Cash and cash
equivalents combined with short-term investments, decreased $11.6 million from
September 28, 1997. The Company generated $143.1 million of funds from
operations in the first nine months of fiscal 1998, up $124.9 million from the
$18.2 million of funds generated from operations during the same period for
fiscal 1997. Cash provided by operating activities for the first nine months of
fiscal 1998 reflected net income of $6.9 million, adjusted mostly for
depreciation and amortization of $84.1 million, $33.6 million in income tax
refunds received, $11.6 million from lower accounts receivable balances, $10.1
million from increases in deferred income on shipments to distributors and
various other changes to working capital. Increased depreciation and
amortization charges in the current period were associated with new facilities,
improvements to existing facilities and new equipment. The asset impairment and
other reserves recorded in the nine months ended December 29, 1996, are
described in more detail above.
During the first nine months of fiscal 1998, the Company's net cash used for
investing activities was $150.3 million, with $112.2 million used to purchase
capital equipment and make property and plant improvements. In addition, during
the current fiscal year, the Company increased its equity investment in an
affiliate by $12.1 million. Cash used for the purchase of short-term
investments, net of sales of short-term investments, was $26.3 million.
For the first nine months of fiscal 1997, the Company's net cash used for
investing activities was $90.4 million. $174.3 million was used for capital
equipment and property and plant improvements. Cash proceeds from primarily
equipment sale and lease back arrangements in September 1996 and December 1996
amounted to $53.0 million. Also 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. In the transaction, which was structured as a tax free
reorganization, 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. Cash generated from the sale of short-term
investments, net of purchases of short-term investments, was $27.2 million.
Cash provided by financing activities during the nine month period ended
December 28, 1997, was $3.1 million as compared to $22.4 million for the same
period one year ago. Financing activity in the current period consisted
primarily of issuance of common stock through employee benefit plans offset by
payments on capital leases and other debt.
13
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
In view of current and anticipated capacity requirements, IDT anticipates
capital expenditures of approximately $40.2 million for the fourth quarter of
fiscal 1998, principally in connection with continued installation of equipment
in the Oregon facility, ongoing investments to maintain current technology
equipment in the San Jose, CA and Salinas, CA facilities and the installation of
equipment in the Philippines and Malaysia assembly and test facilities.
The Company's ability 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. 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 additional financing sooner, the
unavailability of financing on terms satisfactory to IDT could have a material
adverse effect on the Company.
14
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
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, 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. For fiscal 1998, SRAM average selling prices and ASPs of other
product lines continue to decline compared to fiscal 1997, although not as
dramatically as the pace at which they declined between fiscal 1997 and fiscal
1996. Market conditions characterized by excess supply of SRAMs relative to
demand and resultant pricing declines have occurred in the past and may occur in
the future. 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 adversely affect the
Company's operating results. The Company seeks to manage costs, but there can be
no assurance that these efforts will be sufficient to sustain profitability.
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, which include SRAM products,
are incorporated into computer and computer-related products, which have
historically been characterized by significant fluctuations in demand. 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 adversely affect the Company's operating results.
In order to achieve more efficient and effective capacity utilization of the
facilities, the Company continues to install new equipment at all of its
fabrication and test and assembly facilities. 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 Expansion of Product Families - x86 Microprocessors
The Company recently commenced shipments of the WinChip C6 microprocessor, IDT's
first member of its x86 microprocessor product family. This product represents
the Company's first offering to the personal computer (PC) microprocessor
market, which is characterized as a large market dominated by Intel Corporation
(Intel), with a very limited number of other competitors. IDT's success in
competing in this market, and therefore the financial results associated with
selling products to this market, are subject, but not limited to, the following
significant risks and uncertainties:
15
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Factors Affecting Future Results (Cont.)
Competition. Intel holds a dominant position in the market for PC
microprocessors. Intel has held its dominant position over all other
x86 microprocessor competitors for a substantial period of time, and
has significantly greater financial, technical, manufacturing and
marketing strength than does IDT. Currently, Intel's dominant market
position allows it to set and control x86 microprocessor standards and,
therefore, dictate many aspects of the products which PC manufacturers
require in this market.
In addition, IDT's initial x86 microprocessor product is targeted at
the low cost desktop and mobile product categories of the
microprocessor market. Intel also offers products which are purchased
by PC manufacturers in these market categories. Intel's financial
strength and market dominance have enabled it to reduce prices on its
microprocessor products within a short period of time following their
introduction, which reduces the margins and profitability of its
competitors. Further, Intel's marketing resources are far greater than
IDT's. Therefore, Intel's pricing and marketing strategies in the
categories of the microprocessor market targeted by IDT may
significantly impact IDT's efforts to serve this market and, therefore,
IDT's results of operations.
In order for customers to purchase IDT's x86 microprocessors, IDT's
products must be compatible with other components supplied to PC
manufacturers such as core-logic chip sets, motherboards, basic
input/output system (BIOS) software and others which are manufactured
or produced by other companies, including Intel and companies in which
Intel has strategic investments. In addition, these companies are able
to produce chip sets, motherboards, BIOS software and other components
to support each new generation of Intel's microprocessors only to the
extent that Intel makes its related proprietary technology available.
Intel has announced that the new versions of its microprocessor product
will be sold only in the form of a chip module that is not compatible
with "Socket 7" motherboards currently used with most x86
microprocessors. Therefore, Intel may cease supporting the Socket 7
motherboard infrastructure as it transitions to its latest generation
microprocessors. Because IDT's processor is designed to be Socket 7
compatible, and will not work with motherboards designed for Intel's
new chip module, should IDT and other companies serving the x86
microprocessor market not be successful in offering products which
extend the life of the Socket 7 infrastructure, IDT would be required
to expend potentially significant resources to redesign its
microprocessor product offerings. There can be no assurance that the
Company would be successful in such efforts.
In addition to Intel, Advanced Micro Devices, Inc. and National
Semiconductor Corporation (who recently acquired Cyrix Corporation)
also currently offer commercial quantities of x86 microprocessors for
sale. From time to time, intellectual property rights disputes have
arisen between companies competing in the x86 microprocessor markets
(See Intellectual Property Risks discussion below).
Manufacturing. The pace at which IDT is able to enter its target market
category for x86 microprocessors depends, in part, on how quickly it is
able to ramp production of its microprocessor products in its wafer
fabrication and assembly and test facilities. The Company has not
previously manufactured x86 microprocessors and, therefore, may
encounter unexpected production problems or delays as a result of,
among other things, changes required to process technologies, product
design limitations, installation of equipment, and development of
programs and methodologies which test overall product quality. If IDT
is unable to ramp production of its x86 microprocessor successfully,
the Company's operating results would be adversely affected.
Compatibility With Software and Performance Certifications. For its
current product offering, IDT has obtained certifications from
Microsoft and other appropriate certifications from recognized testing
organizations. Failure to obtain and maintain such certifications for
future microprocessor products could substantially impair the Company's
ability to market and sell its future x86 products.
PC Market. Because IDT's target market for its x86 microprocessor
product is initially limited to certain segments of the PC industry,
the growth and acceptance of the product is closely tied to trends in
and growth of the PC industry. The Company believes that PC
manufacturers will continue their trend towards accepting and using
microprocessor products manufactured by companies other than Intel and
that generally the market for PCs and related components will continue
to grow. However, should these industry trends
16
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Factors Affecting Future Results (Cont.)
and growth patterns not occur, for whatever reason, IDT's ability to
sell x86 microprocessor products would be impaired.
Rights of Others. In exchange for payments towards product development
costs, IDT licensed the right to make, use and sell the WinChip C6
microprocessor to a third party. Further, the license with the third
party limits the number of additional licenses that IDT may grant.
Thus, the Company may face competition from the third party in the
future and may be limited in its ability to license the part to others.
Future Products. IDT's ability to bring future x86 products to market
depends on several primary factors including the following three.
First, it must be able to finance such future development. Second, to
compete with Intel and other competitors in the market for future
generation x86 microprocessors, IDT must be able to design and develop
the microprocessors themselves, and must ensure they can be used in PC
platforms, including motherboards, designed to support future Intel or
other microprocessors. Third, a failure, for whatever reason, of the
designers and producers of motherboards, chip sets and other system
components to support IDT's x86 microprocessor offerings would limit
IDT's ability to sell products to the PC market.
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 continues to ramp its production
volumes. Due to production lead times, 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 continue to face a number of substantial risks including, but not
limited to, equipment delays or shortages, power interruptions or failures,
manufacturing start-up or process problems or difficulties in hiring key
personnel. 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, in fiscal 1997, 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 facility now contributes to revenues, the Company recognizes
substantial operating expenses associated with the facility as cost of revenues,
which have reduced gross margins. As commercial production continues in fiscal
1998, the Company anticipates incurring additional operating costs and
depreciation expenses relating to this facility. 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 facility that are comparable to the Company's current products, the
Company's future results of operations would be adversely impacted.
17
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Factors Affecting Future Results (Cont.)
Dependence on New Products
New products and new process technology 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.
Additionally, the Company is currently designing substantially all of its new
MIPS RISC based Microprocessor products in-house. Historically, the Company
supplemented its in-house design efforts with contract design resources. The
Company is in the process of negotiating a renewal of its MIPS license agreement
with a subsidiary of Silicon Graphics, Inc. This agreement licenses IDT to
develop new products based on the MIPS microprocessor architecture.
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.
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 year 1998, the Company expects to expend approximately
$152 million in capital expenditures and anticipates significant continuing
capital expenditures, especially in connection with the introduction of products
for the WinChip C6 microprocessor family, 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 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 under the current or future contracts, or the
inability to obtain a license, could each have a material adverse effect on the
Company.
18
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Factors Affecting Future Results (Cont.)
Risks of International Operations
A substantial percentage of the Company's revenues are derived from export
sales. In addition, the Company's offshore test and assembly operations incur
payroll, facilities and other expenses in local currencies. Accordingly,
movements in foreign currency exchange rates, such as those recently seen in the
Far East, can impact both pricing of and demand for the Company's products as
well as the Company's cost of goods sold. The Company's offshore assembly and
test operations and export sales are also 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 also 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.
Impact of Year 2000 on the Company's Operations
The Company utilizes numerous software programs throughout its operations which
include dates and make date-sensitive calculations based on two digit fields
which are assumed to begin with the year 1900. Software programs written based
on this assumption are vulnerable, as the year 2000 approaches, to
miscalculations and other operational errors which may be significant to their
overall effectiveness. In addition, the Company relies upon products and
information from critical suppliers, large customers and other outside parties,
in the normal course of business, whose software programs are also subject to
the same problem. Should miscalculations or other operational errors occur as a
result of the year 2000 issue, the Company or the parties on which it depends
may be unable to produce reliable information or process routine transactions.
Furthermore, in the worse case, the Company or the parties on which it depends
may, for an extended period of time, be incapable of conducting critical
business activities, which include but are not limited to, manufacturing and
shipping products, invoicing customers and paying vendors. The Company is also
assessing the extent to which year 2000 issues may be incorporated into certain
products which it sells to its customers. Based on the Company's continuing
assessment, management has already determined it will need to replace or
materially modify many of its software applications, including those critical to
the Company's normal operations, in order to avoid significant year 2000 issues.
The Company has also initiated communications with its critical suppliers, large
customers and other outside parties in an effort to identify and mitigate year
2000 matters originating from dependent third parties which may adversely affect
the Company. The Company has formed, and continues to form, teams of internal
and external resources who are devoted to replacing, upgrading and reprogramming
internal software programs and products which are not year 2000 compliant and
testing such changes to ensure their effectiveness. The cost of these teams,
including efforts with the parties on which IDT depends, and other expenditures
associated with addressing the year 2000 problem is still being compiled and is
expected to be funded through ongoing operating cash flows. The Company has
contracted, or is currently negotiating with, various external parties and has
dedicated internal resources which management believes, based on information
currently available, will be sufficient to remedy the Company's year 2000
computer system problems
19
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Factors Affecting Future Results (Cont.)
before they occur. There can be no assurance, however, that all critical year
2000 problems have or will be identified or that the Company will be able to
procure all of the resources necessary to replace all critical year 2000
deficient software applications timely. There can also be no assurance that the
critical year 2000 deficient software programs of the parties on which the
Company depends will be converted timely or not converted to systems which are
incompatible with the Company's systems. Such events, or the final overall costs
associated with addressing the year 2000 issue, may have a material adverse
affect on the future operations of the Company.
20
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On July 17, 1997, IDT filed a petition against Hewlett-Packard Company (HP) in
Santa Clara Superior Court, Case Number CV767581, seeking a declaratory judgment
regarding the validity of IDT's rights to use and sublicense certain advanced
printer technology (TrueRes) which HP acquired from DP-TEK Development Company,
LLC (DP-TEK), a Kansas limited liability company. IDT is seeking to amend its
petition to join DP-TEK and to seek damages from HP. In a related action, on
November 17, 1997, DP-TEK filed a petition for declaratory relief and damages
for breach of contract in an amount of approximately $25 million against IDT in
Kansas. The case was recently removed to federal court, Case Number 97-1541-FGT.
DP-TEK alleges that IDT's license to TrueRes technology is no longer valid, that
IDT failed to develop new products with DP-TEK as required by contract, and that
DP-TEK sold its technology and assets to HP for approximately $25 million less
than it could have had IDT met its obligations. Discovery in both cases is not
complete.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit No. Description Page
----------------- ------------------------------------ ----------------
27 Financial Data Schedule 23
(b) Reports on Form 8-K:
No reports have been filed on Form 8-K during this quarter.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED DEVICE TECHNOLOGY, INC.
Date: February 11, 1998 /s/ Leonard C. Perham
----------------------------------
Leonard C. Perham
Chief Executive Officer
(duly authorized officer)
Date: February 11, 1998 /s/ Alan F. Krock
----------------------------------
Alan F. Krock
Vice President, Chief Financial
Officer (chief accounting officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
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0
0
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</TABLE>
