<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 27, 1998
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 of (I.R.S. Employer
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 October 25, 1998, was approximately 82,278,000.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues $ 130,635 $ 143,807 $ 265,122 $ 292,680
Cost of revenues 89,983 88,643 183,181 181,180
Asset impairment and other 131,944 -- 160,860 --
Restructuring charges 46,384 -- 46,384 --
-------------------- --------------------
Gross profit (137,676) 55,164 (125,303) 111,500
-------------------- --------------------
Operating expenses:
Research and development 36,440 30,632 75,865 60,454
Selling, general and
administrative 25,709 20,048 52,243 42,412
-------------------- --------------------
Total operating expenses 62,149 50,680 128,108 102,866
-------------------- --------------------
Operating income (loss) (199,825) 4,484 (253,411) 8,634
Interest expense (3,515) (3,512) (6,802) (7,255)
Interest income and other, net 1,428 2,641 2,794 4,860
-------------------- --------------------
Income (loss) before income
taxes (201,912) 3,613 (257,419) 6,239
Provision for income taxes 35,173 1,012 29,622 1,747
-------------------- --------------------
Net income (loss) $(237,085) $ 2,601 $(287,041) $ 4,492
==================== ====================
Basic net income (loss)
per share $ (2.88) $ 0.03 $ (3.50) $ 0.06
Diluted net income (loss)
per share $ (2.88) $ 0.03 $ (3.50) $ 0.05
Weighted average shares:
Basic 82,412 80,010 82,040 79,889
Diluted 82,412 83,669 82,040 83,412
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Page 2
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
Sep. 27, Mar. 29,
1998 1998
-------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $128,976 $146,114
Short-term investments 73,946 74,481
Accounts receivable, net 48,499 68,840
Inventories, net 55,693 60,737
Prepayments and other current assets 36,954 74,431
-------------------------
Total current assets 344,068 424,603
Property, plant and equipment, net 307,952 475,440
Other assets 68,582 68,912
-------------------------
TOTAL ASSETS $720,602 $968,955
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,517 $ 57,572
Accrued compensation and related expenses 14,894 15,853
Deferred income on shipments to
distributors 38,905 51,835
Other accrued liabilities 69,221 33,821
-----------------------
Total current liabilities 157,537 159,081
Convertible subordinated notes, net 184,055 183,756
Other liabilities 107,703 79,727
------------------------
Total liabilities 449,295 422,564
Stockholders' equity:
Preferred stock -- --
Common stock and additional paid-in capital 329,672 318,623
Retained earnings (deficit) (58,077) 228,964
Accumulated other comprehensive loss (288) (1,196)
------------------------
Total stockholders' equity 271,307 546,391
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $720,602 $968,955
========================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
Sep. 27, Sep. 28,
1998 1997
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(287,041) $ 4,492
Adjustments:
Depreciation and amortization 64,361 55,109
Loss on sale of property, plant and equipment 792 --
Deferred tax assets 29,145 --
Restructuring, asset impairment and other 179,428 --
Changes in assets and liabilities:
Accounts receivable 20,341 13,593
Inventories 5,044 (4,517)
Income tax receivable 7,309 33,613
Prepayments and other assets 5,805 365
Accounts payable (23,055) 3,269
Accrued compensation and related expenses (959) 947
Deferred income on shipments to
distributors (12,930) 8,107
Other accrued liabilities 36,837 4,143
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,077 119,121
--------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (77,895) (73,540)
Proceeds from sales of property, plant and
equipment 1,354 192
Purchases of short-term investments (38,503) (16,119)
Proceeds from sales of short-term
investments 39,932 4,905
Purchases of equity investments -- (12,090)
--------------------------
NET CASH USED FOR INVESTING ACTIVITIES (75,112) (96,652)
--------------------------
FINANCING ACTIVITIES:
Issuance of common stock, net 4,756 3,079
Proceeds from secured equipment financing 31,764 --
Payments on capital leases and other debt (3,623) (2,959)
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32,897 120
--------------------------
Net increase (decrease) in cash and cash
equivalents (17,138) 22,589
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 146,114 155,149
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 128,976 $ 177,738
==========================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 29, 1998. The
results of operations for the three- and six-month periods ended September 27,
1998 are not necessarily indicative of the results to be expected for the full
year.
2. Certain fiscal 1998 amounts have been reclassified to conform to the fiscal
1999 presentation.
3. In the first quarter of fiscal 1999, the Company recorded a $34.6 million
charge, relating primarily to excess SRAM manufacturing equipment and technology
licensing matters. The charge is reflected in the Condensed Consolidated
Statements of Operations as follows: $28.9 million as cost of revenues, $5.5
million as research and development and $.2 million as general and
administrative. The $28.9 million charge includes a provision of $15.1 million
for writedown to fair market value of excess manufacturing equipment. Reflecting
current economic conditions in the SRAM marketplace, which continues to
experience declines in both demand and price, the Company identified specific
items of manufacturing equipment which were excess to its needs. The carrying
value of excess equipment was reduced to its estimated fair market value, based
primarily on appraisals and estimates from third parties. As described in Note
4, time to liquidate surplus semiconductor equipment is uncertain. Also included
in the $28.9 million charge is $10 million to settle certain patent claims
against the Company.
The $5.5 million charge reported in research and development expenses reflects
the Company's narrowing the focus of its business development activities
associated with the development of a graphics chip and a specialized logic chip.
The Company discontinued these development efforts and provided for remaining
payments required under technology license agreements and recognized other
related costs. The Company also provided for other intellectual property-related
matters.
4. In the second quarter of fiscal 1999, the Company recorded charges of $46.4
million for restructuring and $131.9 million for asset impairment and other
which are specifically identified in the Condensed Consolidated Statements of
Operations as a reduction in gross profit. The $46.4 million restructuring
charge relates primarily to a provision for exit and closure costs associated
with the San Jose, Calif. wafer fabrication facility, which the Board of
Directors decided to close. Manufacturing activities in this facility are
expected to cease by the end of 1998, at which time the Company plans to
complete the termination of approximately 400 employees, primarily in
manufacturing departments. IDT is pursuing the sale of surplus used equipment
from the San Jose facility. However, as there is currently a significant
oversupply of such equipment available for sale, IDT cannot determine the amount
of time required to completely liquidate the surplus equipment. The Company
expects annual cost savings of approximately $45 million as a result of these
restructuring actions.
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The following table sets forth the Company's restructuring expense for the
quarter ended September 27, 1998 and the reserve balance as of that date:
<TABLE>
<CAPTION>
Q2 1999 Balance
Expense Utilized Sep. 27, 1998
------- ---------- -------------
<S> <C> <C> <C>
Write-down of fixed assets $33,047 $(33,047) --
Severance and other employee
related charges 2,620 (308) 2,312
Closure costs for manufacturing
facility 10,717 (496) 10,221
------- -------- -------
$46,384 $(33,851) $12,533
======= ======== =======
</TABLE>
The $131.9 million asset impairment and other charge relates primarily to an
asset impairment reserve recorded against the manufacturing assets of IDT's
eight-inch wafer fabrication facility in Oregon. The Company determined that due
to excess industry capacity and low prices for semiconductor products
manufactured in the Oregon facility, future undiscounted cash flows related to
its wafer fabrication assets were insufficient to recover the carrying value of
the assets. As a result, the Company wrote down these assets to estimated fair
market value based primarily on appraisals and estimates from independent
parties. Of the $131.9 million, $5.0 million is to settle certain patent claims
against the Company.
Additionally, the Company recorded a charge of $3.3 million relating primarily
to retention costs for manufacturing and research and development staff employed
at the San Jose fabrication facility which were recorded as cost of revenues and
research and development expenses in the Condensed Consolidated Statements of
Operations. These costs are being expensed ratably over the retention period of
the employees.
5. Basic net income (loss) per share is based upon weighted-average common
shares outstanding. Diluted net income (loss) per share is computed using the
weighted-average common shares outstanding plus any potentially dilutive
securities. Dilutive securities include stock options using the treasury stock
method, and convertible debt using the if converted method.
Following is a reconciliation of the numerators and denominators of the basic
and diluted net income (loss) per share computations for the periods presented
below:
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
(in thousands except per Sep. 27, Sep. 28, Sep. 27, Sep. 28,
share amounts) 1998 1997 1998 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss)(numerator) $(237,085) $ 2,601 $(287,041) $ 4,492
=================== ===================
Weighted average shares
outstanding (denominator) 82,412 80,010 82,040 79,889
=================== ===================
Net income (loss) per share $ (2.88) $ .03 $ (3.50) $ .06
=================== ===================
Diluted:
Net income (loss)(numerator) $(237,085) $ 2,601 $(287,041) $ 4,492
=================== ===================
Weighted average shares
outstanding 82,412 80,010 82,040 79,889
Net effect of dilutive stock
options -- 3,659 -- 3,523
------------------- -------------------
Total shares (denominator) 82,412 83,669 82,040 83,412
=================== ===================
Net income (loss) per share $ (2.88) $ .03 $ (3.50) $ .05
=================== ===================
</TABLE>
Options to purchase approximately 19.0 million shares were outstanding at
September 27, 1998 (13.4 million at September 28, 1997) but have been excluded
because they were antidilutive.
6. On November 2, 1998, IDT and Quality Semiconductor, Inc. ("QSI") announced
the signing of a definitive agreement for QSI to be acquired by IDT through the
merger of a new wholly owned subsidiary of IDT into QSI. Under the terms of the
agreement, each issued and outstanding common share of QSI will be exchanged for
.6875 shares of IDT Common Stock. The merger is planned to close during the
fourth quarter of IDT's fiscal 1999 and is intended to be accounted for as a
pooling of interests.
7. The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), "Reporting Comprehensive Income," as of the first quarter of
fiscal 1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. Adoption had no impact on the Company's
net income (loss) or stockholders' equity.
<PAGE> 8
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The components of comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
Three months ended
(in thousands) ----------------------
Sep. 27 Sep. 28
1998 1997
----------------------
<S> <C> <C>
Net income (loss) $(237,085) $ 2,601
Currency translation adjustments 282 (697)
Unrealized gain on
available-for-sale investments 812 743
----------------------
Comprehensive income (loss) $(235,991) $ 2,647
======================
Six months ended
(in thousands) ----------------------
Sep. 27 Sep. 28
1998 1997
----------------------
Net income (loss) $(287,041) $ 4,492
Currency translation adjustments 14 (371)
Unrealized gain on
available-for-sale investments 894 897
----------------------
Comprehensive income (loss) $(286,133) $ 5,018
======================
</TABLE>
The components of accumulated other comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
Sep. 27 Mar. 29,
(in thousands) 1998 1998
----------------------
<S> <C> <C>
Cumulative translation
adjustments $ (1,182) $ (1,196)
Unrealized gain on
available-for-sale
investments 894 --
----------------------
$ (288) $ (1,196)
======================
</TABLE>
8. Inventories, net, consisted of the following:
<TABLE>
<CAPTION>
Sep. 27 Mar. 29,
(in thousands) 1998 1998
----------------------
<S> <C> <C>
Raw materials $ 4,056 $ 6,647
Work-in-process 37,204 40,276
Finished goods 14,433 13,814
----------------------
$ 55,693 $ 60,737
======================
</TABLE>
<PAGE> 9
Page 8
9. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
standards for accounting and reporting on derivatives and is effective for
periods beginning after June 15, 1999. Early adoption is permitted. SFAS No. 133
requires that all derivatives be recognized in the balance sheet as assets or
liabilities and measured at fair value. SFAS No. 133 also requires current
recognition in earnings of changes in these fair values, depending on the
intended use and designation of the derivative. The Company is currently
evaluating the effects of SFAS No. 133 and has not determined its method or
timing of adoption, nor the impact on its financial statements. However, the new
requirement to report currency hedging derivatives at fair value could result in
fluctuations in stockholders' equity.
10. On July 31, 1998, a lawsuit was filed by Lemelson Medical Education &
Research Foundation, Limited Partnership ("plaintiff"), against the Company and
25 other corporate defendants. The lawsuit, which alleges that the defendants
are infringing upon 16 patents issued to the plaintiff, was filed in the United
States District Court for the District of Arizona. The plaintiff seeks an
injunction and damages in an unspecified amount. In the opinion of management,
the ultimate outcome of this litigation will not have a material adverse impact
on the Company's results of operations or financial position.
<PAGE> 10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All references are to the Company's fiscal quarters ended September 27, 1998
("Q2 1999"), September 28, 1997 ("Q2 1998"), June 28, 1998 ("Q1 1999") and June
29, 1997 ("Q1 1998"), unless otherwise indicated. Quarterly financial results
may not be indicative of the financial results of future periods. All
non-historical information contained in the following discussion constitutes
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements are not guarantees of future performance and
involve a number of risks and uncertainties, including but not limited to:
operating results, new product introductions and sales, including the IDT
WinChip(TM) microprocessor, competitive conditions, capital expenditures and
capital resources, cash flows, manufacturing capacity utilization, customer
demand, customer inventory levels, protection of intellectual property in the
semiconductor industry, and the risk factors set forth in the section "Factors
Affecting Future Results." Future results may differ materially from such
forward looking statements as a result of such risks. 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.
HISTORICAL INFORMATION RELATING TO FISCAL 1999 RESTRUCTURING AND ASSET
IMPAIRMENT AND OTHER CHARGES AND ACTIONS TAKEN
In the first two quarters of fiscal 1999, IDT recorded $207.2 million in charges
related to asset impairment and restructuring, which are specifically identified
in the Condensed Consolidated Statements of Operations, and an additional $9.0
million of charges, which were recorded as operating expenses. These charges
relate principally to closure of one of three wafer fabrication facilities
located in the United States, reducing the carrying value of one of the
remaining facilities, discontinuing research initiatives and costs associated
with intellectual property matters. These charges are discussed below under the
captions "Gross Profit," "Research and Development" and "Selling, General and
Administrative."
During the period from fiscal 1994 through fiscal 1996, IDT's sales volume grew
significantly, from $330 million more than doubling to $680 million. The growth
was principally based upon strong demand for SRAM products, especially cache
memory products for use in personal computers. At the peak of demand for IDT's
SRAM products, sales of SRAM and related products accounted for approximately
45% of IDT's revenues.
As business conditions in the semiconductor industry improved through the
mid-1990s, the Company took steps to significantly expand its manufacturing
capacity. Most notably, the Company constructed the Oregon fabrication facility
and the assembly and test facility located in Manila, the Philippines. During
the period fiscal 1995 through fiscal 1998, IDT expended in excess of $700
million for acquisitions of property, plant and equipment.
In addition to providing incremental manufacturing capacity, the Oregon facility
provides the Company with advanced wafer fabrication technology and capability.
However, the cost of such advanced wafer manufacturing technology and capability
is significant. To recover such costs, semiconductor manufacturers must be able
to amortize device design,
<PAGE> 11
Page 10
equipment and facility acquisition costs over a significant volume of products
whose selling price reasonably reflects the advanced level of technology
employed in their design and manufacture.
As IDT's additions to manufacturing capacity became available for use in fiscal
1997, business conditions in the memory sector of the semiconductor industry
changed dramatically. Selling prices of industry standard SRAM components fell
as much as 80% over an approximate 12 month period. The price decreases were the
result of a significant increase in market supply of industry standard SRAM
parts attributable to IDT's principally foreign competitors, such as Samsung,
Winbond, UMC, other Taiwanese and Korean companies allocating increased capacity
to SRAM products. Also, U.S. based companies with Taiwan- and Korean-sourced
SRAM wafers from foundries such as TSMC provided additional product supply.
These competitors employed market pricing strategies at a time when market
demand slowed as customers reduced the level of inventories carried.
As a result of the difficult operating conditions which have existed in the
semiconductor industry for the past few years, and which intensified in the
middle of calendar 1998, including excess product supply and low prices, IDT is
consolidating and streamlining manufacturing operations within the Company,
including closing its wafer fabrication facility located in San Jose,
California. This operational decision primarily reflects industry oversupply
conditions.
The Company has moved away from dependence on industry standard products, plans
to expand the range of its products manufactured in Oregon, and, as noted above,
has taken active steps to increase the level of manufacturing facility
utilization. However, the products historically manufactured in the Oregon
facility and planned for the near term are principally SRAM and x86
microprocessor products (which x86 products represent a small percentage of
IDT's total revenues). The pricing of these products in today's marketplace
remains low. As a result of current low market prices, the cash flows generated
by sales of products manufactured in Oregon are disproportionate to the cost of
the facility and are significantly less than the cash flows generated by IDT's
other comparable manufacturing activities.
The Company performed an asset impairment review for the Oregon facility based
upon IDT's operating conditions, and concluded that, despite the closure of its
San Jose facility, IDT is still in a position of overcapacity. The impairment
review revealed that currently projected production volumes and related cash
flows from the Oregon facility would not be sufficient to recover the carrying
value of that manufacturing facility. Therefore, in accordance with current
accounting literature, IDT concluded that the carrying value of the Oregon
manufacturing assets is impaired and has written down the carrying values of
these assets to fair market value, as estimated by third parties with
significant experience in marketing and selling used semiconductor equipment.
As discussed below, the semiconductor industry is cyclical in nature, and while
demand and prices for the products manufactured at the Oregon facility may
improve, the timing and degree of any such recovery is uncertain.
<PAGE> 12
Page 11
RESULTS OF OPERATIONS
REVENUES
Revenues for Q2 1999 and the six months ended September 27, 1998 were $130.6
million and $265.1 million, respectively. Sales for Q2 1999 decreased 2.9% from
$134.5 million recognized in Q1 1999 and decreased 9.2% compared to revenues of
$143.8 million for Q2 1998. Revenues of $265.1 million for the six-month period
ended September 27, 1998 were 9.4% lower than the $292.7 million recognized in
the comparable period of the prior fiscal year.
When comparing revenues for Q2 1999 to Q1 1999, revenues from the sale of the
Company's WinChip(TM) x86 microprocessors increased, and sales of SRAM memory
products remained essentially unchanged. However, product sales volumes for
other IDT products, which include communications memories, logic products and
RISC microprocessors, decreased, primarily reflecting an ongoing period of
product oversupply, related contraction of inventories held by customers, and
continued economic uncertainty in the semiconductor marketplace in Asia. Net
units shipped in Q2 1999 decreased approximately 6.4% and 9.0%, respectively,
compared to Q1 1999 and Q2 1998. Net units shipped during the first six months
of fiscal 1999 decreased 7.0% compared to the same period in fiscal 1998.
Sales of WinChip microprocessors in Q2 1999 increased in relation to sales for
all comparative periods. In addition to selling WinChip products in the United
States, IDT has increased unit sales through product distribution channels in
emerging markets such as those in Asia and Europe. The average selling price
realized per unit decreased, reflecting what has become a very competitive
marketplace for x86 microprocessors positioned at the low end of the
product-performance range.
For other IDT products, when comparing Q2 1999 to Q2 1998 sales, RISC
microprocessor revenues increased, primarily because of greater sales to IDT's
computer network infrastructure equipment customers. While communications
memories, SRAM and logic revenues declined in Q2 1999 compared to Q2 1998,
generally because of the semiconductor industry market conditions described
above. Also during the intervening period, IDT effectively exited the market for
personal computer SRAM cache memory. The factors described above resulting in
decreased revenues in Q1 1999 and Q2 1999 are also the primary reasons revenue
decreased during the first 6 months of fiscal 1999, when compared to the same
period of fiscal 1998. As discussed below, the semiconductor marketplace is
cyclical in nature.
The Company believes revenues and costs associated with new products will
increase in future quarters as the Company continues to execute product
introduction strategies and overall levels of industry demand improve during the
traditionally stronger fourth calendar quarter. In future quarters, excluding
transaction related costs and potential costs to combine manufacturing
operations, the merger of Quality Semiconductor with IDT is expected to benefit
operating results.
Information on risks associated with the expansion of IDT's product families is
included in "Factors Affecting Future Results."
- --------
(TM) WinChip and C6 are trademarks of Integrated Device Technology, Inc. All
other brand names and products names are trademarks, registered trademarks or
trade names of their respective holders.
<PAGE> 13
Page 12
The semiconductor industry is highly cyclical and 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 adversely
affected, and will likely continue to adversely affect, the Company's operating
results.
GROSS PROFIT
In Q1 1999, the Company recorded a charge of $28.9 million which is specifically
identified in the Company's Condensed Consolidated Statements of Operations as a
reduction in gross profit. The $28.9 million charge relates primarily to excess
SRAM manufacturing equipment ($18.9 million) and certain technology licensing
matters ($10.0 million). The net carrying value of equipment before writedown
was $17.4 million, and after writedown was $2.3 million. The portion of the
charge which pertains to excess SRAM related equipment is associated with
equipment which is no longer used in the Company's normal operations because of
changes in demand in the semiconductor marketplace or changes in the Company's
product strategy. The equipment related portion of the charge was computed as
the difference between the net book value of the equipment and estimates of fair
market value, as estimated by third parties with significant experience in
marketing and selling used semiconductor equipment. As a result of the charge
related to excess manufacturing equipment, IDT expects an immediate reduction in
annual depreciation expense in future quarters of approximately $4 million.
Additionally, the Company recorded a charge of $5.7 million relating primarily
to discontinuing certain technology development initiatives, which have been
classified as research and development expenses in the Company's Condensed
Statements of Operations.
In Q2 1999, the Company recorded non-recurring charges of $46.4 million for
restructuring and $131.9 million for asset impairment and other which are
specifically identified in the Company's Condensed Statements of Operations as a
reduction in gross profit.
The $46.4 million restructuring charge relates primarily to a provision for exit
and closure costs associated with the San Jose, Calif. wafer fabrication
facility. Included in this charge are $33 million for fabrication and
assembly-and-test equipment, which was written down to liquidation value;
severance and other employee related expenses of $2.6 million; and closure costs
of $10.7 million. Closure costs of $10.7 million consist of $4.5 million in
costs associated with de-installing equipment previously placed in service,
which IDT expects to pay in Q3 1999; estimated costs of $3.3 million to
decommission the facility, which are expected to be paid in Q4 1999 through Q1
2000; and contract cancellation costs of $2.9 million, which the Company expects
to pay in Q1 2000.
The $131.9 million asset impairment and other charge relates primarily to the
asset impairment charge which reduced the carrying value of the manufacturing
assets of the Oregon fabrication facility. Included in the charges is the
writedown of equipment with a net carrying value of approximately $189 million
before writedown and $62 million after writedown. Additionally, the Company
recorded a charge of $3.3 million relating primarily to retention costs earned
in Q2 1999 by manufacturing and research and development staff employed at the
San Jose fabrication facility which were recorded as cost of revenues and
research and development expenses in the Company's Condensed Statements of
Operations. The Company expects annual cost savings of approximately $45 million
as a result of the manufacturing restructuring action. The cost savings
associated with the manufacturing restructuring are expected to be partially
realized in the fourth quarter of fiscal 1999 and fully realized beginning in
the first quarter of IDT's fiscal 2000. As a result of the asset impairment
charge, which reduced the carrying value of manufacturing equipment, IDT expects
an immediate reduction in annual depreciation expense in future quarters of
approximately $25 million.
Gross profit for Q2 1999 was ($137.7) million, including a $181.6 million charge
for restructuring, asset impairment and other costs, compared to $55.2 million
for Q2 1998. Excluding the $181.6 million in charges for restructuring, asset
impairment and other, gross profit in Q2 1999 increased when compared to Q1 1999
from 30.7% to 33.1%. Excluding these charges, gross profit decreased by $11.9
million from $55.2 million, and gross margin decreased from to 33.1% from 38.4%,
for Q2 1999 compared to Q2 1998. For the first 6 months of fiscal 1999,
excluding restructuring, asset impairment and other related costs, gross margin
also decreased when compared to the first 6 months of fiscal 1998.
Excluding the charges, the decline in gross margin is associated with lower
revenues, higher manufacturing costs and the fixed nature of many of the costs
associated with semiconductor manufacturing facilities. In fiscal 1999, IDT
planned to manufacture and sell greater
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volumes of its products. However, because of changes in marketplace demand,
especially for WinChip microprocessors and continued weakness in SRAM markets,
greater manufacturing volumes and sales revenues did not materialize. Also,
costs associated with the eight-inch wafer fabrication facility in Oregon
continued to adversely impact gross margin for the first half of fiscal 1999, as
these costs were not fully absorbed by additional revenues.
In order to improve gross margin, as outlined above, IDT is consolidating its
wafer manufacturing facilities from three facilities to two. The Company expects
that it will be able to produce sufficient volumes of products at its remaining
wafer fabrication facilities to offset the product volumes currently
manufactured at the facility which will be closed. Further, the Company believes
that incremental available capacity, primarily at IDT's facility in Hillsboro,
Oregon, together with available capacity at the Company's foundry partners,
provide IDT with sufficient capacity to take advantage of improved business
conditions when they occur. The Company also believes that the consolidation of
production volumes will improve planned levels of capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses decreased by $3.0 million (7.6%) from
Q1 1999 and increased by $5.8 million (19.0%) compared to Q2 1998. R&D costs for
the 6 month period ended September 27, 1998 increased $15.4 million when
compared to the same period in FY 1998. R&D expenses for Q1 1999 included $5.5
million in charges, primarily associated with discontinuing certain development
efforts, severance and termination costs associated with development personnel
and related payments under technology license agreements associated with such
development efforts. Development efforts discontinued included a graphics chip
and a specialized logic chip. Cost savings associated with discontinuing these
development efforts are approximately $1 million per quarter and are expected to
be fully realized by the fourth quarter of fiscal 1999. R&D expenses for Q2 1999
included $.6 million in costs, primarily associated with retention costs earned
by research and development staff during Q2 1999 which are employed at the San
Jose fabrication facility. Excluding the charges and related costs, when
compared to Q1 1999, Q2 1999 R&D spending increased because of greater costs
associated with product design initiatives and process R&D. With respect to
process R&D, the Company allocates costs associated with its manufacturing
facilities between cost of goods sold and process R&D based upon activities
performed. Therefore, because of lower production volumes associated with
reduced demand in Q1 1999 and relatively constant process R&D activity, the
allocation of manufacturing costs to process R&D expense increased. The factors
described above resulting in increased R&D costs in Q1 1999 and Q2 1999 are also
the primary reasons R&D increased during the first 6 months of fiscal 1999, when
compared to the same period of fiscal 1998. Management expects that in the
coming quarters, R&D expense will decrease as the allocation of manufacturing
costs associated with process R&D declines as a result of manufacturing facility
consolidation.
Current R&D activities include developing the next generation of WinChip
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, expanding the logic product family,
and developing a family of specialty memory products for the communications and
networking markets.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses decreased by $.8 million
and increased by $5.7 million for Q2 1999 compared to Q1 1999 and Q2 1998,
respectively. SG&A costs for the 6 month period ended September 27, 1998
increased $9.8 million when compared to the same period in FY 1998. When
comparing Q2 1999 to Q2 1998, SG&A costs associated with marketing efforts for
WinChip microprocessors and other products and costs associated with initiatives
to implement and upgrade enterprise-wide management information systems, which
are expected to increase the availability and quality of management information,
both increased. The factors described above resulting in increased SG&A costs in
Q1 1999 and Q2 1999 are also the primary reasons SG&A increased during the first
6 months of fiscal 1999, when compared to the same period of fiscal 1998. The
Company expects that in the coming quarters, excluding the impact of merging
Quality Semiconductor with IDT, recurring SG&A costs will remain relatively
constant, except for costs such as sales commissions and bonus which will vary
in relation to sales volumes.
INTEREST EXPENSE
Interest expense is primarily associated with the 5.5% Convertible Subordinated
Notes, due in 2002, and $21.0 million of secured equipment financing agreements
completed in September 1996, which amortize over the term of the financing
agreements. Interest expense for Q2 1999 decreased by approximately $.2 million
from $3.3 million for Q1 1999 and was essentially unchanged from Q2 1998.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, was essentially flat in Q2 1999 compared to Q1
1999. Compared to Q2 1998, interest income and other, net, for Q2 1999 decreased
by $1.2 million, primarily due to IDT's share of net losses from unconsolidated
affiliates.
TAXES
The $35.2 million tax expense for Q2 1999 is primarily due to a reserve taken
against the value of the Company's net deferred tax assets. For Q3 1999 and Q4
1999, management expects to incur no additional federal tax liability, because
it anticipates a federal tax loss for the full year. Income taxes in state
jurisdictions are not significant, principally due to IDT's projected FY 1999
loss for state income tax purposes. For the remainder of fiscal 1999, a small
amount of foreign tax expense is expected, due to anticipated profits in certain
of the Company's foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 1998, cash and cash equivalents were $129.0 million, a decrease
of $17.1 million from $146.1 million at March 29, 1998.
The Company generated $25.1 million in cash from operating activities for the
first six months of fiscal 1999, down from $119.1 million for the same period in
fiscal 1998.
During the first half of fiscal 1999, the Company's net cash used for investing
activities was $75.1 million, including $77.9 million for capital expenditures.
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Cash provided by financing activities during the first six months of fiscal 1999
was $32.9 million as compared to $.1 million during the same period in fiscal
1998. The Company completed several equipment financing transactions during the
first six months of fiscal 1999. The Company entered into capital leases under
which it sold certain previously purchased semiconductor manufacturing equipment
to leasing companies which leased the equipment back to IDT for use at the
Oregon fabrication facility. These lease transactions generated $26.7 million in
cash proceeds. The Company also entered into other capital leases for
manufacturing equipment during this period. In total, the Company's lease
obligations under capital leases increased by $31.8 million in connection with
these transactions.
During Q1 1999, under another leasing arrangement, equipment purchased for the
Oregon fabrication facility with a net book value of $11.9 million at the time
of the sale and leaseback transaction was sold to a leasing company and leased
back for use at the Oregon facility under a lease classified as operating. The
Company also entered into a $5.0 million secured loan arrangement which is
collateralized by certain manufacturing assets. The Company is not required to
maintain compliance with any financial covenants under any of these new
financing and leasing arrangements.
IDT anticipates capital expenditures of approximately $50 million during the
remainder of fiscal 1999. The Company intends to finance these expenditures
primarily through existing cash and investments. The Company may also
investigate other financing alternatives, depending on whether available terms
are favorable to the Company.
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. However, 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.
SUBSEQUENT EVENTS
In September 1998, the Company's Board of Directors authorized a repurchase
program whereby up to ten million shares of IDT common stock may be purchased in
the open market from time to time. No shares were repurchased during Q2 1999.
The Company initiated buyback activity in Q3 1999 and repurchased approximately
900,000 shares at an approximate aggregate cost of $4.6 million as of the date
of this filing.
On November 2, 1998, IDT and Quality Semiconductor, Inc. ("QSI") announced the
signing of a definitive agreement for QSI to be acquired by IDT. Under the terms
of the agreement, each issued and outstanding common share of QSI will be
exchanged for .6875 shares of IDT Common Stock. The merger is planned to close
during the fourth quarter of IDT's fiscal 1999 and is intended to be accounted
for as a pooling of interests.
On November 6, 1998, IDT announced that its Board of Directors had terminated
the authorization to repurchase shares. The decision to terminate this program
was a result of the Securities and Exchange Commission's position on share
repurchase programs in Staff Accounting
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Bulletin 96 (SAB 96). Specifically, under SAB 96 there are circumstances where
companies that have ongoing stock repurchase programs do not have the ability to
employ the pooling-of-interest accounting method when making acquisitions.
Continuing the repurchase program would restrict IDT's ability to utilize
pooling of interest accounting for the merger with Quality Semiconductor and
could restrict IDT's future ability to pursue the full range of strategic
business development opportunities in which the Company may engage to further
enhance its market position.
FACTORS AFFECTING FUTURE RESULTS
The preceding discussion contains forward-looking statements, which are based on
management's current expectations. These include, in particular, the statements
related to revenues and gross profit, R&D and SG&A expenses and activities,
interest expense, interest income and other, taxes, capital spending and
financing transactions, as well as statements regarding successful development
and market acceptance of new products, industry conditions and demand, effects
of consolidation of production in Oregon, capacity utilization and the
acquisition of QSI. Actual results may differ materially.
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 commodity semiconductor memory and
x86 microprocessor markets; 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,
taxes 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. 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 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 commodity SRAM 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 material declines in product pricing and could especially adversely
affect that portion of the Company's operating results derived from the sale of
industry-standard products. The Company seeks to manage costs, but there can be
no assurance that these efforts will be sufficient to return to profitability.
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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 and x86
microprocessor 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 full and effective use of the facilities, the Company
continues to install new equipment at all of its fabrication and assembly and
test facilities. Additional planned production capacity and yield improvements
by the Company's competitors could dramatically increase the worldwide supply of
products which compete with the Company's products and could, if customer demand
does not absorb increased product quantities, create further downward pressure
on pricing.
RISKS ASSOCIATED WITH EXPANSION OF PRODUCT FAMILIES - X86 MICROPROCESSORS. The
Company commenced shipments of the WinChip microprocessor, IDT's first member of
its x86 microprocessor product family in the third quarter of fiscal 1998. This
product represents the Company's first offering to the 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:
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 IDT does. Currently, Intel's dominant market position allows it to set and
control x86 microprocessor standards and, therefore, dictate many aspects of the
products that PC manufacturers require in this market.
In addition, IDT's x86 microprocessor products are currently 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 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
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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. New versions of
microprocessor products that Intel sells are available primarily in the form of
a chip module that is not compatible with "Socket 7" motherboards. Therefore,
Intel has reduced and may cease support for the Socket 7 motherboard
infrastructure. 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.
The market for x86 microprocessors is currently characterized by short product
life cycles, rapid decreases in ASP's, and migration to increasingly higher
performance microprocessors. Failure by IDT to offer WinChip microprocessors in
sufficient quantities and with the speed and other performance characteristics
desired by customers could adversely impact the Company's results of operations.
In addition to Intel, AMD and National Semiconductor's Cyrix subsidiary 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. Before fiscal 1998, the Company had not previously
manufactured x86 microprocessors and has processed only limited quantities of
x86 microprocessors to date. Therefore, as production volumes of x86
microprocessors increase, the Company could 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.
As described above, in fiscal 1998, IDT contracted with IBM for x86
microprocessor wafer manufacturing services using IBM's CMOS process technology.
As IDT increases the number of products offered within the WinChip family of
microprocessors and should demand for these products increases, IDT may begin to
utilize IBM's manufacturing services to increase the available volume of WinChip
microprocessors. The terms and conditions of the IBM manufacturing services
agreement require IDT to forecast in advance production quantities that it will
purchase and, once production quantities are ordered, the contract limits IDT's
ability to change desired quantities of IBM manufactured products. Products
purchased under the IBM manufacturing services agreement must meet certain
agreed to acceptance criteria. However, these acceptance criteria do not include
the number of usable WinChip processors per wafer nor the speed at which they
will operate. Should IDT not accurately forecast the demand for IBM manufactured
WinChip products, or should the number of good WinChip processors per IBM
manufactured wafer and the speed at which they operate not meet or exceed these
and other characteristics of IDT manufactured products, IDT's results of
operations will be adversely impacted.
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Compatibility With Software and Performance Certifications. IDT has obtained
WinChip certifications from Microsoft Corp. 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 and growth patterns
not occur or IDT not be able to produce products which meet customers needs, 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(TM) microprocessor
to a third party. Thus, the Company may face competition from the third party in
the future.
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, including Socket 7 compatibility,
would limit IDT's ability to sell products to the PC market.
MANUFACTURING RISKS. Historically, the Company has utilized subcontractors for
the majority of its incremental assembly requirements, typically at higher costs
than its own Malaysian and Philippines assembly and test operations. The Company
expects to continue utilizing subcontractors extensively to supplement its own
production volume capacity. 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.
The Company is increasing the production capacity of its Oregon facility to
manufacture IDT WinChip products and absorb the production volumes from its San
Jose wafer fabrication facility, which the Company plans to close. This capacity
expansion program in Oregon faces a number of substantial risks including, but
not limited to, equipment delays or shortages, power interruptions or failures,
and manufacturing start-up or process problems. From time to time, the Company
has experienced production difficulties that have caused delivery delays and
quality problems. The Company could experience manufacturing problems and
product delivery delays in the future as a result of, among other things,
changes to its process technologies, and ramping production and installing new
equipment at its facilities, including the facility in Oregon.
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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. The Company does not carry earthquake
insurance on its facilities, as adequate protection is not offered at
economically justifiable rates. 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 has reduced gross margins. As commercial production
continues in fiscal 1999, the Company anticipates incurring substantial
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 could be
adversely impacted.
The Company has announced plans to improve its operating results through
consolidation of certain manufacturing and other activities, together with
headcount reductions and other actions. The expected cost savings from these
plans might not be sufficient to return the Company to profitability.
DEPENDENCE ON NEW PRODUCTS. New products and process technology costs associated
with the Oregon wafer fabrication facility will continue to require significant
R&D 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, its 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.
Historically, IDT has been significantly dependent on the design capabilities of
Quantum Effect Design, Inc. ("QED"), an equity affiliate of the Company, for the
design and development of derivatives of 64-bit MIPS(R) RISC-based
microprocessors. Currently there are no development contracts in effect between
QED and IDT, and the Company is now
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designing and developing derivatives of MIPS RISC-based microprocessors in-house
as necessary to supplement its in-house design capabilities. From time to time,
IDT may contract with third party semiconductor designers other than QED. As
with all new products, there is significant risk that the Company or its
contractors 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. The Company expects to expend approximately
$50 million for capital additions during the remaining two quarters of fiscal
1999, and anticipates significant continuing capital expenditures, especially in
connection with the introduction of products for the WinChip microprocessor
family, in the next several years. The Company could be required to seek
financing to satisfy its cash and capital needs, and such financing might not 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 on 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. The Company might not be able to obtain such
licenses on acceptable terms or to develop non-infringing technology. Further,
the failure to renew or renegotiate existing licenses on favorable terms, or the
inability to obtain a key license, could have a material adverse effect on the
Company.
RISKS OF INTERNATIONAL OPERATIONS. A substantial percentage of the Company's
revenues are derived from non-U.S. sales. In addition, the Company's offshore
assembly and test operations incur payroll, facilities and other expenses in
local currencies. Accordingly, movements in foreign currency exchange rates,
such as those seen recently in the Far East, can impact both pricing and demand
for the Company's products as well as its cost of goods sold. The Company's
offshore 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 be impacted by currency exchange
rate fluctuations.
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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 COMMON STOCK AND NOTES PRICES. The Company's Common Stock and
Convertible Subordinated Notes ("Notes") have experienced substantial price
volatility. 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. In addition, announcements by the Company or its
competitors regarding new product introductions. 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 Notes.
IMPACT OF YEAR 2000 ON THE COMPANY'S OPERATIONS
Year 2000 Problem Defined. In brief, the Year 2000 problem is a programming
problem found in many computer applications which conform to older commonly
accepted standards. These applications might not function properly after
December 31, 1999 or after the start of a company's fiscal year 2000. The
problem dates back to the days when computer memory was limited and data storage
was expensive. To save space, some dates are stored using only two digits (1998
is stored as 98). This poses no problem when the "missing" digits are all the
same (e.g. 19). However, when two dates are compared, used in a calculation or
sorted and the dates span the January 1, 2000 boundary, problems can occur. For
example, 1999 is earlier than 2000, but without the first two digits, the result
would be that 00 is earlier than 99. The fact that most business software is
heavily dependent on dates means the problem is widespread. Some systems will
fail in very visible and obvious ways, but others will continue to process,
producing erroneous results which might not surface until later. The longer it
takes before these problems are found, the more difficult, and costly, they will
be to correct. All aspects of operations at any company could be impacted, from
financial to shipping, and even such areas as elevators and security systems can
be affected.
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.
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IDT's Approach. In October 1997, IDT engaged the services of Keane, Inc., a
software services firm with over 30 years of relevant experience, to assist in
defining IDT's approach. To date, the Company has paid approximately $165,000 in
consulting fees to Keane. The methodology IDT is using consists of the following
five phases:
o Inventory - In this initial phase, an inventory is taken of all software and
hardware that may be affected by the Year 2000 problem.
o Impact Assessment - In the second phase, the impact of the Year 2000 problem
is assessed for the items identified in the Inventory phase. The assessment
includes estimates of how large the impact really is, along with rough estimates
for fixing the problem.
o Strategy Development and Confirmation - Using the information from the
previous two steps, IDT develops and maintains a strategy for each affected
item. This phase includes the development of any contingency plans that may be
required to mitigate IDT' s risk in a particular area.
o Remediation Plan - In this phase, fixes necessary to bring hardware and
software into Year 2000 compliance are defined. This may include code
modifications, software upgrades, or hardware upgrades.
o Remediation and Testing - In this phase, Year 2000 affected items are
remediated and tested to verify their proper operation into the Year 2000 and
beyond. IDT's rule is that any item in the critical business path must be
tested. The goal is to complete all initial testing by December 31, 1998. Once
initial testing is complete, there will be an ongoing process of remediation
followed by testing until all testing is completed. The target date for all
testing to be completed is June 1, 1999.
The Company has completed the Inventory, Impact Assessment, Strategy Development
and Confirmation and Remediation Plan phases of its Year 2000 plan. The
Remediation and Testing phase is in process as of the date of this filing.
IDT Products. The Company has completed an initial assessment of the extent to
which Year 2000 issues may be incorporated into products which it sells to its
customers. It did not find any Year 2000 related issues in products which IDT
sells to customers.
IDT Business Partners. The Company has contacted all of its major suppliers and
other critical business partners in an effort to identify and mitigate Year 2000
matters originating from third parties which may adversely affect the Company.
Contingency plans, if required, will be developed for transactions with
suppliers that appear to be lagging with their Year 2000 readiness programs.
This may include replacing these suppliers. The Company is currently reviewing
supplier responses and is obtaining additional information.
IDT Business Systems. Based on the Company's continuing assessment, IDT needs to
replace or materially modify many of its software applications, including those
critical to the Company's normal operations, in order to both meet the Company's
business requirements and avoid significant Year 2000 issues.
The Company is in the process of installing business and planning software
licensed from SAP America, Inc. and i2 Technologies, Inc. With the installation
of these software systems, and upgrades to a small number of in-house developed
legacy software applications, the Company
<PAGE> 25
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believes its critical business systems will be Year 2000 compliant. In February
1999, the Company expects to bring the first portion of the SAP implementation
on-line. At that time, it will evaluate the need for contingency plans.
Manufacturing Systems. Each manufacturing site has taken an inventory of its
equipment and is working closely with the equipment vendors regarding Year 2000
issues. The Company is awaiting software and/or hardware upgrades from its
vendors. It is the Company's goal to have all equipment compliant by June 1999.
Contingency plans include such techniques as rolling back the date on equipment
and custom upgrades and interfaces.
By the year 2000, over a five-year period, the Company will have replaced
substantially all of its enterprise wide systems. The Company has not allocated
a portion of the total project cost to the Year 2000 issue. While the Company
continues to monitor its system implementation costs, IDT does not believe the
incremental project cost associated with Year 2000 compliance to be material, as
this feature is included with software purchased by the Company to satisfy its
business needs.
There can be no assurance 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 on a
timely basis. In addition, the critical Year 2000-deficient software programs of
the parties on which the Company depends might not be converted on a timely
basis or could be converted to systems which are incompatible with the Company's
systems.
<PAGE> 26
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 31, 1998, a lawsuit was filed by Lemelson Medical Education & Research
Foundation, Limited Partnership ("plaintiff"), against the Company and 25 other
corporate defendants. The lawsuit, which alleges that the defendants are
infringing upon 16 patents issued to plaintiff, was filed in the United States
District Court for the District of Arizona, case no. 98 1413PHXPGR. In the
lawsuit, plaintiff seeks an injunction and damages in an unspecified amount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 27, 1998, the Company held its 1998 Annual Meeting of Stockholders. On
the record date of July 1, 1998, 82,118,047 shares of the Company's Common Stock
were issued, outstanding and entitled to vote. Tabulated proxies at the meeting
represented 72,230,645, or 88.0%, of the total eligible shares. Voting results
of the proposals presented were as follows:
(1) Proposal I - To elect two Class II directors for a term to expire at the
2001 Annual Meeting of Stockholders:
Name Votes For Authority Withheld
---------------------------------------------------------------------
Federico Faggin 70,603,185 1,627,460
John C. Bolger 70,703,693 1,526,952
(2) Proposal II - To approve an amendment to the Company's 1994 Stock Purchase
Plan to increase the number of shares reserved for issuance thereunder from
5,050,000 to 7,000,000:
Votes For Votes Against Votes Abstained Non-Votes
---------------------------------------------------------------------
63,864,483 7,906,765 459,397 0
(3) Proposal III - To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for fiscal 1999:
Votes For Votes Against Votes Abstained Non-Votes
---------------------------------------------------------------------
71,609,465 339,829 281,351 0
<PAGE> 27
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27* Financial Data Schedule
</TABLE>
- ---------
*Previously filed.
(b) Reports on Form 8-K:
No reports have been filed on Form 8-K during this quarter.
<PAGE> 28
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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: March 16, 1999 /s/ Leonard C. Perham
---------------------------------------
Leonard C. Perham
Chief Executive Officer
(duly authorized officer)
Date: March 16, 1999 /s/ Alan F. Krock
---------------------------------------
Alan F. Krock
Vice President, Chief Financial Officer
(principal accounting officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27* Financial Data Schedule
</TABLE>
- ---------
*Previously filed.
