================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 28, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2669985
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2975 Stender Way,
Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 727-6116
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
5.5% Convertible Subordinated Notes due 2002
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $667,085,000 as of May 21,
1999, based upon the closing sale price of $8.438 per share on the Nasdaq
National Market for that date. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
There were 88,331,600 shares of the Registrant's Common Stock issued and
outstanding as of May 21, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, and 13 of Part III incorporate information by reference from
the Proxy Statement for the 1999 Annual Meeting of Stockholders.
================================================================================
<PAGE>
PART I
All non-historical information contained in this discussion and analysis
constitutes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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;
manufacturing capacity utilization, and the Company's efforts to consolidate and
streamline production; customer demand and 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.
ITEM 1. BUSINESS
Integrated Device Technology, Inc. ("IDT" or the "Company") designs, develops,
manufactures and markets a broad range of high-performance semiconductor
products and modules. Applications for IDT's products include data and
telecommunications equipment, such as routers, hubs, switches, cellular base
stations and other devices; personal computers; and networked peripherals and
servers, such as RAID arrays, servers, and printers.
The Company markets its products on a worldwide basis primarily to OEMs
(original equipment manufacturers) through a variety of channels, including a
direct sales force, distributors and independent sales representatives. The
Company attempts to differentiate its products from competitors' products
through unique architecture, enhanced performance, reduced system cost and
packaging options.
IDT fabricates substantially all of its semiconductor wafers using advanced CMOS
(complementary metal oxide silicon) process technology in its own wafer
fabrication facilities. IDT has also contracted with outside foundries for
WinChip x86 microprocessor wafer manufacturing services.
In May 1999, the Company completed the acquisition of Quality Semiconductor,
Inc. ("QSI"). QSI had been engaged in the design, development and marketing of
high-performance logic and networking semiconductor products.
IDT was incorporated in California in 1980 and reincorporated in Delaware in
1987. The terms the "Company" and "IDT" refer to Integrated Device Technology,
Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
PRODUCTS AND MARKETS
The Company operates in three business segments:
o Communications and High Performance Logic
o SRAMs and other
o x86 Microprocessors
The Communications and High-Performance Logic segment includes communications
products, networking devices, embedded RISC microprocessors and high-performance
logic and clock-management devices. The SRAMs and other segment consists mainly
of high-speed SRAMs (static random access memories).
Products in the SRAM and other segment are generally characterized as commodity
(or industry standard) products which typically have exhibited lower gross
margins and high unit volumes. Products in the Communications and
High-Performance Logic segment, with the exception of some logic devices, tend
to have lower unit sales and and higher margins. Products in these segments are
also manufactured using different
2
<PAGE>
levels of process technology. A significant portion of the wafers produced for
the SRAMs and other and x86 microprocessors segments are fabricated at IDT's
advanced technology, eight-inch wafer production facility in Hillsboro, Oregon.
Most wafers for the Communications and High Performance Logic segment are
produced at IDT's older, six-inch facility located in Salinas, California.
The Company offers approximately 1,300 products in 7,600 product configurations.
IDT's product design efforts are focused on differentiated components and
integration of its components into single devices, modules or subsystems to meet
the needs of its customers.
During fiscal 1999, the Communications and High Performance Logic, SRAMs and
other and x86 microprocessors segments accounted for 71%, 23% and 6%
respectively, of total IDT revenues of $540.2 million.
Communications and High-Performance Logic Segment
Communications Products and Networking Devices. The Company's communications
products are either proprietary or have limited alternative sources of supply.
These products include FIFO memories, multi-port memories, and network products
that offer high-performance features that allow communications and networking
systems to operate more effectively. FIFO memories are used as rate buffers to
transfer large amounts of data at high speeds between separate devices or pieces
of equipment operating at different speeds within a system, when the order of
the data to be transferred needs to be controlled. Multi-port memory products
are used to speed data transfers and act as the link between multiple
microprocessors or between microprocessors and peripherals. These products are
currently used primarily in peripheral interface, communications and networking
products, including bridges, hubs, routers and switches. IDT's network products
family uses emerging network technology designed to support faster transmission,
higher quality images, audio and data.
IDT is a leading supplier of both synchronous and asynchronous FIFO memories and
has increasingly focused its resources on the design of synchronous FIFO
memories. Synchronous FIFO memories have been gaining greater market acceptance
because they are faster and provide an easier user interface than asynchronous
FIFO memories. IDT's family of 9-bit, 18-bit and 36-bit Sync FIFO memories are
being used in many newer networking products. IDT has added the SuperSync(TM) II
family of FIFO memories to its product offerings, providing one of the highest
density (4Mb), highest performance (133MHz) and broadest feature sets
commercially available.
The Company is also a leading supplier of multi-port memory products. IDT's
family of multi-port memories is composed of dual-port asynchronous devices,
four-port products, and synchronous dual-port devices, including what the
Company believes to be among the highest-density (1Mb), highest-performance
(100MHz) and widest word-width (x36) dual-ports commercially available.
The network products family includes a switching chipset, segmentation and
reassembly controllers, and physical interface and muxing/demuxing devices that
are used to interconnect computers and facilitate data transmission in networks.
Logic and Clock Management Products. IDT is a leading manufacturer of
high-speed, byte-wide and double-density 16-bit CMOS logic circuits for
high-performance applications. Logic circuits control data communication between
various elements of electronic systems, such as between a microprocessor and a
memory circuit. IDT offers a wide range of logic circuits products that support
bus and backplane interfaces, memory interfaces and other logic support
applications where high speed and low power are critical. IDT's logic circuits
are used in a broad range of markets. The Company recently introduced Advanced
Low Voltage CMOS (ALVC) and Low Voltage CMOS (LVC) logic products. These low
voltage products represent a rapidly growing segment of the high-performance
logic market.
IDT's 16-bit logic products are available in small, thin packages, enabling
board area to be reduced. These products are designed for applications in which
small size, low power and extra low noise are as important as high speed.
3
<PAGE>
IDT also supplies a series of 8-bit and 16-bit, 3.3-volt logic products and
3.3-volt to 5-volt translator circuits directed at 3.3-volt systems in the
notebook and laptop computer market.
The Company also offers a family of clock drivers and clock generators. These
devices, placed at critical positions in a system, correct the degradation of
timing that occurs the further the impulses travel from the main system clock.
IDT completed its acquisition of QSI shortly after the end of fiscal 1999. QSI's
products are largely complementary to IDT's logic product lines and include the
QuickSwitch(R) and clock management families.
Embedded RISC Microprocessors. IDT markets its RISController(TM) microprocessors
which represent one of the industry's broadest lines of 32-bit and 64-bit
processors based on the MIPS architecture. IDT is a leading supplier of MIPS
processors to the communications and networking markets.
The Company focuses its RISC microprocessor marketing efforts primarily on the
embedded controller market. Embedded controllers are microprocessors that
control a single device such as a network router or switch, printer or set-top
box. The Company provides its customers with integrated solutions for embedded
control, including related support chips and engineering tools such as RTOS
(Real Time Operating System), compilers, reference designs and technical
support.
The Company's RISC microprocessor products include the RC5000, IDT's first
64-bit superscalar microprocessor, which is available with clock speeds up to
250 MHz and the highly compatible family of RISCore4000 64-bit controllers.
During fiscal 1999, IDT introduced the RC32364 32-bit processor which won the
Microprocessor Report Editor's Choice Award for price/performance. In addition,
the Company introduced system controller support chips for both the 32-bit and
64-bit processors.
SRAMs and Other Segment
SRAMS. SRAMs are memory circuits used for storage and retrieval of data during a
computer or communication system's operation. Unlike DRAMs (dynamic random
access memories), SRAMs do not require electrical refreshment of the memory
contents to ensure data integrity, allowing them to operate at high speeds.
SRAMs include substantially more circuitry than DRAMs, resulting in higher
production costs for a given amount of memory, and generally command higher
selling prices than the equivalent density traditional DRAM products. The market
for SRAMs is fragmented by differing demands for speed, power, density,
organization and packaging. As a result, there are a number of niche markets for
SRAMs.
Historically, the Company focused primarily on the cache memory segment of the
SRAM market. But, in fiscal 1999, the PC cache segment represented a very small
percentage of IDT's SRAM revenues, and it is not expected to contribute
significantly to the Company's SRAM revenues moving forward.
In fiscal 1997, IDT announced the first of a family of ZBT(R) (Zero Bus
Turnaround(TM)) SRAMs which eliminate wait states between read and write cycles.
In March 1998, IDT introduced its first 4Mb ZBT memory, which has been shipping
in volume since the first quarter of fiscal 1999.
To provide SRAM products that meet the varying needs of its customers, IDT
offers 16K, 64K, 256K, 1 Megabit and 4 Megabit SRAMs in a number of speed,
organization, power and packaging configurations.
x86 Microprocessors Segment.
The WinChip 2 microprocessor, which began shipping for revenue in the third
quarter of fiscal 1999, is the most recent member of IDT's x86 microprocessor
product family. The Company's x86 microprocessors, including the first
generation WinChip C6(TM) and its successor the WinChip 2, are compatible with
similar products manufactured and sold by Intel Corp. ("Intel"), Advanced Micro
Devices, Inc. ("AMD") and National Semiconductor Corporation's subsidiary Cyrix
Corp. ("Cyrix").
4
<PAGE>
The WinChip 2 microprocessor's features include 3DNow!(TM) and superscalar
MMX(TM) technology and support for the 100MHz system bus specification
(Super7(TM)). The WinChip2 microprocessor is targeted for the sub-$1,000 PC
desktop and sub-$1,500 mobile PC markets. In fiscal 1999, the IDT WinChip
microprocessor was sold with clock speeds of 180MHz to 240MHz. IDT has
manufactured its x86 wafers at its facility in Hillsboro, Oregon and has
contracted with IBM and other foundries to manufacture these products if needed.
CUSTOMERS
The Company markets and sells its products on a worldwide basis primarily to
OEMs in its three business segments. Products in the Communications and
High-Performance Logic segment are sold to communications oriented customers and
consumers of high-performance logic, while products in the SRAMs and other
segment are sold to customers in diverse industries. Products in the x86
microprocessors segment are sold primarily to customers in the personal
computing market. Customers often purchase products from more than one of the
Company's product families. No one OEM direct customer accounted for 10% or more
of the Company's revenues in fiscal 1999, 1998 or 1997.
MARKETING AND SALES
IDT markets and sells its products primarily to OEMs through a variety of
channels, including a direct sales force, distributors and independent sales
representatives.
The Company had 68 direct sales personnel in the United States as of March 28,
1999. Such personnel are based at the Company's headquarters and in 18 sales
offices in Alabama, California, Colorado, Florida, Illinois, Maryland,
Massachusetts, Minnesota, New Jersey, North Carolina, Oregon and Texas, and are
primarily responsible for marketing and sales in those areas. IDT also utilizes
three national distributors, Hamilton Hallmark, a division of Avnet, Inc.; Wyle
Laboratories and Insight Electronics, Inc., and several regional distributors in
the United States. Hamilton Hallmark accounted for 24%, 17% and 14% of the
Company's revenues in fiscal 1999, 1998 and 1997, respectively. In addition, IDT
uses independent sales representatives, which generally take orders on an agency
basis while the Company ships directly to the customer. The representatives
receive commissions on all products shipped to customers in their geographic
area.
In addition, the Company had 70 direct sales personnel and 12 sales offices
located outside of the United States as of March 28, 1999. Sales activities
outside North America are generally conducted by IDT's subsidiaries located in
France, Germany, Hong Kong, Israel, Italy, Korea, Japan, Singapore, Sweden and
the United Kingdom. The Company also has sales offices in Taiwan, Malaysia and
Finland. The Company continues to emphasize its direct marketing efforts to OEMs
in Europe and to United States companies with operations in the Asia-Pacific
area. A significant portion of export sales continues to be made through
international distributors. During fiscal 1999, 1998 and 1997, non-U.S. sales
accounted for 37%, 39% and 38% of total revenues, respectively. Sales outside
the United States are generally denominated in local currencies. Sales and other
financial information for foreign operations is included in Note 10 of the Notes
to Consolidated Financial Statements contained elsewhere in this Form 10-K.
Export sales are subject to certain risks, including currency controls and
fluctuations, changes in local economic and political conditions, import and
export control, and changes in tax laws, tariffs and freight rates.
The Company's distributors typically maintain an inventory of a wide variety of
products, including products offered by IDT's competitors. IDT's distributors
provide inventory management and logistics programs for their customers and also
handle small or rush orders. A portion of the Company's sales is made to
distributors under agreements which allow certain rights of return and price
protection on products unsold by the distributors. Related gross profits thereon
are deferred until the products are resold by the distributors.
5
<PAGE>
MANUFACTURING
IDT believes that maintaining its own wafer fabrication capability facilitates
the implementation of advanced process technologies, provides the Company with a
reliable source of supply of semiconductors and allows it to be more flexible in
shifting production according to product demand. The Company currently operates
sub-micron wafer fabrication facilities in Hillsboro, Oregon and Salinas,
California. The Oregon facility first contributed to revenues beginning in
fiscal 1997. The 192,000 square foot facility, which produces a significant
portion of the wafers fabricated for IDT's SRAMs and other segment, contains a
48,000 square foot, class 1 (less than one particle 0.5 micron or greater in
size per cubic foot), eight-inch wafer fabrication line. The Salinas facility,
first placed in production in fiscal 1986, includes a 24,000 square foot, class
3 (less than three particles 0.5 micron or greater in size per cubic foot),
six-inch wafer fabrication line. Most wafers for the Company's Communications
and High-Performance Logic segment are produced at the Salinas plant.
In fiscal 1999, as part of its efforts to consolidate and streamline
manufacturing operations, the Company closed its 24,000 square foot, class 1,
six-inch wafer fabrication facility located in San Jose, California. Production
from this facility, which had been in use since fiscal 1991, has been absorbed
by the Oregon and Salinas facilities.
IDT supplements its internal wafer fabrication capacity with subcontract wafer
manufacturing capacity. In fiscal 1998, IDT contracted with IBM for x86
microprocessor wafer manufacturing services using IBM's CMOS process technology.
IDT expects, during fiscal 2000, to use IBM and other foundries for WinChip
production.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for an overview of industry capacity trends and a discussion of the
Company's restructuring actions and asset impairment charges in fiscal 1999.
The Company has acquired a wafer fabrication facility in Sydney, Australia, as
part of the QSI merger, which closed in the first quarter of fiscal 2000. The
41,000 square foot facility is being used to produce wafers for logic product
families acquired from, and previously manufactured by, QSI.
IDT also operates two component assembly and test facilities, a 145,000 square
foot facility in Penang, Malaysia and a 176,000 square-foot facility near
Manila, the Philippines. Substantially all of the Company's test operations and
a significant portion of its assembly operations are performed at its Malaysian
and Philippines facilities. IDT also uses subcontractors, principally in Korea,
the Philippines and Malaysia, to perform certain assembly and burn-in
operations. If IDT were unable to assemble or test products offshore, or if air
transportation to these locations were curtailed, the Company's operations could
be materially adversely affected. Additionally, foreign manufacturing exposes
IDT to certain risks generally associated with doing business abroad, including
foreign governmental regulations, currency controls and fluctuation, changes in
local economic and political conditions, import and export controls, and changes
in tax laws, tariffs and freight rates. In addition to this offshore assembly
and test capability, the Company has the capacity for low-volume, quick-turn
assembly in its Santa Clara, California facilities as well as limited test
capabilities in Santa Clara and Salinas. Assembly and test of memory modules
takes place both domestically and offshore.
The Company utilizes proprietary CMOS process technology permitting sub-micron
geometries in its fabrication facilities. The majority of IDT's current products
are manufactured using its proprietary 0.5, 0.35 and 0.25 micron processes. The
Company continues to develop its 0.18 micron CMOS processes.
Wafer fabrication involves a highly sophisticated, complex process that is
extremely sensitive to contamination. Integrated circuit manufacturing costs are
primarily determined by circuit size because the yield of good circuits per
wafer generally increases as a function of smaller die. Other factors affecting
costs include wafer size, number of process steps, costs and sophistication of
manufacturing equipment, packaging type, process complexity and cleanliness.
IDT's manufacturing process is complex, involving a number of steps including
wafer fabrication, plastic or ceramic packaging, burn-in and final test. The
Company continually makes changes to its manufacturing process to lower costs
and improve yields. From time to time, the Company has experienced manufacturing
problems that have caused delays in shipments or increased costs. Manufacturing
problems at its wafer fabrication, assembly or test facilities could materially
adversely affect the Company's results of operations.
The Company generally has been able to arrange for multiple sources of raw
materials, but the number of vendors capable of delivering certain raw
materials, such as silicon wafers, ultra-pure metals and certain chemicals and
gases
6
<PAGE>
is very limited. Some of the Company's packages, while not unique, have very
long lead times and are available from only a few suppliers. From time to time,
vendors have extended lead times or limited supply to the Company due to
capacity constraints. These circumstances could recur and materially adversely
affect IDT's results of operations.
BACKLOG
The Company's backlog of orders as of March 28, 1999 was approximately $132.8
million. The Company defines backlog as all confirmed, unshipped orders. IDT
manufactures and markets both standard products and products with limited or no
second sources. Sales are generally made pursuant to purchase orders, which are
frequently revised to reflect changes in the customer's requirements. The
Company has also entered into master purchase agreements with many of its OEM
customers. These agreements do not require the OEMs to purchase minimum
quantities of the Company's products. Product deliveries are scheduled upon the
Company's receipt of purchase orders under the related OEM agreements.
Generally, these purchase orders and OEM agreements, especially those for
standard products, also allow customers to reschedule delivery dates and cancel
purchase orders without significant penalties. Orders, especially for industry
standard products, are frequently made with very short lead times, rescheduled,
revised or canceled. In addition, distributor orders are subject to price
adjustments both prior to and after shipment. For these reasons, IDT believes
that backlog should not be used as an indicator of future revenues.
RESEARCH AND DEVELOPMENT
IDT's competitive position has been established, to a large extent, through its
emphasis on the development of both proprietary and enhanced-performance,
industry standard products, as well as the development of the Company's advanced
CMOS processes. IDT believes that its focus on continually advancing its process
technologies has allowed the Company to achieve cost reductions in the
manufacture of most of its products. The Company believes that a continued high
level of research and development expenditures is necessary to retain its
competitive position. The Company maintains research and development centers in
Santa Clara, California; Hillsboro, Oregon; Atlanta, Georgia; and Austin, Texas.
Also, with the acquisition of QSI, the Company now has a design center in
Sydney, Australia. New plant start-up costs associated with the Oregon wafer
fabrication facility significantly impacted research and development
expenditures in fiscal 1997. Research and development expenditures, as a
percentage of revenues, were 25%, 21% and 28% in fiscal 1999, 1998 and 1997,
respectively.
The Company's product development activities are focused on the design of new
circuits and modules that provide enhanced performance for growing applications.
The Company continues its research in an effort to develop memory chips with
greater speed and storage capacity. In the communications products area, IDT's
efforts are concentrated on the development of advanced synchronous FIFO
memories and more sophisticated multi-port memory products for the
communications market. Additionally, the Company continues its efforts to
develop a family of specialty products for the network products market and a
family of lower voltage logic devices for a broad range of applications. In the
SRAM family, IDT is utilizing its memory expertise to develop a new family of
advanced products. The Company is emphasizing the design of RISC microprocessors
for embedded control applications, such as routers, switches, printers and
television set-top boxes. IDT continues its efforts to develop x86 processors
and related 3D graphics capability which offer greater performance than its
current products at reduced cost for PC applications. The Company also continues
to refine its CMOS process technology to increase the speed and density of
circuits in order to provide customers with advanced products at competitive
prices. The Company continues to refine its CMOS process technology focusing on
sub-0.25 micron geometry processes, including a 0.18 micron process, and
converting the production of many products to newer generation processes.
7
<PAGE>
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological advances, cyclical market patterns, price erosion, evolving
industry standards, occasional shortages of materials, intellectual property
disputes, high capital equipment costs and availability and control of
manufacturing capacity. Many of the Company's competitors have substantially
greater technical, marketing, manufacturing and financial resources than IDT. In
addition, several foreign competitors receive assistance from their governments
in the form of research and development loans and grants and reduced capital
costs, which could give them a competitive advantage. The Company competes in
different product areas, to varying degrees, on the basis of technical
innovation and performance of its products, as well as quality, price and
product availability. As described under the heading "Products and Markets,"
products in the SRAMs and other segment can generally be characterized as
commodity-type items.
IDT's competitive strategy is to differentiate its products through
high-performance, innovative configurations and proprietary features or to offer
industry standard products with higher speeds or lower power consumption than
its competitors' products. Price competition, introductions of new products by
IDT's competitors, delays in product introductions by IDT or other competitive
factors could have a material adverse effect on the Company in the future.
In fiscal 1998, the Company began shipping the WinChip C6 microprocessor, the
first member of its WinChip x86 microprocessor family. The PC microprocessor
market is a large market dominated by Intel. 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.
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 or offer additional performance at low introductory price points,
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.
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. Accordingly, Intel may dictate
standards that are not compatible with the WinChip microprocessor and such
standards could limit the ability of IDT to sell its products and could require
IDT to incur significant redesign costs.
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 other parts. These components in turn must be compatible with Intel
microprocessors and are often manufactured by Intel, companies in which Intel
has strategic investments or independent companies. Accordingly, in marketing
its microprocessors to PC manufacturers and dealers, IDT is dependent upon
companies other than Intel for the design and manufacture of these components.
There can be no assurance that these third party designers and manufacturers,
who may also be dependent upon Intel for early access to Intel proprietary
information regarding processor standards, will continue to gain such access or
be able to compete with Intel, which could have an adverse effect on IDT.
All sales of IDT's x86 microprocessors since their introduction in fiscal 1998
have been from products configured for the Socket 7 motherboard infrastructure.
Intel has effectively ceased support for Socket 7 in favor of a new chip module
and the new Socket 370 standard. IDT's existing x86 microprocessors are not
compatible with motherboards designed for Intel's new chip module or Socket 370.
If IDT and other companies serving the x86 market are not successful in offering
products that extend the life of the Socket 7 infrastructure, IDT would be
required to expend potentially significant resources to redesign its
microprocessor offerings. While IDT intends to migrate its designs to be
compatible with the Socket 370 standard, IDT may not be successful in such
efforts.
In addition to Intel, AMD and Cyrix 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
market.
8
<PAGE>
In markets where IDT competes to sell industry standard SRAM components, market
supply and pricing strategies of competitors significantly impact the price the
Company receives for its products. In fiscal 1998 and 1997, a significant
increase in market supply of industry standard SRAM parts was attributable to
IDT's principally foreign competitors shifting additional production capacity to
these parts. The decline in average selling prices for industry standard SRAM
parts in and since fiscal 1997 is, therefore, attributable to increases in
available SRAM supply from competitors such as Samsung Electronics, Winbond
Electronics Corp., United Microelectronics Corp. (UMC), other Taiwanese and
Korean companies as well as U.S.-based and other companies with Taiwanese and
Korean sourced SRAM wafers, and their market pricing strategies, at a time when
market demand slowed as customers reduced the level of inventories carried. The
Company's U.S.-based competitors in the SRAM area include Cypress Semiconductor
Corporation ("Cypress") and Motorola, Inc. ("Motorola").
IDT's RISC-based microprocessors compete with products offered by other vendors
of such microprocessors, such as Quantum Effect Design Inc. and NEC Corporation,
and with microprocessors based on other architectures, such as those offered by
Intel and Motorola. IDT's competitors for logic sales include both U.S. and
foreign manufacturers, such as Texas Instruments Incorporated and Philips
Semiconductors. IDT's FIFO and multi-port memories compete with similar products
offered by Cypress and AMD, as well as certain custom memory products.
INTELLECTUAL PROPERTY AND LICENSING
IDT has 195 patents in the United States and 19 abroad. The Company intends to
continue to seek to increase the breadth of its patent portfolio. The Company
also relies on trade secret, copyright and trademark laws to protect its
products. A number of the Company's circuit designs are registered pursuant to
the Semiconductor Chip Protection Act of 1984. This Act gives protection similar
to copyright protection for the patterns which appear on integrated circuits and
prohibits competitors from making photographic copies of such circuits. There
can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented, that the rights granted thereunder will
provide competitive advantages to the Company or that the Company's efforts
generally to protect its intellectual property rights will be successful.
In recent years, there has been a growing trend of companies to resort to
litigation to protect their semiconductor technology from unauthorized use by
others. In the past, the Company has been involved in patent litigation which
adversely affected its operating results. Although the Company has obtained
patent licenses from certain semiconductor manufacturers, the Company does not
have licenses from a number of semiconductor manufacturers who have a broad
portfolio of patents.
IDT has been notified that it may be infringing patents issued to certain
parties, and is currently involved in several license negotiations. There can be
no assurance that additional claims alleging infringement of intellectual
property rights, including infringement of patents that have been or may be
issued in the future, will not be made against the Company in the future or that
licenses, to the extent required, will be available. Should licenses from any
such claimant be unavailable, or not be available on terms acceptable to the
Company, the Company may be required to discontinue its use of certain processes
or the manufacture, use and sale of certain of its products, to incur
significant litigation costs and damages or to develop non-infringing
technology. If IDT is unable to obtain any necessary licenses, pass any
increased cost of patent licenses on to its customers or develop non-infringing
technology, the Company could be materially adversely affected. In addition, IDT
has received patent licenses from several companies that expire over time, and
the failure to renew or renegotiate certain of these licenses as they expire or
significant increases in amounts payable under these licenses could have a
material adverse effect on the Company.
- ------------------
Trademark notice: RC32364, RC5000, RISController, SuperSync, SWITCHStAR,
TurboClock, WinChip and Zero Bus Turnaround are trademarks of Integrated Device
Technology, Inc. QuickSwitch is a registered trademark of Quality Semiconductor,
Inc., a wholly owned subsidiary of Integrated Device Technology, Inc. ZBT is a
registered trademark of Integrated Device Technology, Inc., and the architecture
is supported by Micron Technology, Inc. and Motorola, Inc.
9
<PAGE>
ENVIRONMENTAL REGULATION
Federal, State and local provisions regulate the discharge and disposal into the
environment of certain materials used in the semiconductor manufacturing
process. The Company's manufacturing and assembly and test facilities are
designed to comply with existing regulations, and the Company believes that its
activities conform to present regulations. The Company has been conducting its
operations with all necessary permits and without material adverse impact
attributable to environmental regulation. However, there can be no assurance
that future additions or changes to environmental regulations will not impose
upon the Company the requirement for significant capital expenditure. Further,
any failure by the Company to control the use of, or to restrict adequately the
discharge of hazardous materials under present or future regulations could
subject it to substantial liability or could cause its manufacturing operations
to be suspended. In addition, IDT could be held financially responsible for
remedial measures if its properties were found to be contaminated whether or not
the Company was responsible for such contamination.
EMPLOYEES
At March 28, 1999, IDT and its subsidiaries employed approximately 4,600 people
worldwide, of whom 1,500 were in Malaysia and 1,000 were in the Philippines.
IDT's success depends in part on its ability to attract and retain qualified
personnel, who are generally in great demand. Since its founding, the Company
has implemented policies enabling its employees to share in IDT's success such
as participation in stock option, stock purchase, profit sharing and special
bonus plans for key contributors. IDT has never had a work stoppage. No
employees are represented by a collective bargaining agreement, and the Company
considers its employee relations to be good.
ITEM 2. PROPERTIES
<TABLE>
The Company presently occupies eight major facilities in California, Oregon,
Malaysia and the Philippines:
<CAPTION>
LOCATION FACILITY USE SQUARE FEET
- --------------------------------- ------------------------------------------------- ----------------------
<S> <C> <C>
Salinas, California Wafer fabrication, SRAM and communication 98,000
memory operations
Santa Clara, California Logic and RISC microprocessor operations 62,000
Santa Clara, California Administration, quality assurance and shipping 55,900
and receiving
Santa Clara, California Administration 43,700
Santa Clara, California Communication memory and other operations 50,000
Santa Clara, California Administration 48,300
Sydney, Australia Wafer fabrication and logic design center 41,000
Penang, Malaysia Assembly and test operations 145,000
Hillsboro, Oregon Wafer fabrication 192,000
Canlubang, the Philippines Assembly and test operations 176,000
</TABLE>
IDT leases its Santa Clara facilities under leases expiring between 1999 and
2015, including renewal options. The Oregon facility is subject to a tax
ownership operating lease. Additional information about leased properties is
provided in Note 5 of the Notes to Consolidated Financial Statements. The
Company owns its Malaysian and Philippines facilities, although the Malaysian
facilities are subject to long-term ground leases and the Company has an
interest in but does not own the Philippines land. The Company leases the
facility in Australia as a result of the acquisition of QSI in the first quarter
of fiscal 2000. IDT leases offices for its sales force in 18 domestic and 14
international locations. IDT also leases offices for its design centers in
Georgia and Texas.
10
<PAGE>
In December 1998, the Company closed its 135,000-square foot San Jose facility,
which had been used for wafer fabrication, process technology development, FIFO
and memory subsystems operations, and research and development. Subsequent to
the end of fiscal 1999, the Company completed the sale of this facility (see
Note 13 of the Notes to Consolidated Financial Statements). The San Jose
property had previously been subject to a mortgage, which is now collateralized
by the Company's Salinas facility.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit filed by Lemelson Medical Education & Research Foundation, Limited
Partnership ("plaintiff") against the Company and twenty-five other corporate
defendants was served upon the Company in November 1998. The lawsuit, which
alleges that the defendants' manufacturing equipment infringes upon 16 patents
issued to the plaintiff, is pending in the United States District Court for the
District of Arizona, case number 98-1413. The plaintiff has also made similar
allegations against the Company's wholly owned subsidiary, Quality
Semiconductor, Inc., and eighty-seven other corporate defendants in a lawsuit
filed in the U.S. District Court for the District of Arizona, case number
99-CV-377, in February 1999. The lawsuits are at a preliminary stage. In the
lawsuits, the plaintiff seeks an injunction and damages in an unspecified
amount. If successful, the lawsuits could have a material adverse effect on the
Company's financial condition or results of operations.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended March 28, 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
The executive officers of the Company, and their respective ages as of April 25,
1999, are as follows:
<CAPTION>
Name Age Position
- ----------------------------- ------- ------------------------------------------------
<S> <C> <C>
D. John Carey 62 Chairman of the Board
Leonard C. Perham 56 President and Chief Executive Officer
Jerry Taylor 50 Executive Vice President
Glenn Henry 56 Senior Vice President
Brian Boisseree 41 Vice President, Treasury
David Cote 44 Vice President, Marketing
Michael Crawley 58 Vice President, Sales
Michael Hunter 47 Vice President, Manufacturing
Alan F. Krock 38 Vice President and Chief Financial Officer
Chuen-Der Lien 43 Vice President, Chief Technical Officer
Jack Menache 55 Vice President, General Counsel and Secretary
</TABLE>
Mr. Carey was elected to the Board of Directors in 1980 and has been Chairman of
the Board since 1982. He served as Chief Executive Officer from 1982 until his
resignation in April 1991 and was President from 1982 until 1986. Mr. Carey was
a founder of Advanced Micro Devices in 1969 and was an executive officer there
until 1978.
Mr. Perham joined IDT in 1983 as Vice President and General Manager, SRAM
Division. In 1986, Mr. Perham was appointed President and Chief Operating
Officer and a director of the Company. In 1991, Mr. Perham was elected Chief
Executive Officer. Prior to joining IDT, Mr. Perham held executive positions at
Optical Information Systems Incorporated and Zilog Inc.
Mr. Taylor joined the Company as Vice President, Manufacturing and Memory
Products in June 1996, and was elected Executive Vice President, Manufacturing
and Memory Products, in January 1998. Prior to joining the Company, Mr. Taylor
held engineering positions at Mostek, Fairchild Semiconductor, Benchmarq
Microelectronics, Plano ISD and Lattice Semiconductor. Mr. Taylor was with
Benchmarq Microelectronics from 1987 to 1992, with Plano ISD from 1993 to 1995
and with Lattice Semiconductor from April 1995 through June 1996.
Mr. Henry joined IDT in March 1995 as President of Centaur Technology, IDT's x86
microprocessor design subsidiary. Mr. Henry was elected Senior Vice President in
January 1998. Prior to joining IDT, Mr. Henry was a vice president at Dell
Computer Corporation.
Mr. Boisseree joined IDT in February 1996 as Treasurer and was elected Vice
President, Treasurer in 1998. Prior to joining IDT, Mr. Boisseree served in
management positions at Tandem Computer Corporation from 1988 to 1996.
Mr. Cote joined IDT in April 1997 as Vice President, Marketing. Prior to joining
IDT, he was Vice President of Marketing with Meridian Data from June 1996
through December 1996 and Zeitnet, Inc. from January 1995
12
<PAGE>
through June 1996. Mr. Cote was previously with Synoptics, Inc. from 1991 to
1994 where he achieved the level of Director of Marketing.
Mr. Crawley joined IDT in September 1998 as Vice President, Sales. Prior to
joining IDT, Mr. Crawley worked at Samsung Semiconductor Inc. where he held
various positions between 1990 and 1998, including the position of Vice
President, Memory Sales.
Mr. Hunter was promoted to Vice President, Worldwide Manufacturing in February
1998. Previously he was Vice President, California Silicon Manufacturing, and
has been with IDT since January 1996. Prior to coming to IDT, Mr. Hunter was
Vice President of Fabrication Operations at Chartered Semiconductor from July
1994 through January 1996 and achieved Executive Vice President level at Fujitsu
Persona while with that company from 1989 to 1994.
Mr. Krock joined IDT in February 1996 as Corporate Controller and was elected a
Vice President in July 1997. In January 1998 he was elected Vice President,
Chief Financial Officer. Prior to joining IDT, Mr. Krock was Corporate
Controller at Rohm Corporation from 1992 to 1996 and held management positions
at Price Waterhouse (now PricewaterhouseCoopers LLP) from 1983 to 1992.
Dr. Lien joined IDT in 1987 and was elected Vice President, Technology
Development in 1992 and was elected Vice President, Chief Technical Officer in
April 1996. Prior to joining the Company, he held engineering positions at
Digital Equipment Corporation and AMD.
Mr. Menache joined IDT as Vice President, General Counsel and Secretary in 1989.
In 1989 until joining IDT, he was General Counsel of Berg & Berg Developers.
From 1986 to 1989, he was Vice President, General Counsel and Secretary of The
Wollongong Group Inc. Mr. Menache is a member of the Board of Directors of Peak
International Limited.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Common Stock of the Company is traded on the Nasdaq National Market under
the symbol IDTI. The following table sets forth the high and low last reported
sales prices for the Common Stock as reported by the Nasdaq National Market
during the fiscal quarters indicated:
High Low
----------------------- ----------- ------------
Fiscal 1999
First Quarter $15.00 $ 6.63
Second Quarter 8.19 4.22
Third Quarter 7.38 4.50
Fourth Quarter 9.63 5.13
Fiscal 1998
First Quarter $15.00 $ 9.69
Second Quarter 14.13 10.19
Third Quarter 13.56 9.13
Fourth Quarter 16.13 9.19
As of May 21, 1999, there were approximately 1,300 record holders of the Common
Stock.
The Company has never declared or paid any cash dividends on its Common Stock.
The Company intends to retain any future earnings for use in its business and,
accordingly, does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below are qualified in their entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes thereto included elsewhere in this Annual Report on
Form 10-K.
<TABLE>
STATEMENTS OF OPERATIONS DATA
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------
In thousands, except per share amounts March 28, March 29, March 30, March 31, April 2,
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 540,199 $ 587,136 $ 537,213 $ 679,497 $ 422,190
Restructuring charges, asset impairment and other 204,244 -- 45,223 -- --
Research and development expenses 132,893 121,449 151,420 133,317 78,376
Income (loss) before extraordinary item (283,605) 8,247 (42,272) 118,249 78,302
Net income (loss) (283,605) 8,247 (42,272) 120,170 78,302
Basic earnings per share:
Income (loss) before extraordinary item (3.45) 0.10 (0.54) 1.54 1.12
Net (loss) income (3.45) 0.10 (0.54) 1.56 1.12
Diluted earnings per share:
Income (loss) before extraordinary item (3.45) 0.10 (0.54) 1.42 1.05
Net income (loss) (3.45) 0.10 (0.54) 1.44 1.05
Shares used in computing net income (loss) per share:
Basic 82,290 80,359 78,454 77,026 69,684
Diluted 82,290 84,022 78,454 87,753 74,765
BALANCE SHEET AND OTHER DATA
---------------------------------------------------------------
In thousands, except per share amounts March 28, March 29, March 30, March 31, April 2,
1999 1998 1997 1996 1995
---------------------------------------------------------------
Total assets $ 674,892 $ 968,955 $ 903,584 $ 939,434 $ 561,975
Convertible subordinated notes, net of issuance costs 184,354 183,756 183,157 182,558 --
Other long-term obligations 72,876 79,727 62,547 46,049 44,165
Stockholders' equity 273,036 546,391 524,238 549,727 414,531
Number of employees 4,612 4,979 4,236 3,828 2,965
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following table sets forth items from the Company's consolidated statements
of operations as a percentage of revenues:
Fiscal Year Ended
March 28, March 29, March 30,
1999 1998 1997
---------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 63.8 62.0 60.6
Restructuring charges, asset
impairment and other 37.8 -- 8.4
----- ----- -----
Gross profit (loss) (1.6) 38.0 31.0
Operating expenses:
Research and development 24.6 20.7 28.2
Selling, general and
administrative 19.3 15.1 15.0
----- ----- -----
Total operating expenses 43.9 35.8 43.2
----- ----- -----
Operating income (loss) (45.5) 2.2 (12.2)
Interest expense (2.5) (2.4) (2.2)
Interest income and other, net 1.1 2.2 2.9
----- ----- -----
Income (loss) before
income taxes 46.9 2.0 (11.5)
Provision (benefit) for
income taxes 5.6 0.6 (3.7)
----- ----- -----
Net income (loss) (52.5)% 1.4 (7.8)%
===== ===== =====
================================================================================
The following discussion should be read in conjunction with IDT's
consolidated financial statements and the notes thereto. All non-historical
information contained in this discussion and analysis constitutes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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;
manufacturing capacity utilization, and the Company's efforts to consolidate and
streamline production; customer demand and 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.
Overview
The Company entered fiscal 1999 encouraged by the successful launch of new
products, including its first x86 microprocessor, and the expected recovery of
the world market for semiconductors and IDT's traditional semiconductor
business. However, in the first quarter of fiscal 1999, the market for x86
microprocessors migrated rapidly from IDT's existing products to faster products
that the Company had not yet fully developed. Further, in fiscal 1999, business
conditions in the world semiconductor market, especially Asia, deteriorated.
Because of the worldwide decline in the market for semiconductors, IDT's
inability to rapidly migrate to faster x86 microprocessors and other factors,
IDT's total fiscal 1999 sales declined 8% to $540.2 million from $587.1 million
in fiscal 1998.
In fiscal 1999, as a result of the changed business dynamics impacting the
prospects of its x86 products and continuing difficult business conditions in
the markets for IDT's traditional semiconductor products, the Company undertook
a detailed analysis of asset utilization, cash flows and asset carrying values.
As a result of the analysis, IDT took actions as outlined below under the
heading "Historical Information Relating to Fiscal 1999 Restructuring and Asset
Impairment and Other Charges and Actions Taken."
The combined effect of the restructuring and asset impairment and other
charges of $242.4 million, the decline in revenues described above, and
increased costs associated with new products, was a net loss for fiscal 1999 of
$283.6 million compared to net income of $8.2 million in fiscal 1998. Excluding
the charges, the net loss for fiscal 1999 was $41.2 million.
On November 2, 1998, IDT announced the signing of a definitive agreement to
acquire Quality Semiconductor, Inc. (QSI). The agreement provided for IDT to
issue approximately 5.5 million shares of its common stock in exchange for all
outstanding stock of QSI. Subsequent to the conclusion of IDT's fiscal 1999, IDT
completed the merger of QSI into IDT. This merger is being accounted for as a
pooling of interests.
Throughout a very difficult operating period, in addition to becoming one
of the very few companies ever to launch and sell commercial quantities of x86
microprocessor products, IDT remained focused on producing value-added products
for its communications customers. These products include communications
memories, embedded RISC microprocessors, high-speed, static random access
memories (SRAMs), and high-performance logic products. IDT has successfully
offered many of these and similar products to its customers for more than 10
years. The QSI products, which are largely complementary to IDT's current logic
product families, strengthen the product offerings of IDT's traditional
business. IDT's products are more fully described in the "Business" section of
IDT's Annual Report on Form 10-K. IDT intends to continue its efforts to align
its business practices to focus on serving its markets in an efficient manner
and provide expected returns to stockholders.
17
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Historical Information Relating to Fiscal
1999 Restructuring and Asset Impairment and
Other Charges and Actions Taken
During fiscal 1999, IDT recorded $204.2 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, recording an asset impairment charge to reduce 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
more than doubled, growing from $330 million to $679 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 Hillsboro, Ore. fabrication
facility and the assembly and test facility located in Manila, the Philippines.
During the period fiscal 1995 through fiscal 1998, IDT expended more than $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, equipment and facility
acquisition costs over a significant volume of products with a selling price
that 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 from principally foreign competitors, such as Samsung,
Winbond, UMC and other Taiwanese and Korean companies, which allocated 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 reduced prices at a time when market demand
slowed as customers reduced the level of inventories carried.
As a result of the difficult operating conditions that 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
consolidated and streamlined manufacturing operations, including closing its
wafer fabrication facility located in San Jose, Calif. This operational decision
primarily reflected industry oversupply conditions.
The Company is moving away from dependence on industry-standard products,
is planning 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
Hillsboro facility and planned for the near term are principally SRAM and x86
microprocessor products (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 was impaired and wrote 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.
18
<PAGE>
Results of Operations
Revenues. Fiscal 1999 revenues decreased 8.0% to $540.2 million from $587.1
million in fiscal 1998. Fiscal 1997 revenues were $537.2 million. In fiscal
1999, total units shipped decreased by 2.3% compared to fiscal 1998 quantities,
which were up 48% when compared to fiscal 1997. During these periods, the
average selling price per unit realized by IDT declined, primarily due to lower
global demand.
Sales of WinChip microprocessors in fiscal 1999 increased in relation to
sales for fiscal 1998. Total fiscal 1999 revenues from WinChip microprocessors
and related technology were $31.7 million. In addition to selling WinChip
microprocessor products in the United States, IDT has increased unit sales
through product distribution channels in emerging markets such as those in Asia
and Europe. During fiscal 1999, average selling prices decreased, reflecting
what has become a very competitive marketplace for x86 microprocessors
positioned at the low end of the product-performance range.
Currently, WinChip microprocessor products are in a period of transition.
During fiscal 1999, the market for x86 microprocessors migrated rapidly from
IDT's existing products to faster products, which the Company had not yet fully
developed. The Company is in the process of bringing to market WinChip
microprocessor products which it expects will operate at faster clock speeds
than existing products. However, the clock speed at which new products will be
introduced and the amount of future revenues to be derived from WinChip
microprocessors is uncertain.
For traditional IDT products, when comparing fiscal 1999 to fiscal 1998,
sales of RISC-based microprocessors and embedded controllers increased, while
sales of communications memories, SRAM and logic declined. Increased sales of
RISC-based microprocessor products primarily reflect increased sales to IDT's
network infrastructure customers. Declines in other products sold reflect an
ongoing period of product oversupply, related contraction of inventories held by
customers, and continued economic uncertainty in the semiconductor marketplace
in Asia. Also during the intervening period, IDT effectively exited the market
for personal computer SRAM cache memory. 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 assuming overall levels of industry demand continue
to improve. In future quarters, excluding transaction related costs and
potential costs to combine manufacturing operations, the merger of QSI into the
Company 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." 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. Gross profit in fiscal 1999 was a loss of $8.5 million compared to
$222.8 million in gross profit for fiscal 1998.
In the first quarter of fiscal 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 related primarily to excess SRAM manufacturing equipment ($18.9
million) and certain technology licensing matters ($10.0 million). The carrying
net 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 for which the Company had no
forecasted use 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.
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.
At the end of fiscal 1999, the net book value of assets held for sale
totaled $1.8 million and has been included in other current assets. Due to
current oversupply conditions for used semiconductor equipment, the Company
cannot estimate a date for disposal. In the fourth quarter of fiscal 1999, the
Company cannot estimate a date for disposal. In the fourth quarter of fiscal
1999, the Company reversed $3 million of the technology licensing costs upon
favorable settlement of certain of these matters.
19
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
In the second quarter of 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 Company's Condensed Statements of
Operations as a reduction in gross profit. The $46.4 million restructuring
charge related primarily to a provision for exit and closure costs associated
with the San Jose wafer fabrication facility. Included in these costs were $33.0
million for the write-down of fixed assets and $13.4 million in other costs.
(See Note 3 of Notes to Consolidated Financial Statements). The $131.9 million
in charges for asset impairment and other related 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 $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 the second quarter of
fiscal 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 were partially realized in the fourth
quarter of fiscal 1999 and expected to be 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 a reduction
in annual depreciation expense of approximately $25 million.
For all of fiscal 1999, excluding restructuring, asset impairment and other
non-recurring costs, gross profit decreased by $27.1 million when compared to
fiscal 1998.
Excluding the charges, the decline in gross profit in the comparative
periods is associated with lower revenues and the fixed nature of many of the
costs associated with semiconductor manufacturing facilities. In fiscal 1999,
IDT planned to manufacture and sell greater volumes of its products. However,
because of changes in marketplace demand, especially for WinChip
microprocessors, and continued weakness in SRAM markets, the planned increase in
manufacturing volumes and revenues did not materialize.
Costs associated with the eight-inch wafer fabrication facility in
Hillsboro adversely impacted gross margins for all fiscal years presented, as
these costs were not fully absorbed by additional revenues. In order to improve
gross margin, as outlined above, IDT has consolidated 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 manufactured at the
facility which has been closed and sold. Further, the Company believes that
incremental available capacity, primarily at IDT's facility in Hillsboro,
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 will
improve planned levels of capacity utilization. IDT therefore expects that gross
margin will improve in future quarters.
In fiscal 1997, the Company recorded asset impairment charges of $45.2
million which were specifically identified in the Company's Statements of
Operations as reducing gross profit. Additionally, the Company recorded $9.7
million in charges that relate to the write-off of certain technology
investments and other miscellaneous items, which have been classified in the
Company's Consolidated Statements of Operations in accordance with the nature of
the charge, including cost of revenues. The $45.2 million charge related
principally to asset impairment charges against the carrying value of
manufacturing assets, including the Company's oldest wafer fabrication plant in
Salinas, Calif., and other items. Excluding the $45.2 million charge for asset
impairment and other reserves in fiscal 1997, gross profit in fiscal 1997 was
39.4%.
The increase in gross profit in fiscal 1998 compared to fiscal 1997 was
primarily attributable to the absence of the charge for asset impairment
described above recorded in fiscal 1997.
The fiscal 1999 consolidation of fabrication production volumes into two
manufacturing facilities provides IDT with the opportunity to improve
utilization of its remaining fabrication facilities; however, some additional
capital equipment and set up time is required to process substantial volumes of
products transferred from the closed facility. Historically, SRAM and x86
microprocessor products have been produced at the Hillsboro facility and the
Company is unable to predict whether demand for industry-standard SRAM products
and IDT's x86 microprocessor products, or IDT's share of the available markets,
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 could
continue to be adversely impacted. Further, if prices on industry-standard SRAM
products or x86 microprocessor products do not improve or the Company is not
able to manufacture and sell other products
20
<PAGE>
at comparable or better margins, and if a greater percentage of the Hillsboro
facility's operating costs are allocated to cost of goods sold based on
activities performed, then gross margin may not improve, or may decrease.
Research and Development (R&D). Fiscal 1999 R&D expense of $132.9 million
represents a 9.4% increase compared to the $121.4 million in expenses for fiscal
1998. In the first quarter of fiscal 1999, IDT recorded as R&D expense $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. 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. R&D expenses for fiscal 1999 also include costs primarily
associated with retention costs earned by R&D personnel who were employed at the
San Jose fabrication facility. In addition, R&D spending increased in fiscal
1999 because of additional x86 and RISC microprocessor and logic product design
initiatives. 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. Management expects that in the coming year, R&D
expense will decrease as the proportion of manufacturing costs allocated to
process R&D declines as a result of manufacturing facility consolidation.
R&D expenses decreased in absolute spending and as a percentage of revenues
for fiscal 1998 when compared to fiscal 1997. R&D expenses for fiscal 1998 were
$121.4 million, a decrease of $30.0 million compared to fiscal 1997. In 1997,
the Company incurred significant facility start-up and staffing expenses at its
then-new Oregon fabrication facility.
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 RISControllerTM 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, and developing a family of specialty
memory products for the communications and networking markets.
IDT believes that high levels of R&D investment are required to support its
strategy of providing products to its customers that are not readily available
from IDT 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 greater
than the Company's current products, or that any new offerings will achieve
market acceptance.
Selling, General and Administrative (SG&A). SG&A expense of $104.4 million in
fiscal 1999 was 18.0% higher than the $88.5 million incurred in fiscal 1998.
When comparing fiscal 1999 to fiscal 1998, SG&A expenses associated with
marketing efforts for WinChip microprocessors and other products increased. SG&A
expenses associated with initiatives to implement and upgrade enterprise-wide
management information systems, which are expected to increase the availability
and quality of management information, also increased. In fiscal 1999, IDT
expensed approximately $1.0 million in transaction costs, consisting mainly of
legal, accounting and printing expenses, incurred in connection with the QSI
merger. The Company expects that in the coming quarters, excluding the impact of
merging QSI into IDT, recurring SG&A expenses will remain relatively constant,
except for costs such as sales commissions and sales bonuses which will vary in
relation to sales volumes. Upon conclusion of the QSI merger, after incurring
costs to combine IDT and QSI and upon the completion of the management
information systems implementation projects, both anticipated in the first
quarter of fiscal 2000, management expects that SG&A expenses as a percentage of
sales will decrease.
SG&A expenses increased 9.5% or $7.7 million in fiscal 1998 to $88.5
million, compared to fiscal 1997. The fiscal 1998 increase was primarily
attributable to variable selling expenses associated with the year-over-year
revenue changes, and changes in employee profit sharing and management bonuses
which vary in relation to profitability. In addition, SG&A expenses in fiscal
1998 included initial marketing costs associated with the WinChip
microprocessor.
Interest Expense. Interest expense is mainly associated with the Company's 5.5%
Convertible Subordinated Notes, due in 2002, and secured equipment financing
agreements entered into during fiscal 1997 and fiscal 1999. Interest expense in
fiscal 1999 was $13.9 million, essentially unchanged compared to fiscal 1998.
From fiscal 1997 to fiscal 1998, interest expense increased from $12.0 million
to $14.1 million. This increase was primarily the result of the cessation of
capitalizing interest related to Oregon construction activity during 1997 and
the impact of new equipment financing agreements which were not completed until
midway though fiscal 1997.
21
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interest Income and Other, Net. Interest income and other, net, decreased by
51.5%, from $12.7 million to $6.2 million, in fiscal 1999 compared to fiscal
1998. The decrease is primarily attributable to a $5.1 million increase in IDT's
share of net losses from unconsolidated equity affiliates and a $1.6 million
decrease in interest income. The decrease in interest income resulted from lower
average balances and prevailing interest rates on investments.
Interest income and other, net, decreased $3.1 million to $12.7 million in
fiscal 1998 compared to fiscal 1997. In fiscal 1998, IDT's share of net losses
realized on affiliate investments increased by $4.4 million over fiscal 1997.
Taxes. In the second quarter of fiscal 1999, IDT fully reserved its net deferred
tax assets which resulted in a provision for income taxes of $30.1 million.
Income taxes in state jurisdictions are not significant. A small amount of
foreign tax expense was incurred in fiscal 1999, due to profits in certain of
the Company's foreign subsidiaries. The Company realized no federal tax benefit
in fiscal 1999 because of its inability to carry back losses.
The rate at which IDT records its provision for income tax is determined by
the Company's level of income or loss in the various tax jurisdictions where it
does business, and other factors such as the ability to carry back losses for
tax purposes to years with taxable income. The rate at which the Company
provides for income taxes has decreased as IDT's profitability has declined and
the Company exhausted its ability to derive tax benefits by carrying back
current losses to prior years for tax purposes. In view of the cumulative losses
incurred during the last three years, and in consideration of current accounting
literature and related interpretations, which require that reserves be taken for
net deferred tax assets when there is significant doubt as to whether such
assets will be realized, IDT recorded a reserve for all of its existing net
deferred tax assets during fiscal 1999.
The effective tax rates for fiscal 1998 and 1997 of 28% and (32%),
respectively, differed from the U.S. statutory rate of 35% primarily due to
differences in U.S. and foreign tax rates, changes in valuation allowances for
deferred tax assets; and the utilization of certain tax credits. Historically,
income taxes in state jurisdictions have not been significant, due mainly to
available tax credits. IDT currently enjoys certain tax benefits in Malaysia and
the Philippines, mainly as a result of tax holidays and certain investment
incentives. (See Note 9 of Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
At March 28, 1999, the Company's main sources of liquidity were cash, cash
equivalents and short-term investments which aggregated approximately $193.3
million, as compared to $220.6 million one year earlier. The Company also had
$57.1 million of restricted securities pledged as collateral under a synthetic
leasing arrangement involving manufacturing assets in Oregon. (See Note 5 of
Notes to Consolidated Financial Statements.)
The Company generated $53.7 million of cash from operations during fiscal
1999, down from $195.6 million in fiscal 1998. The decrease primarily reflects
the Company's net loss in fiscal 1999, partially offset by non-cash items
included in the restructuring and asset impairment and other charges during the
year.
For fiscal 1999, the Company's net cash used for investing activities was
$88.1 million, including $105.5 million for capital expenditures. Proceeds from
the sale of short-term investments, net of purchases of such investments, was
$20.2 million.
Cash provided by financing activities in fiscal 1999 was $26.9 million as
compared to $6.6 million during fiscal 1998. The Company completed several
equipment financing transactions during fiscal 1999. The Company entered into
capital leases under which it sold previously purchased semiconductor
manufacturing equipment to leasing companies which leased the equipment back to
IDT for use at the Hillsboro 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.
Under another leasing arrangement in fiscal 1999, equipment purchased for
the Hillsboro 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.
Under a program authorized by the Board of Directors, the Company
repurchased 856,000 shares of its common stock at an aggregate cost of $4.6
million in open market purchases during the third quarter of fiscal 1999. In
November 1998, the Board of Directors terminated the authorization to repurchase
shares. The decision to terminate this program was a result of the Securities
and Exchange Commission's
22
<PAGE>
position on share repurchase programs in Staff Accounting 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 have restricted IDT's ability to utilize pooling of
interest accounting for the merger with QSI and could have restricted 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.
The Company may retire portions of its 5.5% Convertible Subordinated Notes
from time to time, as authorized by the Board of Directors.
IDT anticipates capital expenditures of approximately $85 million in fiscal
2000. The Company plans to finance these expenditures primarily through cash
generated from operations and 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 credit facilities available to the Company will be
sufficient to meet its working capital, mandatory debt repayment and anticipated
capital expenditure requirements through fiscal 2000 and 2001. While the Company
is reviewing all operations with respect to cost-savings opportunities, there
can be no assurance that the Company will not be required to seek other
financing sooner or that such financing, if required, will be available on terms
satisfactory to the Company. If the Company is required to seek other financing
sooner, the unavailability of financing on terms satisfactory to IDT could have
a material adverse effect on the Company.
Factors Affecting Future Results
The 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:
IDT's Operating Results can Fluctuate Dramatically.
IDT's operating results can fluctuate dramatically. For example, the Company had
a net loss of $283.6 million for fiscal 1999 compared to net income of $8.2
million for fiscal 1998. The net loss for fiscal 1999 exceeded IDT's cumulative
net income for all of fiscal 1994, 1995, 1996 and 1998, which totaled $246.8
million. In addition, IDT had a net loss of $42.3 million for fiscal 1997.
Fluctuations in operating results can result from a wide variety of factors,
including:
* timing of new product and process technology announcements and
introductions from IDT or its competitors;
* competitive pricing pressures, particularly in the SRAM and x86
microprocessor markets;
* fluctuations in manufacturing yields;
* changes in the mix of products sold;
* availability and costs of raw materials;
* the cyclical nature of the semiconductor industry and 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.
In addition, many of these factors also impact the recoverability of the
cost of manufacturing, taxes and other assets. As business conditions change,
future writedowns or abandonment of these assets may occur. Also, 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, IDT's operating results for
that quarter could be harmed. Further, IDT may not be able to compete
successfully in the future against existing or potential competitors, and IDT's
operating results could be harmed by increased competition. The economic
downturn and continued uncertainties in some Asian economies, including Korea,
have reduced demand for IDT's products. Should economic conditions in Asia
deteriorate further, especially in Japan, the Company's sales and business
results would be harmed.
The Cyclicality of the Semiconductor Industry Exacerbates the Volatility of
IDT's Operating Results.
The semiconductor industry is highly cyclical. Market conditions characterized
by excess supply relative to demand and resultant pricing declines have occurred
in the past and may occur in the future. Such pricing declines adversely affect
IDT's operating results and force IDT and its competitors to modify their
capacity expansion programs. As an example, in prior years a significant
increase in manufacturing
23
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
capacity of commodity SRAMs caused significant downward trends in pricing, which
adversely affected IDT's gross margins and operating results. IDT is unable to
accurately estimate the amount of worldwide production capacity dedicated to
industry-standard commodity products, such as SRAM, that it produces. IDT's
operating results can be adversely affected by such cyclical factors in the
semiconductor industry as: a material increase in industry-wide production
capacity; a shift in industry capacity toward products competitive with IDT's
products; and reduced demand or other factors that may result in material
declines in product pricing and could affect the portion of IDT's operating
results derived from the sale of industry-standard products. Although IDT seeks
to manage costs, these efforts may not be sufficient to offset the adverse
effect of these factors.
Demand for IDT's Products Depends on Demand in the Computer and Communications
Markets.
The Company's customers incorporate a substantial percentage of IDT's products,
including SRAM and x86 microprocessor products, into computer and
computer-related products, which have historically been characterized by rapid
technological change significant fluctuations in demand. Demand for certain
other IDT products depends upon growth in the communications market. Any
slowdown in the computer or communications markets could materially adversely
affect IDT's operating results.
IDT's Expansion into the x86 Microprocessor Market may not be Successful.
IDT has invested heavily in the development, production capacity and marketing
of the WinChip microprocessor because IDT believes that sales of new products
such as WinChip could be a significant source of future revenues. IDT commenced
shipments of the WinChip C6TM microprocessor, the first member of its x86
microprocessor product family, in fiscal 1998. If IDT is unable to generate a
significant amount of revenues or sustain a significant level of profit from the
WinChip product family, its operating results and financial condition could be
adversely affected. Moreover, the WinChip products represent IDT's first
offering to the PC microprocessor market, a large market dominated by Intel
Corporation. IDT's success in competing in this market is subject, but not
limited to, the following significant risks and uncertainties:
IDT Faces Significant Competition in the x86 Microprocessor Market, Particularly
from Intel.
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. 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.
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. Accordingly, Intel may dictate
standards that are not compatible with the WinChip, and such standards could
limit the ability of IDT to sell its products and could require IDT to incur
significant redesign costs.
For customers to purchase IDT's x86 microprocessors, IDT's products must
also be compatible with other components supplied to PC manufacturers and
dealers, such as core logic chip sets, motherboards, BIOS software and other
parts. These components in turn must be compatible with the Intel
microprocessors and are often manufactured by Intel, companies in which Intel
has strategic investments or independent companies. Accordingly, in marketing
its microprocessors to PC manufacturers and dealers, IDT is dependent upon
companies other than Intel for the design and manufacture of these components.
There could be no assurance that these third party designers and manufacturers,
who may also be dependent upon Intel for early access to Intel proprietary
information regarding microprocessor standards, will continue to gain such
access or be able to compete with Intel, which could have an adverse effect on
IDT.
IDT's x86 Microprocessors Depend on the Socket 7 Infrastructure.
All sales of IDT's x86 microprocessor products since their introduction in
fiscal 1998 have been from products configured for the Socket 7 motherboard
infrastructure. Intel has effectively ceased support for the Socket 7
infrastructure in favor a new chip module and the new Socket 370 standard. IDT's
processor is designed to be Socket 7 compatible, and will not work with
motherboards designed for Intel's new chip module or Socket 370. If IDT and
other companies serving the x86 microprocessor market are not successful in
offering products that extend the life of the Socket 7 infrastructure, IDT would
be required to expend potentially significant resources to redesign its
microprocessor product offerings. While IDT intends to migrate its design to be
compatible with the Socket 370 standard, IDT may not be successful in such
efforts.
24
<PAGE>
The Market For x86 Microprocessors is Competitive, Particularly from Intel, and
has Short Product Life Cycles and Declining Prices.
The market for x86 microprocessors is currently highly competitive and
characterized by short product life cycles, rapid decreases in average selling
prices and migration to increasingly higher-performance microprocessors. IDT may
be unable to produce sufficient quantities of WinChip microprocessors at a
competitive cost and with the speed and other performance characteristics
desired by customers. 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. 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, including IDT. IDT does not have the financial resources to compete
with Intel on such a large scale. In addition to Intel, AMD and National
Semiconductor's Cyrix subsidiary also currently offer commercial quantities of
x86 microprocessors for sale.
In 1992, in exchange for payments toward product development costs, IDT
licensed the right to make, use and sell an initial version of the WinChip C6
microprocessor to a third party, NKK Corporation of Japan. Although NKK does not
have rights with respect to subsequent WinChip products, IDT may face
competition from NKK in the future.
Further, in fiscal 1999, IDT entered into a manufacturing and sales
agreement with a third party to manufacture and purchase from IDT WinChip
products.
IDT has Limited Experience Manufacturing its x86 Microprocessor Products.
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, IDT 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, IDT
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 that test overall product quality. If IDT were unable to ramp
production of its x86 microprocessor successfully, IDT's operating results would
be adversely affected.
IDT's IBM Manufacturing Contract Exposes the Company to Inventory Shortages or
Excesses.
If IDT does not accurately forecast demand, IDT may have a shortage of or excess
inventory to the extent it relies on its new IBM manufacturing contract. In
fiscal 1998, IDT contracted with IBM for x86 microprocessor wafer manufacturing
services using IBM's CMOS process technology. Although IDT does not currently
use these services, IDT plans to utilize IBM's manufacturing services for the
next generation of the WinChip product family. The terms and conditions of the
IBM manufacturing services agreement require IDT to forecast in advance
production quantities that it will purchase. Once production quantities are
ordered, the contract limits IDT's ability to change desired quantities of IBM
manufactured products.
Furthermore, products purchased under the IBM manufacturing services
agreement must meet certain acceptance criteria. However, these acceptance
criteria do not include the number of usable WinChip processors per wafer or the
speed at which they will operate. Should the number of good WinChip processors
per IBM manufactured wafer and the speed at which they operate not meet or
exceed similar characteristics of IDT manufactured products, IDT could have a
shortage of usable inventory or excess unusable inventory.
IDT's x86 Microprocessor Products must be Compatible with Software and
Performance Certifications.
IDT has obtained WinChip certifications from Microsoft Corporation 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.
IDT's Success in the x86 Microprocessor Market Requires PC Market Growth.
Because IDT's target market for its x86 microprocessor products is initially
limited to certain segments of the PC industry, the growth and acceptance of
these products are closely tied to trends in and growth of the PC industry. The
success of the x86 microprocessor product will depend on whether PC
manufacturers continue their trend toward accepting and using microprocessor
products manufactured by companies other than Intel and whether the market for
PCs and related components continues to grow. Should these industry trends and
growth patterns not occur or if IDT is not able to produce products which meet
customers' needs, for whatever reason, IDT's ability to sell x86 microprocessor
products would be impaired.
25
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
IDT Faces Challenges in Bringing Future Products to the x86 Microprocessor
Market.
IDT's ability to bring future x86 products to market depends on several factors
including:
* it must be able to finance such future development;
* to compete with Intel and other competitors in the market for future 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;
and
* a failure, for whatever reason, of the designers and producers of
motherboards, chipsets 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.
IDT's Product Manufacturing Operations are Complex and Subject to Interruption.
The Company has increased the production capacity of its Hillsboro facility to
manufacture IDT WinChip products and is absorbing production volumes from its
San Jose wafer fabrication facility, which IDT has closed. From time to time,
IDT has experienced production difficulties, including reduced manufacturing
yields or products that do not meet IDT's specifications, that have caused
delivery delays and quality problems. While production deliveries and delays
have been infrequent and generally short in duration, IDT could experience
manufacturing problems and product delivery delays in the future as a result of,
among other things, complexity of manufacturing processes, changes to its
process technologies, and ramping production and installing new equipment at its
facilities.
IDT also has a wafer fabrication facility located in Salinas. If IDT were
unable to use this facility, as a result of a natural disaster or otherwise,
IDT's operations would be materially adversely affected until the Company was
able to obtain other production capability. IDT does not carry earthquake
insurance on its facilities, as adequate protection is not offered at
economically justifiable rates.
Historically, IDT 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. IDT expects to continue
utilizing subcontractors extensively to supplement its own production volume
capacity. Due to production lead times, any failure by IDT to adequately
forecast the mix of product demand could adversely affect IDT's sales and
operating results.
IDT's Operating Results can be Substantially Impacted by Facility Expansion,
Utilization and Consolidation.
Facility and capacity additions have resulted in a significant increase in fixed
and variable operating expenses that may not be fully offset by additional
revenues for some time. IDT expenses as R&D the operating costs associated with
bringing a new fabrication facility to commercial production status 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 IDT begins to recognize depreciation expense relating to the
facility. Accordingly, because the Hillsboro fabrication facility contributes to
revenues, IDT recognizes substantial operating expenses associated with the
facility as cost of revenues, which has reduced gross margins. As commercial
production continues and IDT consolidates manufacturing volumes from its closed
San Jose facility in fiscal 1999, IDT anticipates incurring additional operating
costs in Hillsboro. Accordingly, if revenue levels do not increase sufficiently
and cost savings from closing the San Jose plant do not offset these additional
expense levels, or if IDT is unable to achieve gross margins from products
produced at the Oregon facility that are comparable to IDT's other products,
IDT's future results of operations could be adversely impacted. Further, IDT
does not currently fully utilize the capacity available at the Oregon facility.
Due to the commodity nature of many of the products manufactured in Hillsboro,
and due to cyclical market conditions in the semiconductor industry, IDT is not
able to forecast when the Hillsboro facility will become fully utilized.
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. For example, in fiscal 1999, IDT closed
its San Jose facility, resulting in a $46.4 million restructuring charge, and
revalued certain assets at its Hillsboro facility, resulting in a $131.9 million
asset impairment and other charge. The expected cost savings from these actions
might not be sufficient to return IDT to sustained profitability.
IDT's Results are Dependent on the Success of New Products.
New products and process technology costs associated with the Hillsboro wafer
fabrication facility will continue to require significant R&D expenditures.
However, the Company may not be able to develop and introduce new products in a
timely manner, its new products may not gain market acceptance, and it may not
be successful in implementing new process technologies. If IDT is unable to
develop new products in a timely manner, and to sell them at gross margins
comparable to or better than IDT's current products, its future results of
operations could be adversely impacted.
26
<PAGE>
IDT is Dependent on a Limited Number of Suppliers.
IDT'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 IDT 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 IDT due to capacity constraints. IDT'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.
From time to time, IDT contracts with third party semiconductor designers.
As with all new products, there is risk that IDT or its contractors will not be
successful in their efforts to design new products.
IDT May Require Additional Capital on Satisfactory Terms to Remain Competitive.
The semiconductor industry is extremely capital intensive. To remain
competitive, IDT must continue to invest in advanced manufacturing and test
equipment. IDT could be required to seek financing to satisfy its cash and
capital needs, and such financing might not be available on terms satisfactory
to IDT. If such financing is required and if such financing is not available on
terms satisfactory to IDT, its operations could be adversely affected.
Intellectual Property Claims Could Adversely Affect IDT's Business and
Operations.
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. IDT has been involved in patent
litigation in the past, which adversely affected its operating results. Although
IDT has obtained patent licenses from certain semiconductor manufacturers, IDT
does not have licenses from a number of semiconductor manufacturers that have a
broad portfolio of patents. IDT 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. Because the patents others
are asserting primarily involve manufacturing processes, revenues from
substantially all of IDT's products could be subject to the alleged infringement
claims. Additional claims alleging infringement of intellectual property rights
could be asserted in the future. The intellectual property claims that have been
made or that may be asserted against IDT could require that IDT 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 adversely affect IDT.
International Operations Add Increased Volatility to IDT's Operating Results.
A substantial percentage of IDT's revenues are derived from non-U.S. sales.
During fiscal 1999, 1998 and 1997, non-U.S. sales accounted for 37%, 39% and 38%
of IDT's revenues, respectively. During these periods, Asia-Pacific sales
accounted for 8%, 10% and 8% of IDT's revenues, respectively. In addition, IDT'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 IDT's products as well as its cost of goods sold. IDT'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; and
* 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.
IDT is Subject to Risks Associated with Using Hazardous Materials in its
Manufacturing.
IDT is subject to a variety of environmental and other regulations related to
hazardous materials used in its manufacturing process. Any failure by IDT 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.
IDT's Common Stock is Subject to Price Volatility.
IDT's common stock has 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 IDT, the companies
in the semiconductor industry or in the markets served by IDT and
27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
announcements by IDT or its competitors regarding new product introductions. In
addition, our stock price can fluctuate due to price and volume fluctuations in
the stock market, especially those that have affected technology stocks.
Quantitative and Qualitative Disclosures About Market Risk.
Most of the Company's outstanding debt, including the 5.5% Convertible
Subordinated Notes, is at fixed rates. The Tax Ownership Operating Lease related
to IDT's manufacturing facilities in Hillsboro has variable, London Interbank
Offered Rate (LIBOR)-based payments. However, this synthetic lease is
collateralized with investments that have similar, and thus offsetting, interest
rate characteristics. The Company's investment portfolio typically consists of
short-term securities that have managed maturity schedules. As a result of these
factors, a hypothetical 10% move in interest rates would have an insignificant
effect on IDT's financial position, results of operations and cash flows. The
Company does not use derivative financial instruments in its investment
portfolio.
The Company is exposed to foreign currency exchange rate risk as a result
of international sales, assets and liabilities of foreign subsidiaries, and
capital purchases denominated in foreign currencies. The Company uses derivative
financial instruments (primarily forward contracts) to help manage its foreign
currency exchange exposures. The Company does not enter in derivatives for
trading purposes. The Company performed a sensitivity analysis for both fiscal
1998 and 1999 and determined that a 10% change in the value of the U.S. dollar
would have an insignificant near-term impact on IDT's financial position,
results of operations and cash flows.
Impact of Year 2000 on IDT's Operations.
Year 2000 Problem Defined. In brief, the Year 2000 problem is a programming
problem found in many computer applications that 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.
IDT utilizes numerous software programs throughout its operations that
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 that 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, IDT or the parties on which it depends may be
unable to produce reliable information or process routine transactions.
Furthermore, in the worst case, IDT 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.
IDT's Approach. In October 1997, IDT engaged the services of Keane, Inc., a
software services firm with more than 30 years of relevant experience, to assist
in defining IDT's approach. To date, IDT has paid approximately $165,000 in
consulting fees to Keane. The methodology IDT is using consists of the following
five phases:
* Inventory - In this initial phase, an inventory is taken of all software
and hardware that may be affected by the Year 2000 problem.
* 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.
* 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.
28
<PAGE>
* 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.
* 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. While initial testing has been completed, 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 August 1,
1999.
IDT 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. IDT has completed an initial assessment of the extent to which
Year 2000 issues may be incorporated into products that it sells to its
customers. It did not find any Year 2000-related issues in products that IDT
sells to customers.
IDT Business Partners. IDT 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 IDT.
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. IDT is currently reviewing supplier
responses and is obtaining additional information.
IDT Business Systems. Based on IDT's continuing assessment, IDT needs to replace
or materially modify many of its software applications, including those critical
to IDT's normal operations, in order to both meet IDT's business requirements
and avoid significant Year 2000 issues.
IDT 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, IDT believes its critical business systems will be Year
2000 compliant. In February 1999 IDT successfully brought the first portion of
the SAP implementation online.
By the year 2000, over a five-year period, IDT will have replaced
substantially all of its enterprise-wide systems. IDT has not allocated a
portion of the total project cost to the Year 2000 issue. While IDT 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 IDT to satisfy its business
needs. Implemen-tation projects, dates and timelines have been determined
primarily by IDT's expanding and changing business requirements and have not
been accelerated to date for Year 2000 reasons.
Manufacturing Systems. Manufacturing systems represent IDT's only significant
non-information technology (IT) 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 IDT's goal to have all equipment compliant by
June 1999. While IDT is still negotiating with its manufacturing equipment
vendors, amounts paid to these vendors to obtain software upgrades to remediate
Year 2000 issues may approximate $400,000, including $160,000 already incurred.
Contingency plans include such techniques as rolling back the date on equipment
and custom upgrades and interfaces.
There can be no assurance that all critical Year 2000 problems have or will
be identified or that IDT 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 IDT depends might not be converted on a timely basis or could
be converted to systems that are incompatible with IDT's systems.
Worldwide Contingency Plans. IDT is in the process of developing worldwide
contingency plans in all critical business areas throughout the Company.
Requirements Associated with the Introduction of the Euro
IDT is in the process of addressing the issues raised by the introduction of the
Single European Currency (Euro) in January 1999. IDT does not expect the cost of
any system modifications to be material and does not currently expect that
introduction and use of the Euro will materially affect its foreign exchange and
hedging activities or result in any material increase in transaction costs.
During the transition period, that will extend through January 1, 2000, the
Company will continue to evaluate the impact of the Euro. However, based on
currently available information, management does not believe that the
introduction of the Euro will have a material adverse impact on IDT's financial
condition or overall trends in results of operations.
29
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this item is provided under the caption
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7 of this
report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
Consolidated Financial Statements included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets at March 28, 1999 and March 29, 1998
Consolidated Statements of Operations for each of the three fiscal
years in the period ended March 28, 1999
Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended March 28, 1999
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years in the period ended March 28, 1999
Notes to Consolidated Financial Statements
Financial Statement Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
30
<PAGE>
Report of
Independent Accountants
To the Stockholders and Board of Directors of Integrated Device Technology, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Integrated Device Technology, Inc. and its subsidiaries at March 28, 1999 and
March 29, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended March 28, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 16, 1999, except for Note 13,
which is as of May 7, 1999.
31
<PAGE>
<TABLE>
Consolidated
Balance Sheets
<CAPTION>
March 28, March 29,
(In thousands, except share amounts) 1999 1998
--------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 138,660 $ 146,114
Short-term investments 54,616 74,481
Accounts receivable, net of allowance for returns
and doubtful accounts of $8,116 and $11,110 53,047 68,840
Inventories, net 52,577 60,737
Deferred tax assets -- 52,252
Prepayments and other current assets 40,659 22,179
--------- ---------
Total current assets 339,559 424,603
Property, plant and equipment, net 277,448 475,440
Other assets 57,885 68,912
--------- ---------
Total assets $ 674,892 $ 968,955
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,644 $ 57,572
Accrued compensation and related expenses 15,128 15,853
Deferred income on shipments to distributors 38,787 51,835
Other accrued liabilities 47,472 28,724
Current portion of long-term obligations 10,595 5,097
--------- ---------
Total current liabilities 144,626 159,081
Convertible subordinated notes, net of issuance costs 184,354 183,756
--------- ---------
Long-term obligations 72,876 56,640
--------- ---------
Deferred tax liabilities -- 23,087
--------- ---------
Commitments and contingencies (Notes 5 and 6)
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; 82,835,996 and 81,367,847 shares
issued and outstanding 83 81
Additional paid-in capital 331,077 318,542
Treasury stock (311,086 and no shares) (1,638) --
Retained earnings (deficit) (55,359) 228,964
Accumulated other comprehensive loss (1,127) (1,196)
--------- ---------
Total stockholders' equity 273,036 546,391
--------- ---------
Total liabilities and stockholders' equity $ 674,892 $ 968,955
========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
Consolidated Statements of
Operations
<CAPTION>
Fiscal Year Ended
March 28, March 29, March 30,
(In thousands, except per share data) 1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Revenues $ 540,199 $ 587,136 $ 537,213
Cost of revenues 344,424 364,291 325,668
Restructuring charges, asset impairment and other 204,244 -- 45,223
--------- --------- ---------
Gross profit (loss) (8,469) 222,845 166,322
--------- --------- ---------
Operating expenses:
Research and development 132,893 121,449 151,420
Selling, general and administrative 104,439 88,528 80,812
--------- --------- ---------
Total operating expenses 237,332 209,977 232,232
--------- --------- ---------
Operating income (loss) (245,801) 12,868 (65,910)
Interest expense (13,885) (14,088) (12,018)
Interest income and other, net 6,153 12,674 15,764
--------- --------- ---------
Income (loss) before income taxes (253,533) 11,454 (62,164)
Provision (benefit) for income taxes 30,072 3,207 (19,892)
--------- --------- ---------
Net income (loss) $(283,605) $ 8,247 $ (42,272)
--------- --------- ---------
Basic net income (loss) per share: $ (3.45) $ 0.10 $ (0.54)
Diluted net income (loss) per share: $ (3.45) $ 0.10 $ (0.54)
Weighted average shares:
Basic 82,290 80,359 78,454
Diluted 82,290 84,022 78,454
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
Consolidated Statements of
Cash Flows
Fiscal Year Ended
March 28, March 29, March 30,
(In thousands) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(283,605) $ 8,247 $ (42,272)
Adjustments:
Depreciation and amortization 106,180 114,136 102,897
Restructuring, asset impairment and other 179,428 -- 45,223
Deferred tax assets 29,145 5,403 (5,223)
Changes in assets and liabilities:
Accounts receivable, net 15,793 8,760 7,425
Inventories, net 8,160 (13,119) (1,618)
Income tax refund receivable 7,309 26,746 (34,055)
Other assets 10,268 9,226 1,718
Accounts payable (24,928) 12,697 (31,295)
Accrued compensation and related expenses (725) 241 (13,625)
Deferred income on shipments to distributors (13,048) 9,751 10,759
Other accrued liabilities 19,757 13,528 1,877
--------- --------- ---------
Net cash provided by operating activities 53,734 195,616 41,811
--------- --------- ---------
Investing activities
Purchases of property, plant and equipment (105,526) (164,206) (192,747)
Proceeds from sale of property, plant and equipment 3,137 367 54,196
Purchases of short-term investments (105,892) (45,975) (22,639)
Proceeds from sales of short-term investments 126,055 7,754 90,323
Purchases of equity investments (5,867) (9,224) (6,960)
Proceeds from sales of investments collateralizing facility lease -- -- 10,662
--------- --------- ---------
Net cash used for investing activities (88,093) (211,284) (67,165)
--------- --------- ---------
Financing activities
Proceeds from issuance of common stock, net 8,660 12,468 7,615
Repurchase of common stock, net (4,630) -- --
Proceeds from secured equipment financing 31,764 -- 20,959
Payments on capital leases and other debt (8,889) (5,835) (5,299)
--------- --------- ---------
Net cash provided by financing activities 26,905 6,633 23,275
--------- --------- ---------
Net decrease in cash and cash equivalents (7,454) (9,035) (2,079)
Cash and cash equivalents at beginning of period 146,114 155,149 157,228
--------- --------- ---------
Cash and cash equivalents at end of period $ 138,660 $ 146,114 $ 155,149
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 12,974 $ 12,748 $ 12,266
Income taxes, net of refunds (10,393) (32,584) 11,285
Non-cash activities:
Conversion of accrued liability to equity 6,293 -- --
Exchange of common stock for fixed assets -- -- 8,509
Capital lease obligations 5,022 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
Consolidated Statements of
Stockholders' Equity
<CAPTION>
Common Stock Additional
------------------------------ Paid-in Treasury
(In thousands, except share data) Shares Amount Capital Stock
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, March 31, 1996 77,496,833 $ 77 $ 287,064 $ --
Issuance of common stock 2,157,271 3 16,121 --
Tax benefit from stock
option transactions -- -- 1,655 --
Other comprehensive loss:
Translation adjustment -- -- -- --
Unrealized loss on securities, net --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Comprehensive loss
Balance, March 30, 1997 79,654,104 80 304,840 --
Issuance of common stock 1,713,743 1 12,467 --
Tax benefit from stock
option transactions -- -- 1,235 --
Other comprehensive income:
Translation adjustment -- -- -- --
Unrealized gain on securities, net -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income
Balance, March 29, 1998 81,367,847 81 318,542 --
Repurchase of common stock (856,000) (1) -- (4,630)
Issuance of common stock 1,752,418 2 6,243 2,992
Issuance of common stock
to extinguish accrued liability 571,731 1 6,292 --
Other comprehensive income:
Translation adjustment -- -- -- --
Unrealized loss on securities, net -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Comprehensive loss
Balance, March 28, 1999 82,835,996 $ 83 $ 331,077 $ (1,638)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Other Total
(Accumulated Comprehensive Stockholders'
Deficit) Income (Loss) Equity
-------------------------------------------------------
<S> <C> <C> <C>
Balance, March 31, 1996 $ 262,989 $ (403) $ 549,727
Issuance of common stock -- -- 16,124
Tax benefit from stock
option transactions -- -- 1,655
Other comprehensive loss:
Translation adjustment -- (381) (381)
Unrealized loss on securities, net -- (615) (615)
Net loss (42,272) -- (42,272)
--------- --------- ---------
Comprehensive loss (42,272) (996) (43,268)
--------- --------- ---------
Balance, March 30, 1997 220,717 (1,399) 524,238
Issuance of common stock -- -- 12,468
Tax benefit from stock
option transactions -- -- 1,235
Other comprehensive income:
Translation adjustment -- (310) (310)
Unrealized gain on securities, net -- 513 513
Net income 8,247 -- 8,247
--------- --------- ---------
Comprehensive income 8,247 203 8,450
--------- --------- ---------
Balance, March 29, 1998 228,964 (1,196) 546,391
Repurchase of common stock -- -- (4,631)
Issuance of common stock (718) -- 8,519
Issuance of common stock
to extinguish accrued liability -- -- 6,293
Other comprehensive income:
Translation adjustment -- 121 121
Unrealized loss on securities, net -- (52) (52)
Net loss (283,605) -- (283,605)
--------- --------- ---------
Comprehensive loss (283,605) 69 (283,605)
--------- --------- ---------
Balance, March 28, 1999 $ (55,359) $ (1,127) $ 273,036
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
Notes
to Consolidated Financial Statements
Note 1
Summary of Significant
Accounting Policies
Nature of business. Integrated Device Technology, Inc. ("IDT" or the "Company")
designs, develops, manufactures and markets a broad range of high-performance
semiconductor products for its key markets in communications and computing.
IDT's products include communications memories, networking devices, RISC and x86
microprocessors, high-speed SRAMs, and high-performance logic and clock
management products.
Fiscal year. The Company's fiscal year ends on the Sunday nearest March 31.
Fiscal 1999, 1998 and 1997 each included 52 weeks. Fiscal 2000, a 53-week year,
will end on April 2, 2000.
Basis of presentation. The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to prior-year balances, none of
which affected the Company's financial position or results of operations, to
present the financial statements on a consistent basis.
Cash equivalents and short-term investments. Cash equivalents are highly liquid
investments with original maturities of three months or less at the time of
acquisition or with guaranteed on-demand buy-back provisions. Short-term
investments are valued at amortized cost, which approximates market.
The Company's short-term investments are classified as available-for-sale
at March 28, 1999 and March 29, 1998. Investment securities classified as
available-for-sale are measured at market value, and net unrealized gains or
losses are recorded in accumulated comprehensive income, a separate component of
stockholders' equity, until realized. Any gains or losses on sales of
investments are computed based upon specific identification. For the periods
ended March 28, 1999 and March 29, 1998, realized gains and losses on
available-for-sale investments were not material. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates the classification at each reporting date.
As of March 28, 1999, cash equivalents included $9.2 million in
certificates of deposit which were collateralizing certain customs bond
obligations.
Inventories. Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market.
Property, plant, and equipment. Property, plant and equipment are recorded at
cost. Depreciation is computed using the straight-line method over estimated
useful lives of the assets, which generally range from three to five years.
Leasehold improvements and leasehold interests are amortized over the shorter of
the estimated useful lives of the assets or the remaining term of the lease.
Accelerated methods of depreciation are used for tax purposes.
Accounting for long-lived assets. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets," the Company reviews long-lived assets held and used by the
Company for impairment whenever events or changes in circumstances indicate that
the net book value of an asset will not be recovered through expected future
cash flows (undiscounted and before interest) from use of the asset. The amount
of impairment loss is measured as the difference between the net book value of
the assets and the estimated fair value of the related assets.
Revenue recognition. Revenues from product sales are generally recognized upon
shipment, and a reserve is provided for estimated returns and discounts. A
portion of the Company's sales are made to distributors under agreements that
allow certain rights of return and price protection on products unsold by the
distributors. Related gross profits thereon are deferred until the products are
resold by the distributors.
Income taxes. The Company accounts for income taxes under an asset and liability
approach which requires the expected future tax consequences of temporary
differences between book and tax bases of assets and liabilities be recognized
as deferred tax assets and liabilities. No provision for U.S. income taxes is
provided on unremitted earnings of foreign subsidiaries, to the extent such
earnings are deemed to be permanently reinvested. U.S. income taxes are provided
on these earnings to the extent that there is an intention to remit such
earnings.
36
<PAGE>
Net income (loss) per share. Basic and diluted net income (loss) per share are
computed using weighted-average common shares outstanding in accordance with
SFAS No. 128, "Earnings Per Share." Dilutive net income per share also includes
the effect of stock options and convertible debt. The following table sets forth
the computation of basic and diluted net income (loss) per share:
Fiscal Year Ended
(In thousands March 28, March 29, March 30,
except per share amounts) 1999 1998 1997
----------------------------------
Basic:
Net income (loss) (numerator) $(283,605) $ 8,247 $ (42,272)
--------- --------- ---------
Weighted average shares
outstanding (denominator) 82,290 80,359 78,454
--------- --------- ---------
Net income (loss) per share $ (3.45) $ 0.10 $ (0.54)
--------- --------- ---------
Diluted:
Net income (loss) (numerator) $(283,605) $ 8,247 $ (42,272)
--------- --------- ---------
Weighted average shares outstanding 82,290 80,359 78,454
Net effect of dilutive stock options -- 3,663 --
--------- --------- ---------
Total shares (denominator) 82,290 84,022 78,454
--------- --------- ---------
Net income (loss) per share $ (3.45) $ 0.10 $ (0.54)
========= ========= =========
- --------------------------------------------------------------------------------
Options to purchase approximately 18.4 million, 1.6 million and 15.0
million shares were outstanding at fiscal year-ends 1999, 1998 and 1997,
respectively, but have been excluded from the computations because they were
antidilutive. The Company's convertible debt was antidilutive for all periods
presented.
Comprehensive income (loss). The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," at the beginning of fiscal 1999. SFAS No. 130 established
new rules for the reporting and display of comprehensive income (loss) and its
components; however, adoption had no impact on net income (loss) or total
stockholders' equity. The components of accumulated other comprehensive loss
(not tax affected) were as follows:
March 28, March 29,
(in thousands) 1999 1998
------- -------
Cumulative translation adjustments $(1,075) $(1,196)
Unrealized gain (loss) on investments (52) --
------- -------
$(1,127) $(1,196)
======= =======
- --------------------------------------------------------------------------------
Translation of foreign currencies. For subsidiaries whose functional currency is
the local currency, gains and losses resulting from translation of these foreign
currency financial statements into U.S. dollars are recorded as a separate
component of comprehensive income (loss). For subsidiaries where the functional
currency is the U.S. dollar, gains and losses resulting from the process of
remeasuring foreign currency financial statements into U.S. dollars are included
in other income. The effects of foreign currency exchange rate fluctuations have
not been material.
Fair value disclosures of financial instruments. Fair values of cash, cash
equivalents and short-term investments approximate cost due to the short period
of time until maturity. Fair values of long-term investments, long-term debt and
currency forward contracts are based on quoted market prices or pricing models
using current market rates.
Concentration of credit risk. The Company markets integrated circuits to
original equipment manufacturers (OEMs) and distributors primarily in the United
States, Europe and the Far East. The Company performs on-going credit
evaluations of its customers' financial condition and limits the amount of
credit extended when deemed necessary and generally does not require collateral.
Management believes that risk of significant loss is significantly reduced due
to the diversity of its products, customers and geographic sales areas. The
Company maintains a provision for potential credit losses and write-offs of
accounts receivable that were insignificant in each of the three years ended
March 28, 1999.
One distributor's receivable balance represented 16% and 17% of total
accounts receivable at March 28, 1999 and March 29, 1998, respectively. If the
financial condition and operations of this distributor deteriorate below
critical levels, the Company's operating results could be adversely affected.
Stock-based compensation plans. The Company accounts for its stock option plans
and employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company provides additional pro forma disclosures in Note 7.
New accounting pronouncements. The Company plans to adopt SFAS No. 133,
"Accounting for Derivative Instruments," as of the beginning of fiscal 2001.
SFAS No. 133 establishes standards for accounting and reporting on derivatives
37
<PAGE>
Notes to Consolidated Financial Statements
and is effective for periods beginning after June 15, 1999. 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 impact of SFAS No. 133 but does not expect any material effects
on its financial position or results of operations.
Products and markets. The Company operates in three segments (See Note 10)
within the semiconductor industry. Significant technological changes in the
industry could adversely affect operating results. The semiconductor industry is
highly cyclical and has been subject to significant downturns at various times
that have been characterized by diminished product demand, production
overcapacity and accelerated erosion of average selling prices. Therefore, the
average selling price the Company receives for industry-standard products is
dependent upon industry-wide demand and capacity, and such prices have
historically been subject to rapid change. While the Company considers industry
technological change and industry-wide demand and capacity in estimating
necessary allowances, such estimates could change in the future.
Materials. The Company's manufacturing operations depend upon obtaining adequate
raw materials. The number of vendors of certain raw materials, such as silicon
wafers, ultra-pure metals and certain chemicals and gases, is very limited. The
Company's results of operations would be adversely affected if it were unable to
obtain adequate supplies of raw materials in a timely manner or if there were
significant increases in the costs of raw materials.
Note 2
Balance Sheet Components
Inventories, net
March 28, March 29,
(in thousands) 1999 1998
---------------------------
Raw materials $ 4,908 $ 6,647
Work-in-process 32,725 40,276
Finished goods 14,944 13,814
------- -------
$52,577 $60,737
======= =======
- --------------------------------------------------------------------------------
Property, plant and equipment
March 28, March 29,
(in thousands) 1999 1998
--------------------------
Land $ 20,003 $ 24,385
Machinery and equipment 805,683 780,555
Building and leasehold improvements 77,110 102,151
Construction-in-progress 841 3,166
--------- ---------
903,637 910,257
Less accumulated depreciation and amortization (626,189) (434,817)
--------- ---------
$ 277,448 $ 475,440
========= =========
- --------------------------------------------------------------------------------
Short-term investments
March 28, March 29,
(in thousands) 1999 1998
--------------------------
U.S. government agency securities $ 11,103 $ 26,628
State and local government securities 37,074 55,289
Corporate securities 111,972 102,347
Other 30,933 35,705
--------- ---------
Total debt and equity securities 191,082 219,969
Less cash equivalents (136,466) (145,488)
--------- ---------
Short-term investments $ 54,616 $ 74,481
========= =========
- --------------------------------------------------------------------------------
Short-term investments of $15.7 million mature in less than one year and
$38.9 million have maturities between one and five years.
Note 3
Restructuring Charges,
Asset Impairment and Other
During fiscal 1999, the Company recorded $204.2 million of charges in cost of
sales relating primarily to asset impairment, restructuring associated with
closure of a manufacturing facility and costs associated with certain technology
licensing matters.
Asset impairment charges are primarily composed of $15.1 million for excess
SRAM manufacturing equipment and $126.9 million for asset impairment for the
manufacturing assets of the Company's eight-inch wafer fabrication facility in
Hillsboro, Ore. The excess SRAM manufacturing equipment charge represents the
write down to estimated fair market value based primarily on appraisals and
estimates obtained from third parties. The charge resulted from current economic
conditions in the SRAM market, which has experienced declines in both demand and
price. Additionally, the Company determined that due to excess industry capacity
and low prices for semiconductor products manufactured in the Hillsboro
facility, future undiscounted cash flows
38
<PAGE>
related to its wafer fabrication assets were insufficient to recover the $189.1
million 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 third parties.
The restructuring charges aggregated $46.4 million and related 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 ceased in December 1998, and the
Company has completed the termination of approximately 300 employees, primarily
in manufacturing departments. The San Jose facility itself was sold in May 1999,
and IDT is pursuing the sale of surplus used equipment.
The following table sets forth the Company's restructuring expense for
fiscal 1999 and the reserve balance as of March 28, 1999:
Fiscal Balance
1999 March 28,
(in thousands) expense Utilized Adjustments 1999
--------------------------------------------
Write-down of fixed assets $ 33,047 $(33,047) $ -- $ --
Severance and other employee
related charges 2,620 (2,171) (149) 300
Closure costs for manufacturing
facility 10,717 (5,267) (218) 5,232
-------- -------- -------- --------
$ 46,384 $(40,485) $ (367) $ 5,532
======== ======== ======== ========
- --------------------------------------------------------------------------------
At March 28, 1999, the net book value of equipment held for sale aggregated
$1.8 million and has been included in other current assets. Given the current
oversupply conditions in the used semiconductor equipment market, the Company
cannot determine the amount of time required to completely liquidate the surplus
equipment.
Costs associated with technology licensing matters initially aggregated $15
million. However, in the quarter ended March 28, 1999, the Company reversed $3
million of these costs upon favorable settlement of certain of these matters.
Separately, during fiscal 1999, the Company recorded $5.5 million in
research and development expenses and $0.2 million in selling, general and
administrative expenses for costs associated with discontinuance of certain
development efforts, including a graphics chip and a specialized logic chip.
These charges are composed primarily of severance costs and technology license
payments associated with the discontinued efforts. During the second quarter of
fiscal 1999, the Company also recorded a charge of $3.3 million relating
primarily to retention costs of its employees during the closure of its San Jose
fabrication facility; the Company subsequently provided an additional $1.9
million in fiscal 1999 retention costs.
In fiscal 1997, the Company recorded charges related to the impairment of
certain older manufacturing assets and other adjustments of $45.2 million. These
adjustments related primarily to the carrying value of manufacturing assets,
including the Company's oldest wafer fabrication plant in Salinas, Calif. As a
result of significant changes in the semiconductor industry, such as the rapid
erosion of SRAM average selling prices, and the Company's emphasis on
communications-oriented products, the Company accelerated the use of more
advanced manufacturing processes to produce its products. The use of these more
advanced processes and available information on future demand for the Company's
products indicated that the carrying value of these selected older manufacturing
assets was not fully recoverable. The fair value of manufacturing assets was
based principally upon third-party estimates of fair values. Separately, the
Company recorded charges of approximately $9.7 million relating to the
write-down of certain technology investments and other miscellaneous items in
fiscal 1997.
Note 4
Debt
The Company had no short-term borrowings, other than the current portion of
long-term indebtedness, during the two fiscal years ended March 28, 1999.
Information regarding the Company's obligations under long-term debt and capital
leases and equipment financing arrangements is presented below:
March 28, March 29,
(in thousands) 1999 1998
-------------------------
Mortgage payable bearing interest at
9.625% due in monthly installments
of $142 including interest through
April 1, 2005, secured by related
property and improvements $ 7,826 $ 8,730
Capital leases and equipment
financing arrangements at rates
ranging from 2.215% to 8.5%, with
maturities through August 2005 44,739 15,936
5.5% Convertible Subordinated Notes
due 2002 184,354 183,756
--------- ---------
236,919 208,422
Less current portion (10,595) (5,097)
--------- ---------
$ 226,324 $ 203,325
========= =========
- --------------------------------------------------------------------------------
39
<PAGE>
Notes to Consolidated Financial Statements
Future minimum payments under these obligations are summarized as follows:
Capital
leases and
equipment
Long-term debt financing
(in thousands) (Principal only) agreements
-----------------------------------
Fiscal Year
2000 $ 995 $ 11,645
2001 1,095 11,645
2002 187,455 9,294
2003 1,325 6,664
2004 and thereafter 3,206 10,805
---------- ----------
Total 194,076 50,053
Less amount representing interest (1,896) (5,314)
---------- ----------
Total at present value $ 192,180 $ 44,739
========== ==========
- --------------------------------------------------------------------------------
Obligations under capital leases and equipment financing arrangements are
collateralized by the related assets. The Company leased total assets of
approximately $48.1 million and $30.0 million at March 28, 1999 and March 29,
1998, respectively. Accumulated depreciation and amortization on these assets
was approximately $34.8 million and $16.5 million at March 28, 1999 and March
29, 1998, respectively.
In May 1995, the Company issued $201.3 million of 5.5% Convertible
Subordinated Notes ("Notes"), due in 2002. The Company retired $15 million of
the Notes in fiscal 1996. The Notes are subordinated to all existing and future
senior debt and are convertible into shares of the Company's common stock at a
rate of $28.625 per share. The Notes became redeemable at the option of the
Company in June 1998 at 102.75% initially and thereafter at prices declining to
100% at maturity plus accrued interest. Each holder of the Notes has the right,
subject to certain conditions and restrictions, to require the Company to offer
to repurchase any Notes owned by such holder at specified prices plus accrued
interest. Issuance costs of $4.6 million have been netted against the Notes
balance in the consolidated balance sheet and are being amortized over the
seven-year term of the Notes using the straight-line method which approximates
the effective interest method. Interest on the Notes is payable semi-annually on
June 1 and December 1. Based upon quoted market prices, the fair value of the
outstanding Notes was approximately $129.7 million at March 28, 1999.
The fair value of the mortgage payable, based on current rates and time to
maturity, was $8.4 million at March 28, 1999.
Note 5
Commitments
The Company leases most of its administrative and some manufacturing facilities
under operating lease agreements which expire at various dates through fiscal
2004.
In fiscal 1995, the Company entered into a five-year $60 million (revised
to $64 million in fiscal 1996) Tax Ownership Operating Lease transaction to
lease the wafer fabrication facility in Hillsboro. This synthetic lease requires
monthly payments which vary based on LIBOR plus 0.3% (5.2% at March 28, 1999).
The aggregate minimum rent commitment under this lease is approximately $3.4
million per year at the current LIBOR rate plus 0.3%. This lease also provides
the Company with the option of either acquiring the building at its original
cost or arranging for the building to be acquired at the end of the lease term.
The Company's obligations under the lease are secured by a trust deed on the
building and collateralized by cash and/or investments (restricted securities)
at 89.25% of the lessor's construction costs. Restricted securities
collateralizing this lease totaled $57.1 million at both March 28, 1999 and
March 29, 1998 and consist of Treasury bills and notes. In the event of a
decline in asset value at lease termination, the Company could incur a liability
to the lessor of up to 85% of the construction costs of the building, or $54.4
million, under the first-loss guarantee. In addition, the Company must maintain
compliance with certain financial covenants. The Company is currently
negotiating to extend this lease for a period of six years.
As of March 28, 1999, the aggregate future minimum rent commitments under
all operating leases, including the Hillsboro facility, were as follows (in
thousands): $20,128 (2000), $15,338 (2001), $14,002 (2002), $9,333 (2003),
$3,478 (2004) and $948 (2005 and thereafter). Rent expense for the years ended
March 28, 1999, March 29, 1998 and March 30, 1997 totaled approximately $20.0
million, $18.7 million and $13.5 million, respectively.
As of March 28, 1999, one secured standby letter of credit was outstanding
in the amount of $8.1 million. This letter of credit is required for
international purchases and expires on June 1, 1999. The Company also has
foreign exchange facilities used for hedging arrangements with several banks
that allow the Company to enter into foreign exchange contracts of up to $85
million, of which $41.2 million was available at March 28, 1999.
As of March 28, 1999, the Company had outstanding commitments of
approximately $21 million for equipment purchases.
40
<PAGE>
Note 6
Litigation
A lawsuit filed by Lemelson Medical Education & Research Foundation, Limited
Partnership ("plaintiff"), against the Company and twenty-five other corporate
defendants was served upon the Company in November 1998. The lawsuit, which
alleges that the defendants' manufacturing equipment infringes upon 16 patents
issued to the plaintiff, is pending in the United States District Court for the
District of Arizona, case number 98-1413. Plaintiff has also made similar
allegations against the Company's recently acquired, wholly owned subsidiary,
Quality Semiconductor, Inc. (QSI) and 87 other corporate defendants in a lawsuit
filed in the U.S. District Court for the District of Arizona, case no.
99-CV-377, in February 1999. In the lawsuits, the plaintiff seeks an injunction
and damages in an unspecified amount. Both lawsuits are in a preliminary stage.
If successful, the lawsuits could have a material adverse effect on the
Company's financial condition or results of operations.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The Company
is not currently aware of any other legal proceedings that the Company believes
may have, individually or in the aggregate, a material adverse effect on the
Company's financial condition or results of operations.
During the normal course of business, the Company is notified of claims
that it may be infringing on patents issued to other parties and is currently
involved in license negotiations. Should the Company elect to enter into license
agreements with other parties or should the other parties resort to litigation,
the Company may be obligated in the future to make payments or to otherwise
compensate these third parties, which could have an adverse effect on the
Company's financial condition or results of operations.
Note 7
Stockholders' Equity
Stock-based compensation plans. At March 28, 1999, the Company had four
stock-based compensation plans which are described below. The Company applies
APB Opinion No. 25 and related Interpretations in accounting for these plans.
Stock option plans. Shares of common stock reserved for issuance under the
Company's three stock option plans include 13,500,000 shares under the 1994
Employee Stock Option Plan, 4,500,000 shares under the 1997 Employee Stock
Option Plan, and 108,000 shares under the 1994 Director Stock Option Plan. At
March 28, 1999, a total of 5,222,000 options were available but unissued under
these plans. Also outstanding and exerciseable at March 28, 1999 were options
initially granted under previous stock option plans which have not been canceled
or exercised.
Under the plans, options are issued with an exercise price equal to the
market price of the Company's common stock on the date of grant, and the maximum
option term is 10 years. Plan participants typically receive an initial grant
that vests in annual and/or monthly increments over four years. Thereafter,
participants often receive a smaller annual grant which vests on the same basis
as the initial grant. Prior to fiscal 1999, such annual grants vested four years
from the date of grant.
<TABLE>
Following is a summary of the Company's stock option activity and related
weighted average exercise prices for each category:
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
(shares in thousands) Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning options outstanding 17,190 $ 8.90 15,000 $ 8.09 14,021 $ 7.42
Granted 15,957 7.00 5,156 11.16 3,556 10.90
Exercised (619) 4.08 (1,242) 6.31 (815) 3.49
Canceled (14,114) 10.29 (1,724) 10.48 (1,762) 10.56
------- --------- ------- --------- ------- ---------
Ending options outstanding 18,414 $ 6.35 17,190 $ 8.90 15,000 $ 8.09
Ending options exerciseable 4,049 $ 3.91 7,564 $ 6.40 6,335 $ 5.16
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
Notes to Consolidated Financial Statements
In July 1998, employees and officers holding options to purchase 12,411,340
shares of the Company's common stock were offered the opportunity to cancel
options in exchange for grants of new options at an exercise price of $7.125,
the fair market value of IDT stock on July 15, 1998. Under the terms of the
program, 11,956,551 shares were exchanged and are reflected in the grant and
cancellation activity for fiscal 1999. The reissued options expire in seven
years and may not be exercised for a one-year period from the effective date.
Under SFAS No. 123, the Company is required to estimate the fair value of
each option on the date of grant. Option valuation models, such as the
Black-Scholes model, were developed in order to value freely traded options
under ideal market conditions. The Company's stock option awards differ
significantly since they always have vesting restrictions and generally are not
transferable. Models such as Black-Scholes also require highly subjective
assumptions, including expected time until exercise and future stock price
volatility. The calculated fair value of an option on the grant date is highly
sensitive to changes in these subjective assumptions.
The Company has applied the Black-Scholes model to estimate the grant-date
fair value of stock option grants in fiscal 1999, 1998 and 1997, based upon the
following weighted-average assumptions: expected volatility of 60.0% to 62.5%,
expected time-to-exercise of 1.5 years from vest date, risk-free interest rates
of 4.4% to 6.7% and a dividend yield of 0%. The weighted-average fair value per
stock option granted in fiscal 1999, 1998 and 1997, as estimated in accordance
with SFAS No. 123, was $3.21, $6.29 and $6.21, respectively.
<TABLE>
Following is summary information about stock options outstanding at March
28, 1999:
<CAPTION>
Options Outstanding Options Exerciseable
-------------------------------------------- ----------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Life Average Number Average
(shares in thousands) Range of Exercise Prices Outstanding (in years) Exercise Price Exerciseable Exercise Price
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.63 - $ 1.88 1,856 2.4 $ 1.83 1,856 $ 1.83
2.06 - 4.00 733 3.6 3.24 728 3.24
4.13 - 6.00 977 6.0 4.93 223 5.23
6.19 - 6.78 866 5.1 6.25 585 6.21
7.06 - 7.13 13,557 6.3 7.11 402 7.12
8.00 - 32.75 425 4.9 10.69 255 9.37
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Employee stock purchase plan. The Company is authorized to issue up to 7,000,000
shares of its common stock under its 1984 Employee Stock Purchase Plan (ESPP).
All domestic employees are eligible to participate. The purchase price of the
stock is 85% of the lower of the closing price at the beginning or at the end of
each offering period (typically fiscal quarters). Following is a summary of
activity under the Company's ESPP:
Fiscal Fiscal Fiscal
(shares in thousands) 1999 1998 1997
------------------------------
Number of shares issued 1,133 470 560
Average issuance price $ 5.41 $ 9.81 $ 8.52
Number of shares available at year-end 1,401 584 54
- --------------------------------------------------------------------------------
Under SFAS No. 123, the Company must estimate the fair value of employees'
ESPP purchase rights. Valuing the rights involves the use of option valuation
models which are incapable of addressing transferability and vesting
restrictions inherent in the ESPP rights. Estimating the value of these ESPP
rights requires highly subjective assumptions about future events, such as stock
price volatility, and the resulting estimates are sensitive to changes in these
assumptions.
The Company has estimated the fair value of ESPP rights using the
Black-Scholes option valuation model with the following weighted-average
assumptions: an expected
42
<PAGE>
life equal to the offering period (typically one fiscal quarter); expected
volatility of 60.0% to 62.5%; risk-free interest rate of 4.6% to 5.4% and a
dividend yield of 0%. The weighted-average fair value per ESPP right granted in
fiscal 1999, 1998 and 1997, as estimated in accordance with SFAS No. 123, was
$2.01, $4.09 and $3.84, respectively.
Pro forma net income (loss) and net income (loss) per share. Following are the
pro forma amounts to which the Company's net income (loss) and income (loss) per
share would have been reduced, had the Company recorded compensation costs based
on the estimated grant-date fair value, as estimated in accordance with SFAS No.
123, of awards granted under its stock option and employee stock purchase plans.
The pro forma amounts include compensation costs related only to fiscal 1999,
1998 and 1997 stock option grants and purchase rights only. In future years, the
annual compensation expense will increase relative to the fair value of stock
options and purchase rights granted in those future years.
(in thousands, Fiscal Fiscal Fiscal
except per share amounts) 1999 1998 1997
-------------------------------------
Pro forma net loss $ (315,837) $ (7,455) $ (61,585)
Pro forma basic loss per share $ (3.84) $ (0.09) $ (0.78)
Pro forma diluted loss per share (3.84) (0.09) (0.78)
- --------------------------------------------------------------------------------
Stockholder rights plan. In December 1998, the Board of Directors adopted a new
stockholder rights plan designed to protect the long-term value of the Company
for its stockholders during any future unsolicited acquisition attempt. The
Company's former plan expired in December 1998. In connection with the new plan,
the Board declared a dividend of one preferred share purchase right for each
share of the Company's common stock outstanding on January 4, 1999 and further
directed the issuance of one such right with respect to each share of the
Company's common stock that is issued after January 4, 1999, except in specified
circumstances. The rights will expire on December 21, 2008. The rights are
initially attached to the Company's common stock and will not trade separately.
If a person or a group (an "Acquiring Person") acquires 15% or more of the
Company's common stock, or announces an intention to make a tender offer for the
Company's common stock, the consummation of which would result in a person or
group becoming an Acquiring Person, then the rights will be distributed. After
distribution, each right may be exercised for one-hundredth of a share of a
newly designated Series A Junior Participating Preferred Stock, par value of
$0.001 per share, at a price of $45.00. The preferred stock has been structured
so that the value of one-hundredth of a share of such preferred stock will
approximate the value of one share of common stock.
Stock repurchase program. In September 1998, the Company's Board of Directors
authorized the repurchase of up to ten million shares of IDT common stock. The
Company repurchased 856,000 shares at an approximate aggregate cost of $4.6
million during the third quarter of fiscal 1999. The repurchases were recorded
as treasury stock and resulted in a reduction of stockholders' equity. In
November 1998, the Board of Directors terminated the authorization to repurchase
shares. The shares acquired prior to the termination of the repurchase program
are being reissued in conjunction with the Company's stock option and stock
purchase plans. When treasury shares are reissued, the Company uses a first-in,
first-out method and any excess of repurchase cost over reissuance price is
recorded as a reduction of retained earnings.
In the second quarter of fiscal 1999, the Company issued 571,731 shares of
its common stock to settle a liability under an existing cross licensing
arrangement. The settlement was valued at approximately $6.3 million and has
been recorded as additional paid-in capital.
Note 8
Employee Benefits Plans
Under the Company's Profit Sharing Plan, all eligible employees receive profit
sharing contributions of 7% of pre-tax earnings in cash, and an additional 1% of
pre-tax earnings is divided equally among all domestic employees and contributed
to the Company's 401(k) plan. The contributions for fiscal 1999, 1998 and 1997
for this plan, net of administrative expenses, were $0.3 million, $0.9 million
and none, respectively.
43
<PAGE>
Notes to Consolidated Financial Statements
The Company pays an annual cash bonus to certain executive officers and
other key employees based on the pre-tax earnings of the Company and the
employee's individual performance. In fiscal 1998, the amount accrued under the
bonus plan was 6% of operating income or $0.8 million. There was no performance
bonus recorded for the years ended March 28, 1999 or March 30, 1997.
Note 9
Income Taxes
The components of income (loss) before provision (benefit) for income taxes were
as follows:
March 28, March 29, March 30,
(in thousands) 1999 1998 1997
---------------------------------------------
United States $(254,347) $ (7,010) $ (75,138)
Foreign 814 18,464 12,974
--------- --------- ---------
$(253,533) $ 11,454 $ (62,164)
========= ========= =========
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes consisted of the following:
March 28, March 29, March 30,
(in thousands) 1999 1998 1997
--------------------------------------
Current:
United States $ 206 $ (4,712) $(15,262)
State -- -- (13)
Foreign 721 2,516 606
-------- -------- --------
927 (2,196) (14,669)
-------- -------- --------
Deferred:
United States 29,145 5,423 (9,357)
State -- -- 4,134
Foreign -- (20) --
-------- -------- --------
29,145 5,403 (5,223)
-------- -------- --------
Provision (benefit) for income taxes $ 30,072 $ 3,207 $(19,892)
======== ======== ========
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities were as follows:
March 28, March 29,
(in thousands) 1999 1998
---------------------------
Deferred tax assets:
Deferred income on shipments to distributors $ 18,134 $ 20,336
Non-deductible accruals and reserves 27,968 25,991
Capitalized inventory and other expenses 10,625 4,197
Other 2,590 3,164
Net operating loss & credit carryforwards 56,657 13,509
Impairment loss and restructuring reserves 77,841 --
--------- ---------
Gross deferred tax assets 193,815 67,197
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (39,993) (23,087)
--------- ---------
Valuation allowance (153,822) (14,945)
--------- ---------
Net deferred tax assets $ -- $ 29,165
========= =========
- --------------------------------------------------------------------------------
As of March 28, 1999, the Company had established a full valuation
allowance for its net deferred tax assets because of uncertainty of their
realization. At March 29, 1998, the valuation allowance consisted primarily of
state deferred tax assets.
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. statutory income tax rate of 35% to income before the
provision (benefit) for income taxes as follows:
March 28, March 29, March 30,
(in thousands) 1999 1998 1997
----------------------------------------
Provision (benefit) at
U.S. statutory rate $ (88,736) $ 4,009 $ (21,758)
Differences in U.S. and foreign taxes 547 (1,943) (2,580)
General business credits (5,469) (1,820) (1,840)
Tax exempt interest -- -- (1,264)
State tax, net of federal benefit (12,727) -- (6,342)
Valuation allowance 138,877 -- 10,464
Net operating loss
carryback limitation -- 5,094 --
Other (2,420) (2,133) 3,428
--------- --------- ---------
Provision (benefit) for
income taxes $ 30,072 $ 3,207 $ (19,892)
========= ========= =========
- --------------------------------------------------------------------------------
44
<PAGE>
The Company provided foreign income taxes with respect to its Malaysian
manufacturing subsidiary for the first time in fiscal 1998. A recent Malaysian
law change exempted this subsidiary from any income tax obligation for fiscal
1999. Under existing Malaysian law, the Company has certain available carried
forward tax benefits and expects that these benefits will be available in future
periods to reduce its local tax obligations below the 28% statutory rate.
The Company's manufacturing subsidiary in the Philippines operates under a
taxholiday which expires in September 2002.
The Company's intention is to permanently reinvest a portion of its foreign
subsidiary earnings, while it intends to remit as a dividend to its U.S. parent
company, at some future date, the remainder of these earnings. Accordingly, U.S.
taxes have not been provided on approximately $30.1 million of permanently
reinvested foreign subsidiary earnings. U.S. taxes have been provided, pursuant
to APB Opinion No. 23, on $33.3 million in foreign subsidiary earnings that are
intended to be remitted as a dividend at some future date. Upon distribution of
foreign subsidiary earnings in the form of dividends or otherwise, the Company
will be subject to both U.S. income taxes and various foreign country
withholding taxes.
As of March 28, 1999, the Company had approximately $84 million of federal
net operating loss carryforwards which expire in fiscal year 2019. In addition,
the Company had approximately $15 million of federal research and development
tax credit carryforwards, which expire in various years between fiscal years
2013 and 2019, and $2.4 million of federal alternative minimum tax credit
carryforwards which can be used over an indefinite future period. The Company
also had available approximately $14.5 million of state income tax credit
carryforwards. Approximately $4.8 million of the state income tax credits expire
in fiscal years 2005 through 2007; the remaining $9.7 million have no expiration
date. No benefits for the net operating loss and tax credits carryforwards have
been recognized in the financial statements.
Examination by the IRS of the Company's income tax returns for the fiscal
years 1995 and 1996 began in fiscal 1998. Management believes that the ultimate
resolution of these examinations will not have any material adverse impact on
the Company's financial condition or results of operations.
Note 10
Industry Segment, Foreign Operations and Significant Customers
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in fiscal 1999. SFAS No. 131 establishes standards for
reporting on operating segments and related disclosures about products,
geographic areas and major customers.
The Company has three segments, Communications and High-Performance Logic,
SRAMs and other and x86 microprocessors. The Communications and High-Performance
Logic segment includes communications memories, networking devices, embedded
RISC microprocessors and high-performance logic and clock management devices.
The SRAMs and other segment consists mainly of high-speed SRAMs.
The accounting policies for segment reporting are the same as for the
Company as a whole (see Note 1). IDT evaluates segment performance on the basis
of operating profit or loss, which excludes interest expense, interest and other
income, and taxes. There are no intersegment revenues to be reported. IDT does
not identify or allocate assets or depreciation by operating segment, nor does
the chief operating decision maker (the CEO of the Company) evaluate groups on
the basis of these criteria.
IDT's segments offer different products. Products that fall under the three
segments are manufactured using different levels of process technology. A
significant portion of the wafers produced for the SRAMs and other and x86
microprocessors segments are fabricated at IDT's technologically advanced,
eight-inch wafer production facility in Hillsboro. Most wafers for the
Communications and High-Performance Logic segment are produced at IDT's older,
six-inch facility located in Salinas.
Products in the SRAMs and other segment have primarily commodity
characteristics, including high unit sales volumes and lower gross margins.
These commodity products are sold to a variety of customers in diverse
industries. Products in the x86 microprocessors segment are sold mainly to
customers in the computing market. Products in the Company's targeted x86
markets also tend to have commodity characteristics, including relatively low
margins. Unit sales of products in the Communications and High-Performance Logic
segment with the exception of logic devices, tend to be lower than those in the
SRAMs and other segment, but generally have higher margins. Products in the
Communications and High-Performance Logic segment are sold to communications
oriented customers and consumers of high-performance logic.
One national distributor represented 24%, 17% and 14% of net revenues for
fiscal 1999, 1998 and 1997, respectively.
45
<PAGE>
Notes to Consolidated Financial Statements
The tables below provide information about the reportable segments for
fiscal 1999, 1998 and 1997.
Segment revenues
Fiscal Year Ended
March 28, March 29, March 30,
(In thousands) 1999 1998 1997
-------------------------------
Communications and
High-Performance Logic $381,969 $400,993 $358,608
SRAMs and other 126,505 178,539 173,513
x86 microprocessors 31,725 7,604 5,092
------- ------- -------
Total revenues $540,199 $587,136 $537,213
======== ======== ========
- --------------------------------------------------------------------------------
Segment profit (loss)
Fiscal Year Ended
March 28, March 29, March 30,
(In thousands) 1999 1998 1997
-----------------------------------
Communications and
High-Performance Logic $ 92,238 $ 114,627 $ 82,940
SRAMs and other (93,263) (85,845) (98,013)
x86 microprocessors (40,532) (15,914) (5,614)
Restructuring charges,
asset impairment and other (204,244) -- (45,223)
--------- --------- ---------
Total operating income (loss) $(245,801) $ 12,868 $ (65,910)
Interest expense (13,885) (14,088) (12,018)
Interest income and other, net 6,153 12,674 15,764
--------- --------- ---------
Income (loss) before income taxes $(253,533) $ 11,454 $ (62,164)
========= ========= =========
- --------------------------------------------------------------------------------
The Company's significant operations outside of the United States include
manufacturing facilities in Malaysia and the Philippines and sales subsidiaries
in Japan, Asia-Pacific and throughout Europe. Revenues from unaffiliated
customers by geographic area, based on the customers' shipment locations, were
as follows:
Fiscal Year Ended
March 28, March 29, March 30,
(In thousands) 1999 1998 1997
-------- -------- --------
United States $339,353 $358,373 $330,578
Europe 108,156 113,914 93,167
Japan 48,674 55,477 73,385
Asia-Pacific 44,016 59,372 40,083
-------- -------- --------
Total revenues $540,199 $587,136 $537,213
======== ======== ========
- --------------------------------------------------------------------------------
The Company's long-lived assets consist primarily of property, plant and
equipment, which are summarized below by geographic area:
March 28, March 29,
(In thousands) 1999 1998
-------------------------
United States $196,969 $382,894
Malaysia 43,550 53,364
Philippines 36,263 38,724
All other countries 666 458
-------- --------
Total property, plant and equipment, net $277,448 $475,440
======== ========
- --------------------------------------------------------------------------------
Note 11
Related Party Transactions
The Company holds an equity interest of approximately 17% in Quantum Effect
Design Inc. ("QED"). A stockholder and director of the Company also holds an
equity interest of approximately 2% in QED. The Company's share of losses in QED
was $1.1 million and $0.2 million in fiscal 1998 and 1997, respectively; these
amounts are reported as interest income and other in the Consolidated Statements
of Operations. The Company paid royalty expenses of $3.1 million, $3.2 million
and $2.6 million to QED in fiscal 1999, 1998 and 1997 respectively.
The Company holds an equity interest of approximately 34% (87% on an as
converted basis) in Clear Logic, Inc., a corporation founded by a former IDT
executive officer. The Company's share of losses in Clear Logic was $11.1
million, $4.9 million, and $1.4 million in fiscal 1999, 1998 and 1997,
respectively; these amounts are reported as interest income and other in the
Consolidated Statements of Operations. The Company increased its investment by
$6.0 million and $12.1 million in fiscal 1999 and fiscal 1998, respectively.
During fiscal 1999, the Company also extended a secured loan to Clear Logic in
the amount of $3.0 million, of which $2.6 million was outstanding at the end of
fiscal 1999.
In fiscal 1997, the Company acquired, for $8.5 million, a facility
previously leased from a stockholder and director. The Company completed the
transaction by issuing 782,445 unregistered shares of the Company's common stock
at $10.875 per share.
During fiscal 1998, a director of IDT acted as an uncompensated agent on
behalf of a subsidiary of the Company in acquiring parcels of land for future
corporate development. As of March 28, 1999, the Company owed the director $11.5
million, representing the purchase price of the land.
46
<PAGE>
Note 12
Derivative Financial Instruments
The Company has foreign subsidiaries which operate and sell or manufacture the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates. The Company primarily
utilizes forward exchange contracts to hedge against the short-term impact of
foreign currency fluctuations on certain assets or liabilities denominated in
foreign currencies. The total amount of these contracts is offset by the
underlying assets or liabilities denominated in foreign currencies. The gains or
losses on these contracts are included in income as the exchange rates change.
Management believes that these forward contracts do not subject the Company to
undue risk due to foreign exchange movements because gains and losses on these
contracts are offset by gains and losses on the underlying asset and
transactions being hedged. Forward exchange contracts related to firm purchase
and sales commitments are considered identifiable hedges, and realized and
unrealized gains and losses are deferred until settlement of the underlying
commitments. At March 28, 1999 and March 29, 1998, deferred gains and losses
were not material.
Foreign exchange hedge positions, which include buy and sell positions
generally with maturities of less than one year, were as follows:
March 28, March 29,
1999 1998
(In thousands ------------------- -------------------
of U.S. dollars) Buy Sell Buy Sell
------- ------- ------- -------
Japanese Yen $ 8,675 $19,297 $ 410 $ 8,320
British Pound Sterling 1,133 2,433 -- 280
Malaysian Ringgit -- -- 4,120 2,056
Netherlands Guilder 10,919 1,304 9,114 --
Other -- -- 129 718
------- ------- ------- -------
Total at settlement value $20,727 $23,034 $13,773 $11,374
------- ------- ------- -------
Total at fair value $20,059 $22,716 $13,361 $11,232
======= ======= ======= =======
- --------------------------------------------------------------------------------
The Company is exposed to credit-related losses if counterparties to
financial instruments fail to perform their obligations. However, the Company
does not expect any counterparties, which presently have high credit ratings, to
fail to meet their obligations. The Company controls credit risk through credit
approvals, limits and monitoring procedures including the use of high-credit
quality counterparties.
Note 13
Subsequent Events
QSI merger. In May 1999, IDT consummated the acquisition of Quality
Semiconductor, Inc. ("QSI"). QSI had been engaged in the design, development and
marketing of high-performance logic and networking semiconductor products.
To effect the merger, IDT issued approximately 5,214,000 shares of its
common stock in exchange for all of the outstanding common stock of QSI and
granted options to purchase approximately 1,509,000 shares of IDT common stock
in exchange for all of the outstanding options to purchase QSI stock. The merger
is being accounted for as a pooling of interests.
As of the end of March 1999, IDT and QSI had incurred and expensed
approximately $1.0 million and $0.8 million of merger related costs, consisting
primarily of fees for attorneys, accountants, financial printing and other
related expenses. IDT estimates that it will incur additional direct transaction
costs of approximately $4.2 million, consisting primarily of severance costs,
including change-in-control payments. Also, the combined entity expects to incur
certain costs, which may be material but which cannot be reasonably estimated at
the current time, to integrate IDT and QSI. Such actions might include
elimination of duplicate facilities and operations; integration of internal and
customer related activities; and cancellation and continuation of contractual
obligations.
<TABLE>
The following unaudited pro forma condensed data summarizes the combined
operating results of the Company and QSI as if the merger had occurred at the
beginning of the periods presented:
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
March 28, 1999 March 29, 1998 March 30, 1997
(In thousands except per share amounts) --------------------------------------------------
<S> <C> <C> <C>
Revenues $ 601,017 $ 649,827 $ 581,901
Net income (loss) (298,939) 8,457 (43,582)
Net income (loss) per basic common share $ (3.42) $ 0.10 $ (0.53)
Net income (loss) per diluted common share $ (3.42) $ 0.10 $ (0.53)
</TABLE>
Because the fiscal year ends of the two companies differ, the statements of
operations data for QSI have been recast for pro forma purposes as shown below:
IDT QSI
-------------------------------- ------------------------------------
Fiscal year ended March 28, 1999 Fiscal year ended September 30, 1998
Fiscal year ended March 29, 1998 Fiscal year ended September 30, 1997
Fiscal year ended March 30, 1997 Fiscal year ended September 30, 1996
Unaudited pro forma net income (loss) per share is based on reported, historical
average shares outstanding for the two companies, adjusted for the exchange
ratio.
Sale of facility. On May 7, 1999, IDT completed the sale of its San Jose
fabrication facility. The facility had been closed during fiscal 1999 in
connection with the Company's restructuring efforts (see Note 3).
47
<PAGE>
<TABLE>
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY RESULTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Fiscal Year Ended March 28, 1999
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 134,487 $ 130,635 $ 135,690 $ 139,387
Restructuring charges, asset
impairment and other 28,916 178,328 -- (3,000)
Gross profit 12,373 (137,676) 53,598 63,236
Net income (49,956) (237,085) (4,578) 8,014
Basic earnings per share:
Net income (0.61) (2.88) (0.06) 0.10
Diluted earnings per share:
Net income (0.61) (2.88) (0.06) 0.10
Fiscal Year Ended March 29, 1998
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------
Revenues $ 148,873 $ 143,807 $ 144,235 $ 150,221
Gross profit 56,336 55,164 55,042 56,303
Net income 1,891 2,601 2,381 1,374
Basic earnings per share:
Net income 0.02 0.03 0.03 0.02
Diluted earnings per share:
Net income 0.02 0.03 0.03 0.02
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's Directors is
incorporated herein by reference from the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended March 28, 1999, and the information required by this item with respect to
the Company's executive officers is incorporated herein by reference from the
section entitled "Executive Officers of the Registrant" in Part I, Item 4A of
this Report.
The information concerning compliance with Section 16 of the Securities Exchange
Act of 1934 is incorporated herein by reference from the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statements and Financial Statement
Schedule (set forth in Item 8 of Part II of this Form 10-K) are filed
as part of this Annual Report on Form 10-K
(a) 2. Financial Statement Schedules
The financial statement schedule listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule (set forth in
Item 8 of Part II of this Form 10-K) is filed as part of this Annual
Report on Form 10-K.
(a) 3. Listing of Exhibits
Exhibit No. Description
Page
2.1* Agreement and Plan of Reorganization dated as of October 1, 1996, by
and among the Company, Integrated Device Technology Salinas Corp. and
Baccarat Silicon, Inc. (previously filed as Exhibit 2.1 to the
Quarterly Report on Form 10-Q for the Fiscal Quarter Ended December 29,
1996).
2.2* Agreement of Merger dated as of October 1, 1996, by and among the
Company, Integrated Device Technology Salinas Corp. and Baccarat
Silicon, Inc. (previously filed as Exhibit 2.2 to the Quarterly Report
on Form 10-Q for the Fiscal Quarter Ended December 29, 1996).
2.3* Agreement and Plan of Merger, dated as of November 1, 1998, by and
among the Company, Penguin Acquisition, Inc. and Quality Semiconductor,
Inc. (previously filed as Exhibit 2.03 to the Registration Statement on
Form S-4 filed on March 24, 1999).
3.1* Restated Certificate of Incorporation (previously filed as Exhibit 3A
to Registration Statement on Form 8-B dated September 23, 1987).
3.2* Certificate of Amendment of Restated Certificate of Incorporation
(previously filed as Exhibit 3(a) to the Registration Statement on Form
8 dated March 28, 1989).
3.3* Certificate of Amendment of Restated Certificate of Incorporation
(previously filed as Exhibit 4.3 to the Registration Statement on Form
S-8 (File Number 33-63133) filed on October 2, 1995).
3.4* Certificate of Designations specifying the terms of the Series A Junior
Participating Preferred Stock of IDT, as filed with the Secretary of
State of Delaware (previously filed as Exhibit 3.6 to the Registration
Statement on Form 8-A filed December 23, 1998).
3.5* Bylaws of the Company, as amended and restated effective December 21,
1998 (previously filed as Exhibit 3.2 to the Quarterly Report on Form
10-Q for the Fiscal Quarter Ended December 27, 1998).
4.1* Rights Agreement dated December 21, 1998 between IDT and BankBoston,
N.A., as Rights Agent (previously filed as Exhibit 4.1 to the
Registration Statement on Form 8-A filed December 23, 1998).
4.2* Form of Indenture between the Company and The First National Bank of
Boston, as Trustee, including Form of Notes (previously filed as
Exhibit 4.6 to the Registration Statement on Form S-3 (File number
33-59443).
50
<PAGE>
10.1* Assignment of Lease dated October 30, 1985 between the Company and
Synertek Inc. relating to 2975 Stender Way, Santa Clara, California
(previously filed as Exhibit 10.4 to Annual Report on Form 10-K for the
Fiscal Year Ended April 1, 1990).
10.2* Assignment of Lease dated October 30, 1985 between the Company and
Synertek Inc. relating to 3001 Stender Way, Santa Clara, California
(previously filed as Exhibit 10.5 to Annual Report on Form 10-K for
Fiscal Year Ended April 1, 1990).
10.3* Lease dated October 23, 1989 between Integrated Device Technology
International Inc. and RREEF USA FUND - III relating to 2972 Stender
Way, Santa Clara, California (previously filed as Exhibit 10.6 to
Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990).
10.4* Amended and Restated 1984 Employee Stock Purchase Plan, as amended
through August 27, 1998 (previously filed as Exhibit 4.10 to the
Registration Statement on Form S-8 (File Number 333-64279) filed on
September 25, 1998).**
10.5* 1994 Stock Option Plan, as amended through April 25, 1996 (previously
filed as Exhibit 4.5 to the Registration Statement on Form S-8 (File
Number 333-36601) filed on September 26, 1997).**
10.6* 1994 Directors Stock Option Plan and related documents (previously
filed as Exhibit 10.18 to the Quarterly Report on Form 10-Q for the
Fiscal Quarter Ended October 2, 1994).**
10.7* Form of Indemnification Agreement between the Company and its directors
and officers (previously filed as Exhibit 10.68 to Annual Report on
Form 10-K for the Fiscal Year Ended April 2, 1989).**
10.8 Technology License Agreement between IDT and MIPS Technologies, Inc.***
10.9* Patent License Agreement between the Company and American Telephone and
Telegraph Company ("AT&T") dated May 1, 1992 (previously filed as
Exhibit 19.1 to Quarterly Report on Form 10-Q for the Quarter Ended
June 28, 1992) (Confidential Treatment Granted).
10.10* Domestic Distributor Agreement between the Company and Wyle
Laboratories, Inc. Electronic Marketing Group dated as of April 15,
1994 (previously filed as Exhibit 10.15 to the Quarterly Report on Form
10-Q for the Fiscal Quarter Ended October 2, 1994).
10.11* Master Distributor Agreement dated August 26, 1985 between the Company
and Hamilton/Avnet Electronics, Division of Avnet, Inc. (previously
filed as Exhibit 10.54 to the Registration Statement on Form S-1 (File
Number 33-3189))
10.12* Sublease of the Land and Lease of the Improvement by and between
Sumitomo Bank Leasing and Finance, Inc. and the Company dated January
27, 1995 and related agreements thereto (previously filed as Exhibit
10.21 to the Annual Report on Form 10-K for the Fiscal Year Ended April
2, 1995).
10.13* 1995 Executive Performance Plan (previously filed as Exhibit 10.22 to
the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October
1, 1995).**
10.14* Letter amending Patent License Agreement between the Company and AT&T
dated December 4, 1995 (previously filed as Exhibit 10.23 to the Annual
Report on Form 10-K for the Fiscal Year Ended March 31, 1996)
(Confidential Treatment Granted).
10.15* Lease dated July 1995 between Integrated Device Technology, Inc. and
American National Insurance Company relating to 3250 Olcott Street,
Santa Clara, California (previously filed as Exhibit 10.25 to the
Annual Report for the Fiscal Year Ended March 31, 1996).
10.16* Registration Rights Agreement dated as of October 1, 1996 among the
Company, Carl E. Berg and Mary Ann Berg (previously filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended
December 29, 1996).
10.17* 1997 Stock Option Plan, as amended through April 21, 1998 (previously
filed as Exhibit 4.9 to the Registration Statement on Form S-8 (file
no. 333-64279) filed on September 25, 1998).
51
<PAGE>
10.18* Custom Sales Agreement between the Company and International Business
Machines Corporation effective January 19, 1998. (previously filed as
Exhibit 10.25 to the Annual Report on Form 10-K for the Fiscal Year
Ended March 29, 1998) (Confidential Treatment Granted for portions of
the agreement).
10.19* Employment Contract between IDT and Glenn Henry (previously filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Fiscal
Quarter Ended December 27, 1998).**
10.20* Purchase and Sale Agreement and Joint Escrow Instructions between IDT
and Cadence Design Systems, Inc., dated December 15, 1998 (previously
filed as Exhibit 10.27 to the Registration Statement on Form S-4 as
filed on March 24, 1999).
10.21* Lease between IDT and James S. Lindsey dated March 3, 1999 (previously
filed as Exhibit 10.28 to the Registration Statement on Form S-4 as
filed on March 24, 1999).
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
* These exhibits were previously filed with the Commission as indicated and
are incorporated herein by reference.
** These exhibits are management contracts or compensatory plans or
arrangements required to be filed pursuant to Item 14 (c) of Form 10-K.
*** Confidential treatment has been requested for certain portions of this
document pursuant to an application for confidential treatment sent to the
Securities and Exchange Commission. Such portions have been redacted and marked
with a triple asterisk. The non-redacted version of this document has been sent
to the Securities and Exchange Commission.
(b) Reports on Form 8-K
Not applicable.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTEGRATED DEVICE TECHNOLOGY, INC.
Registrant
June 24, 1999 By: /s/ Leonard C. Perham
----------------------
Chief Executive Officer
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ D. John Carey Chairman of the Board June 24, 1999
- --------------------------------
/s/ Leonard C. Perham Chief Executive Officer and Director June 24, 1999
- --------------------------------- (Principal Executive Officer)
/s/ Alan F. Krock Vice President, Chief Financial Officer June 24, 1999
- --------------------------------- (Principal Financial and Accounting Officer)
/s/ Carl E. Berg Director June 24, 1999
- ---------------------------------
/s/ John C. Bolger Director June 24, 1999
- ---------------------------------
/s/ Federico Faggin Director June 24, 1999
- ---------------------------------
</TABLE>
53
<PAGE>
SCHEDULE II
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance at Additions Charged to Deductions Balance at
Beginning Charged to other and End of
of Period Cost and accounts (1) Write-offs Period
Expenses
<S> <C> <C> <C> <C> <C>
(in thousands)
Allowance for returns and doubtful
accounts
Year ended March 30, 1997 $4,580 $ 2,464 $ -- $ 307 $ 7,351
Year ended March 29, 1998 7,351 3,849 -- (90) 11,110
Year ended March 28, 1999 11,110 383 (2,796) (581) 8,116
<FN>
(1) In fiscal 1999, the Company reclassified its international distributor
reserve from accounts receivable to deferred revenue, consistent with its
practice for domestic distributor sales.
</FN>
</TABLE>
54
Redacted Version
CONFIDENTIAL TREATMENT REQUIRED
TECHNOLOGY LICENSE AGREEMENT
This Technology License Agreement ("Agreement") is made effective as of
December 31, 1997 by and between Integrated Device Technology, Inc., a Delaware
corporation with a principal place of business at 2975 Stender Way, Santa Clara,
California 95054, MIPS Technologies, Inc., a Delaware corporation with its
principal place of business at 2011 N. Shoreline Blvd., Mountain View,
California 94039, and Silicon Graphics, Inc., a Delaware corporation with a
principal place of business at 2011 N. Shoreline Boulevard, Mountain View,
California 94043.
WITNESSETH
WHEREAS, IDT and MTI, as successor in interest to MIPS Technologies,
Inc., as successor to MIPS Computer Systems, Inc., are parties to a
"Manufacturing, Marketing, and Purchase Agreement", effective as of January 16,
1988 (the "Original Agreement"), as subsequently amended by the "Supplemental
Agreement No. 1 to the Manufacturing, Marketing, and Purchase Agreement" (the
"Supplemental Agreement"); and
WHEREAS, IDT and MTI now wish to extend their relationship into the
Twenty-First Century, through MTI's agreement to license to IDT future
generations of microprocessors based on MIPS Architectures and MIPS Designs;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
1. DEFINITIONS
1.1 Affiliate - means a business entity that, at any time during the term
of this Agreement, controls, is controlled by, or is under common control with,
a party to this Agreement, such control being exercised, directly or indirectly,
through ownership of (or the power to vote) either (i) of outstanding shares
issued by the business entity sufficient to elect a majority of its directors,
or (ii) if the business entity is not a corporation, of an equity interest in
the business entity sufficient to control management of the affairs of the
business entity or the composition of its principal governing authority, which
ownership or voting power is held as of any time during the term of this
Agreement, provided that such business entity shall be considered an Affiliate
only for the time during which such ownership or voting power exists.
<PAGE>
1.2 ASP - means the lower average selling price of either (i) the fiscal
quarter for which royalties are being computed or (ii) a combination of such
fiscal quarter and its preceding fiscal quarter. The ASP shall be computed by
dividing the Net Revenue received by IDT for the product by the total number of
units sold during the applicable time period.
1.3 CMOS and CMOS-Derivative Technology - means any technology, for MIPS
Chip product design or manufacture that incorporates a type of circuit structure
containing both p-channel and n-channel devices on the same substrate.
1.4 Deliverables - means those items to be delivered by MTI to IDT in the
manner specified in Section 3. 1.
1.5 Effective Date - means the date first written above.
1.6 Internal Use - means the use of a product (whether hardware, software
or combination thereof) to perform its intended and customary function by and
for the benefit of the party using the product and not for sale, distribution or
sublicensing to others. Internal Use includes, but is not limited to,
evaluation, development, maintenance, customer support, employee training and
the like.
1.7 IDT - means Integrated Device Technology, Inc., a corporation with its
principal place of business at 2975 Stender Way, Santa Clara, California 95054
and each of its Affiliates.
1.8 IDT Functional Blocks - means any functional block less than *** of
which is derived from register transfer logic (RTL) supplied by MTI (i.e., more
than *** of the functional block is developed by or for IDT).
1.9 MIPS Architecture - means those MIPS instruction set architectures for
which MTI offers nonexclusive licenses to more than one MIPS Semiconductor
Partner for use in products for sale to the open market. In general, MIPS
Architecture relates to the RISC-based MIPS computer organization, structure and
content, or portions thereof, as designed and enhanced by MTI, including but not
limited to, the MIPS I, MIPS II, MIPS III, MIPS IV, MIPS V, MIPS 16 and the MDMX
instruction set architectures and interface specifications.
1.10 MIPS Binary Code Software- means software in object code form (also
called binary or executable code).
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
2
<PAGE>
1.11 MIPS Commercial Software- means MIPS Binary Code Software and MIPS
Source Code Software.
1.12 MIPS Chip(s) - means (a) those integrated circuit central processor
product(s) using MIPS Technology and employing proprietary MIPS Architecture or
MIPS Designs, in whole or in part; (b) integrated circuit arithmetic
co-processor product(s) designed by or on behalf of MTI to connect with and
operate with a MIPS Chip central processor unit; and (c) integrated circuit bus
interface management product(s) designed by or on behalf of MIPS to connect with
and operate with a MIPS Chip central processor or MIPS Chip co-processor.
Notwithstanding the foregoing, nothing in this definition shall require MTI, or
be deemed to create an obligation on the part of MTI, to create. develop or
acquire any particular MIPS Chip referred to above. MIPS Chips do not include
those custom chips designed by or on behalf of MTI exclusively for a third
party, custom chips substantially funded by a third party, MTI's authorized
original equipment manufacturers, or its product. By way of example only, the
parties acknowledge and agree that MIPS Chips do not include the *** or any
graphics processor or central processor unit developed for *** or exclusively
for MTI.
1.13 MIPS Compatible - means a product which complies with the
specifications for the appropriate user mode ISA as defined in the appropriate
MIPS Architecture Reference Manual.
1.14 MIPS Designs - means a microprocessor now or at any later time during
the term of this Agreement developed or co-developed by MTI and licensable from
MTI by MIPS Semiconductor Partners (excluding those designs funded by a third
party, developed substantially in their entirety on a custom basis for the use
of such third party or MTI and not generally made available to any other third
party) employing the MIPS Architecture. By way of example only, the parties
acknowledge and agree that MIPS Designs do not include the *** or any graphics
processor or central processor unit developed for *** or exclusively for MTI.
1.15 MIPS Functional Block - means any functional block more than or equal
to *** of which is developed by or for MTI.
1.16 MIPS Internal Documentation - means all manuals, user guidelines and
other documentation relating to the MIPS Architecture, MIPS Chips or MIPS
Commercial Software including all modifications, updates, derivations of and
other changes thereto, whether in written, graphical, human readable, or
machine-readable form, and in any media, which MIPS uses internally and does not
make available for sale or distribution to third parties in the ordinary course
of business but which is made available to MIPS Chips and MIPS Designs
Licensees.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
3
<PAGE>
1.17 MIPS Know-How - means:
(a) design, manufacturing, and engineering, know-how, confidential
information, trade secrets, drawings and artwork, in whatever form embodied,
which are relevant or helpful for any of the activities contemplated to be
performed by IDT pursuant to this Agreement including, but not limited to,
manufacturing, using, selling, installing, designing, improving, enhancing,
modifying, repairing or maintaining the MIPS Chips, MIPS Systems, or MIPS
Commercial Software;
(b) any enhancement, revision, improvement, or other modification
thereto, which is owned by MIPS or which is licensed by MIPS from any third
party as of the Effective Date or thereafter (except for the licenses from AT&T,
the Regents of the University of California, Sun Microsystems, and any other
licenses with respect to which MIPS has no right, or must pay a royalty or other
fee to grant licenses of the scope granted in this Agreement). MIPS Know-How
shall include the MIPS Architecture and MIPS Designs contained within any MIPS
Chip.
1.18 MIPS Semiconductor Partners - means certain other parties who have
rights to manufacture and/or sell MIPS Chips produced from their respective
process technologies; MIPS Semiconductor Partners are not "partners" in the
legal sense and do not have rights to share profits or losses with MTI.
1.19 MIPS Source Code Software - means the software in source code version
(or in a form from which a human-readable form can be produced without reverse
compilation), now owned and as developed or acquired which MIPS makes available
for licensing by MIPS Semiconductor Partners in the ordinary course of business
or as set forth in MTI's then current MIPS price list, catalog, or similar
publication (provided MTI obtains the right to grant sublicenses of the scope
granted in this Agreement (a) without an obligation to pay any royalty, fee, or
other consideration as a result of granting such sublicense; or (b) if a payment
of any royalty, fee, or other consideration is due, IDT pays to MTI in advance
the entire amount of such royalty, fee, or consideration, and further provided
that IDT complies with all preconditions of receiving any such sublicense which
may be required by the licensor, for example executing appropriate license
agreements).
1.20 MIPS Systems - means computer boards and systems products which
incorporate MIPS Chips.
1.21 MIPS Technology - means any patents, patent applications, mask work
rights, copyrights, and other statutory rights which are necessary or required
for any of the activities contemplated to be performed by IDT pursuant to this
Agreement including, but not limited to,
4
<PAGE>
designing, manufacturing, using, selling, installing, repairing or maintaining,
the MIPS Chips, MIPS Systems, or MIPS Commercial Software which is owned by MTI
or licensed by MTI from any third party as of the Effective Date or thereafter
(except for the licenses from AT&T, the Regents of the, University of
California, Sun Microsystems, and any other licenses with respect to which MTI
has no right, or must pay a royalty or other fee to grant licenses of the scope
granted in the Agreement). MIPS Technology includes the MIPS Architecture and
MIPS Designs contained within any MIPS Chip.
1.22 MIPS Tools - means the MIPS Commercial Software, in source code
versions, now owned and as developed or acquired, which MTI makes available for
licensing by MIPS Semiconductor Partners in the ordinary course of business
(provided MTI obtains the right to grant sublicenses of the scope granted in
this Agreement (a) without any obligation to pay any royalty, fee, or other
consideration as a result of granting, such sublicense, or (b) if a payment of
any royalty, fee, or other consideration is due, IDT pays to MTI in advance the
entire amount of such royalty, fee, or consideration, and further provided that
IDT complies with all preconditions of receiving any such sublicense which may
be required by the licensor, for example executing appropriate license
agreements). MIPS Tools include, without limitation, the following: System
Programmer's Package, including Pixie, Pixstats, cache 3000/4000, etc., RISC/OS,
MIPS C Compiler, ASM, Debugger & Libraries.
1.23 ***
1.24 *** MIPS Commercial Software - means MIPS Commercial Software which has
been supplied to IDT by MIPS and ***.
1.25 Module - means two (2) or more integrated circuit products on an
assembly.
1.26 MTI - means MIPS Technologies, Inc., a Delaware corporation with its
principal place of business at 2011 N. Shoreline Blvd., Mountain View,
California 94039, and each of its Affiliates.
1.27 Net Revenue - means the gross sales revenue received from the sale of
MIPS Chips, MIPS commercial documentation, or the license of MIPS Commercial
Software, accounted for in accordance with generally accepted accounting
principles, after deduction for discounts, returns, freight, insurance, taxes,
and duties, if any, and after deduction of payments for royalties, fees, or
other consideration payable by a party to a third party. If IDT sells MIPS Chips
to other than an unrelated third party, the Net Revenue for such sale shall be
deemed to be the ASP for the MIPS Chip times the number of chips sold. If there
is no ASP for such MIPS Chip, then the Net
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
5
<PAGE>
Revenue shall be deemed to be *** of the manufacturing cost per chip of that
MIPS Chip times the number of MIPS Chips.
1.28 Original Agreement - means the Manufacturing, Marketing, and Purchase
Agreement, effective as of January 16, 1988, as more fully described in the
first recital of this Agreement.
1.29 ***
1.30 ***
1.31 ***
1.32 SGI - means Silicon Graphics, Inc., a Delaware corporation with its
principal place of business at 2011 N. Shoreline Blvd., Mountain View,
California 94039.
1.33 Specifications - means MIPS' then current specifications including all
improvements, corrections, additions, updates, deletions, and modifications
thereto.
1.34 Supplemental Agreement - means the "Supplemental Agreement No. 1 to the
Manufacturing, Marketing, and Purchase Agreement" dated November 15, 1994, by
and between IDT and MTI, as successor in interest to MIPS Computer Systems, Inc.
1.35 Tape-out - means the machine-readable tape used to generate masks or
other intermediate step to generate masks in a form reasonably suitable to be
delivered to a mask vendor.
1.36 ***
1.37 *** MIPS Commercial Software - means MIPS Commercial Software as
supplied to IDT by MIPS.
2. TECHNOLOGY LICENSE
2.1 MIPS Chips.
2.1.1 ***
2.1.2 Grant. Subject to the offer and acceptance requirements contained
in Section 2.1.1, MTI hereby grants to IDT and IDT hereby accepts a personal,
nonexclusive,
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
6
<PAGE>
worldwide, revocable (only in accordance with Section 16 herein),
non-transferable, and non-assignable right and license to make, have made, use,
modify, market, sell and distribute the MIPS Chips provided that: ***
2.1.3 Modifications. If IDT designs, manufactures, and/or markets any
*** MIPS Chips, IDT shall be solely and completely responsible for the design,
manufacturing, marketing, integrated circuit support, and software support
requirements of its customers. Although MTI is under no obligation to, it may,
if requested and available, provide consulting services to IDT at mutually
agreed upon prices in connection with such IDT modification activities. MTI
shall have the right to purchase generally available *** MIPS Chips directly
from IDT at IDT's then current prices, terms and conditions, and to use such ***
MIPS Chips for any purpose.
2.2 Software License.
2.2.1 ***
2.2.2 ***
2.2.3 MIPS Tools. MTI hereby grants to IDT and IDT hereby accepts a
personal, non-exclusive, worldwide, revocable (only in accordance with Section
16 herein), non-transferable right and license to use MIPS Tools for IDT's
Internal Use only.
2.3 ***
2.4 Documentation Rights.
2.4.1 ***
2.4.2 ***
2.5 Offer and Acceptance Required. The rights and licenses described in
Section 2.2 and Section 2.4 shall only apply to MIPS commercial documentation,
MIPS Internal Documentation, and MIPS Commercial Software that (a) relates to
any MIPS Architecture or MIPS Design which has been offered to and accepted by
IDT in the manner set forth in Section 2.1.1, and (b) has been provided to IDT
as a Deliverable in the manner set forth in Section 3.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
7
<PAGE>
2.6 Rights Under the Original Agreement and the Supplemental Agreement.
IDT, SGI, and MTI agree that this Agreement supersedes the Original
Agreement with respect to all transactions and occurrences on and after the
Effective Date, including, without limitation, all license rights, and royalty
rates. Royalties on sales on and after the Effective Date shall be payable
solely to MTI.
3. Deliverables.
3.1 ***
3.2 ***
3.3 ***
3.4 Program Management. Each party shall identify an individual employee
("Program Manager") who shall be responsible for interfacing with the other
party, especially in connection with the provision of Deliverables. The Program
Manager shall be knowledgeable about his employer's products and design and
manufacturing activities and possess adequate communication skills to keep the
other party fully informed relative to his employer's performance under this
Agreement. Each party shall notify the other in writing of any successor or
designee of the Program Manager.
4. MARKETING RIGHTS AND OBLIGATIONS.
4.1 Marketing Responsibilities. IDT shall use commercially reasonable
efforts to:
(a) actively engage in the marketing and distribution of MIPS Chips;
(b) encourage its existing sales organization to solicit and actively
promote marketing and sales of MIPS Chips;
(c) provide quality support to its customers, by training, and
maintaining a sufficient number of competent technical personnel to
provide such support; and
(d) not engage in any advertising or trade practice which adversely
affects the good name, trademarks, goodwill, or reputation of MTI or
MIPS Chips.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
8
<PAGE>
4.2 Trademarks. - IDT may use MTI trademarks only in accordance with MTI's
specifications, a copy of which is attached hereto as Exhibit B, and only on
products licensed hereunder. IDT acknowledges MTI's ownership of and title to
all rights in the MTI trademarks and the goodwill attaching to the MTI
trademarks. IDT agrees not to contest the MTI trademarks. Each party agrees not
to use, employ or attempt to register any trademarks or trade names which are
confusingly similar to the other party's trademarks.
5. MAINTENANCE AND SUPPORT.
5.1. MIPS Chips. IDT shall be solely and completely responsible for
providing all maintenance and support for MIPS Chips necessary and appropriate
for purchasers of MIPS Chips from IDT except for MIPS Commercial Software
support to purchasers of Certified *** MIPS Chips which MTI shall provide. MTI's
duty to provide maintenance and support to any IDT customer is contingent on
such customer's execution of a valid current MIPS Software Maintenance
Agreement.
5.2. MIPS Tools. MTI shall provide to IDT (on terms and conditions no less
favorable than those provided to MTI's other MIPS Semiconductor partners)
support and maintenance for MIPS Tools (excluding IDT *** MIPS Commercial
Software) which are licensed to IDT pursuant to the terms of this Agreement.
5.3. MIPS Commercial Software.
5.3.1. MTI shall make available for purchase, support and maintenance
services with respect to *** MIPS Commercial Software to third party customers
in accordance with MTI's then current standard terms, conditions, and prices.
5.3.2. IDT may make support and maintenance services available to its
customers of *** MIPS Commercial Software.
5.4 ***
5.5 No Support. MTI shall have no responsibility or obligation to provide
any maintenance or support whatsoever to any person or entity regarding (a) ***
MIPS Chips, or (b) IDT *** of MIPS Commercial Software, MIPS Tools, MIPS
commercial documentation or MIPS Internal Documentation.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
9
<PAGE>
6. COMPENSATION AND PRICES
6.1 License Fee. Upon acceptance of the license rights pursuant to Section
2.1.1, IDT will be entitled to license the new MIPS Architecture or new MIPS
Design *** to license the same MIPS Architecture and MIPS Design on
substantially the same terms and at substantially the same time (within one
year) as IDT.
6.2 Royalties
6.2.1 MIPS Chips.
6.2.1.1 Royalty ***. IDT agrees to pay MTI royalties based on
Net Revenue received by IDT for the sale of MIPS Chips by IDT according to the
royalty rates ("Applicable Rate") included in the following schedule:
*** ***
***% ***% ***
***% ***% ***
***% ***% ***
***
***
***
6.2.1.2 ***
6.2.2 Software.
6.2.2.1 ***
6.2.2.2 ***
6.3. Payment. IDT shall make such royalty and license fee payments to MTI on
the forty-fifth (45th) day following the end of each IDT fiscal quarter. On any
overdue royalty payments,
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
10
<PAGE>
MTI may charge and IDT shall pay a one percent (1%) per month finance charge
upon the unpaid balance until the date of payment.
6.4 Records and Reports.
6.4.1. Records. IDT shall keep complete and accurate records relating
to the sales of *** and *** MIPS Chips sold and each copy of MIPS Commercial
Software licensed, which records shall at a minimum include the name and address
of the purchaser/sublicensee, the date of shipment, the unit price, the total
purchase price of the order and a copy of the sublicense agreement.
6.4.2 Reports. IDT shall report to MTI on an IDT fiscal quarterly basis
for each MIPS Chip sold and each copy of MIPS Commercial Software licensed, the
quantity sold/sublicensed, the Net Revenue and the total amount of royalty and
license fees due and owing to MTI for such IDT fiscal quarter. The reports
described in this Section shall be made to MTI no later than forty-five (45)
days of the close of each IDT fiscal quarter.
6.4.3 Audit. MTI shall have the right, through an independent
accounting firm, to make an examination and audit, not more frequently than
annually, during normal business hours, of IDT's records and accounts as may
contain information bearing upon the amounts due hereunder. Prompt adjustment
shall be made by IDT or MTI as the case may be for any errors or omissions
disclosed by such audit. In the event that any quarterly report understates the
royalties and license fees due for any fiscal quarter by more than five percent
(5%), IDT shall reimburse MTI for the cost of such audit. No IDT information
examined by the independent accounting firm shall be disclosed to MTI or any
other person.
6.5 ***
7. PURCHASING RIGHTS AND OBLIGATIONS.
7.1 ***
7.2 ***
8. Relationship with the Original Agreement. This Agreement supersedes the
Original Agreement with respect to all transactions and occurrences on and after
the Effective Date, including, without limitation, all license rights, and
royalty rates.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
11
<PAGE>
9. New Technology. Subject to the terms of the Mutual Confidential
Information Non-Disclosure Agreement, Exhibit D, the parties shall meet and
discuss information relating to new technology, product plans, and design
efforts, to the extent related to the subject matter of this Agreement.
10. MIPS' DUTY TO PROVIDE EQUAL RIGHTS
The material obligations imposed on IDT under this Agreement shall, in
aggregate, be no greater than those imposed on the other MIPS Semiconductor
Partners of MIPS. The material rights granted to IDT under this Agreement shall
be no less than those granted to any other similarly licensed Semiconductor
Partner. The parties acknowledge and agree that this Agreement will be amended
to accomplish the purpose of this Section should MTI provide, in aggregate, more
rights to or require lesser obligations of any current or future Partner.
11. ***
12. INVENTIONS AND TOOLING
12.1. Title.
12.1.1 All designs, data, MIPS Technology, and MIPS Know-How provided
by MTI to IDT shall remain the property of MTI exclusively throughout the world.
All modifications, enhancements, ideas, discoveries, inventions, derivatives and
other information and improvements to such designs, data, MIPS Technology, and
MIPS Know-How, developed by MTI, shall remain the property of MTI exclusively
throughout the world. MTI shall have the exclusive, world-wide right, title and
interest in and to all patents, patent applications, copyrights, mask works,
trademarks, and all other proprietary right relating to such MTI designs, data,
MIPS Technology, MIPS Know-How, MTI modifications, MTI enhancements, and/or MTI
improvements;
12.1.2 MTI shall retain the ownership rights to the logic design,
circuit design, and pattern generation tapes created by its development efforts.
IDT shall retain physical possession of such items to perform its rights and
obligations under this Agreement. Upon cancellation of this Agreement for any
reason, IDT shall return or destroy MTI Internal Documentation and an officer of
IDT shall certify that such MIPS Internal Documentation has been returned or
destroyed.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
12
<PAGE>
12.1.3 All IDT modifications and improvements to the MIPS Chips, all
IDT modifications and improvements to the technology, and all IDT modifications
and improvements to the information licensed in Section 2 herein, shall belong
exclusively to IDT.
12.2 IDT's Inventions.
12.2.1 All discoveries, improvements, and inventions conceived
including mask works fixed in a semiconductor chip product, in the performance
of this Agreement by IDT shall be the sole and exclusive property of IDT and IDT
shall retain any and all rights to file any patent applications, mask work
registrations, trademark registrations, and copyrights thereon.
12.2.2 IDT shall own all right, title and interest in any integrated
circuit product it develops even if such product is designed specifically to
interface with a MIPS Chip. Upon cancellation of this Agreement for any reason,
MTI shall return or destroy IDT Confidential Information and an officer of MIPS
shall certify that such IDT Confidential Information has been returned or
destroyed.
12.3 Survival. The provisions of this Section shall survive the termination,
cancellation, or expiration of this Agreement.
13. PROPRIETARY INFORMATION
13.1 Definition. "Proprietary Information" as used herein shall mean all or
any portion of only the: (a) written, recorded, graphical or other information
in tangible form disclosed, during the term of this Agreement, by one party to
the other party which is stamped "Proprietary," "Confidential," or with a
similar legend denoting the proprietary interest therein of the disclosing
party; (b) oral information which is disclosed by one party to the other party
to the extent it is identified as "Proprietary" or "Confidential" at the time of
oral disclosure, is reduced to written or other tangible form within thirty (30)
days of oral disclosure, and such written or tangible form is stamped
"Proprietary", "Confidential", or with a similar legend denoting the proprietary
interest therein of the disclosing, party; (c) the MIPS Tools and the
Deliverables; and (d) models and other devices delivered or disclosed, during
the term of this Agreement, by one party to the other party which have been
identified in writing at the time of disclosure as being, proprietary to the
disclosing party and any information, data or know-how derived from any
information contained in items (a), (b), (c) and (d), above ("Derivative
Information"); provided, however, Proprietary Information shall not include any
information that is:
(a) in the possession of the receiving party prior to disclosure by the
disclosing party and not subject to other restrictions on disclosure;
13
<PAGE>
(b) independently developed by the receiving party;
(c) publicly disclosed by the disclosing party;
(d) rightfully received by the receiving party from a third party
without restrictions on disclosure;
(e) approved for unrestricted release or unrestricted disclosure by the
disclosing party; or
(f) produced or disclosed pursuant to applicable laws, regulations or
court order, provided the receiving party has given the disclosing
party prompt notice of such request so that the disclosing party has an
opportunity to defend, limit or protect such production or disclosure.
13.2 Restrictions. This Agreement and the exchanges hereunder shall not be
deemed to establish a confidential relationship between the parties and all
information, documentation and devices exchanged between the parties hereunder
other than Proprietary Information shall be received and treated by the
receiving party on a non confidential and unrestricted basis.
The parties agree, for a period of ten (10) years from the date of
disclosure:
(a) not to disclose Proprietary Information of the other party outside
of the receiving party;
(b) to limit dissemination of the other party's Proprietary Information
to only those of the receiving party's officers, directors, agents and
employees who require access thereto for authorized purposes;
(c) to ensure that each person who receives or has access to
Proprietary Information has previously executed a written nondisclosure
agreement; and
(d) to return to the disclosing party, or destroy, Proprietary
Information of the disclosing party upon receipt of a written request
therefor from the disclosing party, without retaining any copy thereof.
The standard of care to be exercised by the receiving party to meet
these obligations shall be the standard exercised by the receiving party with
respect to its own proprietary information of a similar nature, but in no event
less than due care.
14
<PAGE>
13.3 No Publication. A copyright notice by itself does not constitute or
evidence a publication or public disclosure.
13.4 Proprietary Notices.
13.4.1 MIPS Commercial Software, MIPS commercial documentation, and
MIPS Internal Documentation. MIPS commercial documentation, MIPS Internal
Documentation, and MIPS Commercial Software are copyrighted. Copies may be made
only as permitted by this Agreement. As a condition of the reproduction and
distribution rights granted herein, IDT shall reproduce and apply the MTI
copyright notice to all copies, in whole or in part, in any form, of the MIPS
Commercial Software or MIPS Documentation reproduced hereunder. IDT shall not
alter or remove any copyright, trademark, tradename or other proprietary notice,
legend, symbol or label appearing on or in copies of MIPS Commercial Software or
MIPS Documentation.
13.4.2 MIPS Chips. IDT shall cause MTI's respective copyright and mask
work notices to be placed on the masks of all MIPS Chips containing portions of
MTI copyrighted or MTI mask work content.
13.4.3 Rights in Data. The parties will cooperate in the mutual
determination of a procedure for the usage of appropriate "Rights in Technical
Data" type legends to be included, as appropriate, on items licensed by MTI to
IDT pursuant to this Agreement that IDT has reason and the right to deliver
under one or more U.S. Government contracts or subcontracts.
13.5 Exhibit A. Until the Tape-Out of a MIPS Chip, all documents and
information set forth on Exhibit A, including all updates, modifications and
derivatives thereof, shall be deemed Confidential Information irrespective of
marking. Thereafter, except for bonding diagrams, electrical specifications,
instruction formats, timing diagrams, and any other specifications commonly
provided by semiconductor chip manufacturers to their customers, all such
Exhibit A documents and information, including all updates, modifications, and
derivatives thereof, shall be deemed to be Confidential Information irrespective
of marking. MTI shall not unreasonably refuse to permit IDT to disclose
Confidential Information relating to a design licensed by IDT from MTI hereunder
to prospective customers subject to appropriate confidentiality agreements prior
to tapeout for beta site purposes.
13.6 Survival. The provisions of this Section shall survive the expiration,
termination, or cancellation of this Agreement.
14. PROPRIETARY RIGHTS INDEMNIFICATION
14.1 Indemnification by MTI. MTI shall indemnify and hold IDT harmless
against any claim based on infringement by the design furnished by MTI of a U.S.
trade secret, patent, mask
15
<PAGE>
work right, copyright, trademark or other proprietary right of a third party,
shall defend at its expense all suits against IDT based upon such a claim and
shall pay costs and damages awarded against IDT in such suit, provided that IDT
shall notify MTI promptly in writing of such suit and at MTI's request and at
its expense is given control of such suit and all reasonable requested
information and assistance for defense of same. IDT shall have the right to be
represented by its own attorney at its expense. This indemnity does not extend
to any suit based upon an infringement or alleged infringement of any patent,
copyright, mask work right, trademark, trade secret, or other proprietary rights
by the manufacturing process or modification of the MIPS Chips made by IDT, the
use of the MIPS Chips in combination with other equipment or software not
provided by MTI or a modification or enhancement to the MIPS Chips not made by
MTI, if such claim would not have occurred but for such combination,
modification or enhancement, any marking, or branding applied to the MIPS Chips
or modification or design of the MIPS Chips by or at the request of IDT, or any
infringement based upon AT&T, Berkeley, or Sun Microsystems software except as
to any modifications or enhancements to such software made by MTI and delivered
to IDT. The foregoing states the entire liability of MTI for trade secret,
patent, mask work right, copyright, trademark or other proprietary rights
infringement.
14.2 Limitation of Liability. THE FOREGOING STATES THE ENTIRE LIABILITY OF
THE PARTIES, AND THE EXCLUSIVE REMEDY FOR THE PARTIES, FOR ANY INFRINGEMENT OF
ANY PATENT, COPYRIGHT, TRADEMARK, TRADE SECRET, MASK WORK RIGHT OR OTHER
PROPRIETARY RIGHT OF A THIRD PARTY BY MIPS CHIPS, MIPS COMMERCIAL DOCUMENTATION,
AND MIPS SOFTWARE, OR ANY PART THEREOF.
14.3 Remedy for Infringement.
14.3.1 If the design or manufacture of any MIPS Chip, or any portion
thereof, is finally adjudged to infringe a United States patent, copyright, or
mask work right, MTI may:
(a) procure the right to continue using the MIPS Chip or process;
(b) replace or modify the MIPS Chip or process so that it becomes
noninfringing; or
(c) refund to IDT the costs of such infringing MIPS Chip mask set(s)
(if any) at standard manufacturing cost, the value of all inventory of
such infringing MIPS Chip, and all work-in-process relating to such
infringing MIPS Chip as audited by an independent third party.
14.3.2 This indemnity does not extend to any suit based upon (a) an
infringement or alleged infringement of any patent, copyright, mask work right,
trademark, trade secret or other proprietary rights by the modification of the
MIPS Chip by IDT; or (b) the use of the MIPS Chip
16
<PAGE>
in combination with other equipment or software not provided by MTI; or (c) a
modification or enhancement not made by MTI if such claim would not have
occurred but for such combination, modification, or enhancement; or (d) any
marking or branding applied to the MIPS Chips or modification or design of the
MIPS Chips by or at the request of IDT; or (e) any infringement based upon AT&T,
Berkeley, or Sun Microsystems software except as to any modifications or
enhancements to such software made by MTI and delivered to IDT. SECTION 14
STATES THE ENTIRE LIABILITY OF MTI FOR TRADE SECRET, PATENT, MASK WORK RIGHT,
COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY RIGHTS INFRINGEMENT.
14.4 Survival. The provisions of this Section 14 shall survive the
termination, cancellation or expiration of this Agreement.
15. TERM, CANCELLATION AND TERMINATION
15.1 Term. The term of this Agreement, unless earlier canceled or terminated
in accordance with the provisions of Sections 15.2 and 15.3 hereinafter, shall
be from the Effective Date through December 31, 2007 (the "Termination Date").
15.2 Termination. MTI may terminate this Agreement effective immediately and
without liability upon written notice to IDT if any one of the following events
occurs:
(a) IDT files a voluntary petition in bankruptcy or otherwise seeks
protection under any law for the protection of debtors;
(b) proceeding is instituted against IDT under any provision of the
Federal Bankruptcy Code which is not dismissed within ninety (90) days;
(c) IDT is adjudged a bankrupt;
(d) a court assumes jurisdiction of the assets of IDT under a federal
reorganization act;
(e) a trustee or receiver is appointed by a court for all or a
substantial portion of the assets of IDT;
(f) IDT becomes insolvent, ceases or suspends business; or
(g) IDT makes an assignment of the majority of its assets for the
benefit of its creditors.
17
<PAGE>
15.3 Cancellation for Cause. If either party fail to perform or violates any
material obligation under this Agreement, then, upon thirty (30) days written
notice to the breaching party specifying such default (the "Default Notice"),
the non-breaching party may terminate this Agreement, without liability, unless:
(a) The breach specified in the Default Notice is cured within the
thirty (30) day period; or
(b) The default reasonably requires more than thirty (30) days to
correct (specifically excluding any failure to pay money), and the
defaulting party has begun substantial corrective action to remedy the
default within such thirty (30) days period and diligently pursues such
action, in which event, termination shall not be effective unless
ninety (90) days has expired from the date of the Default Notice
without such corrective action being completed and the default
remedied.
15.4 Fulfillment of Orders Upon Termination. The expiration of this
Agreement shall have no effect on any purchase order placed by MTI prior to the
effective date of such expiration. Any payment obligations incurred prior to
termination, expiration or cancellation shall survive the expiration,
cancellation, or termination of this Agreement.
15.5 Continuation.
15.5.1 Notwithstanding the passage of the Termination Date as set forth
in Section 15.1, or termination/cancellation of this Agreement for any reason,
the rights and licenses granted to IDT pursuant to Section 2 of this Agreement,
except for the right to receive updates on existing MIPS Chip products, MIPS
Commercial Software, and information on future MIPS Chips and Systems, shall
continue (as a result of rights granted in accordance with Section 2) for
successive terms of ten (10) years that will automatically renew, conditioned
upon payment by IDT of royalties pursuant to Section 6 herein.
15.5.2 However, except for IDT's continuing right to distribute ***
MIPS Binary Software conditioned upon payment of royalties (Section 6), if IDT
materially breaches its duties under the terms of the Software License or any
provision herein relating to the MIPS Commercial Software, MTI may cancel the
Software License and all rights granted herein relating to MIPS Commercial
Software. In the event of such cancellation of IDT's rights to MIPS Commercial
Software, IDT shall promptly return to MTI all MIPS Source Code documentation
and information provided by MTI in connection with the MIPS Commercial Software,
and shall promptly pay to MTI any and all amounts due and owing relating to the
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
18
<PAGE>
MIPS Commercial Software. After cancellation, IDT shall have no right to copy,
market, or distribute MIPS Source Code Software or *** MIPS Binary Software.
16. GENERAL TERMS AND CONDITIONS.
16.1 Notices. All notices and requests required or authorized hereunder,
shall be given in writing either by personal delivery to the party to whom
notice is given, or by certified mail, postage prepaid, return receipt
requested. The date upon which any such notice is so personally delivered, or if
the notice is given by certified mail, the date three (3) days after it is
deposited in the U.S. mails, shall be deemed to be the date of such notice,
irrespective of the date appearing therein.
If to IDT: Leonard Perham, President and CEO
2975 Stender Way
Santa Clara, CA 95054
with a copy to: Jack Menache, Esq.
Vice President, General Counsel & Secretary
Integrated Device Technology, Inc.
2975 Stender Way
Santa Clara, CA 95054
If to MTI: James MacHale
MIPS Technologies, Inc.
2011 North Shoreline Boulevard
Mountain View, CA 94043
with a copy to: General Counsel
MIPS Technologies, Inc.
2011 North Shoreline Boulevard
Mountain View, CA 94043
If to SGI: Legal Services
2011 North Shoreline Boulevard
Mountain View, CA 94043
The address of the parties may be changed by notice given in accordance
with this Section.
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
19
<PAGE>
16.2 Export. Each party shall comply with all laws and regulations of the
United States Government relating to the export from the United States of
technical information, technical data, or products made using technical
information or technical data or products received from the other party under
this Agreement and any exhibit hereto. The parties agree to cooperate in
obtaining any required licenses. In the event of a breach, the breaching party
shall indemnify and hold the non-breaching party harmless for any breach of this
Section.
16.3 Governing Law and Forum Selection. This Agreement shall be governed by
California law excluding its conflict of laws rules. All disputes arising out of
this Agreement shall be subject to the exclusive jurisdiction and venue of the
California state courts of Santa Clara County (or, in the case of exclusive
federal jurisdiction, the United States District Court for the Northern District
of California) and the parties consent to the personal and exclusive
jurisdiction and venue of these courts.
16.4 Waiver. The delay or failure of a party to exercise any right, power,
remedy, or privilege hereunder or failure to strictly enforce any breach,
violation, default, provision or condition shall not impair any such right,
power, remedy or privilege nor shall it constitute a waiver thereof or
acquiescence thereto. Any waiver, permit, consent, or approval of any kind
regarding any breach, violation, default, provision or condition of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. No partial waiver of any such right,
power, privilege, breach, violation, default, provision, or condition on any one
occasion shall preclude any other or further exercise thereof or constitute a
waiver thereof or acquiescence thereto on any subsequent occasion unless clear
and express notice thereof in writing is provided.
16.5 Assignment. Neither party shall assign this Agreement or any material
responsibilities, rights, or any orders issued hereunder or delegate any duties
created hereunder to any person or entity other than a U.S. entity controlling,
controlled or under common control with such party, or a U.S. successor in
interest to its MIPS risc microprocessor business by way of merger,
consolidation, transfer of all or substantially all of such assets, without the
prior written consent of the other party. Any attempt of assignment or
delegation without the required consent shall be void. This Section is not
intended to prohibit either party from reasonably subcontracting work in the
course of performing this Agreement.
16.6 Captions. All Section captions and headings are for reference only and
shall not be considered in interpreting or construing this Agreement.
16.7 Severability. If any provision of this Agreement is declared invalid,
illegal, or unenforceable by any tribunal, then such provision shall be deemed
automatically adjusted to conform to the requirements for validity as declared
at such time and, as so adjusted, shall be
20
<PAGE>
deemed a provision of this Agreement as though originally included herein. In
the event that the provision deemed invalid, illegal or unenforceable is of such
a nature that it cannot be so adjusted, the provision shall be deemed deleted
from this Agreement as though the provision had never been included herein. If
any provision or portion of this Agreement is held to be unenforceable or
invalid, the parties agree to negotiate, in good faith, a substitute valid
provision which most nearly effects the parties' intent in entering into this
Agreement. In either case, the remaining provisions of this Agreement shall
remain in full force and effect.
WITHOUT LIMITING THE FOREGOING, IT IS EXPRESSLY UNDERSTOOD AND AGREED
THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION
OF LIABILITY, DISCLAIMER OF WARRANTY OR EXCLUSION OF DAMAGES IS INTENDED BY THE
PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER SUCH PROVISION. FURTHER, IN
THE EVENT THAT ANY REMEDY HEREUNDER IS DETERMINED TO HAVE FAILED OF ITS
ESSENTIAL PURPOSE, ALL LIMITATIONS OF LIABILITY AND EXCLUSIONS OF DAMAGES SHALL
REMAIN IN EFFECT.
16.8 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the successors, administrators, executors, heirs and assigns of each
party hereto.
16.9 Independent Contractors. The parties are each independent contractors
and neither party shall be, nor represent itself to be, the franchiser, joint
venturer, franchisee, partner, broker, employee, servant, agent, or legal
representative of the other party for any purpose whatsoever. Neither party is
granted any right or authority to assume or create any obligation or
responsibility, express or implied, on behalf of or in the name of the other
party, or bind the other party in any matter or thing whatsoever, including but
not limited to, the right or authority to obligate the other party to accept or
deliver any order, or to sell or refuse to sell to any potential customer.
16.10 Limitation of Damages. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
COSTS OF PROCUREMENT OF SUBSTITUTE GOODS AND SERVICES, LOSS OR USE, DATA OR
PROFITS, INTERRUPTION OF BUSINESS OR ANY SPECIAL, INCIDENTAL, INDIRECT,
EXEMPLARY, OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN AN ACTION
FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, AND
WHETHER OR NOT THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE
ESSENTIAL PURPOSE OF THIS PROVISION IS TO LIMIT THE POTENTIAL LIABILITY OF THE
PARTIES.
21
<PAGE>
16.11 Precedence. In the event of any inconsistency or conflict between the
terms and conditions of this Agreement on the one hand and any term or condition
of an Exhibit to this Agreement on the other hand, the terms and conditions of
this Agreement shall in all instances govern and control.
16.12 Entire Agreement. This Agreement and the other documents, exhibits,
schedules, instruments, certificates, and writings attached and/or delivered
pursuant hereto contain and constitute the sole, complete and entire agreement
and understanding of the parties concerning the matters contained herein and may
not be altered, modified or changed in any manner except by writing duly
executed by the parties. No statements, promises or representations have been
made by any party to another, or are relied upon, and no consideration has been
or is offered, promised, expected or held out, other than as stated in this
Agreement. No party is relying on any representations other than those expressly
set forth herein. No conditions precedent to the effectiveness of this Agreement
exist, other than as may be expressly provided herein. There are no oral or
written collateral agreements. All prior discussions and negotiations have been,
and are, merged and integrated into, and superseded by, this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives.
SILICON GRAPHICS, INC. INTEGRATED DEVICE TECHNOLOGY, INC.
By:________________________ By:________________________
Title: ____________________ Title: ____________________
Date: _____________________ Date: _____________________
MIPS TECHNOLOGIES, INC.
By:________________________
Title: ____________________
Date: _____________________
22
<PAGE>
EXHIBIT A
DELIVERABLES
***
*** Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT B
TRADEMARKS
TO BE APPENDED
<PAGE>
EXHIBIT C
MIPS COMMERCIAL SOFTWARE LICENSE AGREEMENT
TO BE APPENDED
<PAGE>
EXHIBIT D
TO BE APPENDED
<TABLE>
EXHIBIT 21.1
LIST OF REGISTRANTS SUBSIDIARIES
<CAPTION>
State or Other Jurisdiction Owned by Registrant
of Incorporation
<S> <S> <C>
Centaur Technology, Inc. California 100
Clear Logic, Inc. California 34
Baccarat Coyote, Inc. California 100
Baccarat Silicon, Inc. California 100
Integrated Device Technology Asia, Limited Hong Kong 100
IDT Asia, Limited Hong Kong 100
IDT Europe Limited United Kingdom 100
I.D.T. France S.A.R.L. France 100
IDT Foreign Sales Corporation Barbados 100
Integrated Device Technology International Holdings, California 100
Inc.
Integrated Device Technology, Inc. Cayman Islands Cayman Islands 100
Corporation
IDT Integrated Device Technology AB (Sweden) Sweden 100
Integrated Device Technology Europe, Inc. California 100
Integrated Device Technology GmbH Germany 100
Integrated Device Technology (Israel) Ltd. Israel 100
Integrated Device Technology Italia S.r.l. Italy 100
Integrated Device Technology Korea, Inc. Korea 100
Integrated Device Technology (Malaysia) SDN. BHD Malaysia 100
Integrated Device Technology Realty Holdings, Inc. Philippines 40
Integrated Device Technology Holdings Inc. Philippines 40
Integrated Device Technology (Philippines), Inc. Philippines 100
Integrated Device Technology Singapore (1997) Pte Ltd Singapore 100
Nippon IDT KK Japan 100
Quality Semiconductor, Inc. California 100
Quality Semiconductor Australia Pty. Ltd. Australia 100
</TABLE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-4681, 33-34458, 33-54937, 33-63133, 33-15871,
333-36601, 333-45245, 333-77559 and 333-64279) of Integrated Device Technology,
Inc. of our report dated April 16, 1999, except for Note 13, which is as of May
7, 1999, appearing on page 31 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
June 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF INTEGRATED DEVICE TECHNOLOGY, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> MAR-28-1999
<CASH> 138,660
<SECURITIES> 54,616
<RECEIVABLES> 61,163
<ALLOWANCES> 8,116
<INVENTORY> 52,577
<CURRENT-ASSETS> 339,559
<PP&E> 903,637
<DEPRECIATION> 626,189
<TOTAL-ASSETS> 674,892
<CURRENT-LIABILITIES> 144,626
<BONDS> 184,354
0
0
<COMMON> 83
<OTHER-SE> 272,953
<TOTAL-LIABILITY-AND-EQUITY> 674,892
<SALES> 540,199
<TOTAL-REVENUES> 540,199
<CGS> 344,424
<TOTAL-COSTS> 548,668
<OTHER-EXPENSES> 132,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,885
<INCOME-PRETAX> (253,533)
<INCOME-TAX> 30,072
<INCOME-CONTINUING> (283,605)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (283,605)
<EPS-BASIC> (3.45)
<EPS-DILUTED> (3.45)
</TABLE>
