<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 0-12695
------------------------
INTEGRATED DEVICE TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2669985
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2975 STENDER WAY,
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 727-6116
NONE
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, $.001
par value, as of January 24, 1999, was approximately 82,757,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................................... $135,690 $144,235 $ 400,812 $436,915
Cost of revenues............................ 82,092 89,193 265,273 270,373
Asset impairment and other.................. -- -- 160,860 --
Restructuring charges....................... -- -- 46,384 --
-------- -------- --------- --------
Gross profit...................... 53,598 55,042 (71,705) 166,542
-------- -------- --------- --------
Operating expenses:
Research and development.................. 29,473 31,294 105,338 91,748
Selling, general and administrative....... 25,362 22,334 77,605 64,746
-------- -------- --------- --------
Total operating expenses.......... 54,835 53,628 182,943 156,494
-------- -------- --------- --------
Operating income (loss)..................... (1,237) 1,414 (254,648) 10,048
Interest expense............................ (3,570) (3,515) (10,372) (10,770)
Interest income and other, net.............. 384 5,408 3,178 10,268
-------- -------- --------- --------
Income (loss) before income taxes........... (4,423) 3,307 (261,842) 9,546
Provision for income taxes.................. 155 926 29,777 2,673
-------- -------- --------- --------
Net income (loss)................. $ (4,578) $ 2,381 $(291,619) $ 6,873
======== ======== ========= ========
Basic net income (loss) per share........... $ (0.06) $ 0.03 $ (3.55) $ 0.09
Diluted net income (loss) per share......... $ (0.06) $ 0.03 $ (3.55) $ 0.08
Weighted average shares:
Basic..................................... 82,367 80,578 82,149 80,119
Diluted................................... 82,367 83,617 82,149 83,614
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 3
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 27, MARCH 29,
1998 1998
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 76,185 $146,114
Short-term investments.................................... 94,817 74,481
Accounts receivable, net.................................. 52,983 68,840
Inventories, net.......................................... 53,869 60,737
Prepayments and other current assets...................... 37,478 74,431
-------- --------
Total current assets.............................. 315,332 424,603
Property, plant and equipment, net.......................... 304,279 475,440
Other assets................................................ 70,327 68,912
-------- --------
TOTAL ASSETS...................................... $689,938 $968,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,013 $ 57,572
Accrued compensation and related expenses................. 12,400 15,853
Deferred income on shipments to distributors.............. 34,562 51,835
Other accrued liabilities................................. 59,397 33,821
-------- --------
Total current liabilities......................... 137,372 159,081
Convertible subordinated notes, net......................... 184,205 183,756
Other liabilities........................................... 105,034 79,727
-------- --------
Total liabilities................................. 426,611 422,564
Stockholders' equity:
Preferred stock........................................... -- --
Common stock and additional paid-in capital............... 326,771 318,623
Retained earnings (deficit)............................... (62,695) 228,964
Accumulated other comprehensive loss...................... (749) (1,196)
-------- --------
Total stockholders' equity........................ 263,327 546,391
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $689,938 $968,955
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(291,619) $ 6,873
Adjustments:
Depreciation and amortization.......................... 85,759 84,145
Loss on sale of property, plant and equipment.......... 835 --
Deferred tax assets.................................... 29,145 --
Restructuring, asset impairment and other.............. 179,428 --
Changes in assets and liabilities:
Accounts receivable.................................... 15,857 11,557
Inventories............................................ 6,868 (6,503)
Income tax receivable.................................. 7,309 33,613
Prepayments and other assets........................... 7,866 2,961
Accounts payable....................................... (26,559) 5,295
Accrued compensation and related expenses.............. (3,453) (3,735)
Deferred income on shipments to distributors........... (17,273) 10,131
Other accrued liabilities.............................. 27,195 (1,230)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 21,358 143,107
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (94,530) (112,218)
Proceeds from sales of property, plant and equipment... 1,558 269
Purchases of short-term investments.................... (86,453) (34,058)
Proceeds from sales of short-term investments.......... 66,555 7,754
Purchases of equity investments........................ (5,867) (12,090)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES................. (118,737) (150,343)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock, net.......................... 6,445 7,625
Repurchase of common stock............................. (4,630) --
Proceeds from secured equipment financing.............. 31,764 --
Payments on capital leases and other debt.............. (6,129) (4,491)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 27,450 3,134
--------- ---------
Net decrease in cash and cash equivalents................... (69,929) (4,102)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 146,114 155,149
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 76,185 $ 151,047
========= =========
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations.............................. $ 5,022 $ --
Conversion of accrued liability to equity.............. $ 6,293 $ --
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of Integrated Device Technology, Inc. ("IDT" or the
"Company"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information included
therein.
These financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in the
Company's Annual Report on Form 10-K for the year ended March 29, 1998. The
results of operations for the three- and nine-month periods ended December 27,
1998 are not necessarily indicative of the results to be expected for the full
year.
2. Certain fiscal 1998 amounts have been reclassified to conform to the
fiscal 1999 presentation.
3. In the first quarter of fiscal 1999, the Company recorded a $34.6
million charge, relating primarily to excess SRAM manufacturing equipment and
technology licensing matters. The charge included a provision for excess
manufacturing equipment. Reflecting current economic conditions in the SRAM
marketplace, which has experienced declines in both demand and price, the
Company identified specific items of manufacturing equipment which were excess
to its needs. The carrying value of excess equipment was reduced to its
estimated fair market value, based primarily on appraisals and estimates from
independent third parties.
The charge also reflected the Company's decision to narrow the focus of its
business development activities. The Company discontinued certain development
efforts and provided for remaining payments required under technology license
agreements and recognized other related costs. The Company also provided for
other intellectual property-related matters.
The charge is reflected in the Condensed Consolidated Statements of
Operations as follows: $28.9 million as cost of revenues, $5.5 million as
research and development and $.2 million as general and administrative. Of the
$28.9 million, $10.0 million to settle certain patent claims against the
Company; substantially all of the remainder pertains to excess manufacturing
capacity.
4. In the second quarter of fiscal 1999, the Company recorded non-recurring
charges of $46.4 million for restructuring and $131.9 million for asset
impairment and other which are specifically identified in the Condensed
Consolidated 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, 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 is under a contract of sale, and IDT is pursuing the sale
of surplus used equipment. The Company expects that the sale of the San Jose
facility will be completed in April 1999. However, as there is currently a
significant oversupply of semiconductor equipment available for sale, IDT cannot
determine the amount of time required to completely liquidate the surplus
equipment.
The following table sets forth the Company's restructuring expense for the
quarter ended September 27, 1998 and the reserve balance as of December 27,
1998:
<TABLE>
<CAPTION>
BALANCE
Q2 1999 Q2 1999 Q3 1999 DECEMBER 27,
EXPENSE UTILIZED UTILIZED 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Write-down of fixed assets.............. $33,047 $(33,047) $ -- $ --
Severance and other employee related
charges............................... 2,620 (308) (1,442) 870
Closure costs for manufacturing
facility.............................. 10,717 (496) (937) 9,284
------- -------- ------- -------
$46,384 $(33,851) $(2,379) $10,154
======= ======== ======= =======
</TABLE>
5
<PAGE> 6
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The $131.9 million asset impairment and other charge relates primarily to
an asset impairment reserve recorded against the manufacturing assets of IDT's
eight-inch wafer fabrication facility in Oregon. The Company determined that due
to excess industry capacity and low prices for semiconductor products
manufactured in the Oregon facility, future undiscounted cash flows related to
its wafer fabrication assets were insufficient to recover the carrying value of
the assets. As a result, the Company wrote down these assets to estimated fair
market value based primarily on appraisals and estimates from independent
parties.
Additionally, the Company recorded a charge of $3.3 million in Q2 1999
relating primarily to retention costs for manufacturing and research and
development staff employed at the San Jose fabrication facility which were
recorded as cost of revenues and research and development expenses,
respectively, in the Condensed Consolidated Statements of Operations. These
costs are being expensed ratably over the retention period of the employees.
5. Basic net income (loss) per share is based upon weighted-average common
shares outstanding. Diluted net income (loss) per share is computed using the
weighted-average common shares outstanding plus any potentially dilutive
securities. Dilutive securities include stock options using the treasury stock
method, and convertible debt using the if converted method.
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BASIC:
Net income (loss) (numerator)....... $(4,578) $ 2,381 $(291,619) $ 6,873
======= ======= ========= =======
Weighted average shares outstanding
(denominator)..................... 82,367 80,578 82,149 80,119
======= ======= ========= =======
Net income (loss) per share......... $ (.06) $ .03 $ (3.55) $ .09
======= ======= ========= =======
DILUTED:
Net income (loss) (numerator)....... $(4,578) $ 2,381 $(291,619) $ 6,873
======= ======= ========= =======
Weighted average shares
outstanding....................... 82,367 80,578 82,149 80,119
Net effect of dilutive stock
options........................... -- 3,039 -- 3,495
------- ------- --------- -------
Total shares
(denominator)........... 82,367 83,617 82,149 83,614
======= ======= ========= =======
Net income (loss) per share......... $ (.06) $ .03 $ (3.55) $ .08
======= ======= ========= =======
</TABLE>
Options to purchase approximately 18.8 million shares were outstanding at
December 27, 1998 (17.4 million at December 28, 1997) but have been excluded
because they were antidilutive.
6. On November 2, 1998, IDT and Quality Semiconductor, Inc. ("QSI")
announced the signing of a definitive agreement for QSI to be acquired by IDT
through the merger of a new wholly owned subsidiary of IDT into QSI. Under the
terms of the agreement, each issued and outstanding common share of QSI will be
exchanged for 0.6875 shares of IDT Common Stock. The merger is currently
expected to close during the first quarter of IDT's fiscal 2000 and is intended
to be accounted for as a pooling of interests.
7. The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), "Reporting Comprehensive Income," as of the first quarter of
fiscal 1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. Adoption had no impact on the Company's
net income (loss) or stockholders' equity.
6
<PAGE> 7
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss).................................. $(4,578) $2,381
Currency translation adjustments................... 345 (190)
Unrealized gain (loss) on available-for-sale
investments...................................... (806) 8
------- ------
Comprehensive income (loss)........................ $(5,039) $2,199
======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss).................................. $(291,619) $6,873
Currency translation adjustments................... 359 (561)
Unrealized gain on available-for-sale
investments...................................... 88 707
--------- ------
Comprehensive income (loss)........................ $(291,172) $7,019
========= ======
</TABLE>
The components of accumulated other comprehensive loss were as follows:
<TABLE>
<CAPTION>
DECEMBER 27, MARCH 29,
1998 1998
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Cumulative translation adjustments................... $(837) $(1,196)
Unrealized gain on available-for-sale investments.... 88 --
----- -------
$(749) $(1,196)
===== =======
</TABLE>
8. Inventories, net, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 27, MARCH 29,
1998 1998
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials........................................ $ 4,060 $ 6,647
Work-in-process...................................... 35,857 40,276
Finished goods....................................... 13,952 13,814
------- -------
$53,869 $60,737
======= =======
</TABLE>
9. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
standards for accounting and reporting on derivatives and is effective for
periods beginning after June 15, 1999. Early adoption is permitted. SFAS No. 133
requires that all derivatives be recognized in the balance sheet as assets or
liabilities and measured at fair value. SFAS No. 133 also requires current
recognition in earnings of changes in these fair values, depending on the
intended use and designation of the derivative. The Company is currently
evaluating the effects of SFAS No. 133 and has not determined its method or
timing of adoption, nor the impact on its financial statements. However, the new
requirement to report currency hedging derivatives at fair value could result in
fluctuations in stockholders' equity.
10. On July 31, 1998, a lawsuit was filed by Lemelson Medical Education &
Research Foundation, Limited Partnership ("plaintiff"), against the Company and
other corporate defendants. The lawsuit, which alleges that the defendants are
infringing upon 16 patents issued to the plaintiff, was filed in the United
States
7
<PAGE> 8
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
District Court for the District of Arizona. The plaintiff seeks an injunction
and damages in an unspecified amount. In the opinion of management, the ultimate
outcome of this litigation will not have a material adverse impact on the
Company's results of operations or financial position.
11. 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 Q3 1999. The repurchases were recorded as treasury stock and resulted in
a reduction of stockholders' equity. On November 6, 1998, IDT announced that its
Board of Directors had 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.
12. On December 8, 1998, the Board of Directors adopted a stockholder
rights plan designed to protect the long-term value of the Company for its
stockholders during any future unsolicited acquisition attempt. In connection
with the 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,
1998 (the "Record Date") and further directed the issuance of one such right
with respect to each share of the Company's common stock that is issued after
the Record Date, except in certain 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 (the "Distribution Date"). After the
Distribution Date, 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 an exercise 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.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All references are to the Company's fiscal quarters ended December 27, 1998
("Q3 1999"), December 28, 1997 ("Q3 1998") September 27, 1998 ("Q2 1999"),
September 28, 1997 ("Q2 1998"), June 28, 1998 ("Q1 1999") and June 29, 1997 ("Q1
1998"), unless otherwise indicated. Quarterly financial results may not be
indicative of the financial results of future periods. All non-historical
information contained in the following discussion constitutes forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, 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; cash flows;
manufacturing capacity utilization; customer demand; customer inventory levels;
protection of intellectual property in the semiconductor industry; and the risk
factors set forth in the section "Factors Affecting Future Results." Future
results may differ materially from such forward looking statements as a result
of such risks. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof.
HISTORICAL INFORMATION RELATING TO FISCAL 1999 RESTRUCTURING AND ASSET
IMPAIRMENT AND OTHER CHARGES AND ACTIONS TAKEN
In the first two quarters of fiscal 1999, IDT recorded $207.2 million in
charges related to asset impairment and restructuring, which are specifically
identified in the Condensed Consolidated Statements of Operations, and an
additional $9.0 million of charges, which were recorded as operating expenses.
These charges relate principally to closure of one of three wafer fabrication
facilities located in the United States, recording an asset impairment reserve
against the carrying value of one of the remaining facilities, discontinuing
research initiatives and costs associated with intellectual property matters.
These charges are discussed below under the captions "Gross Profit," "Research
and Development" and "Selling, General and Administrative."
During the period from fiscal 1994 through fiscal 1996, IDT's sales volume
grew significantly, from $330 million more than doubling to $68 million. The
growth was principally based upon strong demand for SRAM products, especially
cache memory products for use in personal computers. At the peak of demand for
IDT's SRAM products, sales of SRAM and related products accounted for
approximately 45% of IDT's revenues.
As business conditions in the semiconductor industry improved through the
mid-1990s, the Company took steps to significantly expand its manufacturing
capacity. Most notably, the Company constructed the Oregon fabrication facility
and the assembly and test facility located in Manila, the Philippines. During
the period fiscal 1995 through fiscal 1998, IDT expended in excess of $700
million for acquisitions of property, plant and equipment.
In addition to providing incremental manufacturing capacity, the Oregon
facility provides the Company with advanced wafer fabrication technology and
capability. However, the cost of such advanced wafer manufacturing technology
and capability is significant. To recover such costs, semiconductor
manufacturers must be able to amortize device design, 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 attributable to IDT's
- ---------------
TMWinChip and C6 are trademarks of Integrated Device Technology, Inc. All other
brand names and product names are trademarks, registered trademarks or trade
names of their respective holders.
9
<PAGE> 10
principally foreign competitors, such as Samsung, Winbond, UMC and other
Taiwanese and Korean companies allocating increased capacity to SRAM products.
Also, U.S. based companies with Taiwan- and Korean-sourced SRAM wafers from
foundries such as TSMC provided additional product supply. These competitors
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 which have existed in the
semiconductor industry for the past few years, and which intensified in the
middle of calendar 1998, including excess product supply and low prices, IDT is
consolidating and streamlining manufacturing operations, including closing its
wafer fabrication facility located in San Jose, California. This operational
decision primarily reflects industry oversupply conditions.
The Company is moving away from dependence on industry standard products,
plans to expand the range of its products manufactured in Oregon, and, as noted
above, has taken active steps to increase the level of manufacturing facility
utilization. However, the products historically manufactured in the Oregon
facility and planned for the near term are principally SRAM and x86
microprocessor products (which x86 products represent a small percentage of
IDT's total revenues). The pricing of these products in today's marketplace
remains low. As a result of current low market prices, the cash flows generated
by sales of products manufactured in Oregon are disproportionate to the cost of
the facility and are significantly less than the cash flows generated by IDT's
other comparable manufacturing activities.
The Company performed an asset impairment review for the Oregon facility
based upon IDT's operating conditions, and concluded that, despite the closure
of its San Jose facility, IDT is still in a position of overcapacity. The
impairment review revealed that currently projected production volumes and
related cash flows from the Oregon facility would not be sufficient to recover
the carrying value of that manufacturing facility. Therefore, in accordance with
current accounting literature, IDT concluded that the carrying value of the
Oregon manufacturing assets is impaired and has written down the carrying values
of these assets to fair market value, as estimated by third parties with
significant experience in marketing and selling used semiconductor equipment.
As discussed below, the semiconductor industry is cyclical in nature, and
while demand and prices for the products manufactured at the Oregon facility may
improve, the timing and degree of any such recovery is uncertain.
RESULTS OF OPERATIONS
REVENUES
Revenues for Q3 1999 and the nine months ended December 27, 1998 were
$135.7 million and $400.8 million, respectively. Revenues for Q3 1999 increased
3.9% from the $130.6 million recognized in Q2 1999 and decreased 5.9% compared
to revenues of $144.2 million for Q3 1998. Revenues of $400.8 million for the
nine-month period ended December 27, 1998 were 8.3% lower than the $436.9
million recognized in the comparable period of the prior fiscal year.
When comparing revenues for Q3 1999 to Q2 1999, revenues from the sale of
the Company's WinChip(TM) x86 microprocessors increased. Product sales volumes
for other IDT products, which include communications and logic products,
remained constant with the prior quarter. Net units shipped in Q3 1999 increased
approximately 14.7% and 1.5%, respectively, compared to Q2 1999 and Q3 1998. Net
units shipped during the first nine months of fiscal 1999 decreased 3.9%
compared to the same period in fiscal 1998.
Sales of WinChip microprocessors in Q3 1999 increased in relation to sales
for all comparative periods. IDT began selling x86 microprocessors in Q3 1998.
In addition to selling WinChip products in the United States, IDT has increased
unit sales through product distribution channels in emerging markets such as
those in Asia and Europe. The average selling price realized per unit decreased,
reflecting what has become a very competitive marketplace for x86
microprocessors positioned at the low end of the product-performance range.
10
<PAGE> 11
For other IDT products, when comparing Q3 1999 to Q3 1998 sales of
communications products, SRAM and logic declined in Q3 1999 compared to Q3 1998,
primarily reflecting an ongoing period of product oversupply, related
contraction of inventories held by customers, and continued economic uncertainty
in the semiconductor marketplace in Asia. Also during the intervening period,
IDT effectively exited the market for personal computer SRAM cache memory. The
factors described above are also the primary reasons revenues decreased during
the first nine months of fiscal 1999, when compared to the same period of fiscal
1998. As discussed below, the semiconductor marketplace is cyclical in nature.
The Company believes revenues and costs associated with new products will
increase in future quarters as the Company continues to execute product
introduction strategies and overall levels of industry demand continue to
improve. In future quarters, excluding transaction related costs and potential
costs to combine manufacturing operations, the merger of Quality Semiconductor
with IDT is expected to benefit operating results.
Information on risks associated with the expansion of IDT's product
families is included in "Factors Affecting Future Results."
The semiconductor industry is highly cyclical and subject to significant
downturns. Such downturns are characterized by diminished product demand,
production over-capacity and accelerated average selling price erosion. The
price the Company receives for its industry standard SRAM and other products is
therefore dependent upon industry-wide demand and capacity, and such prices have
been historically subject to rapid change. Low SRAM prices have adversely
affected, and will likely continue to adversely affect, the Company's operating
results.
GROSS PROFIT
In Q1 1999, the Company recorded a charge of $28.9 million which is
specifically identified in the Company's Condensed Consolidated Statements of
Operations as a reduction in gross profit. The $28.9 million charge related
primarily to excess SRAM manufacturing equipment and certain technology
licensing matters. 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
Consolidated Statements of Operations.
In Q2 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, Calif. wafer
fabrication facility. The $131.9 million asset impairment and other charge
related primarily to the asset impairment charge recorded against the
manufacturing assets of the Oregon fabrication facility. Additionally, the
Company recorded a charge of $3.3 million relating primarily to retention costs
earned in Q2 1999 by manufacturing and research and development staff employed
at the San Jose fabrication facility which were recorded as cost of revenues and
research and development expenses in the Company's Condensed Consolidated
Statements of Operations. The Company expects annual cost savings of
approximately $45 million as a result of the manufacturing restructuring action.
Gross profit for Q3 1999 was $53.6 million, compared to $55.0 million for
Q3 1998. Gross profit in Q3 1999 increased when compared to Q2 1999 (excluding
Q2 charges for restructuring, asset impairment and other), from 33.1% to 39.5%
of revenues. Excluding the charges in Q2 1999, gross profit increased by $10.3
million from $43.3 million. For the first nine months of fiscal 1999, excluding
restructuring, asset impairment and other non-recurring costs, gross profit
decreased by $28.4 million when compared to the first nine months of fiscal
1998.
11
<PAGE> 12
Excluding the charges, the decline in gross profit in the comparative
nine-month 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 sales revenues did not materialize. Also,
costs associated with the eight-inch wafer fabrication facility in Oregon
continued to adversely impact gross margin for the first half of fiscal 1999, as
these costs were not fully absorbed by additional revenues.
In order to improve gross margin, as outlined above, IDT 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 currently
manufactured at the facility which has been closed. Further, the Company
believes that incremental available capacity, primarily at IDT's facility in
Hillsboro, Oregon, together with available capacity at the Company's foundry
partners, provide IDT with sufficient capacity to take advantage of improved
business conditions when they occur. The Company also believes that the
consolidation of production will improve planned levels of capacity utilization.
IDT therefore expects that gross margin will improve in future quarters.
However, improved gross margins will depend on the level of revenues and
manufacturing capacity utilization, which are uncertain.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses decreased by $7 million (19.1%)
from Q2 1999 and decreased by $1.8 million (5.8%) compared to Q3 1998. R&D costs
for the nine month period ended December 27, 1998 increased $13.6 million when
compared to the same period in FY 1998. R&D expenses for Q1 1999 included $5.5
million in charges, primarily associated with discontinuing certain development
efforts and related payments under technology license agreements. R&D expenses
for Q2 1999 included $.6 million in costs, primarily associated with retention
costs earned by research and development staff during Q2 1999 which were
employed at the San Jose fabrication facility. Also in Q2 1999, because of lower
production volumes associated with reduced demand and relatively constant
process R&D activity, the allocation of manufacturing costs to process R&D
expenses increased. Excluding the charges and related costs, when compared to Q2
1999, Q3 1999 R&D spending decreased because of the conclusion of certain logic
product design initiatives and lower process R&D costs, primarily associated
with the closure of the San Jose fabrication facility. The factors described
above resulting in increased R&D costs in Q1 1999 and Q2 1999 are also the
primary reasons R&D increased during the first nine months of fiscal 1999, when
compared to the same period of fiscal 1998. 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 quarters, R&D expense will decrease as the proportion
of manufacturing costs allocated to process R&D declines as a result of
manufacturing facility consolidation.
Current R&D activities include developing the next generation of WinChip
microprocessors for use in personal computer applications, conducting research
into applications of high-speed DRAM technology for the communications market,
developing RISC microprocessors for primarily communications and embedded
control applications, developing an advanced SRAM architecture that
significantly improves performance of communications applications requiring
frequent switches between reads and writes, and developing a family of specialty
memory products for the communications and networking markets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses decreased by $.3
million and increased by $3 million for Q3 1999 compared to Q2 1999 and Q3 1998,
respectively. SG&A expenses for the nine month period ended December 27, 1998
increased $12.9 million when compared to the same period in FY 1998. When
comparing Q3 1999 to Q3 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. Also, in Q3 1999, IDT expensed the
transaction costs, consisting mainly of legal, accounting and printing expenses,
incurred to date related to the QSI merger. The
12
<PAGE> 13
factors described above resulting in increased SG&A expenses are also the
primary reasons SG&A expenses increased during the first nine months of fiscal
1999, when compared to the same period of fiscal 1998. The Company expects that
in the coming quarters, excluding the impact of merging Quality Semiconductor
with IDT, recurring SG&A expenses will remain relatively constant, except for
costs such as sales commissions and 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 Q1 2000, management expects that
SG&A expenses will decrease.
INTEREST EXPENSE
Interest expense is primarily associated with the 5.5% Convertible
Subordinated Notes, due in 2002, and secured equipment financing agreements
completed in fiscal 1997 and 1999, which amortize over the term of the financing
agreements. Interest expense for Q3 1999 was essentially unchanged compared to
Q2 1999 and Q3 1998.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, decreased by $1.0 million in Q3 1999
compared to Q2 1999. The decrease is mainly attributable to an increase in IDT's
share of net losses from unconsolidated affiliates and lower average balances
and prevailing interest rates on investments. Compared to Q3 1998, interest
income and other, net, for Q3 1999 decreased by $5.0 million, primarily due to a
$2.3 million insurance recovery in Q3 1998 and a $1.7 million increase in IDT's
share of net losses from unconsolidated affiliates in Q3 1999.
TAXES
The Company provided no federal tax benefit in Q3 1999 and does not expect
to incur a federal tax liability in Q4 1999, because it anticipates a tax loss
for the full year. In Q2 1999, IDT recorded $35.2 million in tax expense,
primarily due to a reserve taken against the value of the Company's net deferred
tax assets. Income taxes in state jurisdictions are not significant. A small
amount of foreign tax expense was incurred in Q3 1999 and IDT expects a similar
liability in Q4 1999, due to anticipated profits in certain of the Company's
foreign subsidiaries.
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 doubt as to whether such assets will be
realized, IDT recorded a reserve for all of its net deferred tax assets in Q2
1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1998, cash and cash equivalents were $76.2 million, a
decrease of $69.9 million from $146.1 million at March 29, 1998.
The Company generated $21.4 million in cash from operating activities for
the first nine months of fiscal 1999, down from $143.1 million for the same
period in fiscal 1998.
During the first nine months of fiscal 1999, the Company's net cash used
for investing activities was $118.7 million, including $94.5 million for capital
expenditures.
Cash provided by financing activities during the first nine months of
fiscal 1999 was $27.5 million as compared to $3.1 million during the same period
in fiscal 1998. The Company completed several equipment financing transactions
during the first six months of fiscal 1999. The Company entered into capital
leases under which it sold previously purchased semiconductor manufacturing
equipment to leasing companies
13
<PAGE> 14
which leased the equipment back to IDT for use at the Oregon fabrication
facility. These lease transactions generated $26.7 million in cash proceeds. The
Company also entered into other capital leases for manufacturing equipment
during this period. In total, the Company's lease obligations under capital
leases increased by $31.8 million in connection with these transactions.
During Q1 1999, under another leasing arrangement, equipment purchased for
the Oregon fabrication facility with a net book value of $11.9 million at the
time of the sale and leaseback transaction was sold to a leasing company and
leased back for use at the Oregon facility under a lease classified as
operating. The Company also entered into a $5.0 million secured loan arrangement
which is collateralized by certain manufacturing assets. The Company is not
required to maintain compliance with any financial covenants under any of these
new financing and leasing arrangements.
IDT anticipates capital expenditures of approximately $15 million during
the fourth quarter of fiscal 1999. The Company intends 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.
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 Q3 1999. On November 6, 1998, IDT
announced that its Board of Directors had terminated the authorization to
repurchase shares. The decision to terminate this program was a result of the
Securities and Exchange Commission's position on share repurchase programs in
Staff Accounting Bulletin 96 (SAB 96). Specifically, under SAB 96 there are
circumstances where companies that have ongoing stock repurchase programs do not
have the ability to employ the pooling of interest accounting method when making
acquisitions. Continuing the repurchase program would restrict IDT's ability to
utilize pooling of interest accounting for the merger with Quality Semiconductor
and could restrict IDT's future ability to pursue the full range of strategic
business development opportunities in which the Company may engage to further
enhance its market position.
The Company believes that existing cash and cash equivalents, cash flow
from operations and existing credit facilities will be sufficient to meet its
working capital, mandatory debt repayment and anticipated capital expenditure
requirements for the next twelve months. However, the Company could be required
to seek other financing sooner, and such financing, if required, might not be
available on terms satisfactory to the Company. If the Company is required to
seek additional financing sooner, the unavailability of financing on terms
satisfactory to IDT could have a material adverse effect on the Company.
SUBSEQUENT EVENTS
On January 25, 1999, the Company announced plans to decommission and sell
its San Jose fabrication facility to Cadence Design Systems, Inc. The sale is
expected to be completed by April 1999. As discussed above, the facility was
previously closed as part of the Company's restructuring efforts.
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:
Our Operating Results Can Fluctuate Dramatically. IDT's operating results
can fluctuate dramatically. For example, the Company had a net loss of $291.6
million in the first nine months of fiscal 1999 compared to net income of $6.9
million in the first nine months of fiscal 1998. The net loss for the first nine
months of fiscal 1999 exceeded IDT's cumulative net income for all of fiscal
1994, 1995, 1996 and 1998, which totaled
14
<PAGE> 15
$246.8 million. In addition, IDT had a net loss of $42.3 million for fiscal
1997. The Company's operating results fluctuate due to a wide variety of
factors, including:
- the timing of or delays in new product and process technology
announcements and introductions by IDT or its competitors;
- competitive pricing pressures, particularly in the SRAM commodity
semiconductor memory and x86 microprocessor markets;
- fluctuations in manufacturing yields;
- changes in the mix of products sold;
- availability and costs of raw materials;
- the cyclical nature of the semiconductor industry;
- industry-wide wafer processing capacity;
- economic conditions in various geographic areas; and
- costs associated with other events, such as underutilization or expansion
of production capacity, intellectual property disputes, or other
litigation.
In addition, many of the preceding 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 adversely affected. Further, IDT may not be
able to compete successfully in the future against existing or potential
competitors, and IDT's operating results could be adversely affected 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 adversely affected.
The Cyclicality of the Semiconductor Industry Exacerbates the Volatility of
Our 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 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. Our 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 Our Products Depends on Demand in the Computer and
Communications Industry. 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 significant fluctuations in demand. Demand for certain other
IDT products depends upon growth in the communications market. Any slowdown in
the computer and related peripherals or communications markets could materially
adversely affect IDT's operating results.
15
<PAGE> 16
Our 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 microprocessor, the first member of its x86
microprocessor product family, in the third quarter of fiscal 1998. If IDT is
unable to generate the expected amount of revenues or sustain the level of
profit expected from the WinChip product family, then 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. 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. 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.
For customers to purchase IDT's x86 microprocessors, IDT's products must be
compatible with other components supplied to PC manufacturers. These components
include core-logic chip sets, motherboards, BIOS software and others which are
manufactured or produced by other companies, including Intel and companies in
which Intel has strategic investments. In addition, these companies are able to
produce chip sets, motherboards, BIOS software and other components to support
each new generation of Intel's microprocessors only to the extent that Intel
makes its related proprietary technology available. New versions of
microprocessor products that Intel sells are available primarily in the form of
a chip module that is not compatible with Socket 7 motherboards. Therefore,
Intel has reduced and may cease support for the Socket 7 motherboard
infrastructure. IDT's processor is designed to be Socket 7 compatible, and will
not work with motherboards designed for Intel's new chip module. Therefore, 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. IDT may not be successful in such efforts. All
sales of IDT's x86 microprocessor products since their introduction in fiscal
1998 were from products configured for the Socket 7 motherboard infrastructure.
Sales of such products accounted for less than 10% of IDT's revenues for fiscal
1998 and the first nine months of fiscal 1999.
The market for x86 microprocessors is currently characterized by short
product life cycles, rapid decreases in average selling prices and migration to
increasingly higher performance microprocessors. Failure by IDT to produce
sufficient quantities of WinChip microprocessors at a competitive cost and with
the speed and other performance characteristics desired by customers could
adversely impact IDT's results of operations.
In 1992, in exchange for payments towards product development costs, IDT
licensed the right to make, use and sell an initial version of the WinChip
C6(TM) 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.
In addition to Intel, AMD and National Semiconductor's Cyrix subsidiary
also currently offer commercial quantities of x86 microprocessors for sale. From
time to time, intellectual property rights disputes have arisen between
companies competing in the x86 microprocessor markets (See Intellectual Property
Risks discussion below).
IDT Has Limited Experience Manufacturing its X86 Microprocessor
Products. The pace at which IDT is able to enter its target market category for
x86 microprocessor 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
16
<PAGE> 17
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 which test overall product quality. If
IDT is unable to ramp production of its x86 microprocessor successfully, IDT's
operating results would be adversely affected.
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. Therefore, if IDT does not accurately
forecast demand, IDT may have a shortage of or excess inventory. Although
products purchased under the IBM manufacturing services agreement must meet
certain acceptance criteria, 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 towards 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.
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, chip sets and other system components to support IDT's x86
microprocessor offerings, including Socket 7 compatibility, would limit
IDT's ability to sell products to the PC market.
Our Product Manufacturing Operations are Complex and Subject to
Interruption. The Company has increased the production capacity of its Oregon
facility to manufacture IDT WinChip products and is absorbing production volumes
from its San Jose, California, 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, changes to its process technologies,
and ramping production and installing new equipment at its facilities.
17
<PAGE> 18
IDT's remaining older wafer fabrication facility is located in Salinas,
California. 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.
Our Operating Results Can Be Substantially Impacted by Facility Expansion,
Utilization and Consolidation. Facility and capacity additions, primarily in
fiscal 1997, have resulted in a significant increase in fixed and variable
operating expenses which 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 Oregon fabrication facility contributes to revenues, IDT has
recognized 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 Oregon.
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 those from 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 Oregon, and due to
cyclical market conditions in the semiconductor industry, IDT is not able to
forecast when the Oregon 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 Oregon 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 profitability.
Our Results are Dependent on the Success of New Products. New products and
process technology costs associated with the Oregon wafer fabrication facility
will continue to require significant R&D expenditures. However, we may not be
able to develop and introduce new products in a timely manner, our new products
may not gain market acceptance, and we 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.
We are 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.
Historically, IDT has been significantly dependent on the design
capabilities of Quantum Effect Design, Inc., an equity affiliate of IDT, for the
design and development of derivatives of 64-bit MIPS(R) RISC-based
microprocessors. Currently there are no development contracts in effect between
Quantum and IDT, and IDT is now designing and developing derivatives of MIPS
RISC-based microprocessors in-house. From time to time, IDT contracts with third
party semiconductor designers other than Quantum. As with all new products,
there is risk that IDT or its contractors will not be successful in their
efforts to design new products.
18
<PAGE> 19
We May Require Additional Capital to Remain Competitive. The semiconductor
industry is extremely capital intensive. To remain competitive, IDT must
continue to invest in advanced manufacturing and test equipment. The Company
expects to expend approximately $15 million for capital additions during the
fourth quarter of fiscal 1999, and anticipates significant continuing capital
expenditures, especially in connection with the introduction of products for the
WinChip microprocessor family, in the next several years. 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,
our operations could be adversely affected.
Intellectual Property Claims Could Adversely Affect Our 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 Our Operating
Results. A substantial percentage of IDT's revenues are derived from non-U.S.
sales. During fiscal 1998, 1997 and 1996, non-US sales accounted for 39%, 38%
and 40% of IDT's revenues, respectively. During these periods, Asian-Pacific
sales accounted for 10%, 8% and 9% 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.
We are Subject to Risks Associated with Using Hazardous Materials in Our
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.
Our 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 announcements by IDT or its
competitors regarding new product introductions. In
19
<PAGE> 20
addition, our stock price can fluctuate due to price and volume fluctuations in
the stock market, especially those that have affected the market price of
technology stocks.
IMPACT OF YEAR 2000 ON OUR OPERATIONS
Year 2000 Problem Defined. In brief, the Year 2000 problem is a programming
problem found in many computer applications which conform to older commonly
accepted standards. These applications might not function properly after
December 31, 1999 or after the start of a company's fiscal year 2000. The
problem dates back to the days when computer memory was limited and data storage
was expensive. To save space, some dates are stored using only two digits (1998
is stored as 98). This poses no problem when the "missing" digits are all the
same (e.g. 19). However, when two dates are compared, used in a calculation or
sorted and the dates span the January 1, 2000 boundary, problems can occur. For
example, 1999 is earlier than 2000, but without the first two digits, the result
would be that 00 is earlier than 99. The fact that most business software is
heavily dependent on dates means the problem is widespread. Some systems will
fail in very visible and obvious ways, but others will continue to process,
producing erroneous results which might not surface until later. The longer it
takes before these problems are found, the more difficult, and costly, they will
be to correct. All aspects of operations at any company could be impacted, from
financial to shipping, and even such areas as elevators and security systems can
be affected.
IDT utilizes numerous software programs throughout its operations which
include dates and make date-sensitive calculations based on two-digit fields
which are assumed to begin with the year 1900. Software programs written based
on this assumption are vulnerable, as the year 2000 approaches, to
miscalculations and other operational errors which may be significant to their
overall effectiveness. In addition, the Company relies upon products and
information from critical suppliers, large customers and other outside parties,
in the normal course of business, whose software programs are also subject to
the same problem. Should miscalculations or other operational errors occur as a
result of the Year 2000 issue, 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.
Our Approach. In October 1997, IDT engaged the services of Keane, Inc., a
software services firm with over 30 years of relevant experience, to assist in
defining IDT's approach. To date, 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;
- 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; and
- 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 June 1,
1999.
20
<PAGE> 21
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 expects to bring the first portion of the
SAP implementation on-line. At that time, it will evaluate the need for
contingency plans.
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. Implementation 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. 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. 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.
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, or "Euro", for initial implementation as of
January 1, 1999 and through the transition period to January 1, 2002. 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 will result in any material
increase in transaction costs. The Company will continue to evaluate the impact
over time of the introduction of the Euro; however, based on currently available
information IDT's management does not believe that the introduction of the Euro
will have a material adverse impact on IDT's financial condition or the overall
trends in results of operations.
21
<PAGE> 22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit filed on July 31, 1998, by the Lemelson Medical Education &
Research Foundation, Limited Partnership ("plaintiff"), is pending in the United
States District Court for the District of Arizona, case no. 98 1413PHXPGR
against the Company and other corporate defendants. The lawsuit alleges that the
defendants are infringing upon 16 patents issued to plaintiff. Plaintiff seeks
an injunction and damages in an unspecified amount.
On July 17, 1997, IDT filed a complaint against Hewlett-Packard Company
(HP) in Santa Clara Superior Court, Case Number CV767581, seeking a declaratory
judgment regarding the validity of IDT's rights to use and sublicense certain
advanced printer technology ("TrueRes") which HP acquired from DP-TEK
Development Company, LLC (DP-TEK), a Kansas limited liability company. On March
3, 1998, IDT amended its complaint to join DP-TEK and to seek damages from HP.
In a related action, on November 17, 1997, DP-TEK filed a petition for
declaratory relief and damages for breach of contract in an amount of
approximately $25 million against IDT in Kansas. The case was removed to federal
court, Case Number 97-1541-FGT. Both cases were recently settled.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 8, 1998, the Board of Directors adopted a stockholder rights
plan designed to protect the long-term value of the Company for its stockholders
during any future unsolicited acquisition attempt. In connection with the 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, 1998 (the "Record
Date") and further directed the issuance of one such right with respect to each
share of the Company's common stock that is issued after the Record Date, except
in certain 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 (the "Distribution Date"). After the Distribution Date, 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 an
exercise 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.
Upon a person or group becoming an Acquiring Person, holders of the rights
(other than the Acquiring Person) will have the right to acquire shares of the
Company's common stock at a substantially discounted price. Additionally, if a
person or group becomes an Acquiring Person and the Company is acquired in a
merger or other business combination, or 50% or more of its assets are sold in a
transaction with an Acquiring Person, the holders of rights (other than the
Acquiring Person) will have the right to receive shares of common stock of the
acquiring corporation at a substantially discounted price.
Subsequent to a person or group becoming an Acquiring Person, the Company's
Board of Directors may, at its option, require the exchange of outstanding
rights (other than those held by the Acquiring Person) for common stock at an
exchange ratio of one share of the Company's common stock per right. The
Company's Board may redeem outstanding rights at any time prior to a person or
group becoming an Acquiring Person at a price of $0.001 per right. Prior to such
time, the terms of the rights may be amended by the Board.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Designations specifying the terms of the
Series A Junior Participating Preferred Stock of IDT, as
filed with the Secretary State of Delaware on December 22,
1998 (incorporated by reference to Exhibit 3.6 to
Registration Statement on Form 8-A filed December 23, 1998).
3.2 Bylaws of the Company, as amended and restated effective
December 21, 1998 (incorporated by reference to Exhibit 3.1
to Current Report on Form 8-K filed December 23, 1998).
4.1 Rights Agreement dated December 21, 1998, between IDT and
BankBoston, N.A., as Rights Agent (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form 8-A filed
December 23, 1998).
10.1 Employment Contract between IDT and Glenn Henry.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
On December 23, 1998, the Company filed a Form 8-K to report under
Item 5 its adoption of a stockholder rights plan and amendment of its
bylaws. No financial statements were filed.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED DEVICE TECHNOLOGY, INC.
Date: February 5, 1999 /s/ Leonard C. Perham
--------------------------------------
Leonard C. Perham
Chief Executive Officer
(duly authorized officer)
Date: February 5, 1999 /s/ Alan F. Krock
--------------------------------------
Alan F. Krock
Vice President, Chief Financial
Officer
(principal accounting officer)
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<C> <S>
3.1 Certificate of Designations specifying the terms of the
Series A Junior Participating Preferred Stock of IDT, as
filed with the Secretary State of Delaware on December 22,
1998 (incorporated by reference to Exhibit 3.6 to
Registration Statement on Form 8-A filed December 23, 1998).
3.2 Bylaws of the Company, as amended and restated effective
December 21, 1998 (incorporated by reference to Exhibit 3.1
to Current Report on Form 8-K filed December 23, 1998).
4.1 Rights Agreement dated December 21, 1998, between IDT and
BankBoston, N.A., as Rights Agent (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form 8-A filed
December 23, 1998).
10.1 Employment Contract between IDT and Glenn Henry.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
Made January 25, 1999, by and between Glenn Henry, an individual having his
residence at 411 Lake Cliff Trail, Austin, TX 78746 (hereinafter "Executive")
and Integrated Device Technology, Inc., a Delaware corporation having a place of
business at 2975 Stender Way, Santa Clara, CA 95054 (hereinafter "Employer").
Whereas, the parties desire to enter into an employment agreement; and
Whereas, Executive is employed by Employer as the President and Chief
Executive Officer of Centaur Technology, Inc. and as a Senior Vice President of
Employer.
Now, therefore, in consideration of the foregoing and of the mutual
promises and conditions hereinafter set forth, the parties agree as follows:
1. Position and Duties.
1.1. Executive is the President of Centaur Technology, Inc. and shall serve
at the will of the board of directors of such corporation. Executive
is also a Senior Vice President of Employer and shall serve at the
will of the board of directors of Employer. Employer shall not assign
Executive to any position other than a senior level executive
position, with Employer or a majority owned subsidiary of Employer,
and such title as Employer shall elect, including the title of Vice
President. Hereinafter, the term "Employer" shall also include
"Centaur Technology, Inc." unless the context clearly indicates
otherwise.
1.2. So long as Executive shall be President of Centaur Technology, Inc.,
Executive shall have full power and authority to hire and fire all
employees of Centaur Technology, Inc. and to manage and conduct all
the business of Centaur Technology, Inc. subject to expenditure and
corporate policies set by Employer.
1.3. Executive shall not take any of the following actions on behalf of
Employer without the approval of Centaur Technology, Inc.'s board of
directors:
1.3.1. Borrowing or obtaining credit in any amount or guarantying any
obligation of any third party;
1.3.2. Expending funds for capital equipment in excess of budgeted
expenditures for any fiscal quarter;
1.3.3. Selling or transferring capital assets;
1.3.4. Executing any contract or making any commitment for an amount
in excess of $100,000
<PAGE> 2
1.3.5. Executing any lease of real or personal property where the
total rent and other payments for the minimum term thereof
total $100,000 or more; or
1.3.6. Establishing, modifying, or exercising any discretionary
authority or control over any employee pension plan.
2. Outside Business Activities Limited.
During his employment, Executive shall devote his full energies, interest,
abilities, and productive time to the performance of this agreement and shall
not, without Employer's prior written consent, render to others services of any
kind for compensation, or engage in any other business activity that would
materially interfere with the performance of his duties under this
agreement.
3. Covenant Not to Compete.
As used herein, the term "competition" means the design, development,
and/or marketing of products competitive with IDT's WinChip microprocessors or
other X86 or MIPS microprocessor. During employment and for a period of one year
thereafter, Executive shall not, directly or indirectly, engage in any activity
or other business competitive with Employer's business, without Employer's prior
written consent.
4. Term and Termination of Employment.
4.1. Subject to termination as herein provided, Executive shall be employed
for a term beginning on the date hereof and ending on December 31,
2004.
4.2. Employer may terminate the employment of Executive at any time by
written notice to Executive and payment of severance in the amount of
$200,000, payable in 26 equal bi-weekly installments commencing two
weeks after the payment of Executive's final paycheck.
4.3. Executive may terminate his employment at any time by written notice
to Employer delivered not less than thirty (30) days prior to the
effective date of termination.
4.4. Employer may terminate this agreement at any time without notice and
without payment of any kind (other than compensation accrued to the
date of termination) if Executive commits any material act of
dishonesty related to his employment hereunder, discloses confidential
information of a material nature to a party whose interest is adverse
or competitive with that of Employer, or in a willful, wanton, or
grossly negligent manner fails to perform his duties under this
agreement (such termination is hereinafter referred to as "for
cause").
4.5. This agreement shall terminate on the death or substantial disability
of Executive (a disability which prevents Executive from performing
the essential duties and
2
<PAGE> 3
responsibilities of his employment despite reasonable accommodation)
and except as required pursuant to the terms of any of the Employer's
benefit plans and as to compensation due through the date of
termination, Employer shall thereafter have no obligation to pay any
salary, bonus, incentive or other compensation to Executive.
5. Place of Employment.
Unless the parties agree otherwise in writing, Executive shall be employed
at the offices of Centaur Technology, Inc. in the metropolitan Austin, Texas
area; provided, however, that Employer may from time to time require Executive
to travel temporarily to other locations on Employer's business.
6. Salary and Incentive Compensation.
6.1. Executive shall receive such salary and benefits as shall be
determined by the Board of Directors of Centaur Technology, Inc.
and/or Integrated Device Technology, Inc. from time to time.
6.2. The Board of Directors of Centaur Technology, Inc. and/or Integrated
Device Technology, Inc. shall from time to time establish by
resolution such incentive compensation goals for Executive as they
shall in their sole discretion deem advisable.
7. Ownership of Intangibles.
All processes, inventions, patents, copyrights, trademarks, and other
intangible rights that may be conceived or developed by Executive, either alone
or with others, during the term of Executive's employment, whether or not
conceived or developed during Executive's working hours, and (a) with respect to
which the equipment, supplies, facilities, or trade secret information of
Employer was used, or (b) that relate at the time of conception or reduction to
practice of the invention to the business of the Employer or to Employer's
actual or demonstrably anticipated research and development, or (c) that result
from any work performed by Executive for Employer, shall be the sole property of
Employer. Executive shall, during the term of employment and for one year
thereafter, disclose to Employer all inventions conceived during the term of
Executive's employment hereunder whether or not the property of Employer under
the terms of the preceding sentence, provided that such disclosure shall be
received by Employer in strict confidence. Executive shall execute all
documents, including patent applications and assignments, required by Employer
to establish Employer's rights under this Section.
8. Non Disclosure and Confidentiality.
In the course of his employment, Executive shall have access to
confidential information and trade secrets relating to Employer's business.
Except as required in the course of his employment by Employer, Executive will
not, without Employer's prior consent, either during his employment by Employer
or for three years after termination of that employment,
3
<PAGE> 4
directly or indirectly disclose to any third person any such confidential
information or trade secrets. Confidential information shall not include
information generally available to the public provided it was disclosed or made
available without fault on Executive's part and without breach by the disclosing
party of a duty of confidentiality.
9. Privacy, Advertising.
Executive consents to the use by Employer and its affiliates of Executive's
name, image, and voice for purposes of advertising or trade. This consent shall
remain in effect so long as Executive shall be employed by Employer or any
affiliate of Employer. Employer and its affiliates shall have the right to
continue to distribute, display, or otherwise use any materials brochures,
tapes, videos, movies and the like which were prepared during and in connection
with Executive's employment hereunder after the termination of such employment,
provided, however, that nothing contained herein shall authorize the preparation
of any new materials using Executive's name, image or voice for purposes of
advertising or trade after termination of Executive's employment with Employer.
10. Indemnification by Employer.
Employer shall, to the maximum extent permitted by law, indemnify and hold
Executive harmless against expenses, including reasonable attorney's fees,
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of Executive's
employment by Employer. Employer shall advance to Executive any expense incurred
in defending any such proceeding to the maximum extent permitted by law. This
obligation of Employer is subject to the following conditions: (i) Executive
shall cooperate in the defense of any such lawsuit or claim, and (ii) tender the
defense of such lawsuit or claim to Employer, including the selection and
direction of counsel.
11. Merger or Dissolution.
In the event of a merger in which Employer is not the surviving entity, or
of a sale of all or substantially all of Employer's assets, Employer may, at its
sole option (i) assign this agreement and all rights and obligation under it to
any business entity that succeeds to all or substantially all of the Employer's
business through that merger or sale of assets, or (ii) terminate this agreement
subject to the obligations set forth in paragraph 4.2 above and any fully earned
incentive compensation designated pursuant to paragraph 6 above.
12. Arbitration.
Any controversy or claim arising out of or relating to this agreement or
the employment of Executive hereunder, including without limitation, any claim
of age discrimination or other violation of Executive's civil rights, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction. There shall
4
<PAGE> 5
be one arbitrator. Each party shall pay one half of the fees of the arbitrator
and each party shall pay his own attorney and the expenses of his witnesses and
all other expenses connected with presenting his case. Other costs of the
arbitration, including the cost of any record or transcripts of the arbitration
and administrative fees shall be borne equally by the parties.
13. Limitation of Liability.
Each party shall be liable to the other only for direct damages, and, in
the case of defamation, for special damages. In no event shall either party be
liable to the other for incidental or indirect damages of any nature whatsoever,
including without limitation, mental anguish, whether arising in tort or
contract and whether based on negligence or intentional conduct. The payments to
be made hereunder by Employer to Executive pursuant to paragraphs 4.2 and 6 to
the extent vested, constitute the sole and complete liability of Employer
arising from or connected with the termination of Executive's employment
hereunder, including, without limitation, termination resulting from sex, age,
or other violation of Executive's human rights.
14. Representation Regarding Proprietary Information of Others.
14.1. Executive represents and warrants that on the date of execution of
this Agreement, that he has no written information relating to
computer design or architecture, software, and/or semiconductors
(including without limitation, discs, tapes, mail and the like) in his
possession or under his direction or control which is the property of
others and which he does not have the right to disclose to, and use
for the benefit of, Employer, other than (i) the M86 technical
information.
14.2. Executive further represents and warrants that he is free of any
obligation which would be breached by the employment of Executive by
Employer as contemplated herein.
15. Severability.
If any provision of this agreement is held invalid or unenforceable, the
remainder of this agreement shall nevertheless remain in full force and effect.
If any provision is held invalid or unenforceable with respect to particular
circumstances, it shall nevertheless remain in full force and effect in all
other circumstances.
16. Choice of Law.
This agreement is made in Santa Clara County, California and constitutes
the full and complete agreement of the parties relating to the subject matter
hereof and supersedes any prior understanding or written or oral agreements
between the parties. This Agreement may only be amended by a written agreement
executed by Executive and Employer. THIS AGREEMENT SHALL BE PERFORMED IN THE
STATE OF TEXAS. THE PARTIES AGREE THAT THE LAWS OF THE STATE OF TEXAS SHALL
GOVEN THE INTERPRETATION OF THIS AGREEMENT. ANY ARBITRATION OF ANY DISPUTE
5
<PAGE> 6
HEREUNDER SHALL BE CONDUCTED IN PHOENIX, ARIZONA OR SUCH OTHER PLACE AS THE
PARTIES MAY AGREE.
17. Notices.
Notices required hereunder shall be in writing and shall be given by
personal delivery (if by courier, the messenger service shall be a recognized
commercial service and receipt of delivery shall be retained) or mailed by
registered or certified mail, return receipt requested, postage prepaid in a
properly addressed envelope, to the intended recipient at the address set forth
in this Agreement (or to such other address for a party as shall hereafter be
specified by notice given in accordance with this provision; provided, however,
that notices of a change of address shall be delivered on the fifth business day
after deposit in a postal depository.
Executed by the parties in multiple counterparts as of the day and year
first above written.
- ----------------------------------- -----------------------------------
Glenn Henry Integrated Device Technology, Inc.
By:
--------------------------------
Title:
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED 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> 9-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> DEC-27-1998
<CASH> 76,185
<SECURITIES> 94,817
<RECEIVABLES> 52,983<F1>
<ALLOWANCES> 0
<INVENTORY> 53,869
<CURRENT-ASSETS> 315,332
<PP&E> 304,279<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 689,938
<CURRENT-LIABILITIES> 137,372
<BONDS> 184,205
0
0
<COMMON> 82
<OTHER-SE> 263,245
<TOTAL-LIABILITY-AND-EQUITY> 689,938
<SALES> 400,812
<TOTAL-REVENUES> 400,812
<CGS> 265,273
<TOTAL-COSTS> 472,517
<OTHER-EXPENSES> 105,338
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,372
<INCOME-PRETAX> (261,842)
<INCOME-TAX> 29,777
<INCOME-CONTINUING> (291,619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (291,619)
<EPS-PRIMARY> (3.55)
<EPS-DILUTED> (3.55)
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE
<F2>ITEM SHOWN NET OF DEPRECIATION
</FN>
</TABLE>
