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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended April 2, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2669985
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization)
2975 Stender Way, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 727-6116
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value 5.5%
Convertible Subordinated Notes due 2002
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $3,999,150,000 as of May 26,
2000, based upon the closing sale price of $39.625 per share on the Nasdaq
National Market for that date. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
There were 103,193,600 shares of the Registrant's Common Stock issued and
outstanding as of May 26, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, and 13 of Part III incorporate information by reference from
the Proxy Statement for the 2000 Annual Meeting of Stockholders.
================================================================================
PART I
All non-historical information contained in this discussion and analysis
constitutes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements are not guarantees of future performance and involve a number
of risks and uncertainties, including but not limited to: operating results; new
product introductions and sales; competitive conditions; capital expenditures
and capital resources; manufacturing capacity utilization, and the Company's
efforts to consolidate and streamline production; customer demand and inventory
levels; protection of intellectual property in the semiconductor industry; and
the risk factors set forth in the section "Factors Affecting Future Results."
Future results may differ materially from such forward-looking statements as a
result of such risks. The Company undertakes no obligation to publicly release
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof.
ITEM 1. BUSINESS
Integrated Device Technology, Inc. ("IDT" or the "Company") designs,
develops, manufactures and markets a broad range of high-performance
semiconductor products and modules. Applications for IDT's products include:
data networking and telecommunications equipment, such as routers, hubs,
switches, cellular base stations and other devices; storage area networks
(SANs); other networked peripherals and servers; and personal computers.
The Company markets its products on a worldwide basis primarily to OEMs
(original equipment manufacturers) through a variety of channels, including a
direct sales force, distributors and independent sales representatives. A
significant portion of the Company's sales are to contract electronic
manufacturers (CEMs). Certain of the Company's larger OEM customers buy products
from these CEMs which incorporate IDT products.
The Company attempts to differentiate its products from competitors'
products through advanced architectures and features, enhanced performance,
reduced system cost and packaging options. IDT fabricates substantially all of
its semiconductor wafers using advanced CMOS (complementary metal oxide silicon)
process technology in its own wafer fabrication facilities.
In fiscal 2000, the Company completed the acquisition of Quality
Semiconductor, Inc. ("QSI"). QSI had been engaged in the design, development and
marketing of high-performance logic and networking semiconductor products.
IDT was incorporated in California in 1980 and reincorporated in Delaware
in 1987. The terms the "Company" and "IDT" refer to Integrated Device
Technology, Inc. and its consolidated subsidiaries, unless the context indicates
otherwise.
PRODUCTS AND MARKETS
The Company operated in three business segments during the three fiscal
years ended April 2, 2000:
o Communications and High-Performance Logic
o SRAMs and Other
o x86 Microprocessors
- ---------------------
Trademark notice: RISController, SuperSync, and Zero Bus Turnaround are
trademarks of Integrated Device Technology, Inc. QSI and QuickSwitch are
trademarks of Quality Semiconductor, Inc., a wholly owned subsidiary of
Integrated Device Technology, Inc. ZBT is a registered trademark of Integrated
Device Technology, Inc., and the architecture is supported by Micron and
Motorola.
2
The Communications and High-Performance Logic segment includes
communications memories, communications applications-specific standard products
(ASSPs), embedded RISC microprocessors and high-performance logic and
clock-management devices. The SRAMs and Other segment consists mainly of
high-speed SRAMs (static random access memories).
Products in the SRAM and Other segment are generally characterized as
commodity (or industry standard) products which typically have exhibited lower
gross margins and high unit volumes. Products in the Communications and
High-Performance Logic segment, with the exception of some logic devices, tend
to have lower unit sales and higher margins. Products in these segments are also
manufactured using different levels of process technology. A significant portion
of the wafers produced for the SRAMs and Other segment are fabricated at IDT's
advanced technology, eight-inch wafer production facility in Hillsboro, Oregon.
Most wafers for the Communications and High-Performance Logic segment are
produced at IDT's older, six-inch facility located in Salinas, California,
although certain new communications memories, network products and embedded
processors are being introduced into production at the Hillsboro facility.
The Company offers approximately 1,750 products in 11,200 product
configurations. IDT's product design efforts are focused on differentiated
components and integration of its components into single devices, modules or
subsystems to meet the needs of its customers.
During fiscal 2000, the Communications and High-Performance Logic, SRAMs
and Other and x86 Microprocessors segments accounted for approximately 71%, 28%
and 1% respectively, of total IDT revenues of $701.7 million.
Communications and High-Performance Logic Segment
Communications Products and Networking Devices. The Company's
communications products in this segment are either proprietary or have limited
alternative sources of supply. These include FIFO memories, multi-port memories,
and communications ASSPs that offer high-performance features for communications
and networking systems. FIFO memories are used as rate buffers to transfer large
amounts of data at high speeds between separate devices or pieces of equipment
operating at different speeds within a system, when the order of the data to be
transferred needs to be controlled. New families of FIFO memories also perform
data organizing functions such as adapting the width and speed of incoming data
to system requirements. Multi-port memory products are used to speed data
transfers and act as the link between multiple microprocessors and the same
memory bank, or between microprocessors and peripherals. These products are
currently used primarily in peripheral interface, wireless communications and
networking products, including switches and wireless base stations. IDT's
network products family uses emerging network technology designed to support
higher bandwidth applications in the convergence of voice, data and wireless
networks.
IDT is a leading supplier of both synchronous and asynchronous FIFO
memories and has increasingly focused its resources on the design of synchronous
FIFO memories. Synchronous FIFO memories have been gaining greater market
acceptance because they are faster and provide an easier user interface than
asynchronous FIFO memories. IDT's family of 9-bit, 18-bit and 36-bit Sync FIFO
memories are being used in many newer, more powerful networking and
telecommunications products. IDT believes that the SuperSync(TM) II family of
FIFO memories provides the highest density (4-Mbit), highest performance
(133MHz) and broadest feature sets commercially available.
The Company is also a leading supplier of multi-port memory products. IDT's
family of multi-port memories is composed of dual-port asynchronous devices,
four-port products, and synchronous dual-port devices, including what the
Company believes to be the highest-density (1-Mbit), highest-performance
(166MHz) and widest word-width (x36) dual-ports commercially available.
Communications ASSP products include an ATM switching chipset, ATM
segmentation and reassembly controllers, and physical interface and
muxing/demuxing devices that are used to interconnect systems and facilitate
data transmission in networks.
3
Logic and Clock Management Products. IDT is a leading manufacturer of
high-speed, byte-wide and double-density 16-bit CMOS logic circuits for
high-performance applications. Logic circuits control data communication between
various elements of electronic systems, such as between a microprocessor and a
memory circuit. IDT offers a wide range of logic circuits products that support
bus and backplane interfaces, memory interfaces and other logic support
applications where high speed and low power are critical. IDT's logic circuits
are used in a broad range of markets. The Company recently introduced Advanced
Low Voltage CMOS (ALVC) and Low Voltage CMOS (LVC) logic products. These low
voltage products are expected to represent a rapidly growing sector of the
high-performance logic market.
IDT's 16-bit logic products are available in small, thin packages, enabling
board area to be reduced. These products are designed for applications in which
small size, low power and extra low noise are as important as high speed.
The Company also offers a family of clock drivers and clock generators.
These devices, placed at critical positions in a system, correct the degradation
of timing that occurs the further the impulses travel from the main system
clock.
IDT completed its acquisition of QSI in fiscal 2000. QSI's products are
largely complementary to IDT's logic product lines and include the
QuickSwitch(R) bus switch and TurboClock(TM) clock management families.
Embedded RISC Microprocessors. IDT markets its RISController(TM)
microprocessors which represent a broad line of 32-bit and 64-bit stand alone
processors and integrated processors based on the MIPS architecture. IDT is a
leading supplier of MIPS processors to the communications and networking
markets.
The Company focuses its RISC microprocessor marketing efforts primarily on
the embedded controller market. Embedded controllers are microprocessors that
control a single device such as a network router or switch, printer or set-top
box. The Company provides its customers with integrated solutions for embedded
control, including engineering tools such as RTOS (Real Time Operating System),
compilers, reference designs and technical support.
Shortly after the end of fiscal 2000, IDT introduced its first integrated
processor based on its RC32300 32-bit core. This device incorporates an SDRAM
controller, PCI bridge, and two serial ports. The RC32334 utilizes IDT's unique
IPBus, a hardware interconnect approach that enables more rapid integration of
intellectual property (IP) blocks with the CPU core. This product represents the
first in what is expected to be a family of integrated processors from IDT.
SRAMs and Other Segment
SRAMs are memory circuits used for storage and retrieval of data during the
operation of a communications or computing system. Unlike DRAMs (dynamic random
access memories), SRAMs do not require electrical refreshment of the memory
contents to ensure data integrity, allowing them to operate at high speeds.
SRAMs include substantially more circuitry than DRAMs, resulting in higher
production costs for a given amount of memory, and generally command higher
selling prices than the equivalent density traditional DRAM products. The market
for SRAMs is fragmented by differing demands for speed, power, density,
organization and packaging.
Historically, the Company focused primarily on the cache memory segment of
the SRAM market. But, in fiscal 2000, the PC/server cache segment represented a
very small percentage of IDT's SRAM revenues, and it is not expected to
contribute significantly to the Company's future revenues. IDT's family of
ZBT(R) (Zero Bus Turnaround(TM)) SRAMs eliminate wait states between read and
write cycles and are targeted at meeting the specific needs of communications
customers.
To provide SRAM products that meet the varying needs of its customers, IDT
offers 16K, 64K, 256K, 1-Mbit and 4-Mbit SRAMs in a number of speed,
organization, power and packaging configurations. Higher density SRAM products
and products with additional features believed to be important to the data
networking markets, are in the development stage.
4
x86 Microprocessors Segment
The Company completed the sale of x86 intellectual property and its x86
design subsidiary to Via Technologies, Inc. ("Via"), a Taiwanese company, and
its partners in fiscal 2000 (see Note 14 to the Consolidated Financial
Statements). The Company also entered into a patent cross license agreement with
Via relating to certain non-x86 IDT patents. The Company does not expect to
realize any future revenues from the sale of x86 products.
Customers
The Company markets and sells its products on a worldwide basis primarily
to OEMs in its three business segments. Products in the Communications and
High-Performance Logic segment are sold primarily to communications customers.
Although products in the SRAMs and Other segment are general purpose in nature,
IDT supplies the majority of its products in this segment to its communications
customers. Customers often purchase products from more than one of the Company's
product families. No one OEM direct customer accounted for 10% or more of the
Company's revenues in fiscal 2000, 1999 or 1998. A significant portion of the
Company's sales are to CEMs. When considering sales through all sales channels
(OEM direct, distribution and contract manufacturing), one end customer, Cisco
Systems, Inc. ("Cisco"), accounts, in aggregate, for more than 10% of the
Company's revenues. Because of limitations in the amount of end customer data
made available to IDT by its CEM customers, IDT is not able to precisely
determine the aggregate percentage of its sales which are attributable to Cisco.
However, based upon the best available information, IDT estimates that
end-customer sales to Cisco range between approximately 15-20% of IDT's
revenues, depending on product mix consumed.
Marketing and Sales
IDT markets and sells its products primarily to OEMs through a variety of
channels, including a direct sales force, distributors and independent sales
representatives. The Company also markets and sells products to CEMs.
The Company had 73 direct sales personnel in the United States as of April
2, 2000. Such personnel are based at the Company's headquarters and in 18 sales
offices in Alabama, California, Colorado, Florida, Illinois, Maryland,
Massachusetts, Minnesota, New Jersey, North Carolina, Oregon and Texas, and are
primarily responsible for marketing and sales in those U.S. areas. IDT also
utilizes three national distributors, Avnet, Inc., Wyle Laboratories and Insight
Electronics, Inc., and several regional distributors in the United States.
Worldwide sales to Avnet, Inc. accounted for approximately 19%, 22% and 15% of
the Company's revenues in fiscal 2000, 1999 and 1998, respectively. In addition,
IDT uses independent sales representatives, which generally take orders on an
agency basis while the Company ships directly to the customer. The
representatives receive commissions on all products shipped to customers in
their geographic area.
In addition, the Company had 71 direct sales personnel and 14 sales offices
located outside of the United States as of April 2, 2000. Sales activities
outside North America are generally conducted by IDT's subsidiaries located in
France, Germany, Hong Kong, Israel, Italy, Korea, Japan, Singapore, Sweden and
the United Kingdom. The Company also has sales offices in Taiwan, Malaysia, the
Netherlands and Finland. A significant portion of export sales continues to be
made through international distributors in Europe, Asia-Pacific and Japan.
During fiscal 2000, 1999 and 1998, non-U.S. sales accounted for approximately
38%, 37% and 39% of total revenues, respectively. Sales outside the United
States, except for Japan, are generally denominated in the U.S. dollar. Sales
and other financial information for foreign operations is included in Note 11 of
the Notes to Consolidated Financial Statements contained elsewhere in this Form
10-K. Export sales are subject to certain risks, including currency controls and
fluctuations, changes in local economic and political conditions, import and
export control, and changes in tax laws, tariffs and freight rates.
The Company's distributors typically maintain an inventory of a wide
variety of products, including products offered by IDT's competitors. IDT's
distributors provide inventory management and logistics programs for their
customers and also handle small or rush orders. A portion of the Company's sales
is made to distributors under agreements which allow certain rights of return
and price protection on products unsold by the distributors. Related revenues
and costs of revenues thereon are deferred until the products are resold by the
distributors.
5
Manufacturing
IDT believes that maintaining its own wafer fabrication capability
facilitates the implementation of advanced process technologies, provides the
Company with a reliable source of supply of semiconductors and allows it to be
more flexible in shifting production according to product demand. The Company
currently operates sub-micron wafer fabrication facilities in Hillsboro, Oregon
and Salinas, California. The Oregon facility first contributed to revenues
beginning in fiscal 1997. The 192,000 square foot facility, which produces
substantially all of the wafers fabricated for IDT's SRAMs and Other segment,
contains a 48,000 square foot, class 1 (less than one particle 0.5 micron or
greater in size per cubic foot), eight-inch wafer fabrication line. The Salinas
facility, first placed in production in fiscal 1986, includes a 24,000 square
foot, class 3 (less than three particles 0.5 micron or greater in size per cubic
foot), six-inch wafer fabrication line. Most wafers for the Company's
Communications and High-Performance Logic segment are produced at the Salinas
plant.
IDT supplements its internal wafer fabrication capacity with subcontract
wafer manufacturing capacity.
In fiscal 2000, as part of the merger with QSI, the Company acquired a
41,000 square foot wafer fabrication facility with approximately 5,500 square
feet of clean room space in Sydney, Australia, and other manufacturing assets
which were used to produce wafers for logic product families acquired from QSI.
In May 2000, the Company completed the sale of these and other surplus
manufacturing assets.
IDT also operates two component assembly and test facilities, a 145,000
square foot facility in Penang, Malaysia and a 176,000 square-foot facility near
Manila, the Philippines. Substantially all of the Company's test operations and
a significant portion of its assembly operations are performed at its Malaysian
and Philippines facilities. IDT also uses subcontractors, principally in Korea,
the Philippines and Malaysia, to perform certain assembly and burn-in
operations. If IDT were unable to assemble or test products offshore, or if air
transportation to these locations were curtailed, the Company's operations could
be materially adversely affected. Additionally, foreign manufacturing exposes
IDT to certain risks generally associated with doing business abroad, including
foreign governmental regulations, currency controls and fluctuation, changes in
local economic and political conditions, import and export controls, and changes
in tax laws, tariffs and freight rates. In addition to this offshore assembly
and test capability, the Company has the capacity for low-volume, quick-turn
assembly in its Santa Clara, California facilities as well as limited test
capabilities in Salinas.
The Company utilizes proprietary CMOS process technology permitting
sub-micron geometries in its fabrication facilities. The majority of IDT's
current products are manufactured using its proprietary 0.5, 0.35, 0.25 and 0.18
micron processes. The Company is expanding use of its 0.18 micron CMOS processes
in its Hillsboro facility. The Company continues to develop advanced versions of
its 0.18 micron processes as well as processes below 0.18 microns.
Wafer fabrication involves a highly sophisticated, complex process that is
extremely sensitive to contamination. Integrated circuit manufacturing costs are
primarily determined by circuit size because the yield of good circuits per
wafer generally increases as a function of smaller die. Other factors affecting
costs include wafer size, number of process steps, costs and sophistication of
manufacturing equipment, packaging type, process complexity and cleanliness.
IDT's manufacturing process is complex, involving a number of steps including
wafer fabrication, plastic or ceramic packaging, burn-in and final test. The
Company continually makes changes to its manufacturing process to lower costs
and improve yields. From time to time, the Company has experienced manufacturing
problems that have caused delays in shipments or increased costs. Manufacturing
problems at its wafer fabrication, assembly or test facilities could materially
adversely affect the Company's results of operations.
The Company is dependent on a limited number of suppliers of raw materials
(see "Factors Affecting Future Results.")
6
Backlog
The Company's backlog of orders as of April 2, 2000 was approximately
$288.6 million ($142.1 million as of March 28, 1999). The Company defines
backlog as all confirmed, unshipped orders. IDT manufactures and markets both
products with limited or no second sources and industry-standard products. Sales
are generally made pursuant to purchase orders, which are frequently revised to
reflect changes in the customer's requirements. The Company has also entered
into master purchase agreements with many of its OEM customers. These agreements
do not require the OEMs to purchase minimum quantities of the Company's
products. Product deliveries are scheduled upon the Company's receipt of
purchase orders under the related OEM agreements. Generally, these purchase
orders and OEM agreements, especially those for standard products, also allow
customers to reschedule delivery dates and cancel purchase orders without
significant penalties. Orders, especially for industry standard products, are
frequently made with very short lead times, rescheduled, revised or canceled. In
addition, distributor orders are subject to price adjustments both prior to and
after shipment. For these reasons, IDT believes that backlog should not be used
as an indicator of future revenues.
Research and Development
IDT's competitive position has been established, to a large extent, through
its emphasis on the development of both proprietary and enhanced-performance,
industry standard products, as well as the development of the Company's advanced
CMOS processes. IDT believes that its focus on continually advancing its process
technologies has allowed the Company to achieve cost reductions in the
manufacture of most of its products. The Company believes that a continued high
level of research and development expenditures is necessary to retain its
competitive position. The Company maintains research and development centers in
Santa Clara, California; Hillsboro, Oregon; and Atlanta, Georgia. In June 2000,
the Company announced that it is opening a design center near Dallas, Texas.
Also, with the acquisition of QSI, the Company now has a design center in
Sydney, Australia. Research and development expenditures, as a percentage of
revenues, were approximately 15%, 24% and 20% in fiscal 2000, 1999 and 1998,
respectively.
The Company's product development activities are focused on the design of
new circuits that provide new features and enhanced performance primarily for
growing communications markets applications. In the communications products
area, IDT's efforts are concentrated on the development of advanced synchronous
FIFO memories, more sophisticated multi-port memory products for the
communications market and other families of products which feature the
integration of the Company's logic and memory technologies. Additionally, the
Company continues its efforts to develop a family of specialty products for the
network products market and a family of lower voltage logic devices for a broad
range of applications. The Company is emphasizing the design of integrated
RISC-based controllers for internet related embedded control applications. The
Company also continues to refine its CMOS process technology to increase the
speed and density of circuits in order to provide customers with advanced
products at competitive prices. The Company continues to refine its CMOS process
technology focusing on 0.18 micron and below geometry processes, and converting
the production of products to newer generation processes.
Competition
The semiconductor industry is intensely competitive and is characterized by
rapid technological advances, cyclical market patterns, price erosion, evolving
industry standards, occasional shortages of materials, intellectual property
disputes, high capital equipment costs and uncertain availability of and control
over manufacturing capacity. Many of the Company's competitors have
substantially greater technical, marketing, manufacturing and financial
resources than IDT. In addition, several foreign competitors receive assistance
from their governments in the form of research and development loans and grants
and reduced capital costs, which could give them a competitive advantage. The
Company competes in different product areas, to varying degrees, on the basis of
technical innovation and performance of its products, as well as quality,
product availability and price. As described under the heading "Products and
Markets," products in the SRAMs and Other segment can generally be characterized
as commodity-type items and tend to be most price sensitive.
7
IDT's competitive strategy is to differentiate its products through
high-performance, innovative configurations, proprietary features and breadth of
product offerings. Price competition, introductions of new products by IDT's
competitors, delays in product introductions by IDT or other competitive factors
could have a material adverse effect on the Company in the future.
While IDT has a majority share in the markets for FIFO and multi-port
products, some of the products offered by IDT compete with similar products
offered by Cypress Semiconductor Corporation ("Cypress") as well as certain
custom memory or logic products. IDT's RISC-based microprocessors compete with
products offered by other vendors of such microprocessors, such as Quantum
Effect Devices Inc. and NEC Corporation, and with microprocessors based on other
architectures, such as those offered by Intel and Motorola, Inc. ("Motorola").
IDT's competitors for logic sales include both U.S. and foreign manufacturers,
such as Texas Instruments Incorporated and Pericom Semiconductor Corporation.
Certain of IDT's network products compete with products offered by PMC-Sierra,
Inc.
In markets where IDT competes to sell industry standard SRAM components,
market supply and pricing strategies of competitors significantly impact the
price the Company receives for its products. In fiscal years 1996-1998, a
significant increase in market supply of industry standard SRAM parts was
attributable to IDT's principally foreign competitors shifting additional
production capacity to these parts. The decline in average selling prices for
industry standard SRAM parts during this period was, therefore, attributable to
increases in available SRAM supply from competitors such as Samsung Electronics,
Winbond Electronics Corp., United Microelectronics Corp. (UMC), other Taiwanese
and Korean companies as well as U.S.-based companies with Taiwanese and Korean
sourced SRAM wafers, and to their market pricing strategies, at a time when
market demand slowed as customers reduced the level of inventories carried. The
Company's U.S.-based competitors in the SRAM area include Cypress and Micron
Technology, Inc. ("Micron").
Intellectual Property and Licensing
IDT recognizes that its intellectual property is a valuable corporate
asset, and continues to invest heavily in protecting these assets for advancing
the goals of its business. A number of the Company's circuit designs are
registered pursuant to the Semiconductor Chip Protection Act of 1984. This Act
gives protection similar to copyright protection for the patterns which appear
on integrated circuits and prohibits competitors from making photographic copies
of such circuits. The Company intends to continue its efforts to increase the
breadth of its patent portfolio. There can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented, that
the rights granted thereunder will provide competitive advantages to the Company
or that the Company's efforts generally to protect its intellectual property
rights will be successful.
In recent years, there has been a growing trend of companies to resort to
litigation to protect their semiconductor technology from unauthorized use by
others. In the past, the Company has been involved in patent litigation which
adversely affected its operating results. Although the Company has obtained
patent licenses from certain semiconductor manufacturers, the Company does not
have licenses from a number of semiconductor manufacturers who have a broad
portfolio of patents.
IDT has been notified that it may be infringing patents issued to certain
parties, and is currently involved in licensing negotiations. There can be no
assurance that additional claims alleging infringement of intellectual property
rights, including infringement of patents that have been or may be issued in the
future, will not be made against the Company in the future or that licenses, to
the extent required, will be available. Should licenses from any such claimant
be unavailable, or not be available on terms acceptable to the Company, the
Company may be required to discontinue its use of certain processes or the
manufacture, use and sale of certain of its products, to incur significant
litigation costs and damages or to develop non-infringing technology. If IDT is
unable to obtain any necessary licenses, pass any increased cost of patent
licenses on to its customers or develop non-infringing technology, the Company
could be materially adversely affected. In addition, IDT has received patent
licenses from several companies that expire over time, and the failure to renew
or renegotiate certain of these licenses could have a material adverse effect on
the Company.
8
Environmental Regulation
Federal, State and local provisions regulate the discharge and disposal
into the environment of certain materials used in the semiconductor
manufacturing process. The Company's manufacturing and assembly and test
facilities are designed to comply with existing regulations, and the Company
believes that its activities conform to present regulations. The Company
believes that it has been conducting its operations with all necessary permits
and without material adverse impact attributable to environmental regulation.
However, there can be no assurance that future additions or changes to
environmental regulations will not impose upon the Company the requirement for
significant capital expenditure. Further, any failure by the Company to control
the use of, or to restrict adequately the discharge of hazardous materials under
present or future regulations could subject it to substantial liability or could
cause its manufacturing operations to be suspended. In addition, IDT could be
held financially responsible for remedial measures if its properties were found
to be contaminated whether or not the Company was responsible for such
contamination.
Employees
At April 2, 2000, IDT and its subsidiaries employed approximately 4,800
people worldwide, of whom 1,400 were in Malaysia and 1,200 were in the
Philippines. IDT's success depends in part on its ability to attract and retain
qualified personnel, who are generally in great demand. Since its founding, the
Company has implemented policies enabling its employees to share in IDT's
success such as participation in stock option, stock purchase, profit sharing
and bonus plans for key contributors. IDT has never had a work stoppage. No
employees are represented by a collective bargaining agreement, and the Company
considers its employee relations to be good.
ITEM 2. PROPERTIES
As of April 2, 2000, the Company occupied ten major facilities in California,
Oregon, Australia, Malaysia and the Philippines:
Location Facility Use Square Feet
- -------- ------------ -----------
Salinas, California........... Wafer fabrication, SRAM and communication 98,000
Memory operations
Santa Clara, California....... Logic and RISC microprocessor operations 62,000
Santa Clara, California....... Administration, quality assurance and shipping 55,900
and receiving
Santa Clara, California....... Administration 43,700
Santa Clara, California....... Communication memory and other operations 50,000
Santa Clara, California....... Administration 48,300
Sydney, Australia............. Wafer fabrication and logic design center 41,000
Penang, Malaysia.............. Assembly and test operations 145,000
Hillsboro, Oregon............. Wafer fabrication and process research 192,000
Canlubang, the Philippines.... Assembly and test operations 176,000
IDT leases its Santa Clara facilities under leases expiring between 2004
and 2010, including renewal options. The Oregon facility is subject to a tax
ownership operating lease. Additional information about leased properties is
provided in Notes 5 and 6 of the Notes to Consolidated Financial Statements. The
Company owns its Malaysian and Philippines facilities, although the Malaysian
facilities are subject to long-term ground leases and the Company has an
interest in but does not own the Philippines land. The Company leases the
facility in Australia as a result of the acquisition of QSI in the first quarter
of fiscal 2000. IDT leases offices for its sales force in 18 domestic and 14
international locations. IDT also leases offices for its design centers in
Georgia and Texas.
In the first quarter of fiscal 2001, the Company completed the sale of its
wafer fabrication assets in Sydney. The Company plans to enter into a lease for
a smaller site to house its Australian design center.
9
ITEM 3. LEGAL PROCEEDINGS
A lawsuit filed by Lemelson Medical Education & Research Foundation,
Limited Partnership ("plaintiff") against the Company and twenty-five other
corporate defendants was served upon the Company in November 1998. The lawsuit
alleged that the defendants' manufacturing equipment infringed upon 16 patents
issued to the plaintiff and was filed in the United States District Court for
the District of Arizona, case number CIV-98-1413. The plaintiff also made
similar allegations against the Company's wholly owned subsidiary, Quality
Semiconductor, Inc., and eighty-seven other corporate defendants in a lawsuit
filed in the U.S. District Court for the District of Arizona, case number
CIV-99-0377, in February 1999. In November 1999, the Company entered into an
agreement with Lemelson that settled all outstanding claims and granted the
Company a license to use the Lemelson patents asserted against the Company and
its subsidiary. In the third quarter of fiscal 2000, the Company reversed the
excess portion of reserves previously provided for this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended April 2, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages as of May
28, 2000, are as follows:
Name Age Position
---- --- --------
Jerry Taylor........................ 51 President and Chief Executive Officer
David Cote.......................... 45 Vice President, Marketing and
Communications ASSPs
Bill Franciscovich.................. 40 Vice President, Sales
Michael Hunter...................... 48 Vice President, Manufacturing
Alan F. Krock....................... 39 Vice President and Chief Financial
Officer
Jimmy J.M. Lee...................... 47 Vice President, FIFO, SRAM and Logic
Chuen-Der Lien...................... 44 Vice President, Chief Technical Officer
Christopher P. Schott............... 49 Vice President, Specialty Memory
Products
10
Mr. Taylor joined the Company as Vice President, Memory Products in June
1996, and was elected Executive Vice President, Manufacturing and Memory
Products, in January 1998. Mr. Taylor became President and was appointed to the
Board of Directors in July 1999. He was named Chief Executive Officer in
December 1999. Prior to joining the Company, Mr. Taylor held engineering
positions at Mostek, Fairchild Semiconductor, Benchmarq Microelectronics, Plano
ISD and Lattice Semiconductor. Mr. Taylor was with Benchmarq Microelectronics
from 1987 to 1992, with Plano ISD from 1993 to 1995 and with Lattice
Semiconductor from April 1995 through June 1996.
Mr. Cote joined IDT in April 1997 as Vice President, Marketing. Mr. Cote
was named Vice President, Marketing and Communications ASSPs in March 2000.
Prior to joining IDT, he was Vice President of Marketing with Meridian Data from
June 1996 through December 1996, and Zeitnet, Inc. from January 1995 through
June 1996. Mr. Cote was previously with Synoptics, Inc. from 1991 to 1994, where
he achieved the level of Director of Marketing.
Mr. Franciscovich joined IDT in 1986 and has held various management, sales
and marketing positions with the Company. He was appointed to his current
position in August 1999. His previous positions at IDT included Vice President,
SRAM Products, from August 1998 to July 1999; Director of Sales and Marketing,
CEM Division, from April 1998 to August 1998; and Director of SRAM Marketing,
from April 1996 to April 1998. He served as SRAM Marketing Manager from 1992 to
1996.
Mr. Hunter was promoted to Vice President, Worldwide Manufacturing in
February 1998. Previously he was Vice President, California Silicon
Manufacturing, and has been with the Company since January 1996. Prior to coming
to IDT, Mr. Hunter was Vice President of Fabrication Operations at Chartered
Semiconductor from July 1994 through January 1996, and achieved Executive Vice
President level at Fujitsu Persona while with that company from 1989 to 1994.
Mr. Krock joined IDT in February 1996 as Corporate Controller and was
appointed a Vice President in July 1997. In January 1998 he was elected Vice
President, Chief Financial Officer. Prior to joining IDT, Mr. Krock was
Corporate Controller at Rohm Corporation from 1992 to 1996 and held management
positions at Price Waterhouse (now PricewaterhouseCoopers LLP) from 1983 to
1992.
Mr. Lee joined IDT in 1984. He was appointed to his current position in
August 1999. He previously served as Vice President of the FIFO Products
Division from 1996 to 1999, and as Director of FIFO/ECL Products from 1990 to
1996. Mr. Lee held a management position at Intel Corp. from 1979 to 1984.
Dr. Lien joined IDT in 1987 and was appointed Vice President, Technology
Development in 1992 and was promoted to Vice President, Chief Technical Officer
in April 1996. Prior to joining the Company, he held engineering positions at
Digital Equipment Corporation and AMD.
Mr. Schott has been with the Company since 1981 and was promoted to his
current position in 1989. His previous positions with the Company include
Director of Product Manufacturing at IDT's Salinas facility.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol IDTI. The following table sets forth the high and low last
reported sales prices for the Common Stock as reported by the Nasdaq National
Market during the fiscal quarters indicated:
High Low
---- ---
Fiscal 2000
First Quarter.................................. $10.44 $ 5.41
Second Quarter................................. 24.38 10.88
Third Quarter.................................. 29.19 15.94
Fourth Quarter................................. 43.81 25.63
Fiscal 1999
First Quarter.................................. $15.00 $ 6.63
Second Quarter................................. 8.19 4.22
Third Quarter.................................. 7.38 4.50
Fourth Quarter................................. 9.63 5.13
As of May 28, 2000, there were approximately 950 record holders of the
Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain any future earnings for use in its business
and, accordingly, does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below are qualified in their entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes thereto included elsewhere in this Annual Report on
Form 10-K.
Statements of Operations Data
In thousands, except per share data April 2, March 28, March 29, March 30, March 31,
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Revenues $ 701,722 $ 601,017 $ 649,827 $581,901 $725,686
Restructuring, asset impairment and other (4,726) 204,244 -- 45,223 --
Research and development expenses 108,009 143,355 130,730 158,402 139,643
Income (loss) before extraordinary item 130,611 (298,939) 8,457 (43,582) 123,015
Net income (loss) 130,611 (298,939) 8,457 (43,582) 124,936
Basic earnings per share:
Income (loss) before extraordinary item 1.44 (3.42) 0.10 (0.53) 1.53
Net income (loss) 1.44 (3.42) 0.10 (0.53) 1.56
Diluted earnings per share:
Income (loss) before extraordinary item 1.32 (3.42) 0.10 (0.53) 1.34
Net income (loss) 1.32 (3.42) 0.10 (0.53) 1.44
Shares used in computing net income (loss) per share:
Basic 90,918 87,397 84,732 82,252 80,292
Diluted 99,002 87,397 88,871 82,252 91,595
Balance Sheet and Other Data
April 2, March 28, March 29, March 30, March 31,
In thousands, except employee data 2000 1999 1998 1997 1996
Total assets............................. $1,162,182 $ 741,847 $1,038,787 $956,105 $ 982,213
Convertible subordinated notes, net of
Issuance costs........................ 179,550 184,354 183,756 183,157 182,558
Other long-term obligations.............. 92,172 78,022 86,929 65,387 46,054
Stockholders' equity..................... 681,151 299,326 590,028 554,583 580,948
Number of employees...................... 4,780 4,805 5,185 4,433 3,978
Certain amounts for fiscal 1996-1999 have been restated as a result of a
pooling-of-interests merger.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Company's consolidated statements
of operations as a percentage of revenues:
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
2000 1999 1998
----- ----- -----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 52.0 65.3 62.2
Restructuring charges, asset
impairment and other (0.7) 34.0 --
----- ----- -----
Gross profit 48.7 0.7 37.8
Operating expenses:
Research and development 15.4 23.9 20.1
Selling, general
and administrative 16.8 19.5 15.6
Merger expenses 0.7 0.2 --
----- ----- -----
Total operating expenses 32.9 43.6 35.7
----- ----- -----
Operating income (loss) 15.8 (42.9) 2.1
Interest expense (2.0) (2.5) (2.3)
Interest income
and other, net 5.8 1.1 2.0
----- ----- -----
Income (loss) before
income taxes 19.6 (44.3) 1.8
Provision for income taxes 1.0 5.4 0.5
----- ----- -----
Net income (loss) 18.6% (49.7)% 1.3%
===== ===== =====
The following discussion should be read in conjunction with IDT's
consolidated financial statements and the notes thereto.
All non-historical information contained in this discussion and
analysis constitutes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements are not guarantees of future performance and involve a
number of risks and uncertainties, including but not limited to: operating
results; new product introductions and sales; competitive conditions; capital
expenditures and capital resources; manufacturing capacity utilization, and the
Company's efforts to consolidate and streamline production; customer demand and
inventory levels; protection of intellectual property in the semiconductor
industry; and the risk factors set forth in the section "Factors Affecting
Future Results." Future results may differ materially from such forward-looking
statements as a result of such risks. The Company undertakes no obligation to
publicly release any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof.
The following 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 and capacity utilization.
Overview
IDT made significant progress in improving its results from operations
during fiscal 2000.
The improvement in operating results is primarily attributable to
increased revenues from target and other markets, reduced manufacturing costs
per unit sold associated with more efficient manufacturing operations, reduced
operating costs primarily associated with more focused research and development
efforts, and overall improved conditions in the semiconductor industry.
Revenues increased primarily because of increased unit sales. IDT is
focused on selling semiconductor products to customers primarily in
communications infrastructure markets. Customer acceptance of IDT's new
communications products as well as increasing demand for existing products in
target markets was the primary factor contributing to the increase in product
units sold. Products designed primarily for the communications markets and
related applications are also, at times, utilized by other markets and
applications. For example, products in IDT's logic and SRAM product families
have broad use in applications outside IDT's target communications
infrastructure markets and demand for IDT products in these other markets also
improved during fiscal 2000. In fiscal 2000, IDT completed the merger with
Quality Semiconductor, Inc., ("QSI") which contributed additional revenues.
During fiscal 1999, IDT took steps to make its manufacturing operations
more efficient. These steps included closing the Company's fabrication facility
located in San Jose, Calif., to improve utilization of the remaining fabrication
facilities. The Company also began the process of consolidating QSI
manufacturing volumes within existing IDT facilities, in a similar effort to
increase the utilization of IDT's facilities and reduce the cost per unit
produced. IDT has subsequently completed the sale of these surplus manufacturing
assets to third parties.
14
To focus its efforts to efficiently serve target communications
markets, in fiscal 2000, IDT completed the sale of certain x86 microprocessor
assets, including IDT's x86 product research and development subsidiary, Centaur
Technology, Inc. Through the sale of these assets, IDT was able to reduce the
level of operating expenditures, especially research and development expenses,
while increasing development efforts associated with developing products for
IDT's communications infrastructure markets.
Results of Operations
Revenues. Pooling of interests accounting has been used to account for the
merger of QSI with IDT. Under pooling of interests accounting, IDT's past
results are restated to include the results of QSI (see Note 2 of Notes to
Consolidated Financial Statements).
Revenues for fiscal 2000 were $701.7 million, an increase of $100.7
million compared to the $601.0 million recorded in fiscal 1999. Fiscal 1999
revenues decreased by $48.8 million compared to the $649.8 million recorded for
fiscal 1998.
The increase in revenues from fiscal 1999 to fiscal 2000 is primarily
the result of increased unit sales of IDT's communications and high-performance
logic and SRAM and other products, partially offset by a decline in sales of x86
microprocessor products. Increased unit sales of IDT's communications and
high-performance logic products is principally attributable to the introduction
of new products primarily for data networking and wireless communications
infrastructure markets as well as increased demand for existing products from
customers in these and other markets. In addition, IDT is benefiting from
increased levels of demand for the industry standard products which it
manufactures for its SRAM segment. In September 1999, IDT sold certain of its
x86 microprocessor-related assets and ceased unit sales of these products in
January 2000. The Company expects that unit demand for the products it offers
will now be primarily derived from the communications infrastructure markets.
The Company believes revenues and costs associated with existing and
new products in the communications and high-performance logic and SRAMs and
other segments will increase in future periods as the Company continues to
execute new product introduction strategies and assuming that overall levels of
industry demand continue to improve. IDT does not expect any future x86
microprocessor unit sales.
The merger of QSI into the Company was completed in fiscal 2000.
Revenue, costs and operating margins from QSI products have been included in the
Company's results reported for its communications and high-performance logic
segment. IDT commenced the process of combining IDT's and QSI's manufacturing
operations after the merger was completed in fiscal 2000. In May 2000, IDT
completed the sale of surplus manufacturing assets related to the former QSI
operations.
15
During fiscal 2000, IDT entered into a cross license with Intel Corp.
("Intel") and received as consideration $20.5 million. Of this amount, $8.5
million was recognized as revenue in the second quarter of fiscal 2000. The
remaining revenue associated with the cross license with Intel is being
recognized over seven years, the estimated remaining useful life of the relevant
intellectual property.
Gross Profit. Gross profit in fiscal 2000 was $341.6 million, compared to $4.0
million and $245.5 million in fiscal 1999 and 1998, respectively.
On an operating basis (excluding restructuring, asset impairment and
other special costs and benefits), gross margin showed sequential quarterly
improvement throughout fiscal 2000 and reached 47.6% for the year as a whole,
compared to 35.1% in fiscal 1999 and 37.8% in fiscal 1998. The improvement in
IDT's gross margin in fiscal 2000 compared to fiscal 1999 was due to higher
revenues primarily associated with increased unit sales, and cost savings
associated with the consolidation of wafer fabrication production late in fiscal
1999, including the closure of one fabrication facility. Consolidation of
production has allowed IDT to improve utilization of its remaining fabrication
facilities, resulting in a lower overall cost per unit produced. IDT's gross
margin also improved in fiscal 2000 over fiscal 1999 because of a reduction in
depreciation expense resulting from lower carrying values of impaired
manufacturing assets.
Special items impacting gross profit in fiscal 2000 included $8.5
million in Intel licensing revenue, which carried little related costs, and $4.7
million in net positive adjustments and reversals relating to the completion in
fiscal 2000 of restructuring activities commenced in fiscal 1999 and finalizing
the related accounting.
In fiscal 1999, the Company recorded a $28.9 million charge to cost of
sales which related primarily to excess SRAM manufacturing equipment ($18.9
million) and certain technology licensing matters ($10.0 million, of which $3
million was reversed later in fiscal 1999 upon settlement of certain of these
matters). The net carrying value of this equipment before writedown was $17.4
million, and after writedown was $2.3 million. The excess SRAM manufacturing
equipment charge represented a writedown to estimated fair market value based
primarily on appraisals and third-party estimates. The charge was the result of
prevailing economic conditions in the SRAM market, which had undergone declines
in both demand and price. The charge for manufacturing equipment resulted in
annual depreciation expense savings of approximately $4 million.
Also in fiscal 1999, the Company recorded an R&D expense charge of $5.5
million relating primarily to discontinuing certain technology development
initiatives (see "Research and Development" below).
Additionally, the Company recorded a $131.9 million asset impairment
and other charge in fiscal 1999 which related primarily to an asset impairment
reserve recorded against the manufacturing assets of IDT's eight-inch wafer
fabrication facility in Hillsboro, Ore. The Company determined that due to
excess industry capacity and low prices for semiconductor products manufactured
in the Hillsboro facility, future undiscounted cash flows related to its wafer
fabrication assets were insufficient to recover the carrying value of the
assets. As a result, the Company wrote down these assets to estimated fair
market value based primarily on appraisals and estimates from independent
parties. Of the $131.9 million, $5.0 million was related to certain patent
claims against the Company. The Company reversed $3.0 million in fiscal 2000
upon final settlement of these claims. As a result of asset impairment charges
in fiscal 1999, which reduced the carrying value of manufacturing equipment,
IDT's annual depreciation expense was reduced by approximately $25 million.
16
The Company incurred restructuring charges of $46.4 million in fiscal
1999 related primarily to a provision for exit and closure costs associated with
the San Jose wafer fabrication facility, which the Company closed in the third
quarter of fiscal 1999. The Company completed the sale of this facility in the
first quarter of fiscal 2000. During fiscal 2000, the Company recorded a $1.7
million reserve adjustment, benefiting gross profit, upon the settlement of an
intellectual property dispute. As a result of the restructuring actions, the
Company realized annual cost savings in depreciation, labor, equipment and other
costs of approximately $45 million, which were partially realized in the fourth
quarter of fiscal 1999 and fully realized in fiscal 2000.
Research and Development. For fiscal 2000, research and development ("R&D")
expenses decreased by $35.3 million compared to fiscal 1999. R&D expenses
increased by $12.6 million from fiscal 1998 to fiscal 1999.
R&D expenses decreased in fiscal 2000 for three principal reasons.
First, expenses related to developing process technology have been reduced in
fiscal 2000 because of the closure of IDT's San Jose wafer fabrication facility,
and the consolidation of all process development activities solely at the
Hillsboro facility. Second, the allocation of manufacturing costs associated
with process R&D has decreased in fiscal 2000 as a result of fewer fabrication
facilities and continued improved manufacturing facility utilization at the
remaining facilities. With increased utilization of equipment for production
activities, allocations of costs to R&D activities have decreased based upon the
nature of activities performed. Third, expenses to develop x86 microprocessor
products decreased in the second half of fiscal 2000, as the Company completed
the sale of its Austin, Texas x86 microprocessor design center during the second
quarter of fiscal 2000.
R&D expenses in fiscal 1999 also included $5.5 million in charges,
primarily associated with discontinuing efforts to develop certain new products,
including a graphics chip and a specialized logic chip. Cost savings associated
with discontinuing these development efforts are approximately $1 million per
quarter.
Management expects that in fiscal 2001, R&D expense will increase in
absolute dollars from fiscal 2000's levels. The Company intends to increase its
investment in new product and technology development in an effort to increase
revenues in its target networking and telecommunications customer markets. As a
percentage of revenue, management expects R&D expense to remain relatively
constant, assuming that business conditions and overall industry demand continue
to improve.
Current R&D activities include enhancing IDT's families of integrated
products such as FIFOs and multi-ported communications products; expanding IDT's
offerings of networking and switching products; developing a new family of
RISC-based processors which integrate networking functions; broadening IDT's
high-performance logic and clock product portfolios; delivering two new families
of integrated communications products targeted at improving customers' router
system performance and providing gateways for voice traffic over the internet.
Additionally, IDT is developing advanced manufacturing process technologies,
including 0.15-micron semiconductor fabrication techniques, designed to produce
performance advantages and expand the volumes of semiconductor products produced
to allow continued growth of IDT's communications products.
17
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were essentially flat for fiscal 2000 compared to fiscal 1999.
As a percentage of revenue, SG&A decreased from 19.5% to 16.8% over this period.
The Company expects that in coming quarters, recurring SG&A expenses will
increase slightly, principally related to costs such as sales commissions and
sales bonuses which vary in relation to sales volumes, and marketing expenses
related to new product introductions. Assuming continued strong business
conditions and improving overall industry demand, management expects SG&A
spending as a percentage of revenues to decline in fiscal 2001.
SG&A in fiscal 1999 included expenses associated with x86
microprocessor marketing and enterprise-wide management information system
upgrades. These fiscal 1999 expenses were largely responsible for the $16.7
million increase in SG&A from fiscal 1998 to fiscal 1999.
Merger Expenses. The Company incurred $4.8 million in expenses related to the
QSI merger in the first quarter of fiscal 2000, including $4.6 million in
severance and employee retention costs.
Interest Expense. Interest expense is primarily associated with the 5.5%
Convertible Subordinated Notes, due in 2002, and secured equipment financing
agreements which amortize over the term of the financing agreements. Excluding
historical amounts related to QSI, annual interest expense was essentially
unchanged during the fiscal 1998-2000 period. Substantially all of the Notes
were converted into common stock, in the first quarter of fiscal 2001 (see
"Subsequent Events," below).
Interest Income and Other, Net. Interest income and other, net, was $40.6
million in fiscal 2000, compared to $6.4 million in fiscal 1999. Special items
in fiscal 2000 included net gains of $19.6 million primarily related to the sale
of IDT's x86 design subsidiary and x86 processor related intellectual property;
a realized net gain of $11.3 million on the sale of a portion of the Company's
equity investment in Quantum Effect Devices, Inc. ("QED"); and a gain of $4.6
million on the sale of the Company's San Jose fabrication facility. Interest
income increased by $5.8 million in fiscal 2000 as a result of higher cash
equivalents and investment balances. Interest income and other, net for fiscal
2000 and 1999 includes losses of $14.8 million and $11.1 million, respectively,
related to IDT's equity interest in Clear Logic, Inc. The Company does not
expect to record additional losses related to this investment in fiscal 2001, as
the Clear Logic investment was fully amortized in fiscal 2000.
Taxes. The Company's effective tax rate for fiscal 2000 was 5%. The tax rate in
fiscal 2000 was lower than the 35% federal rate primarily due to the use of net
operating loss and tax credit carryovers to reduce the Company's actual tax
liability.
In view of the cumulative losses incurred during fiscal 1997-1999, and
in consideration of current accounting literature and related interpretations,
which require that reserves be taken for net deferred tax assets when there is
significant doubt as to whether such assets will be realized, IDT recorded a
reserve for all of its existing net deferred tax assets in fiscal 1999. The
Company realized no federal tax benefit in fiscal 1999 because of its inability
to carry back losses.
The effective tax rate for fiscal 1998 of 28% differed from the U.S.
statutory rate of 35% primarily due to differences in U.S. and foreign tax
rates, changes in valuation allowances for deferred tax assets; and the
utilization of certain tax credits.
Historically, income taxes in state jurisdictions have not been
significant, due mainly to available tax credits. IDT currently enjoys certain
tax benefits in Malaysia and the Philippines, mainly as a result of tax holidays
and certain investment incentives. (See Note 10 of Notes to Consolidated
Financial Statements.)
The Company currently expects its effective tax rate for fiscal 2001 to
be 20%. Should the Company's profits during fiscal 2001 differ significantly
from planned levels, the Company's tax rate could change.
18
Liquidity and Capital Resources
At April 2, 2000, cash and cash equivalents were $372.6 million, an increase of
$228.0 million from $144.6 million at March 28, 1999. Additionally the Company
had short-term investments, excluding equity securities, of $49.4 million and
$56.5 million at April 2, 2000 and March 28, 1999, respectively.
The Company also holds equity securities consisting of common stock of
QED, which completed an initial public offering in fiscal 2000. The Company sold
a portion of its holdings as part of the public offering, recognizing a pretax
net gain of $11.3 million. The remaining 2.8 million shares of QED common stock
owned by IDT are recorded on the April 2, 2000, balance sheet at their
then-current fair value of approximately $80 per share, while related unrealized
gains are reported as a separate component of accumulated other comprehensive
income.
The Company generated $242.6 million in cash from operating activities
during fiscal 2000, up from $61.0 million for fiscal 1999. Cash from operating
activities in fiscal 1999 was relatively low due to the Company's net loss in
that year, partially offset by noncash items.
During fiscal 2000, the Company's net cash used for investing
activities was $37.3 million. Capital expenditures were $84.5 million in fiscal
2000, compared to $111.9 million in fiscal 1999. In fiscal 2000, the Company
received $44.3 million in proceeds from sales of property, plant and equipment,
consisting primarily of the sale of its former San Jose fabrication facility,
which was closed during fiscal 1999 in connection with the Company's
restructuring efforts, and assets associated with the Company's x86 design
subsidiary.
Financing activities provided $22.7 million during fiscal 2000.
Financing activities during the year included the repurchase and retirement of a
portion of the 5.5% Convertible Subordinated Notes for $3.5 million. The notes
had a face value of $4.5 million.
IDT anticipates capital expenditures of approximately $125 million
during fiscal 2001, to be financed primarily through cash generated from
operations and existing cash and investments. The Company may also investigate
other financing alternatives, depending on whether available terms are favorable
to the Company.
The Company believes that existing cash and cash equivalents, cash flow
from operations and credit sources available to the Company will be sufficient
to meet its working capital, debt repayment and anticipated capital expenditure
requirements through fiscal 2001 and 2002. There can be no assurance however,
that the Company will not be required to seek additional external financing
sooner or that such financing, if required, will be available on terms
satisfactory to the Company. If the Company is required to seek such external
financing, the unavailability of financing on terms satisfactory to IDT could
have a material adverse effect on the Company.
Subsequent Events
Substantially all holders of the Company's convertible notes converted their
notes into common stock in May 2000, increasing the number of shares outstanding
by approximately 6.3 million. As a result of the conversion, the Company expects
a significant reduction in interest expense in future periods.
19
Factors Affecting Future Results
IDT's Operating Results can Fluctuate Dramatically.
IDT's operating results can fluctuate dramatically. For example, the Company had
net income of $130.6 million for fiscal 2000 compared to a net loss of $298.9
million for fiscal 1999 and net income of $8.5 million for fiscal 1998.
Fluctuations in operating results can result from a wide variety of factors,
including:
o timing of new product and process technology announcements and
introductions from IDT or its competitors;
o competitive pricing pressures, particularly in the SRAM market;
o fluctuations in manufacturing yields;
o changes in the mix of products sold;
o availability and costs of raw materials;
o the cyclical nature of the semiconductor industry and industry-wide wafer
processing capacity;
o economic conditions in various geographic areas; and
o costs associated with other events, such as underutilization or expansion
of production capacity, intellectual property disputes, or other
litigation.
In addition, many of these factors also impact the recoverability of
the cost of manufacturing, tax and other assets. As business conditions change,
future writedowns or abandonment of these assets may occur. Also, the Company
ships a substantial portion of its products in the last month of a quarter. If
anticipated shipments in any quarter do not occur, IDT's operating results for
that quarter could be harmed. Further, IDT may be unable to compete successfully
in the future against existing or potential competitors, and IDT's operating
results could be harmed by increased competition. IDT's operating results are
also impacted by changes in overall economic conditions, both domestically and
abroad. IDT derives almost 40% of its revenues from overseas sales. Continued
uncertainties in some foreign economies, such as Korea, Japan, and other
countries may reduce demand for IDT's products. Should economic conditions
deteriorate, domestically or overseas, the Company's sales and business results
would be harmed.
The Cyclicality of the Semiconductor Industry Exacerbates the Volatility of
IDT's Operating Results.
The semiconductor industry is highly cyclical.
Market conditions characterized by excess supply relative to demand and
resultant pricing declines have occurred in the past and may occur in the
future. Such pricing declines adversely affect IDT's operating results and force
IDT and its competitors to modify their capacity expansion programs. As an
example, in prior years a significant increase in manufacturing capacity
allocated to industry standard SRAM components 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 or planned for the industry-standard products, such as
SRAM, that it produces. IDT's operating results can be adversely affected by
such 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 IDT's operating
results.
Although IDT is attempting to reduce its dependence on revenue derived
from the sale of industry-standard products, and while the Company seeks to
carefully manage costs, these efforts may not be sufficient to offset the
adverse effect the above or other industry related factors can have on the
Company's results.
Demand for IDT's Products Depends on Demand in the Communications, and to a
Lesser Extent, Computer Markets.
The majority of the Company's products are incorporated into customers' systems
in data networking, wireless telecommunications, and other communications
applications. A percentage of the Company's products, including its
high-performance logic components, serve in customers' computer,
computer-related, and other applications. Customer applications for the
Company's products have historically been characterized by rapid technological
change and significant fluctuations in demand. Demand for most IDT products, and
therefore potential increases in revenue, depends upon growth in the
communications market, particularly in the data networking and wireless
telecommunications infrastructure markets and, to a lesser extent, the computer
markets. Any slowdown in these communications or computer related markets could
materially adversely affect IDT's operating results.
20
IDT's Product Manufacturing Operations are Complex and Subject to Interruption.
From time to time, IDT has experienced production difficulties, including
reduced manufacturing yields or products that do not meet IDT's or its
customers' specifications, that have caused delivery delays and quality
problems. While production delivery delays have been infrequent and generally
short in duration, IDT could experience manufacturing problems and product
delivery delays in the future as a result of, among other things, complexity of
manufacturing processes, changes to its process technologies, and ramping
production and installing new equipment at its facilities.
IDT has wafer fabrication facilities located in Hillsboro, Ore. and
Salinas, Calif. As a result of the QSI merger, IDT also acquired manufacturing
assets in eastern Australia and other locations. The sale of QSI-related and
other surplus manufacturing assets was completed by May 2000. Substantially all
of IDT's revenues are derived from products manufactured at facilities which are
exposed to the risk of natural disasters, including earthquakes. Approximately
70% of IDT's total revenue is derived from products manufactured at its
fabrication facility in Salinas which is located near an active earthquake
fault. If IDT were unable to use its facilities, 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 or related to its business
operations, as adequate protection is not offered at economically justifiable
rates.
Historically, IDT has utilized subcontractors for the majority of its
incremental assembly requirements, typically at higher costs than its own
Malaysian and Philippines assembly and test operations. IDT expects to continue
utilizing subcontractors extensively to supplement its own production volume
capacity. Due to production lead times, any failure by IDT to adequately
forecast the mix of product demand could adversely affect IDT's sales and
operating results.
IDT's Operating Results can be Substantially Impacted by Facility Expansion,
Utilization and Consolidation.
Facility and capacity additions have resulted in a significant increase in fixed
and variable operating expenses that in the past have not been fully offset when
revenues declined. IDT records as R&D expense the operating costs associated
with bringing a new fabrication facility to commercial production status in the
period such expenses are 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, if revenue levels are not maintained or if IDT is unable
to achieve gross margins from products produced at the Hillsboro facility that
are comparable to IDT's other products, IDT's future results of operations could
be adversely impacted.
IDT's Results are Dependent on the Success of New Products.
New products and process technology costs associated with the Hillsboro wafer
fabrication facility will continue to require significant R&D expenditures.
However, the Company may not be able to develop and introduce new
products in a timely manner, its new products may not gain market acceptance,
and it may not be successful in implementing new process technologies. If IDT is
unable to develop new products in a timely manner, and to sell them at gross
margins comparable to or better than IDT's current products, its future results
of operations could be adversely impacted.
21
IDT is Dependent on a Limited Number of Suppliers.
IDT's manufacturing operations depend upon obtaining adequate raw materials on a
timely basis. The number of vendors of certain raw materials, such as silicon
wafers, ultra-pure metals and certain chemicals and gases, is very limited. In
addition, certain packages used by IDT require long lead times and are available
from only a few suppliers. From time to time, vendors have extended lead times
or limited supply to IDT due to capacity constraints. IDT's results of
operations would be adversely affected if it were unable to obtain adequate
supplies of raw materials in a timely manner or if there were significant
increases in the costs of raw materials.
From time to time, IDT contracts with third party semiconductor
designers.
IDT May Require Additional Capital on Satisfactory Terms to Remain Competitive.
The semiconductor industry is extremely capital intensive. To remain
competitive, IDT continues to invest in advanced manufacturing and test
equipment. IDT could be required to seek financing to satisfy its cash and
capital needs, and such financing might not be available on terms satisfactory
to IDT. If such financing is required and if such financing is not available on
terms satisfactory to IDT, its operations could be adversely affected.
Intellectual Property Claims Could Adversely Affect IDT's Business and
Operations.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights, which have resulted in significant and often
protracted and expensive litigation. In recent years, there has been a growing
trend by companies to resort to litigation to protect their semiconductor
technology from unauthorized use by others. IDT has been involved in patent
litigation in the past, which adversely affected its operating results. Although
IDT has obtained patent licenses from certain semiconductor manufacturers, IDT
does not have licenses from a number of semiconductor manufacturers that have a
broad portfolio of patents. IDT has been notified that it may be infringing on
patents issued to certain semiconductor manufacturers and other parties and is
currently involved in 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.
22
International Operations Add Increased Volatility to IDT's Operating Results.
A substantial percentage of IDT's revenues are derived from non-U.S. sales.
During fiscal 2000, fiscal 1999 and fiscal 1998, non-U.S. sales accounted for
38%, 37% and 39% of IDT's revenues, respectively. During these periods, Asia
Pacific sales, which exclude Japan, accounted for 10%, 10% and 12% of IDT's
revenues, respectively. Sales in Japan accounted for 11%, 8% and 9% of total
revenues, respectively, during these periods.
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, can impact IDT's cost of goods sold, as well as
both pricing and demand for its products. IDT's offshore operations and export
sales are also subject to risks associated with foreign operations, including:
o political instability;
o currency controls and fluctuations;
o changes in local economic conditions and import and export controls; and
o 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. The Company also purchases certain
semiconductor manufacturing tools, such as photo-lithography equipment, from
overseas vendors. Such tools are typically quoted at a foreign-currency price,
often equivalent to several million U.S. dollars per unit. Currency exchange
rate fluctuations can have a substantial impact on the net U.S.-dollar cost of
these tools to IDT.
IDT is Subject to Risks Associated with Using Hazardous Materials in its
Manufacturing.
IDT is subject to a variety of environmental and other regulations related to
hazardous materials used in its manufacturing process. Any failure by IDT to
control the use of, or to restrict adequately the discharge of, hazardous
materials under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended.
IDT's Common Stock is Subject to Price Volatility.
IDT's common stock has experienced substantial price volatility. Such volatility
may occur in the future, particularly as a result of quarter-to-quarter
variations in the actual or anticipated financial results of IDT, the companies
in the semiconductor industry, or those in the markets served by IDT.
Announcements by IDT or its competitors regarding new product introductions may
also lead to volatility. In addition, IDT's stock price can fluctuate due to
price and volume fluctuations in the stock market, especially those that have
affected technology stocks. IDT's product portfolio includes a mix of
proprietary or limited-source products, and industry-standard or multiple-source
products, IDT's products also employ a variety of semiconductor design
technologies. Stock price volatility may also result from changes in perceptions
about the various types of products IDT manufactures and sells.
IDT is Exposed to Fluctuations in the Market Price of its Investment in QED.
The Company's investment portfolio includes common stock holdings in QED, as
described above. The common stock of QED is highly volatile. At the same time,
the Company is precluded from selling or hedging the value of any of its current
holdings until July 2000, due to underwriting-agreement restrictions. As a
result of these factors, the amount of income and cash flow that IDT ultimately
realizes from this investment in future periods may vary materially from the
current unrealized amount.
23
Quantitative and Qualitative Disclosures About Market Risk.
Most of the Company's outstanding debt, including the 5.5% Convertible
Subordinated Notes, is at fixed rates. The Tax Ownership Operating Lease related
to IDT's manufacturing facilities in Hillsboro has variable, London Interbank
Offered Rate (LIBOR)-based payments. However, this synthetic lease is
collateralized with investments that have similar, and thus offsetting, interest
rate characteristics. The Company's investment portfolio typically consists of
short-term securities that have managed maturity schedules. As a result of these
factors, a hypothetical 10% move in interest rates would have an insignificant
effect on IDT's financial position, results of operations and cash flows. The
Company does not use derivative financial instruments in its investment
portfolio.
The Company is exposed to foreign currency exchange rate risk as a
result of international sales, assets and liabilities of foreign subsidiaries,
and capital purchases denominated in foreign currencies. The Company uses
derivative financial instruments (primarily forward contracts) to help manage
its foreign currency exchange exposures. The Company does not enter in
derivatives for trading purposes. The Company performed a sensitivity analysis
for both fiscal 1999 and 2000 and determined that a 10% change in the value of
the U.S. dollar would have an insignificant near-term impact on IDT's financial
position, results of operations and cash flows.
Impact of Year 2000 on IDT's Operations.
The Company has completed the transition from calendar year 1999 to 2000 and
conducted internal tests for year 2000 issues. No significant impact to the
Company's operations or its business and manufacturing systems has been
detected. The Company will continue to monitor its systems, facilities and
products over the next few months to ensure that latent defects do not manifest
themselves. Such follow-up will be encompassed into the normal monitoring of
Company systems and operations.
Amounts paid to manufacturing equipment vendors to obtain software
upgrades to remediate Year 2000 issues totaled approximately $400,000. IDT also
paid Keane, Inc., a software services firm, approximately $165,000 in consulting
fees. Residual year 2000 and monitoring costs after April 2, 2000 are not
expected to be significant.
Requirements Associated with the Introduction of the Euro.
IDT is continuing to monitor and evaluate the impact of the introduction of the
Single European Currency (Euro). During the transition period ending December
31, 2001, public and private parties may pay for goods and services using either
the Euro common currency or the legacy currency of the participating country.
Beginning January 1, 2002, Euro denominated bills and coins will be issued, with
the legacy currencies being completely withdrawn from circulation on June 30,
2002.
IDT is in the process of evaluating the impact of the Euro's
introduction on the Company's pricing policies, foreign currency hedging
tactics, and administrative systems and costs. Based on its ongoing evaluation,
IDT does not currently expect the cost of any system modifications to be
material and does not expect that the Euro will have a material adverse impact
on IDT's business activities, financial condition or overall trends in results
of operations.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this item is provided under the caption
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7 of this
report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
Index to Consolidated Financial Statements Covered by Report of Independent
Accountants
Consolidated Financial Statements included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets at April 2, 2000 and March 28, 1999
Consolidated Statements of Operations for each of the three fiscal years in
the period ended April 2, 2000
Consolidated Statements of Cash Flows for each of the three fiscal years in
the period ended April 2, 2000
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years in the period ended April 2, 2000
Notes to Consolidated Financial Statements
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Integrated Device Technology, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows, and of
stockholders' equity present fairly, in all material respects, the financial
position of Integrated Device Technology, Inc. and its subsidiaries at April 2,
2000 and March 28, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended April 2, 2000, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 21, 2000, except for
Note 15, which is as of May 15, 2000.
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, April 2, March 28,
except share amounts) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 372,606 $144,598
Short-term investments-- equity securities 223,906 -
Other short-term investments 49,439 56,516
Accounts receivable, net of allowance for returns
and doubtful accounts of $6,045 and $5,302 90,957 62,175
Inventories, net 72,279 60,787
Prepayments and other current assets 40,630 59,381
---------- --------
Total current assets 849,817 383,457
Property, plant and equipment, net 260,107 299,235
Other assets 52,258 59,155
---------- --------
Total assets $1,162,182 $741,847
========== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $37,294 $37,076
Accrued compensation and related expenses 28,530 16,736
Deferred income on shipments to distributors 74,585 45,035
Other accrued liabilities 35,160 49,639
Current portion of long-term obligations 11,317 13,461
---------- --------
Total current liabilities 186,886 161,947
Convertible subordinated notes, net of issuance costs 179,550 184,354
---------- --------
Long-term obligations 92,172 78,022
---------- --------
Deferred tax liabilities 22,423 18,198
---------- --------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity:
Preferred stock; $.001 par value:
10,000,000 shares authorized; no shares issued - -
Common stock; $.001 par value:
200,000,000 shares authorized; 95,667,128 and 87,994,095
shares issued and outstanding 96 88
Additional paid-in capital 421,785 372,900
Treasury stock (none and 311,086 shares) - (1,638)
Retained earnings (accumulated deficit) 39,648 (68,315)
Accumulated other comprehensive income (loss) 219,622 (3,709)
---------- --------
Total stockholders' equity 681,151 299,326
---------- --------
Total liabilities and stockholders' equity $1,162,182 $741,847
========== ========
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, April 2, March 28, March 29,
except per share data) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $701,722 $ 601,017 $649,827
Cost of revenues 364,832 392,748 404,364
Restructuring charges, asset impairment and other (4,726) 204,244 -
-------- --------- --------
Gross profit 341,616 4,025 245,463
-------- --------- --------
Operating expenses:
Research and development 108,009 143,355 130,730
Selling, general and administrative 117,942 117,805 101,145
Merger expenses 4,840 974 -
-------- --------- --------
Total operating expenses 230,791 262,134 231,875
-------- --------- --------
Operating income (loss) 110,825 (258,109) 13,588
Interest expense (13,967) (14,787) (15,210)
Interest income and other, net 40,628 6,413 13,398
-------- --------- --------
Income (loss) before income taxes 137,486 (266,483) 11,776
Provision for income taxes 6,875 32,456 3,319
-------- --------- --------
Net income (loss) $130,611 $(298,939) $ 8,457
======== ========= ========
Basic net income (loss) per share: $ 1.44 $ (3.42) $ 0.10
Diluted net income (loss) per share: $ 1.32 $ (3.42) $ 0.10
Weighted average shares:
Basic 90,918 87,397 84,732
Diluted 99,002 87,397 88,871
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
- ------------------------------------------------------------------------------------------------------------------------------
April 2, March 28, March 29,
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $130,611 $(298,939) $ 8,457
Adjustments:
Depreciation and amortization 89,045 113,596 119,508
Restructuring, asset impairment and other - 179,428 -
Gain on sale of property, plant and equipment (12,042) - -
Deferred tax assets - 31,578 4,220
Changes in assets and liabilities:
Accounts receivable, net (29,585) 18,042 5,266
Inventories, net (14,631) 17,091 (16,824)
Income tax refund receivable - 7,309 26,746
Other assets 14,855 11,993 7,724
Accounts payable 942 (26,035) 14,912
Accrued compensation and related expenses 12,034 (860) 954
Deferred income on shipments to distributors 29,550 (13,603) 13,139
Deferred licensing revenue 32,033 - -
Other accrued liabilities (10,199) 21,364 11,561
-------- --------- --------
Net cash provided by operating activities 242,613 60,964 195,663
-------- --------- --------
Investing activities
QSI net cash used from 10/1/98 to 3/31/99 (1,146) - -
Purchases of property, plant and equipment (84,489) (111,867) (167,546)
Proceeds from sale of property, plant and equipment 44,334 3,137 367
Purchases of short-term investments (166,969) (109,546) (51,661)
Proceeds from sales of short-term investments 170,976 131,465 12,187
Purchases of equity investments - (5,867) (9,224)
-------- --------- --------
Net cash used for investing activities (37,294) (92,678) (215,877)
-------- --------- --------
Financing activities
Proceeds from issuance of common stock, net 44,233 9,038 23,101
Repurchase of common stock, net - (4,787) (229)
Proceeds from secured equipment financing - 31,764 2,850
Payments on capital leases and other debt (21,544) (15,220) (10,070)
-------- --------- --------
Net cash provided by financing activities 22,689 20,795 15,652
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 228,008 (10,919) (4,562)
Cash and cash equivalents at beginning of period 144,598 155,517 160,079
-------- --------- --------
Cash and cash equivalents at end of period $372,606 $ 144,598 $155,517
======== ========= ========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 13,455 $ 13,939 $ 13,839
Income taxes, net of refunds 3,798 (12,093) (30,350)
Non-cash activities:
Conversion of accrued liability to equity - 6,293 3,000
Capital lease obligations - 6,497 6,603
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Retained Accumulated
Common Stock Additional Earnings Other Total
--------------------- Paid-in Treasury (Accumulated Comprehensive Stockholders'
(In thousands) Shares Amount Capital Stock Deficit) Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, March 30, 1997 83,460,220 $83 $332,770 $ - $222,885 $ (1,155) $554,583
Issuance of common stock 2,990,367 3 25,763 - - - 25,766
Tax benefit from stock
option transactions - - 1,420 - - - 1,420
Other comprehensive loss:
Translation adjustment - - - - - (711) (711)
Unrealized gain on
securities, net - - - - - 513 513
Net income - - - - 8,457 - 8,457
----------- ---- -------- -------- -------- -------- --------
Comprehensive income 231,342 (198) 231,144
-------- -------- --------
Balance, March 29, 1998 86,450,587 86 359,953 - 231,342 (1,353) 590,028
Repurchase of common stock (856,000) (1) - (4,630) - - (4,631)
Issuance of common stock 1,827,777 2 6,655 2,992 (718) - 8,931
Issuance of common
stock to extinguish
accrued liability 571,731 1 6,292 - - - 6,293
Other comprehensive income:
Translation adjustment - - - - - (2,304) (2,304)
Unrealized loss
on securities, net - - - - - (52) (52)
Net loss - - - - (298,939) - (298,939)
----------- ---- -------- -------- -------- -------- --------
Comprehensive loss (68,315) (2,356) (70,671)
-------- -------- --------
Balance, March 28, 1999 87,994,095 88 372,900 (1,638) (68,315) (3,709) 299,326
Issuance of common stock 7,673,033 8 43,756 1,638 (83) - 45,319
QSI loss, 10/1/1998
to 3/31/1999 - - - - (22,565) - (22,565)
Tax benefit from stock
option transactions - - 5,129 - - - 5,129
Other comprehensive income:
Translation adjustment - - - - - 595 595
Unrealized gain
on securities, net - - - - - 222,736 222,736
Net income - - - - 130,611 - 130,611
----------- ---- -------- -------- -------- -------- --------
Comprehensive income 39,648 223,331 262,979
-------- -------- --------
Balance, April 2, 2000 95,667,128 $96 $421,785 $ - $ 39,648 $219,622 $681,151
============ ==== ======== ========== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1
- --------------------------------------------------------------------------------
Summary of Significant Accounting Policies
Nature of Business. Integrated Device Technology, Inc. ("IDT" or the "Company")
designs, develops, manufactures and markets a broad range of high-performance
semiconductor products, primarily for communications markets. IDT's products
include communications memories, communications application-specific standard
products (ASSPs), RISC microprocessors, high-speed SRAMs, and high-performance
logic and clock management products.
Fiscal Year. The Company's fiscal year ends on the Sunday nearest March 31.
Fiscal 2000, a 53-week year, ended on April 2, 2000. Fiscal 1999 and 1998 each
included 52 weeks and ended on March 28, 1999 and March 29, 1998, respectively.
Basis of Presentation. The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
In May 1999, IDT consummated the acquisition of Quality Semiconductor, Inc.
("QSI") in a transaction accounted for as a pooling of interests. The financial
statements have been retroactively restated to reflect the combined operations
of IDT and QSI as if the combination had occurred at the beginning of the
earliest period presented (see Note 2). There were no significant differences
between the accounting policies of IDT and QSI.
Certain reclassifications have been made to prior-year balances, none of
which affected the Company's financial position or results of operations, to
present the financial statements on a consistent basis.
Cash Equivalents and Short-term Investments. Cash equivalents are highly liquid
investments with original maturities of three months or less at the time of
acquisition or with guaranteed on-demand buy-back provisions. Short-term
investments, other than equity securities, are valued at amortized cost, which
approximates fair market value.
The Company's short-term investments are classified as available-for-sale
at April 2, 2000 and March 28, 1999. Investment securities classified as
available-for-sale are reported at market value, and net unrealized gains or
losses are recorded in accumulated comprehensive income, a separate component of
stockholders' equity, until realized. Realized gains and losses are computed
based upon specific identification and are included in interest income and
other, net. Management determines the appropriate classification of debt and
equity securities at the time of purchase and reassesses the classification at
each reporting date.
As of April 2, 2000, cash equivalents included $11.7 million in
certificates of deposit which were collateralizing certain customs bond
obligations and a mortgage transaction.
Inventories. Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market.
Property, Plant, and Equipment. Property, plant and equipment are recorded at
cost. Depreciation is computed using the straight-line method over estimated
useful lives of the assets, which generally range from three to five years.
Leasehold improvements and leasehold interests are amortized over the shorter of
the estimated useful lives of the assets or the remaining term of the lease.
Accelerated methods of depreciation are used for tax purposes.
The Company reviews the carrying values of long-lived assets whenever
events and circumstances indicate that the net book value of an asset may not be
recovered through expected future cash flows from its use and eventual
disposition. The amount of impairment loss, if any, is measured as the
difference between the net book value and the estimated fair value of the asset.
Revenue Recognition. Revenues from product sales are generally recognized upon
shipment, and a reserve is provided for estimated returns and discounts. A
portion of the Company's sales are made to distributors under agreements that
allow certain rights of return and price protection on products unsold by the
distributors. Related revenues and costs of revenues thereon are deferred until
the products are resold by the distributors. Revenues related to licensing
agreements are recognized ratably over the lives of the related patents (see
Note 14).
Income Taxes. The Company accounts for income taxes under an asset and liability
approach which requires the expected future tax consequences of temporary
differences between book and tax bases of assets
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and liabilities be recognized as deferred tax assets and liabilities. No
provision for U.S. income taxes is provided on unremitted earnings of foreign
subsidiaries, to the extent such earnings are deemed to be permanently
reinvested.
Net Income (Loss) Per Share. Basic and diluted net income (loss) per share are
computed using weighted-average common shares outstanding. Dilutive net income
per share also includes the effect of stock options and convertible debt. The
following table sets forth the computation of basic and diluted net income
(loss) per share:
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
(In thousands April 2, March 28, March 29,
except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Basic:
Net income (loss)
(numerator) $130,611 $(298,939) $ 8,457
-------- --------- -------
Weighted average
shares outstanding
(denominator) 90,918 87,397 84,732
-------- --------- -------
Net income (loss)
per share $ 1.44 $ (3.42) $ 0.10
-------- --------- -------
Diluted:
Net income (loss)
(numerator) $130,611 $(298,939) $8,457
-------- --------- -------
Weighted average
shares outstanding 90,918 87,397 84,732
-------- --------- -------
Net effect of dilutive
stock options 8,084 - 4,139
-------- --------- -------
Total shares
(denominator) 99,002 87,397 88,871
-------- --------- -------
Net income (loss)
per share $ 1.32 $ (3.42) $ 0.10
======== ========= =======
Total stock options outstanding, including antidilutive options, were 14.7
million, 19.4 million and 18.0 million, at fiscal year-ends 2000, 1999 and 1998,
respectively. The Company's convertible debt was not dilutive in any of the
periods presented.
Comprehensive Income (Loss). Comprehensive income (loss) is defined as the
change in equity during a period from non-owner sources.
The components of accumulated other comprehensive income (loss) were as
follows:
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Cumulative translation
adjustments $ (3,062) $(3,657)
Unrealized gain (loss)
on investments 222,684 (52)
-------- ---------
$219,622 $(3,709)
======== =========
Cumulative translation adjustments are not tax affected.
Translation of Foreign Currencies. For subsidiaries whose functional currency is
the local currency, gains and losses resulting from translation of these foreign
currency financial statements into U.S. dollars are recorded as a separate
component of comprehensive income (loss). For subsidiaries where the functional
currency is the U.S. dollar, gains and losses resulting from the process of
remeasuring foreign currency financial statements into U.S. dollars are included
in other income. The effects of foreign currency exchange rate fluctuations have
not been material.
Fair Value Disclosures of Financial Instruments. Fair values of cash, cash
equivalents and short-term investments other than equity securities approximate
cost due to the short period of time until maturity. Fair values of long-term
investments, long-term debt and currency forward contracts are based on quoted
market prices or pricing models using current market rates.
Concentration of Credit Risk. The Company sells integrated circuits to original
equipment manufacturers (OEMs), distributors and contract electronics
manufacturers (CEMs) primarily in the United States, Europe and the Far East.
The Company performs on-going credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary and
generally does not require collateral. Management believes that risk of loss is
significantly reduced due to the diversity of its products, customers and
geographic sales areas. The Company maintains a provision for potential credit
losses. Write-offs of accounts receivable were insignificant in each of the
three years ended April 2, 2000.
One distributor's receivable balance represented 10% and 14% of total
accounts receivable at April 2, 2000 and March 28, 1999, respectively. One CEM's
receivable balance represented 10% and 8% of total accounts receivable at April
2, 2000 and March 28, 1999, respectively. If the financial condition or
operating results of these customers were to deteriorate below critical levels,
the Company's operating results could be adversely affected.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock-based Compensation Plans. The Company accounts for its stock option plans
and employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company provides additional pro forma disclosures in Note 8.
New Accounting Pronouncements. In 1999, the Financial Accounting Standards Board
(FASB) issued SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133"
which defers the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company plans to adopt SFAS No. 133 as
of the beginning of fiscal 2002. 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 evaluating the impact of SFAS No. 133 but currently
does not expect any material effects on its financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles (GAAP) to revenue recognition in financial
statements. The Company is required to adopt SAB 101 in the first quarter of
fiscal 2001 and is currently studying the impact of SAB 101. The Company
currently does not expect any material effects on its financial position of
results of operations.
Products and Markets. The Company operates in three segments (See Note 11)
within the semiconductor industry. Significant technological changes in the
industry could adversely affect operating results. The semiconductor industry is
highly cyclical and has been subject to significant downturns at various times
that have been characterized by diminished product demand, production
overcapacity and accelerated erosion of average selling prices. Therefore, the
average selling price the Company receives for industry-standard products is
dependent upon industry-wide demand and capacity, and such prices have
historically been subject to rapid change. While the Company considers industry
technological change and industry-wide demand and capacity in estimating
necessary allowances, such estimates could change in the future.
Note 2
- --------------------------------------------------------------------------------
Business Combination
In May 1999, IDT completed the acquisition of QSI, which had been engaged in the
design, development and marketing of high-performance logic and networking
semiconductor products.
To consummate the merger, IDT issued approximately 5.2 million shares of
its common stock in exchange for all of the outstanding common stock of QSI and
granted options to purchase approximately 1.0 million shares of IDT common stock
in exchange for all of the outstanding options to purchase QSI stock. The merger
was accounted for as a pooling of interests, and the financial statements give
effect to the merger for all periods presented.
Because the fiscal year ends of the two companies differed, the statements
of operations data for QSI have been recast as shown below:
- --------------------------------------------------------------------------------
IDT QSI
- --------------------------------------------------------------------------------
Fiscal year ended Fiscal year ended
March 28, 1999 September 30, 1998
Fiscal year ended Fiscal year ended
March 29, 1998 September 30, 1997
Fiscal year ended Fiscal year ended
March 30, 1997 September 30, 1996
QSI's net loss of $22.6 million for the period October 1, 1998 through
March 31, 1999 was recorded as a decrease to stockholders' equity for the year
ended April 2, 2000.
IDT incurred $5.8 million in merger-related costs, including $1.0 million
in fiscal 1999 and $4.8 million in fiscal 2000. Of this amount, $4.6 million
related to payments for severance, retention and change-of-control agreements.
The remainder consisted primarily of accounting and legal fees and printing
costs.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The results of operations previously reported by the separate companies and
the combined amounts shown in the accompanying financial statements are
presented below.
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
March 28, March 29,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
IDT $ 540,199 $587,136
QSI 60,818 62,691
--------- ---------
Combined $ 601,017 $649,827
========= =========
Net income (loss):
IDT $(283,605) $ 8,247
QSI (15,334) 210
--------- ---------
Combined $(298,939) $ 8,457
========= =========
Note 3
- --------------------------------------------------------------------------------
Balance Sheet Components
Inventories, Net.
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Raw materials $ 6,102 $ 5,986
Work-in-process 43,632 36,995
Finished goods 22,545 17,806
------- -------
$72,279 $60,787
======= =======
Property, Plant and Equipment.
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Land $ 8,503 $ 20,003
Machinery and equipment 848,566 848,421
Building and leasehold improvements 83,256 78,580
Construction-in-progress 567 841
--------- ---------
940,892 947,845
Less accumulated depreciation
and amortization (680,785) (648,610)
--------- ---------
$ 260,107 $ 299,235
========= =========
Short-term Investments.
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
U.S. government agency securities $ 12,427 $ 11,103
State and local government securities 76,000 40,774
Corporate securities 277,991 112,036
Equity securities 223,906 -
Other 43,069 31,733
--------- ---------
Total debt and equity securities 633,393 195,646
Less cash equivalents (360,048) (139,130)
--------- ---------
Short-term investments $ 273,345 $ 56,516
========= =========
At April 2, 2000, short-term investments of $230.3 million mature in less than
one year and $43.0 million have maturities between one and five years.
Note 4
- --------------------------------------------------------------------------------
Restructuring Charges, Asset Impairment and Other
During fiscal 1999, the Company recorded $207.2 million of charges in cost of
sales relating primarily to asset impairment, restructuring associated with
closure of a manufacturing facility and costs associated with certain technology
licensing matters. The Company reversed $3 million of the costs associated with
technology licensing matters upon settlement of certain of those matters in late
fiscal 1999. In the third quarter of fiscal 2000, the Company reversed an
additional $3.8 million in charges, due to the settlement of certain technology
licensing and other matters.
Included in the fiscal 1999 charges were $28.9 million in asset impairment
and other charges. These charges consisted primarily of $15.1 million for excess
SRAM manufacturing equipment and $10 million in costs associated with technology
licensing matters. The excess SRAM manufacturing equipment charge represented a
writedown to estimated fair market value based primarily on appraisals and
estimates obtained from third parties. The charge resulted from prevailing
economic conditions in the SRAM market, which had experienced declines in both
demand and price.
Separately in fiscal 1999, the Company also recorded $5.5 million in
research and development expenses and $0.2 million in selling, general and
administrative expenses for costs associated with discontinuance of certain
development efforts, including a graphics chip and a specialized logic chip.
These charges were comprised primarily of severance costs and technology license
payments associated with the discontinued efforts.
During fiscal 1999, the Company also incurred restructuring charges which
aggregated $46.4 million and related primarily to a provision for exit and
closure costs associated with the San Jose wafer fabrication facility, which the
Company closed in the third quarter of fiscal 1999. The Company completed the
sale of the San Jose facility in the first quarter of fiscal 2000.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following tables set forth the Company's expenses and reserve
utilization for fiscal 2000 and fiscal 1999 and the reserve balance as of April
2, 2000:
- --------------------------------------------------------------------------------
Balance Balance
March 28, April 2,
(in thousands) 1999 Utilized Adjustments 2000
- --------------------------------------------------------------------------------
Write-down of
fixed assets $ - $ - $ - $ -
Severance and
other employee
related charges $ 300 (212) (88) -
Closure costs
for manufacturing
facility 5,232 (3,096) (2,136) -
------ ------- ------- ------
$5,532 $(3,308) $(2,224) $ -
====== ======= ======= ======
- --------------------------------------------------------------------------------
Fiscal Balance
1999 March 28,
(in thousands) Expense Utilized Adjustments 1999
- --------------------------------------------------------------------------------
Write-down of
fixed assets $33,047 $(33,047) $ - $ -
Severance and
other employee
related charges 2,620 (2,171) (149) 300
Closure costs
for manufacturing
facility 10,717 (5,267) (218) 5,232
------- -------- ------- ------
$46,384 $(40,485) $ (367) $5,532
The Company has completed its exit plan for the San Jose facility.
Adjustments include a $0.8 million reversal related to the settlement of a
dispute and the release of $0.9 million in excess reserves, both of which are
included in pretax income for fiscal 2000. The Company also reclassified a
portion of the closure-costs reserve to cover long-term environmental
indemnification for the San Jose plant.
Also in fiscal 1999, the Company recorded a $131.9 million asset impairment
and other charge which related primarily to an asset impairment reserve recorded
against the manufacturing assets of IDT's eight-inch wafer fabrication facility
in Hillsboro, Ore. The Company determined that due to excess industry capacity
and low prices for semiconductor products manufactured in the Hillsboro
facility, future undiscounted cash flows related to its wafer fabrication assets
were insufficient to recover the carrying value of the assets. As a result, the
Company wrote down these assets to estimated fair market value based primarily
on appraisals and estimates from independent parties. Of the $131.9 million,
$5.0 million was to settle certain patent claims against the Company.
Note 5
- --------------------------------------------------------------------------------
Debt
The Company had no short-term borrowings, other than the current portion of
long-term debt, during the two fiscal years ended April 2, 2000. Information
regarding the Company's obligations under long-term debt and capital leases and
equipment financing arrangements is presented below:
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Mortgage payable bearing
interest at 9.625% due in
monthly installments of $142
including interest through
April 1, 2005, secured by related
property and improvements $ 6,831 $ 7,826
Capital leases and equipment
financing arrangements at rates
ranging from 2.125% to 9.38%,
with maturities through
August 2005 35,168 52,751
5.5% Convertible Subordinated
Notes due 2002 179,550 184,354
-------- --------
221,549 244,931
Less current portion (11,317) (13,461)
-------- --------
$210,232 $231,470
======== ========
Future minimum payments under these obligations are summarized as follows:
- --------------------------------------------------------------------------------
Capital
leases and
equipment
financing
(in thousands) Long-term debt agreements
- --------------------------------------------------------------------------------
Fiscal Year 2001 $ 11,648 $11,674
2002 11,648 9,299
2003 184,170 6,664
2004 1,704 5,111
2005 and thereafter 1,845 5,694
-------- -------
Total 211,015 38,442
Less amount representing interest (24,634) (3,274)
-------- -------
Total $186,381 $35,168
======== =======
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Obligations under capital leases and equipment financing arrangements are
collateralized by the related assets. The Company leased total assets of
approximately $56.3 million and $60.8 million at April 2, 2000 and March 28,
1999, respectively. Accumulated depreciation and amortization on these assets
was approximately $44.3 million and $37.6 million at April 2, 2000 and March 28,
1999, respectively.
In May 1995, the Company issued $201.3 million of 5.5% Convertible
Subordinated Notes ("Notes"), due in 2002. The Company retired $15 million and
$4.5 million of the Notes in fiscal 1996 and 2000, respectively. The Notes are
subordinated to all existing and future senior debt and are convertible into
shares of the Company's common stock at a rate of $28.625 per share. The Notes
became redeemable at the option of the Company in June 1998 at 102.75% initially
and thereafter at prices declining to 100% in June 2000, plus accrued interest.
Each holder of the Notes has the right, subject to certain conditions and
restrictions, to require the Company to offer to repurchase any Notes owned by
such holder at specified prices plus accrued interest. Issuance costs of $4.6
million have been netted against the Notes balance in the consolidated balance
sheet and are being amortized over the seven-year term of the Notes using the
straight-line method which approximates the effective interest method. Interest
on the Notes is payable semi-annually on June 1 and December 1. In the fourth
quarter of fiscal 2000, holders converted approximately $1.0 million of the
Notes into approximately 34,000 shares of common stock. Based upon quoted market
prices, the fair value of the outstanding Notes was approximately $249.7 million
at April 2, 2000.
The fair value of the mortgage payable, based on current rates and time to
maturity, was $6.9 million at April 2, 2000.
Note 6
- --------------------------------------------------------------------------------
Commitments
The Company leases most of its administrative and some manufacturing facilities
under operating lease agreements which expire at various dates through fiscal
2008.
During fiscal 2000, the Company renegotiated its $64 million Tax Ownership
Operating Lease and extended the lease term to May 2005. The lease relates to
the Company's wafer fabrication facility in Hillsboro, Oregon. Monthly rent
payments under the lease vary based on the London Interbank Offering Rate
(LIBOR). Under the terms of the transaction, the Company now earns interest
income, also based on LIBOR, on its 79% purchase interest in the rental stream.
The Company is required to maintain a deposit of $50.6 million with the
lessor ($57.1 million at March 28, 1999). The Company can, at its option,
acquire the leased assets at original cost or, at the end of the lease, arrange
for them to be acquired by others. In the event of a decline in asset residual
value at lease termination, the Company could incur a liability of up to the
amount of the purchase interest, or $50.6 million. In addition, the Company must
comply with certain financial covenants.
As of April 2, 2000, the aggregate future minimum rent commitments under
all operating leases, including the Hillsboro facility, were as follows (in
thousands): $22,713 (2001), $21,842 (2002), $16,957 (2003), $12,161 (2004),
$10,256 (2005) and $9,183 (2006 and thereafter). Rent expense for the years
ended April 2, 2000, March 28, 1999 and March 29, 1998 totaled approximately
$23.3 million, $21.4 million and $20.0 million, respectively.
As of April 2, 2000, two secured standby letters of credit were
outstanding. The first letter ($8.0 million, expiring in June 2000) is required
for customs bonds related to international sales. The second letter ($2.5
million, expiring in October 2000) is required as collateral enhancement for a
mortgage. The Company also has foreign exchange facilities used for hedging
arrangements with several banks that allow the Company to enter into foreign
exchange contracts of up to $85 million, of which $45.4 million was available at
April 2, 2000.
As of April 2, 2000, the Company had outstanding commitments of
approximately $30 million for equipment purchases.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7
- --------------------------------------------------------------------------------
Litigation
In November 1998, the Company, along with 25 other companies, was sued in the
U.S. District Court for the District of Arizona by the Lemelson Foundation
("Lemelson") for alleged patent infringement. Lemelson made similar allegations
against the Company's subsidiary, Quality Semiconductor, Inc., and 87 other
defendants in a lawsuit filed in February 1999. In November 1999, the Company
entered into an agreement with Lemelson that settled all outstanding claims and
granted the Company a license to use the Lemelson patents asserted against the
Company and its subsidiary. In the third quarter of fiscal 2000, the Company
reversed the excess portion of reserves previously provided for this matter.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The Company
is not currently aware of any other legal proceedings that the Company believes
may have, individually or in the aggregate, a material adverse effect on the
Company's financial condition or results of operations.
During the normal course of business, the Company is notified of claims
that it may be infringing on patents issued to other parties and is currently
involved in license negotiations. Should the Company elect to enter into license
agreements with other parties or should the other parties resort to litigation,
the Company may be obligated in the future to make payments or to otherwise
compensate these third parties, which could have an adverse effect on the
Company's financial condition or results of operations.
Note 8
- --------------------------------------------------------------------------------
Stockholders' Equity
Stock Option Plans. Shares of common stock reserved for issuance under the
Company's stock option plans include 13,500,000 shares under the 1994 Employee
Stock Option Plan, 7,500,000 shares under the 1997 Employee Stock Option Plan,
and 108,000 shares under the 1994 Director Stock Option Plan. At April 2, 2000,
a total of 5,523,000 options were available but unissued under these plans. Also
outstanding and exerciseable at April 2, 2000 were options initially granted
under previous stock option plans which have not been canceled or exercised.
Under the plans, options are issued with an exercise price equal to the
market price of the Company's common stock on the date of grant, and the maximum
option term is 10 years. Plan participants typically receive an initial grant
that vests in annual and/or monthly increments over four years. Thereafter,
participants generally receive a smaller annual grant which vests on the same
basis as the initial grant. Prior to fiscal 1999, such annual grants vested four
years from the date of grant.
In connection with the merger with QSI (see Note 2), each stock option
outstanding under QSI's stock option plans was converted to an option of the
Company's stock at a ratio of 0.6875. No additional options may be granted under
QSI's stock option plans. All tables presented below have been restated as if
the merger had occurred at the beginning of fiscal 1998.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Following is a summary of the Company's stock option activity and related
weighted average exercise prices for each category:
- -----------------------------------------------------------------------------------------------------
Fiscal 2000 Fiscal 1999 Fiscal 1998
----------------- ------------------ ------------------
(shares in thousands) Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------
Beginning options outstanding 19,401 $ 6.30 18,034 $ 8.88 15,852 $ 7.95
Granted 5,165 13.66 16,986 6.88 5,549 11.23
Exercised (6,776) 5.65 (640) 4.14 (1,457) 6.10
Canceled (3,047) 7.29 (14,979) 10.17 (1,910) 10.16
------ ------ ------ ------ ------ ------
Ending options outstanding 14,743 $ 8.97 19,401 $ 6.30 18,034 $ 8.88
Ending options exerciseable 5,997 $ 6.50 4,259 $ 4.06 7,812 $ 6.39
In fiscal 1999, employees and officers holding options to purchase
approximately 12.4 million shares of the Company's common stock were offered the
opportunity to cancel options in exchange for grants of new options at an
exercise price of $7.125, the fair market value of IDT stock on July 15, 1998. A
total of 12.0 million shares were exchanged and are shown in the grant and
cancellation activity for fiscal 1999.
Under SFAS No. 123, the Company is required to estimate the fair value of
each option on the date of grant. Option valuation models, such as the
Black-Scholes model, were developed in order to value freely traded options
under ideal market conditions. The Company's stock option awards differ
significantly since they always have vesting restrictions and generally are not
transferable. Models such as Black-Scholes also require highly subjective
assumptions, including expected time until exercise and future stock price
volatility. The calculated fair value of an option on the grant date is highly
sensitive to changes in these subjective assumptions.
The Company has applied the Black-Scholes model to estimate the grant-date
fair value of stock option grants in fiscal 2000, 1999 and 1998, based upon the
following weighted-average assumptions: expected volatility of 60% to 65%,
expected time-to-exercise of 1.5 years from vest date, risk-free interest rates
of 4.4% to 6.7% and a dividend yield of 0%. The weighted-average fair value per
stock option granted in fiscal 2000, 1999 and 1998, as estimated in accordance
with SFAS No. 123, was $7.30, $3.21 and $6.42, respectively.
Following is summary information about stock options outstanding at April 2,
2000:
- ---------------------------------------------------------------------------------------------------------------------
(shares in thousands) Options Outstanding Options Exerciseable
------------------------------------------------------ -------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Life Average Number Average
Range of Exercise Prices Outstanding (in years) Exercise Price Exerciseable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
$ 1.63 - $ 4.13 1,029 2.2 $ 2.45 994 $ 2.42
4.26 - 6.78 855 5.0 5.56 335 5.87
7.06 - 7.13 8,153 5.3 7.11 4,413 7.12
7.63 - 10.00 2,710 6.3 7.78 155 8.45
10.13 - 19.06 852 6.2 15.08 59 12.90
23.13 - 38.00 1,144 6.7 28.91 41 27.64
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Employee Stock Purchase Plan. The Company is authorized to issue up to 8,500,000
shares of its common stock under its 1984 Employee Stock Purchase Plan (ESPP).
All domestic employees are eligible to participate. The purchase price of the
stock is 85% of the lower of the closing price at the beginning or at the end of
each offering period (typically fiscal quarters). Following is a summary of
activity under the Company's ESPP:
- --------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
(shares in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Number of shares issued 806 1,207 506
Average issuance price $ 7.29 $ 5.28 $ 9.78
Number of shares
available at year-end 2,095 1,401 658
Under SFAS No. 123, the Company must estimate the fair value of employees'
ESPP purchase rights. Valuing the rights involves the use of option valuation
models which are incapable of addressing transferability and vesting
restrictions inherent in the ESPP rights. Estimating the value of these ESPP
rights requires highly subjective assumptions about future events, such as stock
price volatility, and the resulting estimates are sensitive to changes in these
assumptions.
The Company has estimated the fair value of ESPP rights using the
Black-Scholes option valuation model with the following weighted-average
assumptions: an expected life equal to the offering period (typically one fiscal
quarter); expected volatility of 60% to 65%; risk-free interest rate of 4.6% to
5.5% and a dividend yield of 0%. The weighted-average fair value per ESPP right
granted in fiscal 2000, 1999 and 1998, as estimated in accordance with SFAS No.
123, was $3.34, $1.98 and $4.15 respectively.
Pro Forma Net Income (Loss) and Net Income (Loss) Per Share. Following are the
pro forma amounts to which the Company's net income (loss) and income (loss) per
share would have been reduced, had the Company recorded compensation costs based
on the estimated grant-date fair value, as estimated in accordance with SFAS No.
123, of awards granted under its stock option and employee stock purchase plans.
The pro forma amounts include compensation costs related only to fiscal 2000,
1999 and 1998 stock option grants and purchase rights only. In future years, the
annual compensation expense will increase relative to the fair value of stock
options and purchase rights granted in those future years.
- --------------------------------------------------------------------------------
(in thousands, Fiscal Fiscal Fiscal
except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Pro forma net
income (loss) $110,043 $(332,885) $(8,610)
Pro forma basic earnings (loss)
per share $ 1.21 $ (4.05) $ (0.10)
Pro forma diluted
earnings (loss)
per share 1.11 (4.05) (0.10)
Stockholder Rights Plan. In December 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, 1999 and further directed the issuance of one such right with respect
to each share of the Company's common stock that is issued after January 4,
1999, except in specified circumstances. The rights will expire on December 21,
2008. The rights are initially attached to the Company's common stock and will
not trade separately. If a person or a group (an "Acquiring Person") acquires
15% or more of the Company's common stock, or announces an intention to make a
tender offer for the Company's common stock, the consummation of which would
result in a person or group becoming an Acquiring Person, then the rights will
be distributed. After distribution, each right may be exercised for
one-hundredth of a share of a newly designated Series A Junior Participating
Preferred Stock, par value of $0.001 per share, at a price of $45.00. The
preferred stock has been structured so that the value of one-hundredth of a
share of such preferred stock will approximate the value of one share of common
stock.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock Repurchase Program. In September 1998, the Company's Board of Directors
authorized the repurchase of up to ten million shares of IDT common stock. The
Company repurchased 856,000 shares at an approximate aggregate cost of $4.6
million during fiscal 1999. The repurchases were recorded as treasury stock and
resulted in a reduction of stockholders' equity. In November 1998, the Board of
Directors terminated the repurchase authorization. As of April 2, 2000, the
Company had completed the reissuance of all treasury shares in conjunction with
the Company's stock option and employee stock purchase plans. The Company uses a
first-in, first-out method for the reissuance of treasury shares and any excess
of repurchase cost over reissuance price has been recorded as a reduction of
retained earnings.
Other. In fiscal 1999, the Company issued 571,731 shares of its common stock to
settle a liability under an existing cross licensing arrangement. The settlement
was valued at approximately $6.3 million and was recorded as additional paid-in
capital.
Note 9
- --------------------------------------------------------------------------------
Employee Benefits Plans
Under the Company's Profit Sharing Plan, all eligible employees receive profit
sharing contributions of 7% of pre-tax earnings in cash, and an additional 1% of
pre-tax earnings is divided equally among all domestic employees and contributed
to the Company's 401(k) plan. The contributions for fiscal 2000, 1999 and 1998
for this plan, net of administrative expenses, were $11.0 million, $0.3 million
and $0.9 million, respectively.
The Company pays an annual cash bonus to certain executive officers and
other key employees based on profitability and individual performance. For
fiscal 2000, 1999 and 1998, the amount accrued under the bonus plan was 6% of
operating income, or $7.8 million, none and $0.8 million, respectively.
Note 10
- --------------------------------------------------------------------------------
Income Taxes
The components of income (loss) before provision (benefit) for income taxes were
as follows:
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
United States $ 108,555 $(266,529) $ (5,530)
Foreign 28,931 46 17,306
--------- --------- --------
$ 137,486 $(266,483) $ 11,776
========= ========= ========
The provision for income taxes consisted of the following:
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Current:
United States $ 3,930 $ (260) (3,756)
State 88 - -
Foreign 2,857 1,138 2,855
------- ------ ------
6,875 878 (901)
------- ------ ------
Deferred:
United States - 31,505 4,734
State - 622 (155)
Foreign - (549) (359)
------- ------- -------
- 31,578 4,220
------- ------- -------
Provision for income taxes $ 6,875 $32,456 $ 3,319
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities were as follows:
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred income on
shipments to distributors $ 26,249 $ 19,345
Non-deductible accruals
and reserves 23,752 30,172
Capitalized inventory
and other expenses 1,228 (682)
Other 4,264 3,330
Net operating loss
& credit carryforwards 31,803 64,190
Impairment loss
and restructuring reserves 71,969 77,841
Deferred licensing revenue 11,574 -
Equity earnings in affiliates 13,262 7,566
--------- ---------
184,101 201,762
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (43,218) (32,465)
Unrealized gain on equity securities (89,074) -
--------- ---------
(132,292) (32,465)
--------- ---------
Valuation allowance (51,809) (169,297)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of April 2, 2000 and March 28, 1999, the Company had established a full
valuation allowance for its net deferred tax assets because of uncertainty of
their realization. The valuation allowance for deferred tax assets decreased by
approximately $117.5 million in fiscal 2000. The decrease in the allowance was
primarily due to an increase in deferred tax liabilities related to unrealized
gains on available-for-sale equity securities. The Company also utilized certain
net operating loss carryforwards during fiscal 2000.
The provision for income taxes differs from the amount computed by applying
the U.S. statutory income tax rate of 35% to income before the provision
(benefit) for income taxes as follows:
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Provision (benefit) at
U.S. statutory rate $ 48,120 $(93,269) $ 4,121
Differences in U.S.
and foreign taxes (6,857) 547 (1,943)
General business credits (4,477) (5,469) (2,098)
Tax exempt interest - - (70)
State tax, net
of federal benefit 234 (12,727) (101)
Valuation allowance (117,488) 138,877 -
Net operating loss
carryback limitation - 6,794 5,094
Deferred gains
on investments 89,074 - -
Other (1,731) (2,297) (1,684)
--------- -------- -------
Provision for
income taxes $ 6,875 $ 32,456 $ 3,319
========= ======== =======
A Malaysian law change exempted the Company's Malaysia subsidiary from any
income tax obligation for fiscal 1999. Under Malaysian law, in fiscal 2000 and
past years, the Company generated certain tax incentive benefits and expects
that a portion of these benefits will be available in years after fiscal 2000 to
reduce its local tax obligations below the 28% statutory rate.
The Company's manufacturing subsidiary in the Philippines operates under a
tax holiday which expires in September 2002.
The Company's intention is to permanently reinvest a portion of its foreign
subsidiary earnings, while it intends to remit as a dividend to its U.S. parent
company, at some future date, the remainder of these earnings. Accordingly, U.S.
taxes have not been provided on approximately $59.4 million of permanently
reinvested foreign subsidiary earnings. U.S. taxes have been provided, pursuant
to APB Opinion No. 23, on $23.7 million in foreign subsidiary earnings that are
intended to be remitted as a dividend at some future date. Upon distribution of
foreign subsidiary earnings in the form of dividends or otherwise, the Company
will be subject to both U.S. income taxes and various foreign country
withholding taxes.
As of April 2, 2000, the Company had federal and state net operating loss
carryforwards of approximately $16.6 million and $12.9 million, respectively,
which will expire in the years 2002 through 2018 if not utilized. In addition,
the Company had approximately $13.9 million of federal research and development
tax credit carryforwards, which expire in various years between fiscal years
2013 and 2020, and $2.4 million of federal alternative minimum tax credit
carryforwards which can be used over an indefinite future period. The Company
also had available approximately $8.9 million of state income tax credit
carryforwards having no expiration date. No benefits for the net operating loss
and tax credits carryforwards have been recognized in the financial statements.
Examination by the IRS of the Company's income tax returns for the fiscal
years 1995 and 1996 began in fiscal 1998. Management expects that this audit
will be completed during fiscal 2001 and believes that the ultimate resolution
of these examinations will not have any material adverse impact on the Company's
financial condition or results of operations.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 11
- --------------------------------------------------------------------------------
Segment Reporting
The Company operated in three segments during fiscal 1998-2000: (1)
Communications and High-Performance Logic, (2) SRAMs and Other and (3) x86
Microprocessors. The Communications and High-Performance Logic segment includes
communications memories, communications applications-specific standard products
(ASSPs), RISC microprocessors and high-performance logic and clock management
devices. The SRAMs and Other segment consists mainly of high-speed SRAMs. In the
second quarter of fiscal 2000, the Company completed the sale of x86
intellectual property and its Centaur design subsidiary and the Company expects
future x86 Microprocessor segment revenues, if any, to be insignificant.
The accounting policies for segment reporting are the same as for the
Company as a whole (see Note 1). IDT evaluates segment performance on the basis
of operating profit or loss, which excludes interest expense, interest and other
income, and taxes. There are no intersegment revenues to be reported. IDT does
not identify or allocate assets by operating segment, nor does the chief
operating decision maker (the CEO of the Company) evaluate groups on the basis
of these criteria.
IDT's segments offer different products. Products that fall under the three
segments are manufactured using different levels of process technology. A
significant portion of the wafers produced for the SRAMs and Other segment are
fabricated at IDT's technologically advanced, eight-inch wafer production
facility in Hillsboro. Wafers for the x86 Microprocessors segment were also
produced at the Hillsboro facility. Most wafers for the Communications and
High-Performance Logic segment are produced at IDT's older, six-inch facilities
located in Salinas, California and Australia.
Products in the SRAMs and Other segment have primarily commodity
characteristics, including high unit sales volumes and lower gross margins.
These commodity products are sold to a variety of customers in diverse
industries, including communications. Products in the x86 Microprocessors
segment were sold mainly to customers in the computing market and also tended to
have commodity characteristics, including relatively low margins. Unit sales of
products in the Communications and High-Performance Logic segment with the
exception of logic devices, tend to be lower than those in the SRAMs and Other
segment, but generally have higher margins. Products in the Communications and
High-Performance Logic segment are sold to communications oriented customers and
consumers of high-performance logic.
One distributor represented 19%, 22% and 15% of net revenues for fiscal
2000, 1999 and 1998, respectively.
The tables below provide information about the reportable segments for
fiscal 2000, 1999 and 1998.
Segment Revenues.
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Communications and High-
Performance Logic $497,777 $442,787 $463,684
SRAMs and Other 194,605 126,505 178,539
X86 Microprocessors 9,340 31,725 7,604
-------- -------- --------
Total revenues $701,722 $601,017 $649,827
======== ======== ========
Segment Profit (Loss).
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Communications and High-
Performance Logic $125,357 $ 89,195 $115,347
SRAMs and Other (9,163) (101,816) (85,845)
x86 Microprocessors (10,095) (21,562) (15,914)
Restructuring charges,
asset impairment
and other 4,726 (204,244) -
Other nonrecurring costs - (19,682) -
Interest expense (13,967) (14,787) (15,210)
Interest income
and other, net 40,628 6,413 13,398
-------- --------- --------
Income (loss) before
income taxes $137,486 $(266,483) $ 11,776
======== ========= ========
The Company's significant operations outside of the United States include
manufacturing facilities in Malaysia and the Philippines and sales subsidiaries
in Japan, Asia Pacific and Europe. Revenues from unaffiliated customers by
geographic area, based on the customers' shipment locations, were as follows:
- --------------------------------------------------------------------------------
Fiscal Year Ended
- --------------------------------------------------------------------------------
April 2, March 28, March 29,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
United States $434,452 $379,076 $394,985
Europe 123,728 113,533 118,929
Japan 76,209 48,674 55,477
Asia Pacific 67,333 59,734 80,436
-------- -------- --------
Total revenues $701,722 $601,017 $649,827
======== ======== ========
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company's long-lived assets consist primarily of property, plant and
equipment, which are summarized below by geographic area:
- --------------------------------------------------------------------------------
April 2, March 28,
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
United States $187,967 $213,228
Malaysia 34,734 43,550
Philippines 36,700 36,263
All other countries 706 6,194
-------- --------
Total property, plant
and equipment, net $260,107 $299,235
======== ========
Note 12
Related Party Transactions
The Company holds an equity interest of approximately 11% in Quantum Effect
Devices Inc. ("QED"). A stockholder and director of the Company also holds an
equity interest of approximately 1% in QED. The Company's share of losses in
QED, which was recorded as interest income and other, net, was $1.1 million in
fiscal 1998. The Company paid royalty expenses of $3.2 million, $3.1 million and
$3.2 million to QED in fiscal 2000, 1999 and 1998 respectively.
In the fourth quarter of fiscal 2000, the Company sold a portion of its
equity interest in connection with QED's initial public offering. IDT recognized
a pretax gain of $11.3 million which is included in interest income and other,
net.
The Company holds an equity interest of approximately 21% (55% on an as
converted basis) in Clear Logic, Inc., a corporation founded by a former IDT
executive officer. The Company's losses associated with the operating results of
Clear Logic were $14.8 million, $11.1 million and $4.9 million in fiscal 2000,
1999 and 1998, respectively; these amounts are reported as interest income and
other, net. The Company increased its investment by $10.0 million, $6.0 million
and $12.1 million in fiscal 2000, 1999 and 1998, respectively. IDT's investment
in Clear Logic has now been fully amortized and the Company does not expect to
record additional losses in future periods. In the fourth quarter of fiscal
2000, a portion of the Company's investment was converted into a redeemable debt
instrument. During fiscal 1999, the Company also extended a secured loan to
Clear Logic in the amount of $3.0 million, of which $2.1 million was outstanding
at the end of fiscal 2000.
During fiscal 1998, a director of IDT acted as an uncompensated agent on
behalf of a subsidiary of the Company in acquiring parcels of land for future
corporate development. As of March 28, 1999, the Company owed the director $11.5
million, representing the purchase price of the land. In fiscal 2000, that
subsidiary sold the land at its acquisition price to Acquisition Technology,
Inc., of which the director is president.
Note 13
- --------------------------------------------------------------------------------
Derivative Financial Instruments
The Company has foreign subsidiaries which operate and sell or manufacture the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates. The Company primarily
utilizes forward exchange contracts to hedge against the short-term impact of
foreign currency fluctuations on certain assets or liabilities denominated in
foreign currencies. The total amount of these contracts is offset by the
underlying assets or liabilities denominated in foreign currencies. The gains or
losses on these contracts are included in income as the exchange rates change.
Management believes that these forward contracts do not subject the Company to
undue risk due to foreign exchange movements because gains and losses on these
contracts are offset by gains and losses on the underlying asset and
transactions being hedged. Forward exchange contracts related to firm purchase
and sales commitments are considered identifiable hedges, and realized and
unrealized gains and losses are deferred until settlement of the underlying
commitments. At April 2, 2000 and March 28, 1999, deferred gains and losses were
not material.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Foreign exchange hedge positions, which include buy and sell positions
generally with maturities of less than one year, were as follows:
- --------------------------------------------------------------------------------
April 2, 2000 March 28, 1999
(In thousands --------------------- ------------------------
of U.S. dollars) Buy Sell Buy Sell
- --------------------------------------------------------------------------------
Japanese Yen $12,284 $38,405 $ 8,675 $19,297
British Pound
Sterling 1,752 1,474 1,133 2,433
Australian Dollar 11,400 5,732 - -
Netherlands Guilder 3,757 1,846 10,919 1,304
Other 1,213 122 - -
------- ------- ------- -------
Total at settlement
value $30,406 $47,579 $20,727 $23,034
======= ======= ======= =======
Total at fair value $30,278 $48,911 $20,059 $22,716
======= ======= ======= =======
The Company is exposed to credit-related losses if counterparties to
financial instruments fail to perform their obligations. However, the Company
does not expect any counterparties, which presently have high credit ratings, to
fail to meet their obligations. The Company controls credit risk through credit
approvals, limits and monitoring procedures including the use of high-credit
quality counterparties.
Note 14
- --------------------------------------------------------------------------------
Licensing Agreements and Sales of Assets
In September 1999, the Company completed the sale of x86 intellectual property
and its Centaur x86 microprocessor design subsidiary, located in Austin, Texas,
to VIA Technologies Inc. ("VIA"), a Taiwanese company, and its partners for an
aggregate amount of $31 million. The design subsidiary consisted mainly of
x86-related employees and property, plant and equipment. IDT and VIA also
entered into a patent cross license agreement relating to certain non-x86 IDT
patents under which IDT received $20 million.
The Company recorded a pretax gain of $19.6 million, net of transaction
costs, upon closure of the sale transaction. The Company also deferred $20.0
million in future revenue related to the cross license agreement, which is being
recognized ratably over the remaining average life of the patents, which
approximates seven years.
In August 1999, the Company also entered into an intellectual property
cross-license agreement with Intel Corporation for $20.5 million, $8.5 million
of which was recognized as revenue during the quarter ended September 26, 1999.
The remaining cross license fee is being recognized ratably over the average
remaining life of the patents, which approximates seven years.
In the fourth quarter of fiscal 2000, the Company recorded a contingent
loss of approximately $3 million relating to the pending sale of excess
manufacturing assets acquired in the merger with QSI. The loss is included in
interest income and other, net. The sale is expected to be finalized in the
first quarter of fiscal 2001.
Note 15
- --------------------------------------------------------------------------------
Subsequent Events
Conversion of Subordinated Notes. In April 2000, the Company called for
redemption of its 5.5% Convertible Subordinated Notes ("Notes"), effective May
15, 2000. Substantially all holders elected to convert their Notes into IDT
common stock, increasing the number of shares outstanding by approximately 6.34
million. The Company paid $0.4 million to holders who selected the cash option.
During fiscal 2000, interest and other expenses attributable to the Notes were
approximately $10.1 million, net of taxes.
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) QUARTERLY RESULTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Ended April 2, 2000
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues $ 153,981 $ 173,544 $ 176,698 $ 197,499
Restructuring charges,
asset impairment and other -- -- (3,783) (943)
Gross profit 68,369 84,298 88,993 99,956
Net income 8,478 40,467 31,231 50,435
Basic earnings per share 0.10 0.45 0.34 0.54
Diluted earnings per share 0.09 0.41 0.31 0.49
Fiscal Year Ended March 28, 1999
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues $ 153,021 $ 146,731 $ 149,705 $ 151,560
Restructuring charges,
asset impairment and other 28,916 178,328 -- (3,000)
Gross profit (loss) 17,487 (132,756) 54,507 64,787
Net income (loss) (50,945) (239,362) (9,985) 1,353
Basic earnings (loss) per
share (0.59) (2.74) (0.11) 0.02
Diluted earnings (loss) per
share (0.59) (2.74) (0.11) 0.02
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's
Directors is incorporated herein by reference from the Company's Proxy Statement
for the 2000 Annual Meeting of Stockholders which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended April 2, 2000, and the information required by this item with
respect to the Company's executive officers is incorporated herein by reference
from the section entitled "Executive Officers of the Registrant" in Part I, Item
4A of this Report.
The information concerning compliance with Section 16 of the Securities
Exchange Act of 1934 is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
from the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
from the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statements (set forth in Item 8 of Part
II of this Form 10-K) are filed as part of this Annual Report on Form
10-K
(a) 2. Financial Statement Schedules
The following are filed as part of this Anuual Report on Form 10-K:
Financial Statement Schedule II - Valuation and Qualifying Accounts
Report of Independent Accountants on Financial Statement Schedules
All other schedules have been omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedules, or because the information required is
included in the consolidated financial statements or notes thereto.
3. (a) Listing of Exhibits
Exhibit No.
Page Description
---- -----------
2.1* Agreement and Plan of Reorganization dated as of October 1, 1996,
by and among the Company, Integrated Device Technology Salinas
Corp. and Baccarat Silicon, Inc. (previously filed as Exhibit 2.1
to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended
December 29, 1996).
2.2* Agreement of Merger dated as of October 1, 1996, by and among the
Company, Integrated Device Technology Salinas Corp. and Baccarat
Silicon, Inc. (previously filed as Exhibit 2.2 to the Quarterly
Report on Form 10-Q for the Fiscal Quarter Ended December 29,
1996).
2.3* Agreement and Plan of Merger, dated as of November 1, 1998, by and
among the Company, Penguin Acquisition, Inc. and Quality
Semiconductor, Inc. (previously filed as Exhibit 2.03 to the
Registration Statement on Form S-4 filed on March 24, 1999).
3.1* Restated Certificate of Incorporation (previously filed as Exhibit
3A to Registration Statement on Form 8-B dated September 23,
1987).
3.2* Certificate of Amendment of Restated Certificate of Incorporation
(previously filed as Exhibit 3(a) to the Registration Statement on
Form 8 dated March 28, 1989).
3.3* Certificate of Amendment of Restated Certificate of Incorporation
(previously filed as Exhibit 4.3 to the Registration Statement on
Form S-8 (File Number 33-63133) filed on October 2, 1995).
3.4* Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of IDT, as filed with the
Secretary of State of Delaware (previously filed as Exhibit 3.6 to
the Registration Statement on Form 8-A filed December 23, 1998).
3.5* Bylaws of the Company, as amended and restated effective December
21, 1998 (previously filed as Exhibit 3.2 to the Quarterly Report
on Form 10-Q for the Fiscal Quarter Ended December 27, 1998).
4.1* Rights Agreement dated December 21, 1998 between the Company and
BankBoston, N.A., as Rights Agent (previously filed as Exhibit 4.1
to the Registration Statement on Form 8-A filed December 23,
1998).
4.2* Form of Indenture between the Company and The First National Bank
of Boston, as Trustee, including Form of Notes (previously filed
as Exhibit 4.6 to the Registration Statement on Form S-3 (File
number 33-59443).
10.1 Second Amendment to Lease dated September 1999 between the Company
and Morton and Jeanette Rude Trust relating to 2975 Stender Way,
Santa Clara, California.
19
Exhibit No.
Page Description
---- -----------
10.2 Third Amendment to Lease dated August 1999 between the Company and
Spieker Properties L.P. relating to 3001 Stender Way, Santa Clara,
California.
10.3 Lease dated September 1999 between the Company and S.I. Hahn LLC
relating to 2972 Stender Way, Santa Clara, California.
10.4* Amended and Restated 1984 Employee Stock Purchase Plan, as amended
through August 27, 1998 (previously filed as Exhibit 4.10 to the
Registration Statement on Form S-8 (File Number 333-64279) filed
on September 25, 1998).**
10.5* 1994 Stock Option Plan, as amended through April 25, 1996
(previously filed as Exhibit 4.5 to the Registration Statement on
Form S-8 (File Number 333-36601) filed on September 26, 1997).**
10.6* 1994 Directors Stock Option Plan and related documents (previously
filed as Exhibit 10.18 to the Quarterly Report on Form 10-Q for
the Fiscal Quarter Ended October 2, 1994).**
10.7* Form of Indemnification Agreement between the Company and its
directors and officers (previously filed as Exhibit 10.68 to
Annual Report on Form 10-K for the Fiscal Year Ended April 2,
1989).**
10.8* Technology License Agreement between the Company and MIPS
Technologies, Inc (previously filed as Exhibit 10.8 to the Annual
Report on Form 10-K for the Fiscal Year Ended March 28, 1999).***
10.9* Patent License Agreement between the Company and American
Telephone and Telegraph Company ("AT&T") dated May 1, 1992
(previously filed as Exhibit 19.1 to Quarterly Report on Form 10-Q
for the Quarter Ended June 28, 1992) (Confidential Treatment
Granted).
10.10* Master Distributor Agreement dated August 26, 1985 between the
Company and Hamilton/Avnet Electronics, Division of Avnet, Inc.
(previously filed as Exhibit 10.54 to the Registration Statement
on Form S-1 (File Number 33-3189))
10.11 Rent Purchase Agreement and Second Amendment to Sublease of the
Land and Lease of the Improvements by and among Sumitomo Bank
Leasing and Finance, Inc. and the Company dated September 1999.
10.12* 1995 Executive Performance Plan (previously filed as Exhibit 10.22
to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended
October 1, 1995).**
10.13* Letter amending Patent License Agreement between the Company and
AT&T dated December 4, 1995 (previously filed as Exhibit 10.23 to
the Annual Report on Form 10-K for the Fiscal Year Ended March 31,
1996) (Confidential Treatment Granted).
10.14* Lease dated July 1995 between the Company and American National
Insurance Company relating to 3250 Olcott Street, Santa Clara,
California (previously filed as Exhibit 10.25 to the Annual Report
for the Fiscal Year Ended March 31, 1996).
10.15* Registration Rights Agreement dated as of October 1, 1996 among
the Company, Carl E. Berg and Mary Ann Berg (previously filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Fiscal
Quarter Ended December 29, 1996).
10.16* 1997 Stock Option Plan, as amended through April 21, 1998
(previously filed as Exhibit 4.9 to the Registration Statement on
Form S-8 (file no. 333-64279) filed on September 25, 1998).
20
Exhibit No.
Page Description
---- -----------
10.17* Purchase and Sale Agreement and Joint Escrow Instructions between
the Company and Cadence Design Systems, Inc., dated December 1998
(previously filed as Exhibit 10.27 to the Registration Statement
on Form S-4 as filed on March 24, 1999).
10.18* Lease between the Company and James S. Lindsey dated March 1999
(previously filed as Exhibit 10.28 to the Registration Statement
on Form S-4 as filed on March 24, 1999).
10.19 Lease between the Company and S.I. Hahn, LLC dated December 1999
relating to 3001 Coronado Drive, Santa Clara, California.
10.20 Lease between the Company and S.I. Hahn, LLC dated February 2000
relating to 2901 Coronado Drive, Santa Clara, California.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedules
27.2 Restated Financial Data Schedules
___________
* These exhibits were previously filed with the Commission as indicated and
are incorporated herein by reference.
** These exhibits are management contracts or compensatory plans or
arrangements required to be filed pursuant to Item 14 (c) of Form 10-K.
*** Confidential treatment has been requested for certain portions of this
document pursuant to an application for confidential treatment sent to the
Securities and Exchange Commission. Such portions have been redacted and
marked with a triple asterisk. The non-redacted version of this document
has been sent to the Securities and Exchange Commission.
(b) Reports on Form 8-K: Not applicable.
21
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULES
To the Board of Directors
of Integrated Device Technologies, Inc.
Our audits of the consolidated financial statements referred to in our report
dated April 21, 2000, except for Note 15, which is as of May 15, 2000, relating
to the financial statements appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedules listed in Item 14(a)(2)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
April 21, 2000, except for Note 15,
which is as of May 15, 2000
SCHEDULE II
INTEGRATED DEVICE TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Deductions Balance at
Beginning Cost and Other and End of
of Period Expenses Accounts Write-offs Period
(in thousands)
Allowance for returns and doubtful accounts
Year ended March 29, 1998 $ 6,128 $ 4,532 $ 5,065 $(7,567) $ 8,158
Year ended March 28, 1999 8,158 513 2,320 (5,689) 5,302
Year ended April 2, 2000 5,302 455 7,451 (7,163) 6,045
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTEGRATED DEVICE TECHNOLOGY, INC.
Registrant
June 23, 2000 By: /s/ Jerry G. Taylor
---------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Jerry G. Taylor President, Chief Executive Officer and Director June 23, 2000
- -------------------------- (Principal Executive Officer)
Jerry G. Taylor
/s/ Alan F. Krock Vice President, Chief Financial Officer June 23, 2000
- -------------------------- (Principal Financial and Accounting Officer)
Alan F. Krock
/s/ Carl E. Berg Director June 23, 2000
- --------------------------
Carl E. Berg
/s/ John C. Bolger Director June 23, 2000
- --------------------------
John C. Bolger
/s/ Federico Faggin Director June 23, 2000
- --------------------------
Federico Faggin