10-K 1 FORM 10K 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 (FEE REQUIRED) For the fiscal year ended March 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-12695 INTEGRATED DEVICE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Delaware 94-2669985 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2975 Stender Way, Santa Clara, California 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 727-6116 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value 5.5% Convertible Subordinated Notes due 2002 (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $1,203,292,000 as of April 28, 1996, based upon the closing sale price of $15.50 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 77,631,723 shares of the Registrant's Common Stock issued and outstanding as of April 28, 1996. DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12, and 13 of Part III incorporate information by reference from the 1996 Proxy Statement for the Annual Meeting of Stockholders to be held on August 28, 1996. 1 ITEM 1. BUSINESS Integrated Device Technology, Inc. "IDT" or "the Company" designs, develops, manufactures and markets a broad range of high-performance semiconductor products for the communications, desktop computer, office automation and workstation/server markets using advanced CMOS (complimentary metal oxide silicon) process technology. The Company focuses its development efforts on providing proprietary and enhanced industry-standard products that improve the performance of systems incorporating high-performance microprocessors. The Company offers over 5,000 product configurations in four product families: SRAM components and modules, specialty memory products, logic circuits and RISC (reduced instruction set computers) microprocessors. The Company markets its products on a worldwide basis primarily to OEMs through a variety of channels, including a direct sales force, distributors and independent sales representatives. The Company's end-user customers include Alcatel, AT&T, Apple Computer, Bay Networks, Canon, Cisco Systems, Compaq Computer, Dell Computer, Digital Equipment, FORE Systems, Hewlett Packard, IBM, Intel, Motorola, NEC, Nokia, Olivetti, Siemens Nixdorf, Silicon Graphics, Sun Microsystems and Tektronix. The Company attempts to differentiate itself from competitors through unique architecture, enhanced system cost, performance, and packaging options. 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 IDT offers over 5,000 product configurations in four product families: SRAM components and modules, specialty memory products, logic circuits, and RISC microprocessors. During fiscal 1996, these product families accounted for 46%, 27%, 17% and 10%, respectively, of total revenues of $679.5 million. The Company markets its products primarily to OEMs in the communications, desktop computer, office automation and workstation/server markets. IDT's product design efforts are focused on proprietary components and integration of its components into single devices, modules or subsystems to meet the needs of customers. SRAMs. SRAMs are memory circuits used for storage and retrieval of data during a computer system's operation. SRAMs do not require electrical refreshment of the memory contents to ensure data integrity, allowing them to operate at high speeds. SRAMs include substantially more circuitry than DRAMs, resulting in higher production costs for a given amount of memory, and generally command higher selling prices than the equivalent density traditional DRAM products. The market for SRAMs is fragmented by differing demands for speed, power, density, organization and packaging. As a result, there are a number of niche markets for SRAMs. The Company is focused primarily on the cache memory segment of the SRAM market. The Company's SRAM product strategy is to offer high-performance 5 volt and 3.3 volt SRAM 2 components and modules that have differentiated features optimized to work with specified microprocessors, such as Intel Pentium, PowerPC and MIPS RISC microprocessors. Cache memory provides intermediate storage between fast microprocessors and relatively slow traditional DRAM main memory. Cache memory operates at the speed of the microprocessor and increases the microprocessor's efficiency by temporarily storing the most frequently used instructions and data. Special cache tag SRAMs provide a look-up table that tells the cache controller which blocks of data are currently stored in the cache SRAMs. IDT is a leading supplier of cache SRAM components and modules to personal computer manufacturers. The Company offers a range of cache SRAMs, including burst-mode cache and cache tag SRAMs that support Intel and PowerPC microprocessors. The Company's cache SRAM components are often integrated into cache memory modules. These modules typically include a cache controller, cache tag SRAM and cache SRAM components and are ready to plug into sockets on a computer system's motherboard. IDT offers a series of standard and custom cache memory modules for IBM and IBM-compatible PCs and PowerPC-based personal computers as well as for certain RISC microprocessor-based systems. The Company continues to develop its next generation SRAM products to meet the growing cache memory needs of increasingly faster microprocessors. IDT's new products are being designed to operate at higher speeds and provide greater levels of integration. In 1996, the Company announced Fusion Memory* technology, with production scheduled to begin during fiscal 1997. Fusion Memory products use DRAM technology and function with speed comparable to some SRAM products. DRAM technology offers lower production costs than required to produce equivalent density SRAM products. The Company believes that Fusion Memory products can supplement the Company's existing SRAM product offerings and will be available initially in a 1 Megabit product. In order to provide SRAM products that meet the varying needs of its customers, IDT uses CMOS process technology and offers 16K, 64K, 256K and 1 Megabit SRAMs in a number of speed, organization, power and packaging configurations. Specialty Memory Products. The Company's proprietary specialty memory products include FIFOs and multi-port memories that offer high-performance features which allow communications and computer systems to operate more effectively. FIFOs 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. Multi-port memory products are used to speed data transfers and act as the link between multiple microprocessors or between microprocessors and peripherals when the order of the data to be transferred needs to be controlled. These products are currently used primarily in peripheral interface, communications and networking products, including bridges, hubs, routers and switches. *Fusion Memory is a trademark of Integrated Device Technology, Inc. 3 IDT is a leading supplier of both synchronous and asynchronous FIFOs and has increasingly focused its resources on the design of synchronous FIFOs. Synchronous FIFOs have been gaining greater market acceptance because they are faster and provide an easier user interface. IDT's family of 9-bit SyncFIFOs are being used in many newer networking products. The Company is a leading supplier of multi-port memory products. IDT's family of multi-port memories is composed primarily of dual-port asynchronous devices. The Company also offers four-port products, a synchronous dual-port device and a SARAM, that combines the flexibility of a multi-port product with the ease of a FIFO. In addition, the Company is developing a family of specialty memory products for the emerging asynchronous transfer mode ("ATM") market. During fiscal 1996, IDT announced and shipped revenue units of its first product for the ATM market. The first member of this ATM family, a SAR (segmentation and reassembly) chip, is a highly integrated, low cost interface device for ATM network cards. Other members of the ATM family will include low-cost physical media interface devices, as well as more highly-integrated SAR devices for ATM networks. Logic Circuits. 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 circuit products which support bus and backplane interfaces, memory interfaces and other logic support applications where high-speed, low power and high-output drive are critical. IDT's logic circuits are used in a broad range of markets. IDT's 16-bit logic products are available in small packages, enabling board area to be reduced. These products are designed for new applications in which small size, low power and extra low noise are as important as high speed. IDT also supplies a series of 8-bit and 16-bit, 3.3 volt logic products and a 3.3 volt to 5 volt translator circuit directed at 3.3 volt systems in the notebook and laptop computers and other markets. 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. RISC Microprocessor Components. IDT is a licensed manufacturer of MIPS RISC microprocessors. IDT manufactures 32-bit and 64-bit MIPS microprocessors and IDT derivative products for the communications, office automation, workstation/server and desktop computer 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 printer, copier or network router. The Company sells several proprietary 32-bit embedded controllers, including devices with on-circuit SRAM cache memory and floating point functions. 4 In 1996, the Company introduced the R5000, IDT's first 64-bit superscalar microprocessor, which is available with clock speeds of up to 200 Mhz. In 1993, the Company introduced its ORION*R4600* microprocessor, which is capable of clock speeds of up to 150 Mhz. The R5000 and R4600 are higher performance derivatives of the 64-bit R4000 and R4400 microprocessors developed by MIPS Computer Systems (MIPS). MIPS was acquired by Silicon Graphics (SGI) in 1992 and the R4000 and R4400 were introduced by the Company and other MIPS licensees in 1992 and 1993, respectively. The R5000 was developed for SGI by Quantum Effect Design, Inc. ("QED"), an affiliate of IDT. Through agreements with SGI, IDT obtained a license to manufacture and sell the R5000. The R4600 was developed for the Company by QED. Systems based on the ORION family of microprocessors are targeted at both embedded and desktop applications. CUSTOMERS The Company markets and sells its products primarily to OEMs in the communications, desktop computer, office automation and workstation/server markets. Customers often purchase products from more than one of the Company's product families. In fiscal 1996, one OEM customer, Apple Computer Inc., accounted for 12 % of the Company's revenue. The following is an alphabetical listing of current representative end-user customers of the Company, by market: DESKTOP OFFICE WORKSTATION/ COMMUNICATIONS COMPUTER AUTOMATION SERVER --------------- ------------ ----------------- ------------------- Alcatel Apple Computer Canon Digital Equipment AT&T AST Research Electronics For Imaging EMC Bay Networks Compaq Computer QMS NEC Cabletron Dell Computer Samsung Siemens Nixdorf Cisco Systems Gateway Computers Tektronix Silicon Graphics Ericsson Groupe Bull Texas Instruments Sun Microsystems FORE Systems Hewlett-Packard Toshiba Fujitsu IBM Xerox Motorola ICL Nokia Intel Siemens Olivetti * R4600 and Orion are trademarks of Integrated Device Technology, Inc. 5 MARKETING AND SALES IDT markets and sells its products primarily to OEMs through a variety of channels, including a direct sales force, distributors and independent sales representatives. The Company had 77 direct sales personnel in the United States at March 31, 1996. Such personnel are located at the Company's headquarters and in 18 sales offices in Alabama, California, Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon and Texas, and are primarily responsible for marketing and sales in those areas. IDT also utilizes four national distributors, Hamilton Hallmark, Future Electronics, Wyle Laboratories and Insight Electronics, Inc. and several regional distributors in the United States. Hamilton Hallmark accounted for 11%, 13% and 15% of the Company's revenues in fiscal 1996, 1995 and 1994, 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. The Company had 55 direct sales personnel and eleven sales offices located outside of the United States at March 31, 1996. Sales activities outside North America are generally controlled by IDT's subsidiaries located in France, Germany, Hong Kong, Italy, Japan, Sweden and the United Kingdom. The Company also has sales offices in Taiwan, Singapore and Israel. The Company continues to emphasize its direct marketing efforts to OEMs in Europe and to United States companies with operations in the Asia/Pacific area. A significant portion of export sales, however, continues to be made through international distributors, which tend not to carry inventory or carry significantly smaller levels compared to domestic distributors. During fiscal 1994, 1995 and 1996, export sales accounted for 32%, 39% and 40% of total revenues, respectively. Sales outside the United States are generally denominated in local currencies. Sales and other financial information for foreign operations is included in Note 12 of the Consolidated Financial Statements contained elsewhere in this Form 10K. Export sales are subject to certain risks, including currency controls and fluctuations, changes in local economic conditions, import and export controls, 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, and often handle small or rush orders. Pursuant to distribution agreements, the Company grants distributors the right to return slow-moving products for credit against other products and offers protection to the distributors against inventory obsolescence or price reductions. Revenue recognition of sales to distributors is deferred until the products are resold by the distributor. MANUFACTURING IDT believes that maintaining its own wafer fabrication capability facilitates the implementation of advanced process technologies and new higher-performance product designs, provides it 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 6 wafer fabrication facilities in San Jose and Salinas, California, and is currently qualifying for sale products fabricated in the new facility in Hillsboro, Oregon. 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. The San Jose facility includes a 24,000 square foot, class 1 (less than one particle 0.5 micron or greater in size per cubic foot), six-inch wafer fabrication line that was first placed in production in March 1991. Construction commenced on the Oregon facility in August 1994 and was completed in 1996, and it is expected the Oregon facility will contribute to revenues in fiscal 1997. The facility is 192,000 square feet and contains a 48,000 square foot, class 1, eight-inch wafer fabrication line. The Company currently estimates that the cost to construct, equip, and bring this facility to full production capacity, excluding assets leased through the tax ownership lease transaction described in Note 7 of the Consolidated Financial Statements, will be approximately $425 to $450 million. Through March 31, 1996, excluding the tax ownership lease assets, the Company has spent $150 million on the Oregon facility. The Company believes the construction of the facility in Oregon reduces the Company's risk of a natural disaster affecting all of its wafer fabrication facilities which, excluding the Oregon facility, are all currently located in Northern California. If demand for the Company's products does not fully utilize the additional capacity provided by the Oregon facility, the incremental fixed costs and operating expenses may materially adversely affect the Company's results of operations and financial condition. IDT also operates component assembly and test facilities which aggregate 145,000 square feet in Penang, Malaysia. Substantially all of the Company's test operations and a significant portion of its assembly operations are performed at its Malaysian facility. IDT also uses subcontractors, principally in Korea, the Philippines and Malaysia, to perform certain assembly 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 conditions and changes in tax rates, 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 Santa Clara as well as limited test capability in Santa Clara, San Jose and Salinas. Assembly and test of memory modules takes place both domestically and offshore. The Company has been operating its wafer fabrication facilities in Salinas and San Jose and its assembly operations in Malaysia at approximate installed equipment capacity since fiscal 1994. To address its capacity requirements, in fiscal 1996 the Company completed the conversion of its Salinas wafer fabrication facility from five-inch to six-inch wafers. In late fiscal 1995, the Company acquired an interest in approximately 10 acres of land in the Philippines and is constructing an assembly and test facility which initially will be 176,000 square feet. Construction of the building is expected to be completed in mid-fiscal 1997. The Company has the capability to expand to accommodate growth. The Company estimates the costs to acquire the land, construct the building and equip the facility in multiple phases will total approximately $75 million in capital expenditures, of which approximately $21 million will be spent in fiscal 1997. The Company faces a number of risks in order to accomplish its goals to increase production in its existing plants and to construct, equip and commence operations of the Oregon and Philippines 7 facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company utilizes proprietary CMOS process technology permitting sub-micron geometries. The majority of IDT's current products are manufactured using its proprietary 0.65 micron processes, an increasing number are being manufactured using the Company's new 0.5 micron processes and the Company is currently developing several sub-0.5 micron CMOS processes. Wafer fabrication involves a highly sophisticated, complex process that is extremely sensitive to contamination. Integrated circuit manufacturing costs are primarily determined by circuit size because the yield of good circuits per wafer generally increases as a function of smaller die. Other factors affecting costs include wafer size, number of process steps, costs and sophistication of manufacturing equipment, packaging type, process complexity and cleanliness. IDT's manufacturing process is complex, involving a number of steps including wafer fabrication, plastic or ceramic packaging, burn-in and final test. The Company continually makes changes to its manufacturing process to lower costs and improve yields. From time to time the Company has experienced manufacturing problems that have caused delays in shipments or increased costs. Manufacturing problems with the new facility in Oregon or its existing wafer fabrication, assembly or test facilities could materially adversely affect the Company's results of operations. The Company generally has been able to arrange for multiple sources of raw materials, but the number of vendors capable of delivering certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases is very limited. Some of the Company's packages, while not unique, have very long lead times and are available from only a few suppliers. From time to time vendors have extended lead times or limited supply to the Company due to capacity constraints. These circumstances could reoccur and could materially adversely affect IDT. BACKLOG IDT manufactures and markets primarily 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 also allow customers to reschedule delivery dates and cancel purchase orders without significant penalties. Orders are frequently rescheduled, revised or canceled. In addition, distributor orders are subject to price adjustments both prior to, and occasionally after shipment. For these reasons, IDT believes that its backlog, while useful for scheduling production, is not necessarily a reliable indicator of future revenues. 8 RESEARCH AND DEVELOPMENT IDT's competitive position has been established, to a large extent, through its emphasis on the development of proprietary and enhanced performance industry-standard products, and the development of 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 Northern California, Atlanta, Georgia, Austin, Texas and Morrisville, North Carolina. In addition, the new plant start-up costs associated with the Oregon wafer fabrication facility will significantly impact research and development expenditures in fiscal 1997. Research and development expenditures are set out in the Consolidated Statement of Operations in the Consolidated Financial Statements and as a percentage of revenues were 20%, 19% and 19% in fiscal 1996, 1995 and 1994, respectively. The Company's product development activities are focused on the design of new circuits and modules that provide enhanced performance for growing applications. In the SRAM family, IDT is utilizing its 5 volt and 3.3 volt SRAM and subsystem design expertise to develop advanced SRAM cache memories and modules for microcomputer systems based on Intel's Pentium, IBM and Motorola's PowerPC, and SGI's MIPS RISC microprocessors. Additionally, the Company continues its research into applications of Fusion Memory technology, with the goal of expanding product offerings. IDT's efforts in the specialty memory products area are concentrated on the development for the communications market of advanced synchronous FIFOs and more sophisticated multi-port memory products. In fiscal 1996, the Company continued its efforts to develop a family of specialty memory products for the emerging ATM market and a family of lower voltage logic devices for a broad range of applications. The Company is emphasizing the design of RISC microprocessors for embedded control applications, such as printers and telecommunications switches. 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, thus enhancing their competitive positions. The Company continues to refine its CMOS process technology focusing on sub-0.5 micron geometry processes and converting the production of many products to newer generation processes. In fiscal 1992, the Company purchased an equity interest in QED, a newly formed corporation. Pursuant to a development agreement between QED and the Company, QED developed the ORION R4600 microprocessor for IDT. QED also designed the R5000 for SGI, and through agreements with SGI, IDT obtained a license to manufacture and sell the R5000. The R5000 is targeted at 3-D visualization, internetworking and office automation applications. Except for the R5000, the Company owns such products, subject to the payment of royalties and other fees to QED and SGI. IDT has licensed Toshiba and NKK to manufacture and market certain of these products. With respect to the R5000, SGI owns the intellectual property rights. There can be no assurance that QED will continue to design products for the Company or be successful in developing such products. 9 In addition, the Company is engaged in the development of microprocessors for use in general applications at its research center in Austin Texas. COMPETITION The semiconductor industry is intensely competitive and is characterized by rapid technological advances, cyclical market patterns, price erosion, evolving industry standards, occasional shortages of materials, intellectual property disputes, high capital equipment costs and availability and control of manufacturing capacity. Many of the Company's competitors have substantially greater technical, marketing, manufacturing and financial resources than IDT. In addition, several foreign competitors receive assistance from their governments in the form of research and development loans and grants and reduced capital costs, which could give them a competitive advantage. The Company competes in different product areas, to varying degrees, on the basis of technical innovation and performance of its products, as well as quality, price and product availability. IDT's competitive strategy is to differentiate its products through high-performance, innovative configurations and proprietary features or to offer industry-standard products with higher speeds or lower power consumption. 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. INTELLECTUAL PROPERTY AND LICENSING IDT has obtained 64 patents in the United States and 18 abroad and has 95 inventions in various stages of the patent application process, 86 of which are in the United States. The Company intends to continue to increase the scope of its patents. The Company also relies on trade secret, copyright and trademark laws to protect its products, and a number of the Company's circuit designs are registered pursuant to the Semiconductor Chip Protection Act of 1984. This Act gives protection similar to copyright protection for the patterns which appear on integrated circuits and prohibits competitors from making photographic copies of such circuits. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, that the rights granted thereunder will provide competitive advantages to the Company, or that the Company's efforts generally to protect its intellectual property rights will be successful. In recent years, there has been a growing trend of companies to resort to litigation to protect their semiconductor technology from unauthorized use by others. The Company in the past has been involved in patent litigation which adversely affected its operating results. Although the Company has obtained patent licenses from certain semiconductor manufacturers, the Company does not have licenses from a number of semiconductor manufacturers who have a broad portfolio of patents. IDT has been notified that it may be infringing patents issued to certain semiconductor manufacturers and other parties, and is currently involved in several license negotiations. There can be no assurance that additional claims alleging infringement of intellectual property rights, 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 10 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 noninfringing technology. If IDT is unable to obtain any necessary licenses, pass any increased cost of patent licenses on to its customers or develop noninfringing technology, the Company could be materially adversely affected. In addition, IDT has received patent licenses from several companies that expire over time, and the failure to renew or renegotiate certain of these licenses as they expire or significant increases in amounts payable under these licenses could have an adverse effect on the Company. On May 1, 1992, IDT and AT&T entered into a five-year royalty-free patent cross-license agreement. As part of this agreement, patent litigation instituted by AT&T was settled and dismissed. Under the agreement, IDT made a lump sum payment and issued shares of its Common Stock to AT&T, granted a discount on future purchases, and gave credit for future purchases of technology on a nonexclusive basis. In December 1995, the agreement with AT&T was modified to reflect AT&T's restructure into three legal entities, extend the agreement for five years beyond the original expiration date and other agreed-upon changes. On December 10, 1992, IDT and Texas Instruments ("TI") entered into a five-year patent cross-license agreement. As part of this agreement, patent litigation instituted by TI was dismissed. Under the agreement, IDT granted to TI a license to certain IDT technology and products and guaranteed that TI will realize certain revenues from the licensed technology and products, and IDT will develop certain products which will be manufactured and sold by both IDT and TI. See Note 5 of Notes to Consolidated Financial Statements. ENVIRONMENTAL REGULATION Federal, State and local provisions have been enacted regulating the discharge and disposal into the environment of certain materials used in the semiconductor manufacturing process. The Company's manufacturing facilities are designed to comply with existing regulations, and the Company believes that its activities conform to present regulations. The Company has been conducting its operations with all necessary permits, and without material adverse impact attributable to environmental regulation. However, there can be no assurance that future additions or changes to environmental regulations will not impose upon the Company the requirement for significant capital expenditure. Further, any failure by the Company to control the use of, or to restrict adequately the discharge of hazardous materials under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended. In addition, IDT could be held financially responsible for remedial measures if its properties were found to be contaminated whether or not the Company was responsible for such contamination. EMPLOYEES At March 31, 1996, IDT and its subsidiaries employed 3,828 people worldwide, of whom 1,389 were in Penang. 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. Examples are stock option, stock purchase, profit sharing and special bonus plans for key contributors. IDT has never had a work stoppage; no employees are represented by a collective bargaining agreement; and the Company considers its employee relations to be good. 11 ITEM 2. PROPERTIES The Company presently occupies eight major facilities in California, Oregon and Malaysia: LOCATION FACILITY USE SQUARE FEET --------- ------------- ------------ Salinas Wafer fabrication, SRAM and multiport 98,000 memory operations Santa Clara Logic operation 62,000 Santa Clara Administration and RISC microprocessor 43,700 operations Santa Clara Administration and other 50,000 operations Santa Clara Administration ` 48,300 Penang, Malaysia Assembly and test 145,000 San Jose Wafer fabrication, process technology 135,000 development, FIFO and memory subsystems operations, and research and development Oregon Wafer fabrication 192,000 The Company leases its Salinas facility from Carl E. Berg, a director, under a lease expiring in 2005 and in October 1994 purchased a 5.5 acre parcel adjacent to its Salinas facility for $653,000 from Mr. Berg. IDT recently entered into an agreement with Mr. Berg to acquire the Salinas facility in a transaction structured as a tax free reorganization. IDT leases its Santa Clara facilities under leases expiring in 1999 through 2015, including renewal options. The Oregon facility is subject to a tax ownership operating lease. Additional information about leased properties, including the purchase of the Salinas facility, is provided in Note 7 of the Consolidated Financial Statements. The Company owns its Malaysian and San Jose facilities, although the Malaysian facilities are subject to long-term ground leases, and the San Jose facility is subject to a mortgage. IDT leases offices for its sales force in 18 domestic locations as well as Edinburgh, Hong Kong, London, Milan, Munich, Paris, Singapore, Stockholm, Taipei, Tel Aviv and Tokyo. IDT leases offices for its design centers in Georgia, North Carolina and Texas. In late fiscal 1995, the Company acquired an interest in approximately 10 acres of land in the Philippines, and construction has commenced on a 176,000 square foot assembly and test facility, which may be expanded in the future. 12 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of the fiscal year ended March 31, 1996. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, and their respective ages as of April 30,1996 are as follows: Name Age Position ----- --- -------- D. John Carey 59 Chairman of the Board Leonard C. Perham 52 President & Chief Executive Officer William B. Cortelyou 40 Vice President, Wafer Operations Robin H. Hodge 56 Vice President, Assembly and Test Alan H. Huggins 43 Vice President, Memory Division Daniel L. Lewis 47 Vice President, Sales Chuen-Der Lien 40 Vice President, Research and Development, Chief Technology Officer Jack Menache 52 Vice President, General Counsel and Secretary Richard R. Picard 48 Vice President, Logic and Microprocessor Products Robert Phillips 51 Vice President, Manufacturing William D. Snyder 51 Vice President, Finance and Chief Financial Officer Mr. Carey was elected to the Board of Directors in 1980 and has been Chairman of the Board since 1982. He served as Chief Executive Officer from 1982 until his resignation in April 1991 and was President from 1982 until 1986. Mr. Carey was a founder of Advanced Micro Devices ("AMD") in 1969 and was an executive officer there until 1978. Mr. Perham joined IDT in October 1983 as Vice President and General Manager, SRAM Division. In October 1986, Mr. Perham was appointed President and Chief Operating Officer and a director of the Company. In April 1991, Mr. Perham was elected Chief Executive Officer. Prior to joining IDT, Mr. Perham held executive positions at Optical Information Systems Incorporated and Zilog Inc. 13 Mr. Cortelyou joined IDT in 1982. In January 1990, he was elected Vice President, Wafer Operations, Salinas. Mr. Cortelyou currently serves as Vice President, Wafer Operations. Prior to joining IDT, Mr. Cortelyou was an engineer at AMD. Mr. Hodge joined IDT as Director of Assembly Operations in March 1989. In January 1990, Mr. Hodge was elected Vice President, Assembly Operations. Mr. Hodge currently serves as Vice President, Assembly and Test. From 1983 until joining IDT, Mr. Hodge was Director of Assembly Operations for Maxim Integrated Products. Mr. Huggins joined IDT in 1983 and was elected Vice President in 1987. Mr. Huggins currently serves as Vice President, Memory Division. Prior to joining the Company, Mr. Huggins held various engineering positions at AMD. Effective May 15, 1996, Mr. Huggins resigned as an executive officer. Mr. Lewis joined IDT in 1984 as Eastern Area Sales Manager. In June 1991, he was elected Vice President, Sales. Prior to joining IDT, Mr. Lewis held management positions at Avatar Technologies, Inc., Data General and Zilog. Dr. Lien joined IDT in 1987 and was elected Vice President, Technology Development in April 1992 and was elected Vice President, Research and Development, Chief Technology Officer in 1996. Prior to joining the Company, he held engineering positions at Digital Equipment Corporation and AMD. Mr. Menache joined IDT as Vice President, General Counsel and Secretary in September 1989. From April 1989 until joining IDT, he was General Counsel of Berg & Berg Developers. From 1986 until April 1989, he was Vice President, General Counsel and Secretary of The Wollongong Group Inc. Mr. Picard joined IDT in 1985. In 1989 he was elected Vice President, Static RAM Product Line. In April 1990 he was appointed Vice President and General Manager, Logic Products. He was elected Vice President, Logic and Microprocessor Products in May 1993. Prior to joining IDT, Mr. Picard held management positions at International Micro Circuits, Zilog and AMD. Mr. Phillips joined IDT in March 1995 as Vice President, Manufacturing. Prior to joining IDT, Mr. Phillips was Vice President of Fab, Assembly and Test Operations at Vitesse Semiconductor and Edsun Labs, and was President of PMT Manufacturing Technology, Inc. Mr. Snyder joined the Company as Treasurer in 1985. In May 1990, he was elected Vice President, Corporate Controller, and in September 1990 Mr. Snyder was elected Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Snyder held financial management positions at Actrix Computer, Zilog and Digital Equipment Corporation. 14 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 1996: First Quarter 25 1/16 18 1/32 Second Quarter 33 1/4 22 9/16 Third Quarter 24 3/8 12 7/8 Fourth Quarter 14 7/8 9 1/4 Fiscal 1995: First Quarter 15 11/16 11 15/16 Second Quarter 14 7/16 8 1/8 Third Quarter 15 1/32 9 1/4 Fourth Quarter 20 3/8 14 3/16 In August, 1995, the Company announced a two-for-one stock split in the form of a stock dividend for stockholders of record on August 25, 1995. The distribution of additional shares was on September 15, 1995. Price information for all periods presented has been retroactively adjusted to reflect this stock dividend. As of April 28, 1996, there were approximately 1,427 record holders of the 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. 15 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 Form 10-K.
FISCAL YEAR ENDED ------------------------------ MARCH 31, APRIL 2, APRIL 3, MARCH 28, MARCH 29, 1996 1995 1994 1993 1992 (1) ------------------------------------------------------------------------------ (In thousands, except per share data) STATEMENT OF OPERATIONS DATA Revenues $ 679,497 $ 422,190 $ 330,462 $ 236,263 $ 202,734 Income (loss) before extraordinary item $ 118,249 $ 78,302 $ 40,165 $ 5,336 ($32,808) Net income (loss) $ 120,170 $ 78,302 $ 40,165 $ 5,336 ($32,808) Primary earnings per share: Income before extraordinary item $ 1.44 $ 1.05 $ 0.61 $ 0.09 ($0.62) Net income $ 1.47 $ 1.05 $ 0.61 $ 0.09 ($0.62) Fully diluted earnings per share: Income before extraordinary item $ 1.42 $ 1.04 $ 0.60 $ 0.09 ($0.62) Net income $ 1.44 $ 1.04 $ 0.60 $ 0.09 ($0.62) Shares used in computing net income (loss) per share: Primary 81,897 74,765 66,232 59,402 52,510 Fully diluted 87,753 75,426 67,260 59,402 52,510 BALANCE SHEET DATA Total assets $ 939,434 $ 561,975 $ 349,571 $ 239,994 $ 229,730 Long-term obligations, excluding current portion $ 36,682 $ 36,595 $ 37,462 $ 48,987 $ 53,050 Convertible subordinated notes, net of issuance costs $ 182,558 Stockholders' equity $ 549,727 $ 414,531 $ 224,367 $ 117,760 $ 104,602 Research & development expenses $ 133,317 $ 78,376 $ 64,237 $ 53,461 $ 52,044 Number of employees 3,828 2,965 2,615 2,414 2,159 (1) In fiscal 1992, the Company recorded restructuring and other charges of $24.8 million.
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain amounts, as a percentage of revenues, from the Company's consolidated statements of operations for the three fiscal years ended March 31, 1996, April 2, 1995 and April 3, 1994. FISCAL YEAR ENDED MARCH 31, APRIL 2, APRIL 3, 1996 1995 1994 ------------------------------- Revenues 100.0% 100.0% 100.0% Cost of revenues 43.2 42.5 48.3 ------------------------------- Gross profit 56.8 57.5 51.7 ------------------------------- Operating expenses: Research and development 19.6 18.6 19.4 Selling, general and administrative 13.1 15.3 16.5 ------------------------------- Total operating expenses 32.7 33.9 35.9 ------------------------------- Operating income 24.1 23.6 15.8 Net interest income 1.5 1.2 (0.6) ------------------------------- Income before provision for income taxes 25.6 24.8 15.2 Provision for income taxes 8.2 6.2 3.0 Income before extraordinary item 17.4 18.6 12.2 ------------------------------- Extraordinary item: Gain from early extinguishment of debt, net of tax 0.3 -- -- ------------------------------- Net income 17.7% 18.6% 12.2% =============================== 17 Overview Revenues were $679.5 million in fiscal 1996, a 61% increase over fiscal 1995 of $422.2 million and a 106% increase over fiscal 1994 of $330.5 million. Net income was $1.44 per fully diluted share in fiscal 1996 compared to $1.04 in fiscal 1995 and $0.60 in fiscal 1994. During fiscal 1996, IDT made significant progress in increasing capacity in Penang, Malaysia, completed the conversion of the Salinas wafer facility from five-inch to six-inch wafers, started construction of a new assembly and test facility in the Philippines and completed construction of the Hillsboro, Oregon wafer facility. The Oregon facility is expected to ship its first revenue units in the first quarter of fiscal 1997. Both revenues and profits were affected dramatically by a volatile market for the Company's largest product line, SRAMs, which accounted for 46% of IDT's total fiscal 1996 revenue. For the first two quarters of the fiscal year, SRAMs were in great demand and prices rose. At the same time, through die shrinks and better utilization of manufacturing capacity, IDT reduced costs of production resulting in record operating margins despite startup costs associated with the new Oregon plant. During the latter part of the year, SRAM pricing began to fall significantly as a number of competitors, particularly Taiwanese, shifted capacity to SRAMs. Shortly thereafter, demand for high speed SRAMs by personal computer (PC) manufacturers slowed. The SRAM order rate declined further as certain customers not only reduced SRAM order rates, but also sold off excess SRAM inventory at low prices causing excess supply. As an example of the market conditions, in less than six months, selling prices for new orders on the industry-standard 3.3 volt 32Kx8 SRAM declined by as much as 80% from the peak. Consequently, while revenues and earnings grew sequentially in the first three quarters of fiscal 1996, fourth quarter earnings and revenue dropped significantly from the immediately preceding quarter and fourth quarter earnings decreased compared to the same period in the prior year. Results of Operations Revenues of $679.5 million were achieved in fiscal 1996 through a combination of improved selling prices on SRAM products shipped during the first three quarters, higher output as the Company increased die production and generally increased demand across all of IDT's other products. SRAM revenues increased 90.3% to $315.4 million compared to fiscal 1995. Fiscal 1995 revenue increased 28% over fiscal 1994 due to strong demand for fast SRAMs for secondary cache requirements in the PC market. Looking forward, the Company does not expect demand in the PC market will resume last year's growth rates, and is uncertain as to whether pricing for commodity SRAMs will change. Gross profit increased 59% to $385.8 million in fiscal 1996 when compared to fiscal 1995 and 126% over the gross profit reported in fiscal 1994. However, as a result of significant price declines on SRAM orders taken in the second half of the year, IDT's gross profit as a percentage of revenue declined to 56.8% in fiscal 1996 compared to 57.5% in fiscal 1995. Gross profit as a percentage of revenue was 51.7% in fiscal 1994. While gross profit as a percentage of revenue for the first three quarters of fiscal 1996 was not appreciably different from the prior year, the fourth quarter declined to 54.3%. Some markets such as telecommunications and datacommunications remained robust throughout the year, but falling prices and orders in the PC market offset strong performance for the remainder of the Company's market segments in the third and fourth quarters. Costs associated with 18 the Hillsboro, Oregon plant are expected to negatively impact gross margins in fiscal 1997, while that plant is on a ramp to increase production. IDT's policy is to expense new plant startup costs to research and development (R & D) expense until a facility is ready to begin commercial production. In fiscal 1996 substantially all Oregon plant expenses, amounting to $ 18.5 million, were charged to R & D expense, but as that plant reaches production status in fiscal 1997, an increasingly significant portion of the total costs will be allocated to cost of goods sold, based upon activities performed. R & D expenses increased 70% to $133.3 million in fiscal 1996 as compared to $78.4 million in fiscal 1995, and $64.2 million in fiscal 1994. As a percentage of revenue, R & D expense was 19.6% of fiscal 1996 revenue, an increase from 18.6% in fiscal 1995. R & D expenses had been 19.4% of fiscal 1994 revenue. The increase in 1996 can be principally attributed to process engineering research costs of approximately $18.5 million relative to the new Oregon wafer fabrication plant. Other R & D activities included development of sub 0.5 micron processes, the release of 20 new products, including IDT's first product for the ATM (asynchronous transfer mode) market, the SAR (segmentation and reassembly) chip, and further development and design of new products and processes. The Company expects the startup of the new Oregon facility to continue to impact R & D expense in fiscal 1997 but that total R & D expense as a percentage of revenue will be reduced compared to fiscal 1996. IDT believes that high levels of R & D investment is required to support its strategy of providing products to its customers which are not readily available from competitors. Selling, general and administrative (S, G & A) expenses increased 37% to $88.8 million in fiscal 1996, as compared to $64.6 million in fiscal 1995. As a percentage of revenues, S, G & A expenses declined to 13.1% of fiscal 1996 revenue compared to 15.3% of fiscal 1995 revenue. Fiscal 1994 S, G & A expenses were $54.3 million or 16.5% of revenue. The 1996 increase in S, G & A expenses can be attributed to higher variable selling expenses associated with the year-over-year revenue growth of 61%, increases in employee profit sharing and management bonuses, increases in sales personnel and increases in provisions for bad debts. In 1997, IDT plans to install an enterprise-wide management information system and anticipates that S, G & A expenses will remain constant as a percentage of revenues. Interest expense was $9.3 million in fiscal 1996 as compared to $3.3 million and $5.2 million in fiscal years 1995 and 1994, respectively. Interest expense increased in 1996 primarily due to the issuance of $201.3 million of 5 1/2% convertible subordinated notes issued in the first quarter of the fiscal year. 1996 gross interest expense of $12.3 million was reduced by $3.0 million in connection with capitalization of construction period interest for the Oregon wafer fabrication plant. Despite retiring $15 million of the 5 1/2% convertible subordinated notes in the fourth quarter resulting in an extraordinary gain (see Note 5 of the Consolidated Financial Statements), interest expense is expected to be higher in fiscal 1997, as the notes were not outstanding for all of fiscal 1996. Furthermore, interest capitalization will cease when the Oregon facility is placed in production. Interest income and other, net, increased to $19.4 million in fiscal 1996 compared to $8.2 million and $3.1 million in fiscal years 1995 and 1994, respectively. The increase in interest income was due primarily to the investment of higher cash balances from the proceeds of the issuance of $201.25 million of subordinated notes in the first quarter of fiscal 1996. Fiscal 1995 had been impacted favorably by a $97.6 million equity offering. As the Company continues to pay cash for 19 substantial capital equipment acquisitions, less cash will be available for investment, resulting in lower interest income in fiscal 1997. The effective tax rates for fiscal 1996, 1995 and 1994 of 32%, 25% and 20%, respectively, differed from the US statutory rate of 35% primarily due to earnings of foreign subsidiaries being taxed at lower rates, and the utilization of certain tax credits. The Company has consumed substantially all of the tax benefits associated with its Malaysian subsidiary, and it has fully utilized carried forward R&D tax credits. The Company accounts for its stock option plans and its employee stock purchase plan in accordance with provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995 the Financial Accounting Standards Board released the Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation." While SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995, as permitted by SFAS 123, the Company intends to continue to account for its employee stock plans in accordance with APB 25. Consequently, SFAS 123 is not expected to have any material impact on IDT's financial condition or results of operations. Liquidity and Capital Resources IDT's financial condition improved during fiscal 1996. Cash and cash-equivalents and short term investments increased from $221.6 million at the end of 1995 to $261.3 million at the end of 1996. Working capital increased from $261.2 million to $286.2 million despite substantial cash investments in plant, property and equipment. These increases were a result of improved profitability as well as the issuance of the 5 1/2% convertible subordinated notes. Additionally the Company has $67.8 million of cash classified as other assets, which are pledged as security relative to the operating lease for the Oregon facility. As of March 31, 1996, the Company had $5.4 million available under unsecured lines of credit, all of which are overseas. See Note 6 of Notes to Consolidated Financial Statements. During fiscal 1996, 1995 and 1994 cash flow from operations was $200.9 million, $115.8 million and $100.1 million, respectively. Improved operating results in fiscal 1995 and 1996 was the largest single factor affecting cash flow from operations. Other factors contributing to greater cash flow from operations include increases in accounts payable and other current liabilities. See the Consolidated Statements of Cash Flows in the Consolidated Financial Statements. IDT expects that increased depreciation expenses associated with its recent and forecasted capital expenditures will be significant relative to future cash flows from operations. During fiscal 1996, 1995 and 1994 the Company's net cash used in investing activities was $359.3 million, $163.2 million and $68.9 million, respectively, of which $287.5 million, $94.7 million and $37.4 million, respectively, was used for capital equipment and property and plant improvements. In fiscal 1996, $57.3 million was used to collateralize the Oregon facility lease. In fiscal 1994, financing activities generated $34.8 million, the primary source of which was an equity offering which resulted in net cash of $46.8 million. In fiscal 1995, financing activities generated $89.2 million, the primary source of which was an equity offering in December 1994 which resulted in net cash of $97.6 20 million. In fiscal 1996, financing activities generated $185.4 million, the primary source of which was the issuance of convertible subordinated debt (see Note 5 of the Consolidated Financial Statements) which resulted in net cash of $196.7 million. In view of current and anticipated capacity requirements, IDT anticipates capital expenditures of approximately $255 million in fiscal 1997, principally in connection with continued installation of equipment in the new Oregon facility plus the construction and partial equipping of the new Philippine plant and other capacity improvements. Looking forward, the Company believes that existing cash balances, cash flow from operations, existing credit facilities and other financing arrangements that are available will be sufficient to fund its anticipated capital expenditures and working capital needs through fiscal 1997. If the Company is required to seek other financing sooner, the unavailability of financing on terms satisfactory to IDT could have a material adverse effect on the Company. Factors Affecting Future Results Except for the historical information contained in this Annual Report on Form 10-K, the matters discussed in this report are forward looking statements. These forward looking statements concern matters that involve risks and uncertainties, including but not limited to those set forth below, that could cause actual results to differ materially from those projected in the forward looking statements. In any event, the matters set forth below should be carefully considered when evaluating the Company's business and prospects. IDT's operating results have been, and in the future may be, subject to fluctuations due to a wide variety of factors including the timing of or delays in new product and process technology announcements and introductions by the Company or its competitors, competitive pricing pressures, particularly in the SRAM memory market, fluctuations in manufacturing yields, changes in the mix of product sold, availability and costs of raw materials, the cyclical nature of the semiconductor industry, industry-wide wafer processing capacity, economic conditions in various geographic areas, and costs associated with other events, such as underutilization or expansion of production capacity, intellectual property disputes, or other litigation. Further, there can be no assurance that the Company will be able to compete successfully in the future against existing or potential competitors or that the Companies operating results will not be adversely affected by increased price competition. 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. During the past year, markets for some of the Company's SRAMs were characterized by excess demand relative to supply and the resulting favorable pricing. During the later part of fiscal 1996, a number of companies, principally foreign, shifted manufacturing capacity to SRAMs causing rapid adjustments to supply and consequently impacting market prices. The resulting significant downward trend in prices in an extremely short period negatively affected SRAM gross margins, and adversely affected the Company's operating results. A material increase in industry-wide production capacity, shift in industry capacity toward products competitive with the Company's products, reduced demand or other factors could result in a 21 rapid decline in product pricing and could also materially adversely affect the Company's operating results. The Company ships a substantial portion of its quarterly sales in the last month of a quarter. If anticipated shipments in any quarter do not occur, the Company's operating results for that quarter could be adversely affected. In addition, a substantial percentage of the Company's products are incorporated into computer and computer-related products, which have historically been characterized by significant fluctuations in demand. Furthermore, any decline in the demand for advanced microprocessors which utilize SRAM cache memory could adversely affect the Company's operating results. In addition, demand for certain of the Company's products is dependent upon growth in the communications market. Any slowdown in the computer and related peripherals or communications markets could also materially adversely affect the Company's operating results. The Company is operating its domestic wafer fabrication facilities and Malaysian assembly operations at approximately installed equipment capacity. As a result, the Company has utilized subcontractors for the majority of its incremental assembly requirements, typically at higher costs that its own Malaysian operations. The Company expects to continue utilizing subcontractors extensively until it opens its Philippines assembly plant. At times during fiscal 1996, as a result of production capacity constraints, the Company was not able to take advantage of all market opportunities presented to it. Due to long production lead times and current capacity constraints, any failure by the Company to forecast adequately the mix of product demand could adversely affect the Company's sales and operating results. To address its capacity requirements, during the past year, the Company has undertaken extensive production expansion programs including the construction of an eight-inch wafer fabrication line in Oregon and an assembly and test facility in the Philippines. These expansion programs face a number of substantial risks including, but not limited to, delays in construction, cost overruns, equipment delays or shortages, manufacturing start-up or process problems or difficulties in hiring key managers and technical personnel. In addition, the Company has never operated an eight-inch wafer fabrication facility. Accordingly, the Company could incur unanticipated process or production problems. From time to time, the Company has experienced production difficulties that have caused delivery delays and quality problems. There can be no assurance that the Company will not experience manufacturing problems and product delivery delays in the future as a result of, among other things, changes to its process technologies, ramping production, installing new equipment at its facilities and constructing new facilities in Oregon and the Philippines. Further, the Company's existing wafer fabrication facilities are located relatively near each other in Northern California. If the Company were unable to use these facilities, as a result of a natural disaster or otherwise, the Company's operations would be materially adversely affected until the Company was able to obtain other production capability. The Company's capacity additions will result in a significant increase in fixed and operating expenses. Historically, the Company has expensed the operating expenses associated with bringing a new fabrication facility to commercial production as R&D in the period such expenses are incurred. However, as commercial production at a new fabrication facility commences, the operating costs will be classified as cost of revenues, and the Company will begin to recognize depreciation expense relating to the facility. Accordingly, although the Company expects the Oregon fabrication facility to contribute to revenues in fiscal 1997, the Company will recognize substantial operating expenses 22 associated with the facility in 1997, which could reduce gross margins. Specifically, as commercial production begins in fiscal 1997, the Company anticipates incurring substantial operating costs and depreciation expense relating to the facility before production of substantial volume is achieved. Accordingly, if revenue levels do not increase sufficiently to offset these additional expense levels, or if the Company is unable to achieve gross margins from products produced at the Oregon facility that are comparable to the Company's current products, the Company's future results of operations could be adversely impacted. New products, process technology and start-up costs associated with the Oregon wafer fabrication facility continue to require significant research and development expenditures. However, there can be no assurance that the Company will be able to develop and introduce new products in a timely manner, that new products will gain market acceptance or that new process technologies can be successfully implemented. If the Company is unable to develop new products in a timely manner, and to sell them at gross margins comparable to the Company's current products, the future results of operations could be adversely impacted. The Company's manufacturing operations depend upon obtaining adequate raw materials on a timely basis. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. In addition, certain packages used by the Company require long lead times and are available from only a few suppliers. From time to time, vendors have extended lead times or limited supply to the Company due to capacity constraints. The Company's results of operations would be adversely affected if it were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials. The semiconductor industry is extremely capital-intensive. To remain competitive, the Company must continue to invest in advanced manufacturing and test equipment. In fiscal 1997, the Company expects to expend approximately $255 million in capital expenditures and anticipates significant continuing capital expenditures in the next several years. There can be no assurance that the Company will not be required to seek financing to satisfy its cash and capital needs or that such financing will be available on terms satisfactory to the Company. If such financing is required and if such financing is not available on terms satisfactory to the Company, its operations would be materially adversely affected. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. 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. The Company in the past has been involved in patent litigation, which adversely affected its operating results. Although the Company has obtained patent licenses from certain semiconductor manufacturers, the Company does not have licenses from a number of semiconductor manufacturers who have a broad portfolio of patents. The Company has been notified that it may be infringing patents issued to certain semiconductor manufacturers and other parties and is currently involved in several license negotiations. There can be no assurance that additional claims alleging infringement of intellectual property rights will not be asserted in the future. The intellectual property claims that have been made or may be asserted against the Company could require that the Company discontinue the use of certain processes or cease the manufacture, use and sale of infringing products, to incur significant litigation costs and damages and to develop noninfringing technology. There can be no assurance that the Company would be able to obtain such licenses on acceptable terms or to develop noninfringing technology. Further, the failure to renew or renegotiate existing licenses, or significant increases in amounts payable or the inability to obtain a license, could have a materially adverse effect on the Company. A substantial percentage of the Company's revenues are derived from export sales, which are generally denominated in local currencies. The Company's offshore assembly and test operations and export sales are subject to risks associated with foreign operations, including currency controls and fluctuations, changes in local economic conditions and import and export controls, as well as changes in tax laws, tariffs and freight rates. Recently, contract pricing for raw materials, as well as for subcontract assembly services, has been impacted by currency exchange rate fluctuations. 23 The Company is subject to a variety of regulations related to hazardous materials used in its manufacturing process. Any failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous materials under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended. The Company's Common Stock has experienced substantial price volatility and such volatility may occur in the future, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of the Company, the companies in the semiconductor industry or in the markets served by the Company, or announcements by the Company or its competitors regarding new product introductions. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies' stock in particular. These factors may adversely affect the price of the Common Stock. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS Consolidated Financial Statements included in Item 8: Report of Independent Accountants Consolidated Balance Sheets at March 31, 1996 and April 2, 1995 Consolidated Statements of Operations for each of the three fiscal years in the period ended March 31, 1996 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended March 31, 1996 Consolidated Statements of Stockholder's Equity for each of the three fiscal years in the period ended March 31, 1996 Notes to Consolidated Financial Statements Financial Statement Schedule II - Valuation and Qualifying Accounts and Reserves 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. REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Integrated Device Technology, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Integrated Device Technology, Inc. and its subsidiaries at March 31, 1996 and April 2, 1995 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California April 19, 1996 25 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
March 31, 1996 April 2, 1995 --------------------------------------- ASSETS Current assets: Cash and cash equivalents $157,228 $130,211 Short-term investments 104,046 91,425 Accounts receivable, net of allowance for returns and 85,026 71,974 doubtful accounts of $4,580 and $ 3,830 Inventory 46,630 37,459 Deferred tax assets 38,712 24,923 Prepayments and other current assets 15,658 8,533 --------------------------------------- Total current assets 447,300 364,525 Property, plant and equipment, net 415,214 178,780 Other assets 76,920 18,670 --------------------------------------- TOTAL ASSETS $939,434 $561,975 ======================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $78,821 $39,814 Accrued compensation and related expense 29,237 22,889 Deferred income on shipments to distributors 31,325 22,348 Income taxes payable 5,747 1,716 Other accrued liabilities 12,171 10,609 Current portion of long term obligations 3,799 5,903 --------------------------------------- Total current liabilities 161,100 103,279 Convertible subordinated notes, net of issuance cost 182,558 ------ --------------------------------------- Long term obligations 36,682 36,595 --------------------------------------- Deferred tax liabilities 9,367 7,570 --------------------------------------- Commitments and Contingencies Stockholders' equity: Preferred stock;$.001 par value: 10,000,000 shares authorized; no shares issued Common stock; $.001 par value: 200,000,000 shares authorized; 77,496,833 and 76,209,268 shares issued and outstanding 77 76 Additional paid-in capital 287,064 271,580 Retained earnings 262,989 142,819 Unrealized gain on available-for-sale securities, net 102 ------ Cumulative translation adjustment (505) 56 --------------------------------------- Total stockholders' equity 549,727 414,531 --------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $939,434 $561,975 ======================================= The accompanying notes are an integral part of these financial statements.
26 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
FISCAL YEAR ENDED ----------------------- MARCH 31, APRIL 2, APRIL 3, 1996 1995 1994 ---------------------------------------------------------- Revenues $679,497 $422,190 $330,462 Cost of revenues 293,695 179,652 159,627 ---------------------------------------------------------- Gross profit 385,802 242,538 170,835 ---------------------------------------------------------- Operating expenses: Research and development 133,317 78,376 64,237 Selling, general and administrative 88,752 64,647 54,329 ---------------------------------------------------------- Total operating expenses 222,069 143,023 118,566 ---------------------------------------------------------- Operating income 163,733 99,515 52,269 Interest expense (9,269) (3,298) (5,165) Interest income and other, net 19,432 8,186 3,102 ---------------------------------------------------------- Income before provision for income taxes 173,896 104,403 50,206 Provision for income taxes 55,647 26,101 10,041 ---------------------------------------------------------- Income before extraordinary item 118,249 78,302 40,165 Extraordinary item: Gain from early extinguishment of debt (net of tax provision of $904) 1,921 ---------------------------------------------------------- Net income $120,170 $78,302 $40,165 ========================================================== Primary earnings per share: Income before extraordinary item $1.44 $1.05 $0.61 ========================================================== Net income $1.47 $1.05 $0.61 ========================================================== Fully diluted earnings per share: Income before extraordinary item $1.42 $1.04 $0.60 ========================================================== Net income $1.44 $1.04 $0.60 ========================================================== Weighted average shares of common stock and common stock equivalents: Primary 81,897 74,765 66,232 ========================================================== Fully diluted 87,753 75,426 67,260 ========================================================== The accompanying notes are an integral part of these financial statements.
27 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FISCAL YEAR ENDED ----------------------------- MARCH 31, APRIL 2, APRIL 3, 1996 1995 1994 ------------------------------------------------- Operating activities: Net income $120,170 $78,302 $40,165 Adjustments: Depreciation and amortization 53,782 38,816 37,594 Provision for losses on accounts receivable 2,536 299 476 Gain from early extinguishment of debt (1,921) Changes in assets and liabilities: Accounts receivable (14,456) (31,630) 2,071 Inventory (9,171) (7,604) (2,618) Deferred tax assets (7,719) 3,081 (10,897) Other assets (12,514) (6,226) (1,247) Accounts payable 39,651 23,889 106 Accrued compensation and related expense 6,348 6,361 9,799 Deferred income on shipments to distributors 8,977 4,756 7,142 Income taxes payable 12,004 7,605 11,574 Other accrued liabilities 3,228 (1,846) 5,885 ------------------------------------------------- Net cash provided by operating activities 200,915 115,803 100,050 ------------------------------------------------- Investing activities: Purchases of property, plant and equipment (287,491) (94,717) (37,412) Purchases of short-term investments (215,097) (96,499) (40,221) Proceeds from sales of short-term investments 200,618 38,425 8,747 Purchases of investments collateralizing facility lease (57,333) (10,449) ------------------------------------------------- Net cash used for investing activities (359,303) (163,240) (68,886) ------------------------------------------------- Financing activities: Issuance of common stock, net 6,608 103,549 55,337 Proceeds from issuance of convertible subordinated notes, net of issuance costs 196,721 Proceeds from borrowings 2,731 Payment on capital leases and early extinguishment of convertible subordinated notes (17,924) (14,391) (23,271) ------------------------------------------------- Net cash provided by financing activities 185,405 89,158 34,797 ------------------------------------------------- Net increase in cash and cash equivalents 27,017 41,721 65,961 Cash and cash equivalents at beginning of period 130,211 88,490 22,529 ------------------------------------------------- Cash and cash equivalents at end of period $157,228 $130,211 $88,490 ================================================= Supplemental disclosure of cash flow information: Interest paid $7,457 $2,698 $4,713 Income taxes paid 54,616 13,901 9,163 The accompanying notes are an integral part of these financial statements.
28 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
ADDITIONAL CUMULATIVE UNREALIZED TOTAL COMMON STOCK PAID-IN RETAINED TRANSLATION GAIN ON STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SECURITIES, NET EQUITY ------------------------------------------------------------------------------------- Balance, March 28, 1993 56,755,442 $ 56 $ 93,703 $24,352 $ (351) $ - $ 117,760 Issuance of common stock 4,055,662 4 9,239 9,243 Issuance of common stock at $7.855 per share, pursuant to public offering, net of expenses of $366 6,000,000 6 46,758 46,764 Tax benefits of stock option transactions 10,488 10,488 Translation adjustment (53) (53) Net income 40,165 40,165 ------------------------------------------------------------------------------------- Balance, April 3, 1994 66,811,104 66 160,188 64,517 (404) - 224,367 Issuance of common stock 1,778,164 2 5,986 5,988 Issuance of common stock at $12.8375 per share, pursuant to public offering, net of expenses of $261 7,620,000 8 97,553 97,561 Tax benefits of stock option transactions 7,853 7,853 Translation adjustment 460 460 Net income 78,302 78,302 ------------------------------------------------------------------------------------- Balance, April 2, 1995 76,209,268 76 271,580 142,819 56 - 414,531 Issuance of common stock 1,287,565 1 6,607 6,608 Tax benefits of stock option transactions 8,877 8,877 Translation adjustment (561) (561) Unrealized gain on available-for-sale securities, net 102 102 Net income 120,170 120,170 ------------------------------------------------------------------------------------- Balance, March 31, 1996 77,496,833 $ 77 $287,064 $262,989 $ (505) $ 102 $549,727 ===================================================================================== The accompanying notes are an integral part of these financial statements.
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year. The Company's fiscal year ends on the Sunday nearest March 31. Fiscal years 1995 and 1996 each included 52 weeks. The fiscal year ended April 3, 1994 was a 53-week year. The fiscal year-end of certain of the Company's foreign subsidiaries is March 31, and the results of their operations as of their fiscal year end have been combined with the Company's. Transactions during the intervening period in 1995 and 1994 were not significant. Consolidation. The consolidated financial statements include the accounts of Integrated Device Technology, Inc. (IDT or the Company) and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash, Cash Equivalents and Short-term Investments. Cash equivalents are highly liquid investments with original maturities of three months or less at the time of acquisition or with guaranteed on-demand buy-back provisions. Short-term investments are valued at amortized cost, which approximates market. The Company's investments are classified as available-for-sale as of March 31, 1996 and April 2, 1995. Investment securities classified as available-for-sale are measured at market value and net unrealized gains or losses are recorded as a separate component of stockholders' equity until realized. Any gains or losses on sales of investments are computed based upon specific identification. As of March 31, 1996, gross realized and unrealized gains and losses on investments available for sale were not material. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates the classification at each reporting date. Available-for Sale Securities (in thousands) March 31, 1996 April 2, 1995 ------------------------------ U.S.Government agency securities $ 47,096 $ 25,813 State and local governments 142,933 94,345 Corporate securities 56,898 73,160 Others 10,969 8,215 ------------ ----------- Total debt and equity securities 257,896 201,533 Less cash equivalents (153,850) (110,108) ------------ ----------- Short-term investments $ 104,046 $ 91,425 ============ ============ Short-term investments of $65,992,000 mature in less than one year and $38,054,000 have maturities between one and four years. 30 Inventory. Inventory is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based upon estimated realizable value reduced by normal gross margin. Inventory at March 31, 1996 and April 2, 1995 was: (in thousands) March 31, 1996 April 2, 1995 ------------------------------ Raw materials $ 5,171 $ 4,404 Work-in-process 22,538 16,977 Finished goods 18,921 16,078 ------- --------- $46,630 $ 37,459 ======= ========= Property, Plant and Equipment. Property, plant and equipment are stated at cost. Depreciation is computed for property, plant and equipment using the straight-line method over estimated useful lives of the assets. 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 computations. Property, plant and equipment at March 31, 1996 and April 2, 1995 were: (in thousands) March 31, 1996 April 2, 1995 ------------------------------ Land $ 11,920 $ 6,076 Machinery and equipment 585,011 332,680 Building and leasehold improvements 48,820 40,576 Construction-in-progress 15,167 5,553 ---------- ---------- 660,918 384,885 Less accumulated depreciation and amortization (245,704) (206,105) ---------- ---------- $ 415,214 $ 178,780 ========== ========== Revenue Recognition. Revenue from product sales is generally recognized upon shipment and a reserve is provided for estimated returns and discounts. A portion of the Company's sales is made to distributors under agreements which allow certain rights of return and price protection on products unsold by the distributors. Related gross profits thereon are deferred until the products are resold by the distributors. Income Taxes. The Company accounts for income tax in accordance with a liability approach. Net Income Per Share. Primary net income per common share is computed using the weighted average number of common shares and the dilutive effects of common stock equivalent shares outstanding during the period. Common stock equivalent shares include shares issuable under the Company's stock option plans. Fully diluted net income per share is computed by adjusting the primary shares outstanding and net income for the potential effect of the conversion of the 5.5% Convertible Subordinated Notes (Note 5) outstanding during the period and the elimination of the related interest and deferred issue costs (net of income taxes). 31 Translation of Foreign Currencies. Accounts denominated in foreign currencies have been translated in accordance with SFAS 52. The functional currency for the Company's sales operations is the applicable local currency, with the exception of the Hong Kong sales subsidiary whose functional currency is the U.S. dollar. 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 accumulated in a separate component of stockholders' equity. For the Malaysian and Philippines manufacturing subsidiaries and the Hong Kong sales subsidiary, 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 income. The effect of foreign currency exchange rate fluctuations have not been material. Fair Value Disclosures of Financial Instruments. Fair values of cash and cash equivalents, short-term investments and short-term debt 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 and Off-Balance-Sheet Risk. The Company markets high-speed integrated circuits to OEMs and distributors primarily in the United States, Europe and the Far East. The Company performs on-going credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary but generally does not require collateral. Management believes that any 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, and write-offs of accounts receivable were insignificant in each of the three years ended March 31, 1996. One distributor's receivable balance represented 10% and 6% of total accounts receivable at March 31, 1996, and April 2, 1995, respectively. One OEM's receivable represented 7% and 16% of total accounts receivable at March 31, 1996 and April 2, 1995, respectively. If the financial condition and operations of this distributor or OEM deteriorate below critical levels, the Company's operating results could be adversely affected. Industry Risk. Products and Markets. The Company operates in predominantly one industry segment (Note 12) within the semiconductor industry. 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 over capacity 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. Materials. The Company's manufacturing operations depend upon obtaining adequate raw materials. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. The Company's results of operations would be adversely affected if it were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials. 32 Employee Stock Plans. The Company accounts for its stock options plans and its employee stock purchase plan in accordance with provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company intends to continue to apply APB No. 25 for purposes of determining net income and to adopt the pro forma disclosure requirements in fiscal 1997. Use of estimates. 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, although such differences are not expected to be material to the financial statements. Stock dividend and reclassifications. On August 2, 1995, the Company announced a two-for-one stock split of its common stock in the form of a 100% stock dividend payable to stockholders of record as of August 25, 1995. On or about September 15, 1995 stockholders received certificates representing one additional share for every share held. The Company's par value of $0.001 per share remained unchanged. Historical share and per share amounts have been restated to reflect retroactively the stock dividend. Certain reclassifications have been made to prior year balances, none of which affected results of operations, to present the financial statements on a consistent basis. 33 NOTE 2--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 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 losses and gains on the underlying asset and transactions being hedged. These forward exchange contracts are considered identifiable hedges and realized and unrealized gains and losses are deferred until settlement of the underlying commitments. At March 31, 1996 deferred gains and losses are not material. Foreign exchange hedge positions which include buy and sell positions, generally with maturities of less than three months are as follows:
March 31, 1996 April 2, 1995 ---------------------------------------- ------------------------------------- Buy Sell Buy Sell (in thousands of U.S. dollars) Japanese Yen $ $ 14,569 $ 1,898 $ 10,357 British Pound Sterling 2,561 992 Malaysian Ringgits 5,271 2,214 2,003 3,022 Others 211 ----- ------ ------ ------ $ 5,271 $ 19,344 $ 3,901 $ 14,582 ===== ====== ====== ======
The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, it 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. 34 NOTE 3--OTHER ASSETS--INTANGIBLES During fiscal 1993, IDT entered into various royalty-free patent cross-license agreements. The patents licenses granted to IDT under these agreements have been recorded at their cost of approximately $8,200,000 and are being amortized on a straight-line basis over five years. The amortization relating to patents licenses was $1,647,000 in each of fiscal years 1996, 1995 and 1994. 35 NOTE 4--LONG-TERM LEASE OBLIGATIONS The Company leases certain equipment under long-term leases or finances purchases of equipment under bank financing agreements. Leased assets and assets pledged under financing agreements which are included under property, plant and equipment are as follows: (in thousands) March 31, 1996 April 2, 1995 -------------- ------------- Machinery and equipment $ 17,296 $ 39,316 Less accumulated depreciation and amortization (13,233) (27,396) -------- -------- $ 4,063 $ 11,920 ======== ======== The capital lease agreements and equipment financings are collateralized by the related leased equipment and contain certain restrictive covenants. Future minimum payments under capital leases and equipment financing agreements, at varying interest rates (4.7%-10.5%) are as follows: FISCAL YEAR (in thousands) 1997 $ 3,312 1998 1,629 1999 3 ----- Total minimum payments 4,944 Less interest (340) ----- Present value of net minimum payments 4,604 Less current portion (3,047) ----- $ 1,557 ===== 36 NOTE 5--LONG-TERM DEBT Long-term debt consists of the following: (in thousands) March 31, 1996 April 2, 1995 -------------- ------------- Mortgage payable bearing interest at 9.625% due in monthly installments of $142,000 including interest through April 1, 2005 The note is secured by property and improvements in San Jose, California $ 10,238 $ 10,922 Less current portion (752) (684) ------- ------- $ 9,486 $ 10,238 ======= ======= Principal payments required in the next five years and beyond are as follows (in thousands): $752 (1997), $828 (1998), $911 (1999), $1,003 (2000) and $6,744 (2001 and beyond). In fiscal 1996, the Company capitalized $2,983,000 of interest expense ($152,000 in fiscal year 1995) in connection with the construction of the Hillsboro, Oregon plant. During fiscal 1993, IDT recorded a long-term obligation in connection with the dismissal of certain litigation and entered into a patent cross-license agreement. The present values of the amount due at the end of the license term were $7,073,000 and $7,581,000 at March 31, 1996 and April 2, 1995, respectively. In both fiscal years, these amounts payable have been reduced by an amount of royalty income pursuant to certain guaranteed revenues realized on sales of IDT's products. The Company is accreting $1,620,000 in future interest charges, reflecting an 8% discount rate, from the recorded amount at March 31, 1996 to the amount due at the end of the term using the effective interest method. In May 1995, the Company issued $201.3 million of 5.5% Convertible Subordinated Notes (the "Notes"), due 2002. The Notes are subordinated to all existing and future senior debt and are convertible into shares of the Company's common stock at a conversion rate of $28.625 per share and are redeemable at the option of the Company in whole or in part at any time on or after June 2, 1998 at 102.75% initially and thereafter at prices declining to 100% at maturity plus accrued interest. Each holder of these Notes has the right, subject to certain conditions and restrictions, to require the Company to offer to repurchase all outstanding Notes, in whole or in part, owned by such holder, at specified repurchase prices plus accrued interest upon the occurrence of certain events and in certain circumstances. The costs incurred in connection with the offering ($4,600,000) have been netted against the Notes balance in the consolidated balance sheet and are being amortized over the 7-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 commencing December 1, 1995. Based upon quoted market prices, the fair value of the Notes was approximately $152,725,000 at March 31, 1996. 37 In January 1996, the Company retired $15 million of the Notes at a cost of approximately $12 million resulting in an extraordinary gain. The gain, net of tax and deferred issue costs, has been recorded as an extraordinary item in the Company's consolidated financial statements for the twelve months ending March 31, 1996. The per share amount of the gain on early retirement of debt, net of related income tax effect, was $0.02 in fiscal 1996. 38 NOTE 6--LINES OF CREDIT The Company's Malaysian subsidiary has unsecured revolving lines of credit that allow borrowings up to $2,600,000 with three local banks. These lines have no expiration dates. At March 31, 1996 there were no outstanding borrowings against these lines. The borrowing rates for these lines are incurred at the local bank's cost of funds plus 0.75% to 1% (8.6%-8.7% on March 31, 1996). In fiscal 1996, the Company's Japanese subsidiary had a secured revolving line of credit that allowed borrowings of up to approximately $2,800,000. The line of credit automatically extends until the Company requests termination. As of March 31, 1996, no amounts were outstanding under this line of credit. The borrowing rate for this line of credit is the local bank's short-term prime rate existing at the borrowing date. At March 31, 1996 this short-term borrowing rate was 1.63%. The Company also has foreign exchange facilities with several banks that allow the Company to enter into foreign exchange contracts of up to $115,000,000, of which $94,761,000 was available at March 31, 1996. 39 NOTE 7--COMMITMENTS Lease Commitments. The Company leases most of its administrative and manufacturing facilities under operating lease agreements which expire at various dates through 2005. One facility is leased from a shareholder and director. The Company recorded rental expense for the facility leased from the shareholder and director of $1,058,000, $1,527,000 and $1,396,000 in fiscal 1996, 1995 and 1994, respectively. During fiscal 1995, this lease was renewed through June 2005. On March 8, 1996, the Company entered into an agreement to purchase this facility for a purchase price of approximately $8,509,000 in a transaction structured as a tax-free stock exchange. The following rent commitments table has not been adjusted to reflect this transaction as the details have not been finalized. In fiscal 1995, the Company entered into a five-year $60 million (revised to $64 million in fiscal 1996) Tax Ownership Lease transaction to lease the wafer fabrication facility in Hillsboro, Oregon. This lease requires monthly payments which vary based on the London Interbank Offered Rate (LIBOR) plus 0.3% (5.77% at March 31, 1996). This lease also provides the Company with the option of either acquiring the building at its original cost or arranging for the building to be acquired at the end of the respective lease term. The Company's obligations under the lease are secured by a trust deed on the building and collateralized by cash and/or investments (restricted securities) up to 105% of the lessor's construction costs until the building was completed in fiscal 1996 and 85% thereafter. Restricted securities, included in other non-current assets, collateralizing this lease were $67,782,000 at March 31, 1996 and $10,500,000 at April 2, 1995. The Company is also contingently liable under a first-loss clause for up to 85% of the construction costs of the building. In addition, the Company must maintain compliance with certain financial covenants. Management believes that this contingent liability will not have a material adverse effect on the Company's financial position or results of operations. The aggregate minimum rent commitments under all operating leases, including the Hillsboro facility, which began in January 1996 at approximately $3,700,000 per year, are as follows: (FISCAL YEAR) (IN THOUSANDS) 1997 $ 8,040 1998 8,140 1999 7,939 2000 7,001 2001 3,356 2002 and thereafter 4,002 ----- $ 38,478 ====== 40 Rent expense for the years ended March 31, 1996, April 2, 1995 and April 3, 1994 totaled approximately $4,552,000, $3,326,000 and $3,488,000 respectively. As of March 31, 1996, two secured standby letters of credit were outstanding totaling $8,235,000. One letter of credit is held in connection with the Company's workers compensation insurance and matures on January 28, 1997. The other letter of credit is required for international purchases and expires on June 10, 1996. As of March 31, 1996, the Company had commitments of $52 million for equipment purchases and $9.8 million for the construction of buildings. NOTE 8--SALE OF COMMON STOCK In December 1994, the Company completed a public offering of 7,620,000 shares of its Common Stock and received net proceeds of $97,600,000. 41 NOTE 9--STOCKHOLDERS' EQUITY Stock Option Plans. The Company has stock option plans under which key employees, officers, directors and consultants may be granted options to purchase shares of the Company's common stock at prices which are not less than fair market value at the date of grant. Options granted are generally exercisable in 25% increments each year beginning one year after the grant date. During January 1996, employees and officers holding options to purchase 6,752,351 shares of the Company's common stock were offered the opportunity to cancel options in exchange for grants of new options, with certain restrictions and limitations, at the then current market price. Under the terms of the program, 6,090,334 shares were exchanged and are reflected in the grant and cancellation activity for fiscal 1996. Activity under the plans is summarized as follows:
Options Outstanding ------------------------------------------------ Available Aggregate for Issuance Number Price per Share Price ------------------------------------------------------------------------------------- Balance, March 28, 1993 1,940,214 10,393,798 $ 1.625 - $ 6.0625 $ 21,245,000 Additional authorization 1,950,000 Granted (3,700,468) 3,700,468 $ 3.50 - $ 12.6875 26,599,000 Surrendered, canceled or expired 568,020 (574,846) $ 1.625 - $ 11.0625 (1,738,000) Exercised (3,561,226) $ 1.625 - $ 8.8125 (6,695,000) ----------- ---------- ------------ Balance, April 3, 1994 757,766 9,958,194 $ 1.625 - $ 12.6875 39,411,000 Additional authorization 3,350,000 Granted (3,024,112) 3,024,112 $ 8.25 - $ 19.844 41,595,000 Surrendered, canceled or expired 574,024 (567,202) $ 1.625 - $ 19.844 (4,903,000) Exercised (1,477,158) $ 1.625 - $ 14.0625 (3,529,000) ----------- ---------- ------------ Balance, April 2, 1995 1,657,678 10,937,946 $ 1.625 - $ 19.844 72,574,000 Additional authorization 4,000,000 Granted (10,907,337) 10,907,337 $ 9.875 - $ 32.75 156,026,000 Surrendered, canceled or expired 6,789,906 (6,789,906) $ 1.625 - $ 32.0625 (121,662,000) Exercised (1,034,261) $ 1.625 - $ 18.9375 (2,955,000) ----------- ---------- ------------ Balance, March 31, 1996 1,540,247 14,021,116 $ 1.625 - $ 32.0625 103,983,000 =========== ========== ============ Exercisable at March 31, 1996 4,120,357 $ 1.625 - $ 19.844 $ 12,485,000 ========== ============
Stock Purchase Plan. The Company has a stock purchase plan under which employees and officers may purchase shares of the Company's common stock. The purchase price at which shares may be purchased under this plan is 85% of the lower of the fair market value on the first or last day of each quarterly plan period. As of March 31, 1996 and April 2, 1995, 3,435,714 and 3,189,810 shares, respectively, had been purchased by employees, net of repurchases by the Company, under the terms of the plan agreements. At March 31, 1996, 614,286 shares were reserved and available for issuance under this plan. 42 Stockholder Rights Plan. In February 1992, the Board approved certain amendments to the Company's Stockholder Rights Plan. Under the plan, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. As a result of a two-for-one stock dividend in September 1995, the number of Rights associated with each share of Common Stock was adjusted proportionately to one-half of a Right per share of Common Stock. Each Right entitles the holder, under certain circumstances, to purchase common stock of the Company with a value of twice the exercise price of the Right. In addition, the Board of Directors may, under certain circumstances, cause each Right to be exchanged for one share of common stock or substitute consideration. The Rights are redeemable by the Company and expire in 1998. 43 NOTE 10--EMPLOYEE BENEFITS PLANS The Profit Sharing Plan is available to all employees who have at least six months of service with the Company. Under this plan, all eligible IDT employees will 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. Administrative expenses are netted against the Profit Sharing Plan contribution. The cash contributions for the years ended March 31, 1996, April 2, 1995 and April 3, 1994 for this plan were $14,056,000, $8,360,000 and $5,128,000 respectively. The Company pays an annual cash bonus to certain executive officers and other key employees based on the pre-tax earnings of the Company and the employee's individual performance. Prior to fiscal 1996 the aggregate amount of all bonuses paid for any single fiscal year was up to 6% of pre-tax profits for the year. During fiscal 1996, the amount accrued under the bonus plan was 6% of operating income less a factor for the percent change in the Company's income tax provision rate over the prior year. The performance bonus recorded for the years ended March 31, 1996, April 2, 1995 and April 3, 1994 for this plan were $9,136,000, $6,264,000 and $ 3,012,000 respectively. 44 NOTE 11 INCOME TAXES The components of income before provision for income taxes are as follows:
March 31, April 2, April 3, (in thousands) 1996 1995 1994 ----------- ----------- ---------- United States $ 161,209 $ 96,524 $ 44,808 Foreign 12,687 7,879 5,398 ----------- ----------- ---------- $ 173,896 $ 104,403 $ 50,206 =========== =========== ========== The provisions for income taxes consist of the following: March 31, April 2, April 3, (in thousands) 1996 1995 1994 ----------- ----------- ---------- Current income taxes: United States $ 63,829 $ 21,164 $ 14,699 State 1,517 3,902 4,039 Foreign 2,293 668 798 ----------- ----------- ---------- 67,639 25,734 19,536 ----------- ----------- ---------- Deferred (prepaid) income taxes: United States (11,340) (182) (5,379) State (652) 549 (4,116) ----------- ----------- ---------- (11,992) 367 (9,495) ----------- ----------- ---------- Provision for income taxes $ 55,647 $ 26,101 $ 10,041 =========== =========== ==========
45 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 assets and liabilities are as follows: March 31, April 2, (in thousands) 1996 1995 ----------- ----------- Deferred tax assets: Deferred income on shipments to distributors $ 12,289 $ 8,768 Non-deductible accruals and reserves 16,208 8,980 Capitalized inventory and other expenses 9,694 5,817 Other 521 1,358 ----------- ----------- Total deferred tax assets 38,712 24,923 ----------- ----------- Deferred tax liabilities: Depreciation (9,367) (7,570) ----------- ----------- Total deferred tax liabilities (9,367) (7,570) ----------- ----------- Net deferred tax assets $ 29,345 $ 17,353 =========== =========== 46 The provisions for income taxes differ from the amount computed by applying the U.S. statutory income tax rate of 35% to income before the provision for income taxes as follows:
March 31, April 2, April 3, (in thousands) 1996 1995 1994 ----------- ----------- ---------- Provision at U.S. statutory rate $ 60,864 $ 36,541 $ 17,572 Earnings of foreign subsidiaries considered permanently reinvested, less foreign taxes (2,327) (2,444) (951) General business credits (1,994) (6,504) (2,710) Tax rate differential 0 0 (1,167) State tax, net of federal benefit 865 3,245 3,558 Valuation allowance 0 (2,337) (6,108) Other (1,761) (2,400) (153) ----------- ----------- ---------- Provision for income taxes $ 55,647 $ 26,101 $ 10,041 =========== =========== ==========
The Company's Malaysian subsidiary operated under a tax holiday which extended through July, 1993. Management believes it is likely that carryovers of depreciation from the tax holiday period along with expected additional depreciation grants will defer the time when the Malaysian subsidiary will first begin to pay local income taxes on operating income until after its year ended March 31, 1996. The Company's intention is to permanently reinvest its earnings in all of its foreign subsidiaries, except for its German subsidiary, Integrated Device Technology GMBH. Accordingly, U.S. taxes have not been provided on approximately $38,673,085 of unremitted earnings, of which approximately $32,495,430 were earned by the Company's Malaysian subsidiary. Upon distribution of those 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. 47 NOTE 12--INDUSTRY SEGMENT, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS IDT operates predominantly in one industry segment. The Company designs, develops, manufactures and markets a broad range of high-performance semiconductor products for the communications, desktop computer, office automation and workstation/server markets using advanced CMOS (Complimentary Metal Oxide Silicon) process technology. The Company offers products in four product families; SRAM components and modules, specialty memory products, logic circuits and RISC microprocessors and subsystems. During fiscal 1994, two of the Company's national distributors became one entity. Sales through a national distributor accounted for 11%, 13% and 15% of net revenues for fiscal 1996, 1995 and 1994 respectively. Additionally, one OEM customer accounted for 12% of net revenues in fiscal 1996. Major operations outside the United States include manufacturing facilities in Malaysia and sales subsidiaries in Japan, the Pacific Rim, and throughout Europe. At March 31, 1996, and April 2, 1995 total liabilities for operations outside of the United States were $34,475,000 and $42,065,000, respectively. The following is a summary extract of IDT's foreign operations by geographic areas for fiscal 1996, 1995 and 1994:
TRANSFERS SALES TO BETWEEN OPERATING UNAFFILIATED GEOGRAPHIC INCOME IDENTIFIABLE CUSTOMERS AREAS NET REVENUES (LOSS) ASSETS (in thousands) Fiscal year ended March 31, 1996 United States $ 404,994 $ 150,769 $555,763 $149,206 $574,287 Japan 72,530 72,530 3,405 21,482 Europe 144,154 144,154 39,274 28,478 Asia-Pacific 57,819 46,870 104,689 8,466 72,703 Eliminations (197,639) (197,639) 89 (42,633) Corporate (36,707) 285,117 -------------------------------------------------------------------------------- Consolidated $ 679,497 $ -- $679,497 $163,733 $939,434 ================================================================================ Fiscal year ended April 2, 1995 United States $ 256,014 $ 60,266 $316,280 $111,394 $292,501 Japan 36,974 36,974 582 11,973 Europe 85,180 7,566 92,746 9,524 30,788 Asia-Pacific 44,022 30,929 74,951 5,812 36,855 Eliminations (98,761) (98,761) (217) (48,797) Corporate (27,580) 238,655 -------------------------------------------------------------------------------- Consolidated $ 422,190 $ -- $422,190 $ 99,515 $561,975 ================================================================================ Fiscal year ended April 3, 1994 United States $ 223,600 $ 42,500 $266,100 $ 70,788 $197,385 Japan 29,959 29,959 (257) 8,033 Europe 60,064 3,274 63,338 677 8,182 Asia-Pacific 16,839 24,869 41,708 5,146 27,202 Eliminations (70,643) (70,643) (408) (24,470) Corporate (23,677) 133,239 -------------------------------------------------------------------------------- Consolidated $ 330,462 $ -- $330,462 $ 52,269 $349,571 --------------------------------------------------------------------------------
Transfers between geographic areas are accounted for at amounts which are generally above cost and consistent with the rules and regulations of governing tax authorities. Such transfers are eliminated in the consolidated financial statements. Operating income by geographic areas reflect foreign earnings 48 reported by the foreign entities and does not include an allocation of general corporate expenses. Identifiable assets are those assets that can be directly associated with a particular foreign entity and thus do not include assets used for general corporate purposes: cash and cash equivalents, short-term investments and deferred tax assets. NOTE 13--CROSS-LICENSE AGREEMENT During fiscal 1993, the Company entered into a 5 year patent cross-license agreement which obligated the payment of an amount of royalties dependent upon the level of the Company's profitability. The maximum royalty under this agreement was accrued in fiscal 1994 and paid during fiscal 1995. 49 NOTE 14 -- RELATED PARTIES TRANSACTIONS The Company leases one facility from a shareholder and director of the Company (Note 7). The Company paid rent of $1,266,000 during fiscal 1996, under a lease agreement that was renewed during fiscal 1996 through June 2005, with options to renew for successive five-year periods through 2015. On March 8, 1996, the Company entered into an agreement to acquire the Salinas facility for $8,509,000, with payment in the form of 782,445 unregistered shares of the Company's stock at $10.875 per share. The Company holds an approximately 37.4% equity interest in Quantum Effect Design, Inc., (QED). A shareholder and director also holds an approximate 3.7% equity interest in QED. During fiscal 1996, the Company paid QED a total of $900,000 for product development and nonrecurring engineering expenses. During fiscal 1996, the Company recorded royalty expense of $2,029,000 to QED. The Company holds an approximately 14% equity interest in Monolithic System Technology, Inc. (MoSys). An executive officer and director and a shareholder and director of the Company are members of the board of directors of MoSys. The shareholder and director also holds an equity interest of approximately 15% of MoSys. During the year ended March 31, 1996, the Company recorded $1,594,000 of revenues associated with a foundry relationship whereby IDT manufactured DRAM wafers for MoSys. 50 SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended March 31, 1996 First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- Revenues $152,195 $178,504 $188,545 $160,253 Gross profit 87,873 102,785 108,145 86,999 Income before extraordinary item 28,791 34,336 35,535 19,587 Net income 28,791 34,336 35,535 21,508 Primary earnings per share: Income before extraordinary item 0.35 0.42 0.44 0.24 Net income 0.35 0.42 0.44 0.27 Fully diluted earnings per share: Income before extraordinary item 0.35 0.40 0.42 0.25 Net income 0.35 0.40 0.42 0.27 Year ended April 2, 1995 First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- Revenues $95,043 $95,585 $105,765 $125,797 Gross profit 54,632 55,574 60,528 71,804 Income before extraordinary item 16,878 17,006 19,799 24,619 Net income 16,878 17,006 19,799 24,619 Primary earnings per share: Income before extraordinary item 0.23 0.24 0.27 0.30 Net income 0.23 0.24 0.27 0.30 Fully diluted earnings per share: Income before extraordinary item 0.23 0.24 0.27 0.30 Net income 0.23 0.24 0.27 0.30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended March 31,1996, and the information from the section entitled "Executive Officers of the Registrant" in Part I, Item 4A of this Report. ITEM 11. EXECUTIVE COMPENSATION There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is incorporated herein by reference the information required by this Item included in the Company's Proxy statement for the 1996 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements are included in Item 8: - Consolidated Balance Sheets at March 31, 1996 and April 2, 1995 - Consolidated Statements of Operations for each of the three fiscal years in the period ended March 31, 1996 - Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended March 31, 1996 - Consolidated Statements of Stockholders' Equity for each of the three fiscal years in the period ended March 31, 1996 - Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 52 All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedules, or because the required information is included in the financial statements or notes thereto. (a) 3. Listing of Exhibits Exhibit No. Description Page 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 Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (previously filed as Exhibit 3(a) to the Registration Statement on Form 8 dated March 28, 1989). 3.5* Bylaws dated January 25, 1993 (previously filed as Exhibit 3.4 to Annual Report on Form 10-K for the Fiscal Year Ended March 28, 1993). 4.1* Amended and Restated Rights Agreement dated as of February 27, 1992, between the Company and The First National Bank of Boston (previously filed as Exhibit 4.1 to Current Report on Form 8-K dated February 27, 1992). 4.2* Amendment dated September 29, 1995 to the Rights Agreement (previously filed as Exhibit 4.2 to Amendment No. 2 to the Registration Statement on Form 8-A filed October 19, 1995). 4.3* 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 S-3 Registration Statement (File number 33-59443). 10.1* Lease for 1566 Moffet Street, Salinas, California, dated June 28, 1985 between the Company and Carl E. Berg and Clyde J. Berg, dba Berg & Berg Developers (previously filed as Exhibit 10.7 to Form S-1 Registration Statement (File No. 33- 3189)). 10.2* Assignment of Lease dated October 30, 1985 between the Company and Synertek Inc. relating to 2975 Stender Way, Santa Clara, California (previously filed as Exhibit 10.4 to Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990). 53 10.3* Assignment of Lease dated October 30, 1985 between the Company and Synertek Inc. relating to 3001 Stender Way, Santa Clara, California (previously filed as Exhibit 10.5 to Annual Report on Form 10-K for Fiscal Year Ended April 1, 1990). 10.4* Lease dated October 23, 1989 between Integrated Device Technology International Inc. and RREEF USA FUND - III relating to 2972 Stender Way, Santa Clara, California (previously filed as Exhibit 10.6 to Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990). 10.5* First Deed of Trust and Assignment of Rents, Security Agreement and Fixture Filing dated March 28, 1990 between the Company and Santa Clara Land Title Company for the benefit of The Variable Annuity Life Insurance Company relating to 2670 Seeley Avenue, San Jose, California (previously filed as Exhibit 10.7 to Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990). 10.6* Amended and Restated 1984 Employee Stock Purchase Plan(previously filed as Exhibit 10.16 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 2, 1994).** 10.7* 1994 Stock Option Plan, as amended through May 3, 1995 (previously filed as Exhibit 4.8 to the Registration Statement on Form S-8 (File Number 33-63133) filed on October 2, 1995).** 10.8* 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).** 10.9* 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).** 10.10* Manufacturing, Marketing and Purchase Agreement between the Company and MIPS Computer Systems, Inc. dated January 16, 1988 (previously filed as Exhibit to Annual Report on Form 10-K for the Fiscal Year Ended March 29, 1992) (Confidential Treatment Granted). 10.11* Preferred Stock Purchase Agreement dated January 14, 1992 among the Company, Berg & Berg Enterprises, Inc. and Quantum Effect Design, Inc. (previously filed as Exhibit 10.13 to Annual Report on Form 10-K for the Fiscal Year Ended March 29, 1992). 10.12* 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). 54 10.13* Patent License Agreement dated September 22, 1992 between the Company and Motorola, Inc. (previously filed as Exhibit 19.1 to Quarterly Report on Form 10Q for the Quarter Ended September 27, 1992) (Confidential Treatment Granted). 10.14* Agreement between the Company and Texas Instruments Incorporated effective December 10, 1992, including all related exhibits, among others, the Patent Cross-License Agreement and the OEM Purchase Agreement (previously filed as Exhibit 19.1 to Quarterly Report on Form 10-Q for the Quarter Ended December 27, 1992) (Confidential Treatment Granted). 10.15* Series A Preferred Stock Purchase Agreement dated July 16,1992 among Monolithic System Technology, Inc. and certain purchasers (previously filed as Exhibit 10.12 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 2, 1994). 10.16* Series B Preferred Stock Purchase Agreement dated March 1994 among Monolithic System Technology, Inc. and certain purchasers (previously filed as Exhibit 10.13 to the Quarter Report on Form 10-Q for the Fiscal Quarter Ended October 2, 1994). 10.17* Series C Preferred Stock Purchase Agreement dated June 13,1994 among Monolithic System Technology, Inc. and certain purchasers (previously filed as Exhibit 10.14 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 2, 1994). 10.18* Domestic Distributor Agreement between the Company and Wyle Laboratories, Inc. Electronic Marketing Group dated as of April 15, 1994 (previously filed as Exhibit 10.15 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 2, 1994). 10.19* Lease Extension and Modification Agreement between the Company and Baccarat Silicon, Inc. ("Baccarat") dated as of September 1, 1994, relating to 1566 Moffet Street, Salinas, California (previously filed as Exhibit 10.16 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 2, 1994). 10.20* Promissory Note dated April 28, 1995 between L. Robert Phillips and the Company and related document (previously filed as Exhibit 10.20 to the Annual report on Form 10-K for the Fiscal Year Ended April 2, 1995).** 10.21* Sublease of the Land and Lease of the Improvement by and between Sumitomo Bank Leasing and Finance, Inc. and the Company dated January 27, 1995 and related agreements thereto (previously filed as Exhibit 10.21 to the Annual Report on Form 10-K for the Fiscal Year Ended April 2, 1995). 10.22* 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).** 55 10.23 Letter amending Patent License Agreement between the Company and AT&T dated December 4, 1995 (Confidential Treatment Requested). 10.24 Letter agreement dated March 8, 1996 between the Company and Baccarat regarding the acquisition of Baccarat by the Company. 10.25 Lease dated July 1995 between Integrated Device Technology, Inc. and American National Insurance Company relating to 3250 Olcott Street, Santa Clara, California. 11.0 Statement re: computation of earnings per share 21.1 Subsidiaries of the Company. 23.1 Consent of Price Waterhouse LLP. 27.1 Financial Data Schedule (EDGAR version only) * 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. (b) Reports on Form 8-K Not applicable. 56 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 May 15, 1996 By: /s/ Leonard C. Perham 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/ D. John Carey Chairman of the Board May 15, 1996 (D. John Carey) /s/ Leonard C. Perham Chief Executive Officer May 15, 1996 (Leonard C. Perham) and Director (Principal Executive Officer) /s/ William D. Snyder Vice President, Chief May 15, 1996 (William D. Snyder) Financial Officer (Principal Financial and Accounting Officer) /s/ Carl E. Berg Director May 15, 1996 (Carl E. Berg) /s/ John C. Bolger Director May 15, 1996 (John C. Bolger) /s/ Federico Faggin Director May 15, 1996 (Federico Faggin)
57 SCHEDULE II INTEGRATED DEVICE TECHNOLOGY, INC. VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Beginning of Cost and Recoveries and Balance at Period Expenses Write-offs End of Period (In thousands) Inventory Lower of Cost or Market Reserve Year ended April 3, 1994 $ 2,190 $1,509 $ (2,905) $ 794 Year ended April 2, 1995 $ 794 $ 603 $ (760) $ 637 Year ended March 31, 1996 $ 637 $2,866 $ (191) $3,312
EXHIBIT INDEX Exhibit No. Name ---------- ---- 10.23 Letter amending Patent License Agreement between the Company and AT&T dated December 4, 1995 (Confidential Treatment Requested). 10.24 Letter agreement dated March 8, 1996 between the Company and Baccarat regarding the acquisition of Baccarat by the Company. 10.25 Lease dated July 1995 between Integrated Device Technology, Inc. and American National Insurance Company relating to 3250 Olcott Street, Santa Clara, California. 11.0 Statement re: computation of earnings per share 21.1 Subsidiaries of the Company. 23.1 Consent of Price Waterhouse LLP. 27.1 Financial Data Schedule (EDGAR version only) EX-10.23 2 EXHIBIT 10.23 December 4, 1995 Re: Patent License Agreement between American Telephone and telegraph Company, now AT&T Corp. (AT&T) Integrated Device Technology, Inc. (IDT) effective May 1, 1992 and relating to Silicon Semiconductor Devices and Information Handling Systems (the "Agreement") Based upon recent discussions between our companies concerning modifying the Agreement the following is proposed: 1. AT&T recently announced that it is restructuring itself to conduct its business in the form of three separate legal entities. These three entities will include a Service Company, a Systems and Technology Company, and AT&T Global Information Solutions (GIS). AT&T shareholders will hold shares in each of these entities. It is possible that either IDT or any of these three entities may at some time in the future wish to divest all or part of its business. Thus, we wish to clarify the licenses, rights and obligations under the Agreement of IDT, the three entities, and any future divested present business. First although each of the three entities will have its own patent portfolio, IDT will have the same licenses and rights (and any corresponding obligations) after the restructuring (including patents originating from the three entities through April 30, 1997) as it would have had under the Agreement and this Letter Agreement from AT&T if the restructuring had not occurred. Second, the three entities will have the same licenses and rights (and any corresponding obligations) after restructuring (including patents originating from IDT through April 30, 1997) that AT&T had under the Agreement and this Letter Agreement prior to such restructuring. Third, in the future, if IDT or any of the three entities divest a portion of its present business, the licenses and rights granted in the subject agreement may be sublicensed to the divested business by the divesting company. Such sublicenses may be granted and retained only while the future divested business operates as a separately identifiable business and only to the extent applicable to products and services sold by the future divested business prior to its divestiture. The payment obligations of IDT under the Agreement and this Letter Agreement shall be only to one of the three entities. 2. The Technology Credit which IDT granted to AT&T in Section 2.02 of the Agreement may be used by any of the three entities at any time prior to April 30, 2002, however the total amount of the credit shall not exceed [ REDACTED * ], including portions of the credit previously used by AT&T. 3. IDT and the three entities agree that for the period from May 1, 1997 through April 30, 2002, neither they nor any of their RELATED COMPANIES or assigns shall bring any legal action against the other party or any of their RELATED COMPANIES alleging infringement by such other party or any of their RELATED COMPANIES of any patent issued from May 1, 1997 through April 30, 2002 with respect to any product which is a LICENSED PRODUCT. Nothing herein, however, shall be construed as a waiver of any party's (or any of their RELATED COMPANIES') rights against the other party or any of their RELATED COMPANIES with * Confidential treatment has been requested for certain portions of this document. Amendment to Patent License Agreement December 1, 1995 Page 2 respect to acts of infringement after April 30, 2002, nor shall any party (or any of their RELATED COMPANIES) be estopped from bringing any legal action against the other party or any of their RELATED COMPANIES after April 30, 2002, to enforce any and all of their rights, including the rights to obtain monetary damages and injunctive relief, based on any act of infringement occurring after April 30, 2002. Nothing contained in the Agreement or this amendment thereto shall be construed as granting to AT&T or IDT a patent or other license under any of the other's patents having a first filing date after April 30, 1997. 4. In lieu of paying royalties to AT&T in accordance with Section 2.05 of the Agreement for the period from May 1, 1997 until April 30, 2002 and for agreement by the parties not to bring any legal action in paragraph 3 herein, the following shall apply (a) With respect to REPORTABLE PRODUCTS (as defined in the agreement) Sold, leased or put into use from May 1, 1997 until April 30, 2002, IDT shall semiannually pay to AT&T Corp. royalty at the rate of [ REDACTED * ] of all of IDT's gross sales less MODULES plus the components in the MODULES which are manufactured by IDT. The total of such payments shall not exceed [ REDACTED * ]. (b) IDT shall, within sixty (60) days after the end of each of the following semiannual periods: October 31, 1997 April 30, 1998 October 31, 1998 April 30, 1999 October 31, 1999 April 30, 2000 October 31, 2000 April 30, 2001 October 31, 2001 April 30, 2002 send to Contract Administrator, Liberty Corner Division 150 Allen Road Suite 2000, Liberty Corner, New Jersey 07938-1955, a statement certified by a responsible official of IDT showing all of IDT's gross sales less MODULES plus the components in the MODULES which are manufactured by IDT during each semiannual period and pay AT&T, or their designee, at Sun Bank, P.O. Box 913021, Orlando, Florida 32891-3021, or alternatively, by bank wire transfers to AT&T's account: AT&T Licensing Payments, Metrotech Center, Brooklyn, New * Confidential treatment has been requested for certain portions of this document. Amendment to Patent License Agreement December 1, 1995 Page 3 York 11245, United States of America, the royalties payable in accordance with such statement. After payment of [ REDACTED * ], IDT will have no further obligation to issue reports to AT&T. MODULES means any multiplicity of SILICON SEMICONDUCTIVE DEVICES on a connectorized printed circuit board or equivalent. 5. The terms and conditions in Sections 2.07, 2.08, 2.09, 2.11 and 2.12 of the Agreement shall apply to royalties payable pursuant to paragraph 4, above, provided, however, that [ REDACTED * ] in Section 2.12 shall be deleted and the amount [ REDACTED * ] shall be substituted in lieu thereof. Additionally, with regard to Section 2.12 only, the term LIMITED PERIOD shall extend until April 30, 2002. 6. Any term in capital letters which is defined in the Definitions Appendix of the Agreement shall retain the meaning specified therein except as otherwise herein specified. To ensure that the parties are in agreement with respect to this matter and can act with a common understanding, please indicate your confirmation of the above by signing and dating this letter in the space provided below. Kindly return an executed copy to AT&T in the enclosed envelope at your earliest convenience. Thank you for your cooperation. Very truly yours AT&T Corp. /s/ M. R. GREENE M. R. Greene Vice President, Intellectual Property & Licensing Counsel ACCEPTED AND AGREED: Integrated Device Technology, Inc. /s/ LEONARD C. PERHAM Leonard C. Perham President and Chief Executive Officer * Confidential treatment has been requested for certain portions of this document. EX-10.24 3 EXHIBIT 10.24 March 8, 1996 Mr. Carl Berg President Baccarat Silicon, Inc. 10050 Bandley Drive Cupertino, CA 95014 Re: 1566 Moffett Street, Salinas, California - IDT FAB 2 Dear Carl: The purpose of this letter is to confirm our agreement to acquire 100% of the unregistered shares of Baccarat Silicon, Inc. in a tax-free exchange for 782,445 unregistered shares of IDTI common stock, representing a value of Baccarat Silicon, Inc. of $8,509,090 and IDTI stock of $10.875 per share, today's closing price. The exchange shall be conditioned upon the approval of the transaction by a majority of IDT's disinterested directors and the qualification of the transaction as a tax free exchange. Further, the transaction shall be contingent upon Baccarat Silicon, Inc. owning in fee simple all of the property subject to the lease of the referenced premises, free of all liens, encumbrances, and liabilities, other than routine easements of record and being free of all other liabilities. Please signify your agreement by signing and returning the enclosed copy of this letter at your earliest convenience. Very truly yours, /s/ Jack Menache ___________________________ Jack Menache AGREED: Vice President, Baccarat Silicon, Inc General Counsel /s/ Carl E. Berg ___________________________ Carl Berg President EX-10.25 4 LEASE BETWEEN AMERICAN NAT'L INS. CO. & IDT LEASE BETWEEN AMERICAN NATIONAL INSURANCE COMPANY, A TEXAS CORPORATION, AS LANDLORD, AND INTEGRATED DEVICE TECHNOLOGY, INC. A DELAWARE CORPORATION, AS TENANT 3250 OLCOTT STREET SANTA CLARA, CALIFORNIA TABLE OF CONTENTS Page Section Description Number ------- ----------- ------ 1. Premises 1 -------- 2. Term 2 ---- 3. Base Rent; Adjustment; General Rent Provisions 2 ---------------------------------------------- 4. Direct Costs 2 ------------ 5. Security Deposit 2 ---------------- 6. Restrictions on Use; Compliance with Laws 2 ----------------------------------------- 7. Improvements and Alterations 3 ---------------------------- 8. Repairs and Maintenance 3 ----------------------- 9. Liens 3 ----- 10. Assigning and Subleasing 3 ------------------------ 11. Waiver; Indemnity 5 ----------------- 12. Insurance 5 --------- 13. Services and Utilities 6 ---------------------- 14. Estoppel Certificate 6 -------------------- 15. Holding Over 6 ------------ 16. Subordination; Requirements of Lenders 6 -------------------------------------- 17. Environmental Indemnities 6 ------------------------- 18. Access by Landlord 7 ------------------ 19. Default by Tenant 7 ----------------- 20. Remedies of Landlord 7 -------------------- 21. Default by Landlord; Limitation of Liability 9 -------------------------------------------- 22. Damage and Destruction 9 ---------------------- 23. Eminent Domain 10 -------------- 24. Sale by Landlord 10 ---------------- 25. Surrender of Premises 10 --------------------- 26. Quiet Enjoyment 10 --------------- 27. Notices 10 ------- 28. Personal Property Taxes 10 ----------------------- 29. Interest and Late Charges 11 ------------------------- 30. Successors and Assigns 11 ---------------------- 31. Attorneys' Fees 11 --------------- 32. Light and Air 11 ------------- 33. Signs and Directory 11 ------------------- 34. Parking 11 ------- 35. Brokers 11 ------- 36. Authority; Joint and Several Liability 11 -------------------------------------- 37. Option to Renew 11 --------------- 38. Miscellaneous 12 ------------- i Exhibit "A" Outline of Premises Exhibit "B" Form of Notice of Lease Term Dates and Areas Exhibit "C" Work Agreement Exhibit "D" Form of Estoppel Certificate ii STANDARD OFFICE LEASE THIS LEASE ("Lease") is made as of July ____, 1995 by and between AMERICAN NATIONAL INSURANCE COMPANY, a Texas corporation ("Landlord"), and INTEGRATED DEVICE TECHNOLOGY, INC., a Delaware corporation, ("Tenant"), upon the following terms and conditions: 1. Premises. 1.1 Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions set forth in this Lease, those certain premises (the "Premises") described in Section 1.1.1 of the Basic Lease Information (as defined below) and Section 1.2, all as more particularly described in Exhibit "A" attached hereto and hereby made a part hereof. For purposes of this Lease, the rentable area of the Premises has been or shall be determined by Landlord by reference to the "Standard Method for Measuring Floor Area in Office Buildings," adopted by the Building Owners and Managers Association International and approved by the American National Standards Institute, Inc., as reprinted May, 1981. The terms and conditions of this Lease shall include, without limitation, the following basic Lease information (the "Basic Lease Information"): 1.1.1 Premises (Section 1.1): 3250 Olcott Street, Santa Clara, California, consisting of approximately 48,275 rentable square feet 1.1.2 Lease term (Section 2 and Section 37): Five (5) years and zero (0) months, scheduled to commence as set forth in Section 2 of this Lease, subject to three (3) options to renew of five (5) years each. 1.1.3 Base Rent (Section 3.1): Monthly Rent Monthly Months Per Rentable Square Foot Rent ------ ------------------------ ---- 01 - 36 $0.75 $36,206.25 37 - 60 $0.80 $38,620.00 Base Rent is subject to increase pursuant to Section 4(d)(ii) of the Work Agreement attached as Exhibit "C" 1.1.4 Security deposit (Section 5): $38,620.00 1.1.5 Permitted use (Section 6.1): General administrative offices and for no other purpose 1.1.6 Address of Tenant for notices Integrated Device Technology, Inc. prior to 2972 Stender Way Commencement Santa Clara, California 95054 Date Attention: Tom Wroblewski, Vice President (Section 27): Telephone No.: (408) 727-6116 with a courtesy only copy to: Integrated Device Technology, Inc. 2972 Stender Way Santa Clara, California 95054 Attention: General Counsel 1.1.7 Address of Tenant for notices Integrated Device Technology, Inc. from and 3250 Olcott Street including Santa Clara, California 95054 Commencement Date Attention: Tom Wroblewski, Vice President (Section 27): Telephone No.: (408) 727-6116 with a courtesy only copy to: Integrated Device Technology, Inc. 2972 Stender Way Santa Clara, California 95054 Attention: General Counsel 1.1.8 Parking rights (Section 34): 100% of the parking spaces located on the Premises, as more particularly identified in Exhibit "A" 1.1.9 Landlord's Broker (Section 35): Colliers Parish International, Inc. 1.1.10 Tenant's Broker (Section 35): BT Commercial 1.1.11 Landlord's Construction Representative (Exhibit "C"): Claud Jackson 1.1.12 Tenant's Construction Representative (Exhibit "C"): Tom Wroblewski 1.1.13 Tenant Improvement Allowance and Additional Tenant Improvement Allowance (Exhibit "C"): Up to $20 per rentable square foot as provided in Section 1.1.1, plus up to $5 per rentable square foot for certain supplemental allowances. Each reference in this Lease to any of the Basic Lease Information shall be construed to incorporate, in addition to the Basic Lease Information, the terms and conditions set forth in the particular Lease section in which such reference is made. 1.2 The term "Premises" as used in this Lease shall mean the land described in Exhibit "A", together with all buildings located thereon, related facilities and appurtenances, walkways, parking facilities, landscaped areas and sidewalks. 1 2. Term. The term of this Lease shall commence upon the later (the "Commencement Date") of the following dates: (a) ninety (90) days following the date of this Lease, or (b) the date that Landlord tenders possession of the Premises to Tenant, provided that any work to be performed by Landlord pursuant to the Work Agreement (as defined in Section 7.1 below) is substantially completed as provided in said Work Agreement. Such term shall continue for the balance of the month in which the Commencement Date occurs (if the Commencement Date occurs on other than the first day of any calendar month) and thereafter for the number of whole years and months specified in said Section 1.1.2, unless sooner terminated pursuant to any provision hereof. The parties hereto shall execute a written statement, substantially in the form attached hereto as Exhibit "B" and hereby made a part hereof, setting forth the Commencement Date and the date of expiration of this Lease, and related information, promptly after same have been ascertained, but the enforceability of this Lease shall not be affected should either party fail or refuse to execute such statement. If permission is given to Tenant, in Landlord's sole discretion, to enter or occupy the Premises prior to the Commencement Date, such early entrance or occupancy shall be subject to all the terms of such permission and all the provisions of this Lease which could be reasonably and logically construed as applying thereto and Tenant shall not in any way interfere with or delay any work from being substantially completed or otherwise cause additional cost or expense to Landlord. 3. Base Rent; Adjustment; General Rent Provisions. 3.1 Tenant shall pay to Landlord as base rent ("Base Rent") for the Premises, without prior notice or demand, throughout the term of this Lease, the amount so specified in Section 1.1.3 of the Basic Lease Information (subject to any increase provided for therein or in Section 4(d)(ii) of the Work Agreement attached hereto as Exhibit "C"), in advance, in equal monthly installments, on or before the first day of each and every calendar month during the term hereof, except that Base Rent for the first full month for which Base Rent shall be payable hereunder shall be paid upon substantial completion of the Tenant Improvements pursuant to the Work Agreement. 3.2 Base Rent and any other rent due under this Lease for any period during the term hereof which is for less than one (1) month shall be a pro rata portion of the monthly amount due, based upon a thirty (30) day month. Rent and all other amounts due to Landlord shall be paid to Landlord, without deduction, offset or abatement, except as may otherwise be specifically set forth in this Lease, at Landlord's address as specified in Section 27 below or to such other firm or at such other place as Landlord may from time to time designate in writing. Landlord shall have the right to accept all rent and other payments, whether full or partial, and to negotiate checks in payment thereof without any waiver of rights, irrespective of any conditions to the contrary sought to be imposed by Tenant. Rent hereunder shall be deemed paid to Landlord when received by Landlord, or its designee, at Landlord's address, or at such other address as Landlord shall have designated. 4. Direct Costs. 4.1 "Direct Costs" shall mean both Tax Costs and Operating Costs, as those terms are hereinafter defined, whether determined separately or jointly. 4.2 "Tax Costs" shall mean the sum of the following: any and all real property taxes, assessments (including, but not limited to, general and special assessments), charges, surcharges, license and other fees, levies, costs of improvement bonds, penalties and any and all other taxes (other than income, franchise, estate and gift taxes of Landlord) on or relating to all or a portion of the Premises (as it may exist from time to time) including, but not limited to, any legal or equitable interest of Landlord therein which may be imposed, levied, assessed or charged for any reason by any authority having the direct or indirect power to tax including, but not limited to, the United States or the state, county or city in which the Premises is located, or any other local governmental authority, agency, district or political subdivision thereof, together with personal property taxes, assessments, fees and charges (other than those paid by Tenant pursuant to Section 28 below), and fees of tax consultants and attorneys retained to seek a reduction, to contest or to act in some other manner in connection with any of the foregoing Tax Costs, together with any tax, assessment or other amount (including, without limitation, commercial rental taxes) imposed, levied or charged as a substitute for or a supplement to the foregoing. Tax Costs for each tax year shall be appropriately prorated to determine the Tax Costs for the subject calendar year. 4.3 "Operating Costs" shall mean the sum of the following: any and all costs, expenses and disbursements paid or incurred in connection with the ownership, management, operation, security, maintenance and repair of the Premises (as it may exist from time to time) including, but not limited to, salaries, wages, benefits and related costs for employees; management fees; charges for utilities and services (including any taxes thereon); the cost of insurance (except for insurance to be maintained by Landlord as expressly provided in Section 12 of this Lease); the cost of building and cleaning supplies and materials. Without limiting the generality of the foregoing, and notwithstanding any contrary provision herein, if at any time Landlord is required by any rule, regulation or law to make any changes, alterations or improvements to the Premises (including, but not limited to, electrical, mechanical or other systems or components) ("Required Alterations") (but excluding Required Alterations attributable exclusively to Tenant's specific use and occupancy of the Premises, which alterations shall be Tenant's sole responsibility), all costs relating to such Required Alterations (including, but not limited to, all planning, legal, architectural, engineering, construction, financing and other costs) fairly characterized as "expenses" under generally accepted accounting principles shall be fully included in Operating Costs in the year in which such charges accrue, or in such year as Landlord pays such charges, as Landlord shall elect. Operating Costs shall not include the cost of any of those items set forth in Section 1 of the Work Agreement. 4.4 Tenant shall, with Landlord's cooperation, arrange for all Tax Costs, to the extent possible, to be billed directly to Tenant. Any Tax Costs billed to Landlord shall be paid by Tenant within ten (10) days after demand therefor, accompanied by bills or invoices for same, from Landlord. Provided Landlord's interest in the Premises is not in any way affected, Tenant may in good faith protest the payment of Tax Cost that Tenant believes is unwarranted or excessive and may defer payment of such Tax Cost pending conclusion of such contest if legally permitted to do so. 5. Security Deposit. Concurrently with Tenant's execution hereof, Tenant shall pay to Landlord a security deposit to secure the performance and observance of all obligations and covenants of Tenant hereunder. The initial amount of such deposit is specified in Section 1.1.6 of the Basic Lease Information. Landlord may apply such deposit to remedy any failure by Tenant to perform or observe any of its obligations and covenants hereunder. Should Landlord use any portion of such deposit pursuant to the foregoing, Tenant shall forthwith replenish such deposit in full. Landlord shall, upon the expiration or sooner termination hereof, promptly return any unused portion of such deposit to Tenant (or the last permitted assignee of Tenant's interest hereunder). Landlord shall not be obligated to return any unused portion of the security deposit until all obligations of Tenant are performed (including, without limitation, Tenant's payment obligations under Section 4.3). Landlord shall not be required to keep such deposit separate from its general funds, and Tenant shall not be entitled to any interest on such deposit. 6. Restrictions on Use; Compliance with Laws. 6.1 Tenant shall use and occupy the Premises only as specified in Section 1.1.5 of the Basic Lease Information. Tenant shall not use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause or maintain or permit any nuisance in or about the Premises, nor shall Tenant cause or permit any hazardous or toxic waste, substance or material to be 2 brought to the Premises or used, handled, stored or disposed of in or about the Premises. Tenant shall not commit or suffer the commission of any waste in or about the Premises. 6.2 Tenant shall not use the Premises or permit anything to be done in or about the Premises which shall in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall not do or permit anything to be done on or about the Premises or bring or keep anything therein which will in any way increase the rate of any insurance upon the Premises or any of its contents or cause a cancellation of said insurance or otherwise affect said insurance in any manner, and Tenant shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. 7. Improvements and Alterations. 7.1 Initial improvements to the Premises shall be governed by the provisions of Exhibit "C" attached hereto and hereby made a part hereof (the "Work Agreement") and the other provisions of this Lease not in conflict therewith. 7.2 Without the prior written consent of Landlord, Tenant shall not make or permit to be made any alterations, additions or improvements in, on or to the Premises, except for interior, nonstructural alterations to the Premises not exceeding Ten Thousand Dollars ($10,000) for any such single alteration, addition or improvement. Notwithstanding any contrary provision herein, Tenant shall not, in any event, make any alterations, additions or improvements which affect structural portions or mechanical or electrical systems of the Premises or which are visible from the exterior of the Premises. Any alterations, additions or improvements desired by Tenant shall be made at Tenant's sole cost and expense in compliance with Section 9 below and in accordance with plans and specifications, and pursuant to governmental permits, approved in advance by Landlord. Any contractor selected by Tenant to make same must be licensed and be approved in advance by Landlord and must provide insurance coverage acceptable to Landlord. Upon completion of any alterations, additions or improvements, Tenant shall furnish to Landlord a set of "as built" plans and specifications therefor, and, within ten (10) days after such completion, Tenant shall cause an appropriate notice of completion to be recorded in the Official Records of Santa Clara County, California. Tenant shall cause all such alterations, additions or improvements to be completed in a good, workmanlike, diligent, prompt and expeditious manner in compliance with all applicable laws. Landlord's approval of Tenant's plans and specifications shall not constitute a representation or warranty of Landlord as to the adequacy thereof or compliance thereof with applicable laws. Tenant shall pay to Landlord the reasonable costs actually incurred by Landlord for reviewing Tenant's plans and specifications and Landlord's coordination, scheduling and review of the subject work, regardless of whether Landlord or Tenant contracts for such work. 8. Repairs and Maintenance. 8.1 By taking possession of the Premises, Tenant shall accept the Premises as being in the condition in which Landlord is obligated to deliver them and otherwise in good order, condition and repair. Except as expressly set forth in this Lease, Landlord has made no representation or warranty to Tenant or any agent thereof regarding the condition of the Premises or their present or future suitability for Tenant's intended use. Subject to the provisions of Section 22 and Section 8.4 below, Tenant shall, at all times during the term hereof and at Tenant's sole cost and expense, keep the Premises and every part thereof in good order, condition and repair, including without limitation, all interior and exterior walls (including paint as needed), the roof membrane, interior surfaces of the ceilings, walls and floors, the plumbing, window glass, plate glass and doors, heating, ventilation and air conditioning systems, electrical wiring, switches and fixtures, landscaping, parking areas and sidewalks. 8.2 If Tenant fails or neglects to repair or maintain the Premises as described in Section 8.1 above within five (5) business days after receipt of Landlord's written notice stating the repairs or maintenance required to be made, or Tenant fails to complete such repairs or maintenance within thirty (30) days of such notice, or such longer period as is reasonably necessary, provided Tenant is pursuing such repairs or maintenance with continuity and diligence, or in the event of an emergency, Landlord may make such repairs or maintenance as it deems reasonably necessary for the account of Tenant. Following Landlord's completion of such repair work, Tenant shall promptly reimburse Landlord for all reasonable expenses incurred upon its receipt of paid invoices. 8.3 Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932, and Sections 1941 and 1942, of the Civil Code of California and any similar law, statute or ordinance now or hereafter in effect. It is hereby understood and agreed that Landlord has no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, except as specified in Section 22 below or in the Work Agreement. 8.4 At Landlord's cost and expense, Landlord shall keep the structural portions of the roof (expressly excluding therefrom the roof membrane), the structural walls and the foundation of the Premises in good condition and repair at all times during the term of this Lease. Notwithstanding anything in this Lease to the contrary, if, during the first six (6) months of the term of this, any repair and/or replacement of the existing mechanical and electrical systems (including heating, ventilating and air conditioning), the structural portions of the building located on Premises or the roof membrane are required as a result of normal wear and tear, Landlord shall make such repairs and/or replacements at Landlord's cost and expense. 9. Liens. Tenant shall keep the Premises free from any liens arising from any labor performed or materials furnished in connection with any work done or caused to be done by Tenant or arising from any obligations incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and at law or in equity, the right to cause same to be released by such means as it shall deem proper including, but not limited to, payment (from the security deposit referred to in Section 5 above or otherwise) of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith shall be considered additional rent and shall be payable to it by Tenant on demand with interest at the Interest Rate (as defined in Section 29 below). Landlord may require, at Landlord's sole option, that Tenant cause to be provided to Landlord, at Tenant's sole cost and expense, a performance and labor and materials payment bond acceptable to Landlord with respect to any improvements, additions or alterations to the Premises. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises and any other party having an interest therein from mechanics' and materialmen's liens, and Tenant shall give to Landlord at least five (5) business days' prior notice of commencement of any work on the Premises. 10. Assigning and Subleasing. 10.1 Tenant shall not assign, sublease or otherwise transfer, voluntarily, by operation of law or otherwise, any interest herein or in the Premises, or permit any assignment, sublease or other transfer to occur, without Landlord's prior written consent, which shall not be unreasonably withheld. For purposes of this Section 10, the term "transfer" shall include, without limitation, entering into any license or concession agreement or otherwise permitting any third party other than Tenant and Tenant's employees, contractors, invitees and guests to occupy or use the Premises or any portion thereof. In determining whether to grant such consent, Landlord may consider various factors 3 including, but not limited to, the following: (a) business criteria relating to the proposed transferee's background, experience, reputation, general operating ability and ability to perform Lease obligations, and potential for succeeding in its business, (b) financial criteria relating to the proposed transferee's financial responsibility, credit rating and capitalization, (c) the identity and personal characteristics of the proposed transferee and its invitees and guests, and (d) the nature of the proposed use and business of the proposed transferee. Without limiting the generality of the foregoing, Landlord hereby reserves the right to condition any such consent upon Landlord's determination that (i) the proposed transferee is at least as financially and morally responsible as Tenant then is, or was upon the execution hereof, whichever is greater, and (ii) the proposed transferee shall use the Premises in compliance with Section 6 above. Notwithstanding any provision in this Lease to the contrary, Tenant shall not enter into any proposed assignment, sublease or other transfer of any interest herein or in the Premises which would result in (a) diminution in the value of the Premises, (b) the Premises being occupied by more than two (2) tenants, or (c) a breach by Landlord of any loan obligation or agreement, any covenants, conditions and restrictions of record, or any insurance policy. Hypothecation and encumbering of any of Tenant's interest herein is prohibited. Tenant shall submit the following information with a written request for Landlord's consent to any assignment, sublease or other transfer: (i) all transfer and related documents, (ii) financial statements, (iii) business, credit and personal references and history, and (iv) such other information as Landlord may reasonably request relating to the proposed transfer and the parties involved therein. Any transaction which does not comply with the provisions of this Section shall be voidable at the option of Landlord. 10.2 Notwithstanding any provision in this Lease to the contrary, if Tenant desires at any time to assign, sublease or transfer any interest herein or in the Premises, it shall first notify Landlord of its desire to do so and shall designate in such notice the space and time period involved. Landlord shall have ten business (10) days after delivery of such notice in which to elect, at its option, to recapture said space for said time period. If Landlord does not, within such ten business (10) day period, deliver to Tenant notice of its election to so recapture, Tenant may proceed with such assignment, sublease or transfer in accordance with the terms designated in Tenant's notice, subject to the other provisions of this Lease, including, but not limited to, Landlord's reasonable consent thereto pursuant to the foregoing. 10.3 With respect to any assignment, sublease or other transfer of any interest herein or in the Premises, Tenant shall, notwithstanding any contrary provision herein, pay to Landlord, promptly following Tenant's receipt thereof, seventy-five (75%) of the amount by which all rental and other payments (whether paid in installments, as lump sums, or otherwise) relating to the space in question received by Tenant exceed the Base Rent, Direct Costs and other amounts paid pursuant to this Lease for the subject period with respect to such space subleased (with the rental and other amounts paid by Tenant for the Premises allocated on the basis of rentable area). Amounts payable under this Section by Tenant to Landlord shall be based on gross figures less only the actual, reasonable costs incurred by Tenant to procure such assignment, sublease or other transfer, including the reasonable costs of any leasehold improvements or other alterations to the Premises made in connection therewith and approved in advance by Landlord in Landlord's reasonable discretion. The provisions of this Section shall apply regardless of whether such assignment, sublease or other transfer is made in compliance with the provisions of this Lease. Any payments made to Landlord pursuant to this Section shall not cure any default under this Lease arising from such assignment, sublease or transfer. Tenant shall not artificially structure any sublease, assignment or other transfer in order to reduce the amount payable to Landlord under this Section, nor shall Tenant take any other steps for the purpose of circumventing its obligation to pay amounts to Landlord under this Section; in the event that Tenant does same, the amount payable to Landlord under this Section shall be the amount that would have been payable to Landlord had same not occurred. 10.4 Tenant shall reimburse Landlord for Landlord's reasonable costs and expenses (including, but not limited to, reasonable attorneys', accountants', architects', engineers' and consultants' fees) incurred in connection with the processing and documentation of any requested assignment, sublease or other transfer; provided, however, before incurring costs and expenses for the services of any architect, engineer or consultant, Landlord shall first provide Tenant the opportunity to supply promptly to Landlord the information, documentation or advice Landlord would have otherwise sought from professionals of Landlord's own selection, the sufficiency of which information, documentation and advice shall be determined by Landlord in its reasonable discretion. 10.5 No assignment, sublease or other transfer, even with the consent of Landlord, shall result in Tenant's being released from any of its obligations hereunder. Landlord's consent to any one transfer shall apply only to the specific transaction thereby authorized and such consent shall not be construed as a waiver of the duty of Tenant or any transferee to obtain Landlord's consent to any other or subsequent transfer or as modifying or limiting Landlord's rights hereunder in any way. Landlord's acceptance of rent directly from any assignee, subtenant or other transferee shall not be construed as Landlord's consent thereto nor Landlord's agreement to accept the attornment of any subtenant in the event of any termination of this Lease. In no event shall Landlord's enforcement of any provision of this Lease against any transferee be deemed a waiver of Landlord's right to enforce any term of this Lease against Tenant or any other person. 10.6 If Tenant is a corporation, an unincorporated association, limited liability company or a partnership, any cumulative transfer, assignment or hypothecation of any stock or interest in such corporation, association, limited liability company or partnership greater than twenty-five percent (25%) thereof, or any cumulative transfer, assignment or hypothecation (other than in the ordinary course of business) of any assets of such corporation, association, limited liability company or partnership greater than twenty-five percent (25%) thereof, shall be deemed an assignment within the meaning and provisions of this Section and shall be subject to the provisions hereof; provided, however, that the foregoing shall not apply to corporations, fifty percent (50%) or more of the stock of which is traded through a national or regional exchange or over-the-counter. 10.7 Notwithstanding any of the foregoing provisions, covenants and conditions to the contrary, in the event that this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code"), any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other consideration constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. If Tenant proposes to assign this Lease pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment setting forth (i) the name and address of such person, (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided by Tenant to assure such person's future performance under the Lease including, without limitation, the assurance referred to in Section 365 of the Bankruptcy Code, or any such successor or substitute legislation or rule thereto, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption. Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bonafide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. 10.8 Any transaction which does not comply with the provisions of this Section 10 shall constitute a breach of and default under this Lease by Tenant. 4 11. Waiver; Indemnity. 11.1 Notwithstanding any contrary provision herein, and except to the extent arising from the negligence or willful misconduct of Landlord, Landlord shall not be liable and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property or any other loss (including, but not limited to, loss of income) in or about the Premises, by or from any cause whatsoever, and, without limiting the generality of the foregoing, whether caused by water leakage of any character from the roof, walls, basement or any other portion of the Premises, or by gas, fire, oil or electricity, or by any interruption of utilities or services, or by any occupant or other person, or by any other cause whatsoever in, on or about the Premises. Notwithstanding any contrary provision in this Lease, Landlord shall in no event be liable for consequential damages under this Section 11.1. 11.2 Except to the extent arising from the negligence or willful misconduct of Landlord, Tenant shall indemnify Landlord and hold Landlord harmless from and against any and all claims, demands, losses, damages, liabilities, costs and expenses (including, but not limited to, reasonable attorneys' fees) arising from Tenant's use or enjoyment of the Premises, from the conduct of Tenant's business, from any act or omission, work or thing done, permitted or suffered by Tenant (or any officer, employee, agent, contractor, representative, licensee, guest, invitee or visitor thereof) in or about the Premises, or from any default under this Lease by Tenant. If any action or proceeding is brought against Landlord by reason of any such matter, Tenant shall, upon Landlord's request, defend same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property of Tenant or injury to persons in or about the Premises, except to the extent arising from the negligence or willful misconduct of Landlord, and Tenant hereby waives all claims in respect thereof against Landlord. The provisions of this Section shall survive the expiration or termination of this Lease with respect to any claims or liability arising from events occurring prior to such expiration or termination. 12. Insurance. 12.1 Throughout the term hereof, Tenant shall carry and maintain, at its own expense, the following types, amounts and forms of insurance: 12.1.1 Tenant shall carry and maintain a policy of commercial general liability insurance with a combined single limit of Three Million Dollars ($3,000,000) per occurrence in the name of Tenant (with Landlord and, if requested by Landlord, any mortgagee, trust deed holder, ground lessor or secured party with an interest in this Lease or the Premises named as an additional insured). Such policy shall specifically include, without limitation, personal injury, broad form property damage, and contractual liability coverage, the last of which shall cover the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements in Section 11 above. Such policy shall provide coverage on an occurrence basis. The amount of such insurance required hereunder shall be subject to adjustment from time to time as reasonably requested by Landlord. 12.1.2 Tenant shall carry and maintain a policy or policies of property insurance in the name of Tenant (with Landlord or, if requested by Landlord, any mortgagee, trust deed holder, ground lessor or secured party with an interest in this Lease or the Premises named as loss payee as their insurable interests appear) covering Tenant's leasehold improvements and any property of Tenant at the Premises and providing protection against all perils included within the classification of fire, earthquake, extended coverage, vandalism, malicious mischief, special extended peril (all risk) and sprinkler leakage, in an amount equal to at least one hundred percent (100%) of the replacement cost thereof from time to time (including, without limitation, cost of debris removal), with an agreed amount endorsement. Any proceeds from such insurance shall be used for the repair or replacement of the property damaged or destroyed, unless this Lease is terminated pursuant to the provisions hereof. If the Premises are not repaired or restored following damage or destruction, Landlord shall receive and retain any proceeds from such insurance allocable to Tenant's leasehold improvements. 12.1.3 Tenant shall carry and maintain a policy or policies of property insurance in the name of Tenant (with Landlord or, if requested by Landlord, any mortgagee, trust deed holder, ground lessor or secured party with an interest in this Lease or the Premises named as additional insureds) covering the Premises and providing protection against all perils included within the classification of fire, flood, extended coverage, vandalism, malicious mischief, special extended peril (all risk) and sprinkler leakage, in an amount equal to at least one hundred percent (100%) of the replacement cost thereof from time to time (including, without limitation, cost of debris removal), with an agreed amount endorsement. Any proceeds from such insurance shall be used for the repair or replacement of the Premises, unless this Lease is terminated pursuant to the provisions hereof. If the Premises are not repaired or restored following damage or destruction, Landlord and Tenant shall share in any proceeds from such insurance in proportion to their respective contribution to the cost of Tenant's leasehold improvements pursuant to Section 4(d) of the Work Agreement. 12.1.4 Tenant shall carry and maintain a policy or policies of workers' compensation and employers' liability insurance in compliance with all applicable laws. 12.1.5 Landlord may from time to time require that Tenant carry and maintain a policy or policies of insurance for business interruption or rent loss insurance in an amount at least equal to 100% of the sum of the annual Base Rent and Additional Rent due hereunder. 12.1.6 All of the policies required to be obtained by Tenant pursuant to the provisions of this Section 12.1 shall be issued by companies licensed to do business in California), and shall be in form and content, reasonably acceptable to Landlord. Without limiting the generality of the foregoing, any deductible amounts under said policies shall be subject to Landlord's reasonable approval. All policies required to be obtained by Tenant shall provide that the interests of Landlord and any other additional insureds or loss payees designated by Landlord shall not be invalidated due to any breach or violation of any warranties, representations or declarations contained in such policies or the applications therefor. Each policy shall designate Landlord as an additional insured or loss payee, subject to the foregoing, and shall provide full coverage in the amounts set forth herein. Although named as an additional insured, Landlord shall be entitled to recover under said policies for any loss occasioned to it, its servants, agents and employees, by reason of the negligence of Tenant. Tenant shall, prior to delivery of the Premises by Landlord to Tenant, provide Landlord with copies of and certificates for all insurance policies. All insurance policies shall provide that they may not be modified or canceled until after thirty (30) days' written notice to Landlord (by any means described in Section 27 below) and to any other additional insureds thereunder. Tenant shall, at least fifteen (15) days prior to the expiration of any of such policies, furnish Landlord with a renewal or binder therefor. Tenant may carry insurance under a so-called "blanket" policy, provided that such policy provides that the amount of insurance required hereunder shall not be prejudiced by other losses covered thereby. All insurance policies carried by Tenant shall be primary with respect to, and non-contributory with, any other insurance available to Landlord. If Tenant fails to carry any insurance policy required hereunder or to furnish copies thereof and certificates therefor pursuant hereto, Landlord may, upon notice (unless such policy has lapsed), obtain such insurance, and Tenant shall reimburse Landlord for the costs thereof with the next monthly rental payments due hereunder. 12.2 During the term of this Lease, Landlord shall keep and maintain property insurance for the Premises in such reasonable amounts, and with such reasonable coverages, as would be carried by a prudent owner of a similar building in the general market area of the Premises or as any lienholder may require. Tenant acknowledges that it shall not be a named insured in such policies and that it has no right to receive any proceeds from any such insurance policies carried by Landlord. Notwithstanding any contrary provision herein, Landlord 5 shall not be required to carry insurance covering the property described in Section 12.1.2. Landlord may, in its sole and entire discretion, elect to carry insurance covering flood and earthquake. 12.3 Each party hereto hereby waives any and all rights to recover against the other party, or against the officers, employees or principals thereof, for loss or damage arising from any peril to the extent insured against under any property or workers' compensation insurance policy carried by such waiving party. To the extent commercially reasonably available, each such policy shall be endorsed to reflect the foregoing. 12.4 Tenant shall pay any increases in insurance premiums relating to property in the Premises other than the Premises to the extent that any such increase is specified by the insurance carrier as being caused by Tenant's acts or omissions or use or occupancy of the Premises. 13. Services and Utilities. 13.1 Tenant shall be responsible for procuring all janitorial, waste disposal and other services to the Premises during the times and in the manner that such services are customarily furnished in comparable buildings in the immediate market area. 13.2 Tenant shall be responsible for procuring, and Tenant shall promptly pay the cost of, all utilities and other resources consumed within the Premises. 13.3 Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from any interruption of utilities or services caused by (i) the installation or repair of any equipment in connection with the furnishing of utilities or services, (ii) acts of God or the elements, labor disturbances of any character, any other accidents or any other conditions beyond the reasonable control of Landlord, or by the making of repairs or improvements to the Premises or the Premises, or (iii) the limitation, curtailment, rationing or restriction imposed by any governmental agency or service or utility supplier on use of water or electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises. Furthermore, Landlord shall be entitled, without any obligation or compensation to Tenant, to cooperate voluntarily in a reasonable manner with the efforts of national, state or local governmental agencies or service or utility suppliers in reducing energy or other resource consumption; if Landlord shall so cooperate, Tenant shall also reasonably cooperate therewith. 14. Estoppel Certificate. Within ten (10) days after any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a certificate (the "Certificate") substantially in the form attached hereto as Exhibit "D" and hereby made a part hereof, together with such financial information relating to Tenant or any guarantor as Landlord or any prospective purchaser or lender may reasonably request. Landlord shall have the right to amend or otherwise supplement the Certificate to include such other information and provisions as may be reasonably requested by any existing or prospective lender or by any prospective purchaser. Landlord and Tenant intend that the Certificate may be relied upon by any existing or prospective lender or by any prospective purchaser. 15. Holding Over. If Tenant, with Landlord's written consent, remains in possession of all or any portion of the Premises after the expiration or sooner termination of the term hereof, such holding over shall be deemed to constitute a tenancy from month to month only, upon such terms and conditions hereof as could be reasonably and logically construed as applying thereto; provided, however, that during such holding over, Base Rent shall be one hundred twenty-five percent (125%) of the Base Rent in effect immediately prior to such expiration or termination, and any and all options and rights of first refusal or other preferential rights of Tenant shall be deemed to have lapsed and to be of no further force or effect. Landlord may terminate such tenancy from month to month by giving to Tenant at least seven (7) days' written notice thereof at any time. Acceptance by Landlord of any rent after such expiration or termination shall not be deemed to constitute Landlord's consent to such holding over. 16. Subordination; Requirements of Lenders. 16.1 Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting all or any portion of the Premises, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed affecting all or any portion of the Premises. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a deed in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor-in-interest to Landlord at the option of such successor-in-interest. So long as Tenant is not in default under this Lease, Tenant's possession of the Premises shall not be disturbed as a result of such termination, foreclosure or deed in lieu of foreclosure. Tenant shall execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents evidencing the priority or subordination of this Lease and the attornment of Tenant with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed or trust. 16.2 If, in connection with the obtainment of financing for the Premises or any portion thereof, the lender requests reasonable modifications hereto as a condition to the furnishing of such financing, Tenant shall not unreasonably withhold or delay its consent thereto, provided that such modifications do not materially increase the obligations of Tenant hereunder or materially adversely affect Tenant's rights hereunder. 17. Environmental Indemnities . 17.1 Tenant agrees that Tenant, its agents and contractors shall not use, manufacture, store or dispose of any flammable explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances (collectively "Hazardous Materials") on, under or about the Premises, provided that Tenant may handle, store, use or dispose in a safe and lawful manner of products containing small amounts of Hazardous Materials, which products are of a type customarily found in offices and households (such as aerosol cans containing insecticides, toner for copiers, paints, paint removers and the like). Tenant shall indemnify and hold harmless Landlord from and against any and all claims, losses, liabilities, damages, costs and expenses, including without limitation attorneys fees and costs actually incurred, arising out of or in any way connected with the use, manufacture, storage, or disposal of Hazardous Materials by Tenant, its agents or contractors on, under or about the Premises, including, without limitation, the cost of any required or necessary repair, cleanup or detoxification and the preparation of any closure or other required plans in connection herewith. 17.2 Landlord shall indemnify and hold harmless Tenant from and against any and all claims, losses, liabilities, damages, costs and expenses, including without limitation attorneys fees and costs actually incurred, which arise during or after the term of this Lease from or in connection with toxic or hazardous substances present in the soil, groundwater or soil vapor on or under the Leased Premises before or during the term of this Lease Agreement, except to the extent that Tenant, its officers, employees or agents are responsible for the presence 6 of toxic or hazardous substances or exacerbate the contamination resulting from the presence of toxic or hazardous substances. Without limiting the generality of the foregoing, the indemnification provided by this paragraph shall specifically cover costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of the presence of toxic or hazardous substances in the soil, groundwater or soil vapor on or under the Leased Premises, except to the extent Tenant, its officers, employees or agents are responsible for the presence of toxic or hazardous substances or exacerbate the contamination resulting from the presence of toxic or hazardous substances. 17.3 Upon execution of this Lease, Tenant shall cause to be conducted an environmental audit of the Premises to determine the environmental condition of the Premises, and the soil, groundwater and soil vapor on or under the Premises. The results of such tests shall be made available to Landlord upon request. 17.4 The indemnities set forth in Section 17.2 and 17.3 hereof shall survive any termination of this Lease. 18. Access by Landlord. Subject to prior arrangement with Tenant (except in the event of an emergency) and compliance with Tenant's security requirements, Landlord reserves, and Landlord (and its agents, contractors and employees) shall at reasonable times have, the right to enter the Premises to inspect same, to show the Premises to any prospective purchaser, beneficiary, mortgagee or, during the last six (6) months of the term hereof, tenant, to post notices of nonresponsibility, and to make any alteration, improvement or repair to the Premises, without abatement of rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures in and through the Premises where reasonably required by the character of the work to be performed, provided that entrance to the Premises shall not be blocked thereby, and provided further that Landlord shall use reasonable efforts to minimize any interference with Tenant's use of and access to the Premises resulting from the foregoing. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby, except to the extent arising from the negligence or willful misconduct of Landlord. Any entry to the Premises or portions thereof obtained by Landlord in an emergency shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. 19. Default by Tenant. The occurrence of any of the following shall constitute a breach of and default under this Lease by Tenant: 19.1 Failure by Tenant to pay any amount (including, without limitation, monthly installments of Base Rent and Direct Costs) when and as same becomes payable in accordance with the provisions of this Lease, or to duly, promptly and completely perform any obligation of Tenant under Section 14 or 16 above, and the continuation of such failure for a period of three (3) days after written notice from Landlord to Tenant specifying the nature of such failure. 19.2 Failure by Tenant to duly, promptly and completely perform or observe any other obligation or covenant of Tenant contained in this Lease, and the continuation of such failure for a period of ten business (10) days after written notice from Landlord to Tenant specifying the nature of such failure; provided, however, that if any such failure not involving a hazardous condition is curable, but cannot reasonably be cured within such period, Tenant shall not be deemed to be in default hereunder if Tenant promptly commences such cure within such period and thereafter diligently pursues such cure to completion within a reasonable time, but in no event more than thirty (30) days after such notice. 19.3 Tenant's vacating or abandoning of the Premises. 19.4 Any financial statement or any representation given to Landlord by Tenant, or any assignee, sublessee, other transferee or successor of Tenant or any guarantor of this Lease, proves to be materially false or misleading. 19.5 The insolvency of Tenant; the making by Tenant of any assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy, insolvency or creditors' rights in general (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of all or a substantial part of Tenant's assets or of Tenant's interest under this Lease, where such seizure is not discharged within thirty (30) days. The occurrence of any of the acts or events referred to in this subsection with respect to any guarantor of this Lease shall also constitute a default hereunder. 19.6 The attachment, execution or other judicial seizure of a substantial portion of Tenant's assets or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The notices referred to in Sections 19.1 and 19.2 above shall be in lieu of, and not in addition to, any notice required under Section 1161 et seq. of the California Code of Civil Procedure. 20. Remedies of Landlord. 20.1 In the event of Tenant's breach of or default under this Lease as provided in Section 19 above, Landlord, at Landlord's option, and without limiting Landlord in the exercise of any other right or remedy Landlord may have on account of such default, and without any further demand or notice, may terminate this Lease and/or, to the extent permitted by law, remove all persons and property from the Premises, which property shall be stored by Landlord at a warehouse or elsewhere at the risk, expense and for the account of Tenant. 20.2 If Landlord elects to terminate this Lease as provided in Section 20.1 above, Landlord shall be entitled to recover from Tenant the aggregate of: 20.2.1 The worth at the time of award of the unpaid rent and charges equivalent to rent earned as of the date of the termination hereof; 20.2.2 The worth at the time of award of the amount by which the unpaid rent and charges equivalent to rent which would have been earned after the date of termination hereof until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; 20.2.3 The worth at the time of award of the amount by which the unpaid rent and charges equivalent to rent for the balance of the term hereof after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; 7 20.2.4 Any other amount necessary to compensate Landlord for the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom; and 20.2.5 Any other amount which Landlord may hereafter be permitted to recover from Tenant to compensate Landlord for the detriment caused by Tenant's default. For the purposes of this Section, the "time of award" shall mean the date upon which the judgment in any action brought by Landlord against Tenant by reason of such default is entered or such earlier date as the court may determine; the "worth at the time of award" of the amounts referred to in Sections 20.2.1 and 20.2.2 shall be computed by allowing interest at the Interest Rate, but not less than the legal rate; and the "worth at the time of award" of the amount referred to in Section 20.2.3 shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%) per annum. Tenant agrees that such charges shall be recoverable by Landlord under California Code of Civil Procedure Section 1174(b) or any similar, successor or related provision of law. Further, Tenant hereby waives the provisions of California Code of Civil Procedure Section 1174(c) and California Civil Code Section 1951.7 or any other similar, successor or related provision of law providing for Tenant's right to satisfy any judgment in order to prevent a forfeiture of this Lease or requiring Landlord to deliver written notice to Tenant of any reletting of the Premises. 20.3 Nothing in this Section 20 shall be deemed to affect Landlord's right to indemnification, under the indemnification clause or clauses contained in this Lease, for claims or liability arising from events occurring prior to the termination of this Lease. 20.4 Notwithstanding anything to the contrary set forth herein, Landlord's reentry to perform acts of maintenance or preservation of, or in connection with efforts to relet, the Premises, or any portion thereof, or the appointment of a receiver upon Landlord's initiative to protect Landlord's interest under this Lease shall not terminate Tenant's right to possession of the Premises or any portion thereof and, until Landlord does elect to terminate this Lease, this Lease shall continue in full force and Landlord may pursue all its remedies hereunder including, without limitation, the right to recover from Tenant as they become due hereunder all rent and other charges required to be paid by Tenant under the terms of this Lease. 20.5 In the event of any default by Tenant as set forth above, then in addition to any other remedies available to Landlord at law or in equity or under this Lease, Landlord shall have the right to bring an action or actions from time to time against Tenant, in any court of competent jurisdiction, for all rental and other sums due or becoming due under this Lease, including all damages and costs proximately caused thereby, notwithstanding Tenant's abandonment or vacation of the Premises or other acts of Tenant, as permitted by Section 1951.4 of the California Civil Code or any successor, related or similar provision of law. Such remedy may be exercised by Landlord without prejudice to its right thereafter to terminate this Lease in accordance with the other provisions contained in this Section 20. 20.6 The terms "rent" and "rental," as used in this Section 20 and in any and all other provisions of this Lease, shall mean Base Rent, Direct Costs and any and all other amounts payable by Tenant pursuant to the provisions of this Lease. 20.7 In the event of Tenant's abandonment of the Premises or if Landlord shall elect to reenter or shall take possession of the Premises pursuant to any legal proceeding or pursuant to any notice provided by law, and until Landlord elects to terminate this Lease, Landlord may, from time to time, without terminating this Lease, recover all rental as it becomes due under Section 20.5 above and/or relet the Premises or any part thereof for the account of and on behalf of Tenant, on any terms, for any term (whether or not longer than the term of this Lease), and at any rental as Landlord in its reasonable discretion may deem advisable, and Landlord may make any alterations and repairs to the Premises in connection therewith. In the event that Landlord shall elect to so relet the Premises on behalf of Tenant, then rentals received by Landlord from such reletting shall be applied: 20.7.1 First, to reimburse Landlord for the costs and expenses of such reletting (including, without limitation, costs and expenses of retaking or repossessing the Premises, removing persons and property therefrom, securing new tenants, and, if Landlord shall maintain and operate the Premises, the costs thereof) and necessary or reasonable alterations. 20.7.2 Second, to the payment of any indebtedness of Tenant to Landlord other than Base Rent, Direct Costs and other sums due and unpaid hereunder. 20.7.3 Third, to the payment of rent, Base Rent, Direct Costs and other sums due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of other or future obligations of Tenant to Landlord as the same may become due and payable. Should the rentals received from such reletting, when applied in the manner and order indicated above, at any time be less than the total amount owing from Tenant pursuant to this Lease, then Tenant shall pay such deficiency to Landlord, and if Tenant does not pay such deficiency within five (5) days of its receipt of written notice, Landlord may bring an action against Tenant for recovery of such deficiency or pursue its other remedies hereunder or under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law. 20.8 All rights, powers and remedies of either party hereunder and under any other agreement now or hereafter in force between Landlord and Tenant shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to either party at law or in equity. The exercise of any one or more of such rights or remedies shall not impair Landlord's right to exercise any other right or remedy including, without limitation, any and all rights and remedies of Landlord under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law. 20.9 As security for Tenant's performance and satisfaction of each and every one of its duties and obligations under this Lease, Tenant does hereby assign and grant to Landlord a security interest under the California Commercial Code in and to Tenant's right, power and authority, during the continuance of this Lease, to receive the rents, issues, profits or other payments received under any sublease or other transfer of part or all of Tenant's interest in the Premises, reserving unto Tenant the right prior to any default hereunder to collect and retain said rents, issues and profits as they become due and payable, except that nothing contained herein shall be construed to alter the provisions of Section 10 above. Upon any such default, Landlord shall have the right at any time thereafter, without notice (except as may be provided for herein), either in person, by agent or receiver to be appointed by a court, to enter and take possession of the Premises and collect such rents, issues, profits or other payments, including without limitation those past due and unpaid, and apply same, less costs and expenses of collection, including without limitation reasonable attorneys' fees upon any indebtedness secured hereby and in such order as Landlord may determine. 20.10 If, after Tenant's abandonment of the Premises, Tenant leaves behind any items of personal property, then Landlord shall store such property at a warehouse or any other location at the risk, expense and for the account of Tenant, and such property shall be released only upon Tenant's payment of such charges, together with moving and other costs relating thereto and all other sums due and owing under this Lease. If Tenant does not reclaim such property within the period permitted by law, Landlord may sell such property in accordance with law and apply the proceeds of such sale to any sums due and owing hereunder, or retain said property, granting Tenant credit against sums due and owing hereunder for the reasonable value of such property. 8 20.11 To the extent any decisions, statutes, rules, regulations and other laws of the State of California are inconsistent and in conflict with specific terms and provisions hereof, the terms and provisions of this Lease shall be controlling. 20.12 If, at any time during the term hereof, Tenant fails, refuses or neglects to do any of the things herein provided to be done by Tenant, Landlord may, after notice (except in the event of an emergency), do same, but at the expense and for the account of Tenant. The amount of any money so expended or obligations reasonably incurred by Landlord therefor, together with interest thereon at the Interest Rate, shall be repaid to Landlord within five (5) days after demand by Landlord. 21. Default by Landlord; Limitation of Liability. 21.1 Landlord shall not be deemed to be in default hereunder unless obligations required of Landlord hereunder are not performed by Landlord, or by any beneficiary under any deed of trust, mortgagee, ground lessor or other lienholder with rights in all or any portion of the Premises, within thirty (30) days after written notice thereof by Tenant to Landlord and to such other parties whose names and addresses are furnished to Tenant in writing, which notice specifies that there has been a failure to perform such obligations; provided, however, that if the nature of such obligations is such that more than thirty (30) days are reasonably required for their cure, Landlord shall not be deemed to be in default hereunder if Landlord or any of such other parties commences such cure within such thirty (30) day period and thereafter diligently pursues such cure to completion. 21.2 If Landlord is in default hereunder and, as a consequence thereof, Tenant obtains a judgment against Landlord, such judgment may be satisfied first out of the right, title and interest of Landlord in the Premises and out of the rent or other revenue receivable by Landlord from the Premises, or out of the proceeds receivable by Landlord from the sale or other disposition of all or any portion of Landlord's right, title and interest in the Premises. 22. Damage and Destruction. 22.1 If, at any time prior to the expiration or termination of this Lease, the Premises is wholly or partially damaged or destroyed, the loss to Landlord from which is (except for any applicable deductible) fully covered by insurance maintained by Landlord or for Landlord's benefit, which casualty renders the Premises totally or partially inaccessible or unusable by Tenant, in the ordinary conduct of Tenant's business, then: (a) Within sixty (60) days after notice to Landlord of such damage or destruction, Landlord shall provide Tenant with notice of its determination of whether the damage or destruction can be repaired within one hundred eighty (180) days of such notice of damage or destruction without the payment of overtime or other premiums. If all repairs to such Premises can, in Landlord's judgment, be completed within said one hundred eighty (180) day period without the payment of overtime or other premiums, Landlord shall, at Landlord's expense, repair the same and this Lease shall remain in full force and effect and a proportionate reduction of the Base Rent shall be allowed Tenant for such portion of the Premises as shall be rendered inaccessible or unusable to tenant, and which is not used by Tenant, during the period of time that such portion is unusable or inaccessible and not used by Tenant; provided, however, that there shall be such rent abatement only if (a) the damage so repaired is not caused by the negligence or willful misconduct of Tenant or any of its agents, contractors, employees, invitees or guests, and (b) a material portion of the Premises is so rendered inaccessible or unusable for more than five (5) consecutive business days. (b) If all such repairs to the Premises cannot, in Landlord's judgment, be completed within one hundred eighty (180) days following the date of notice to Landlord of such damage or destruction without the payment of overtime or other premiums, Landlord shall notify Tenant of such determination and either Landlord or Tenant may, by written notice to the other no later than ninety (90) days after the occurrence of such damage or destruction elect to terminate this Lease as of the date of the occurrence of such damage or destruction. If Landlord and Tenant elect to continue all or any portion of this Lease, the terms and conditions thereof shall be mutually agreed upon in writing by Landlord and Tenant within one hundred twenty (120) days after the occurrence of such damage or destruction, otherwise this Lease shall be deemed terminated as of the date of the occurrence of such damage or destruction. 22.2 If, at any time prior to the expiration or termination of this Lease, the Premises is wholly or partially damaged or destroyed from a casualty, the loss to Landlord from which is not fully covered by insurance maintained by Landlord or for Landlord's benefit, which damage renders the Premises inaccessible or unusable to Tenant in the ordinary course of its business, Landlord, at its option, upon written notice to Tenant within sixty (60) days after notice to Landlord of the occurrence of such damage or destruction, may elect to repair or restore such damage or destruction provided such repair or restoration shall be completed within one hundred eighty (180) days following such notice, or Landlord may elect to terminate this Lease. If Landlord elects to repair or restore such damage or destruction, this Lease shall continue in full force and effect, but Base Rent shall be proportionately reduced as provided in Section 22.1(a). If Landlord does not elect by notice to Tenant to repair such damage, or if the damage cannot, in Landlord's judgment, be completed within one hundred eighty (180) days following the date of notice to Landlord of such damage or destruction, the Lease shall terminate. 22.3 Notwithstanding anything to the contrary contained in Section 22.1 and 22.2, if the Premises is wholly or partially damaged or destroyed within the final twelve (12) months of the term of this Lease, either party hereto may, by giving the other party notice within sixty (60) days after notice to Landlord of the occurrence of such damage or destruction, elect to terminate this Lease. 22.4 In the event of any damage to or destruction of the Premises, under no circumstances shall Landlord be required to repair any injury, or damage to, or make any repairs to or replacements of, Tenant's personal property. However, Tenant shall deliver to Landlord the proceeds of insurance received by Tenant from the "all risk" property policy carried by Tenant on the Tenant Improvements (as that term is defined in the Work Agreement), and Landlord shall, pursuant to its receipt thereof, repair same to the extent Landlord shall receive such insurance proceeds from Tenant (but if the amount of insurance proceeds shall not be sufficient to cause the repair of the Tenant Improvements to be fully made by Landlord, Tenant shall pay to Landlord, within ten (10) days of receipt of request therefor, the additional amount of funds reasonably requested by Landlord in order to complete the repair of the Tenant Improvements) and this Lease shall remain in full force and effect. Landlord shall have no responsibility for any contents placed or kept in or on the Premises by Tenant or Tenant's employees. 22.5 Notwithstanding any contrary provision herein, and regardless of whether caused by casualty, (a) Landlord shall not be obligated to repair or replace any paneling, decorations, railings, floor coverings, alterations, additions, fixtures or improvements installed on the Premises by or at the expense of Tenant (other than such items that were installed as a part of the original Tenant Improvements), and (b) any damage caused by the negligence or willful misconduct of Tenant or any of its agents, contractors, employees, invitees or guests shall be promptly repaired by Tenant, at its sole cost and expense, to the reasonable satisfaction of Landlord; provided, however, that Landlord shall bear said cost and expense to the extent it receives proceeds covering such damage. This Section 22 shall be Tenant's sole and exclusive remedy in the event of damage or destruction to the Premises, and Tenant, as a material inducement to Landlord entering into this Lease, hereby agrees that the provisions of this Section 22 shall supersede the provisions of Section 1932, subdivision 2, and Section 1933, subdivision 4, of the Civil Code of California, and any similar law, statute or ordinance now or hereafter in effect. Except for abatement of rent, if any, as expressly provided for in this Section 22, Tenant shall have no claim against Landlord for any damage, compensation or claim by reason of (i) any damage 9 to the Premises, (ii) such repairs, or (iii) any inconvenience, interruption or cessation of Tenant's business or annoyance caused by such damage, destruction or repair. 23. Eminent Domain. If the entire Premises, or so much thereof as to render the balance thereof not reasonably usable for the conduct of Tenant's business, shall be taken or appropriated under the power of eminent domain or conveyed in lieu thereof, either party hereto may, by serving written notice upon the other party hereto within thirty (30) days thereafter, immediately terminate this Lease. In such event, Landlord shall receive (and Tenant shall assign to Landlord upon demand by Landlord) any income, rent, award or any interest therein which may be paid in connection therewith, and Tenant shall have no claim against Landlord for any part of any sum so paid, whether or not attributable to the value of the unexpired term of this Lease; provided, however, that nothing herein shall prevent Tenant from pursuing a separate award in connection with the taking of Tenant's removable tangible personal property placed in the Premises solely at Tenant's expense and for Tenant's relocation costs. If a part of the Premises shall be so taken, appropriated or conveyed and neither party hereto shall elect to so terminate this Lease, (i) Base Rent payable hereunder shall be abated in the proportion that the rentable area of the portion of the Premises so taken, appropriated or conveyed bears to the rentable area of the entire Premises, and (ii) if the Premises shall have been damaged as a consequence of such partial taking, appropriation or conveyance, Landlord shall, to the extent of any severance damages received by Landlord, restore the Premises continuing under this Lease; provided, however, that Landlord shall not be required to repair or restore any damage to the property of Tenant or to make any repairs to or restoration of any alterations, additions, fixtures or improvements installed on the Premises by or at the expense of Tenant, and Tenant shall pay any amount in excess of such severance damages required to complete such repairs or restoration. Notwithstanding anything to the contrary contained in this Section, if the temporary use or occupancy of any part of the Premises shall be taken or appropriated under the power of eminent domain or conveyed in lieu thereof during the term of this Lease, this Lease shall be and remain unaffected by such taking, appropriation or conveyance and Tenant shall continue to pay in full all rent payable hereunder by Tenant during the term of this Lease; in the event of any such temporary taking, appropriation or conveyance, Tenant shall be entitled to receive that portion of any award which represents compensation for loss of the use or occupancy of the Premises during the term of this Lease, and Landlord shall be entitled to receive the balance of such award. To the extent that it is inconsistent with the above, each party hereto hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure allowing either party to petition a court to terminate this Lease in the event of a partial taking of the Premises. 24. Sale by Landlord. If Landlord sells or transfers the Premises, provided all of Landlord's remaining obligations under this Lease are assigned to and assumed by Landlord's successor-in-interest, Landlord shall, upon consummation of such sale or transfer, be released from any liability relating to obligations or covenants thereafter to be performed or observed under this Lease, and in such event Tenant agrees to look solely to Landlord's successor-in-interest with respect to such liability. Landlord may transfer or credit any security deposit or prepaid rent to Landlord's successor-in-interest, and upon such transfer Landlord shall be discharged from any further liability therefor. 25. Surrender of Premises. Tenant shall, upon the expiration or sooner termination of the term hereof, surrender to Landlord the Premises, and all repairs, changes, alterations, additions and improvements thereto, in good order, condition and repair, ordinary wear and tear excepted, clean and free of debris; provided, however, that Landlord may require that Tenant remove changes, alterations, additions and improvements, whether installed by Landlord or by Tenant, in which event Tenant shall so remove same at its sole cost and expense. Tenant shall, upon the expiration or sooner termination of the term hereof, and at Tenant's sole cost and expense, remove all movable furniture, equipment and other personal property belonging to Tenant placed in the Premises solely at Tenant's expense. Tenant shall immediately, at its sole cost and expense, repair any damage caused by the removal of any property. 26. Quiet Enjoyment. So long as Tenant is not in default hereunder, Tenant shall have the right to the quiet and peaceful enjoyment and possession of the Premises and the common areas during the term of this Lease, subject to the terms and conditions of this Lease. 27. Notices. Whenever any notice, demand or other communication is to be given under the provisions of this Lease by either party hereto to the other party hereto, it shall be in writing and shall be (a) personally served, (b) mailed by United States registered or certified mail, return receipt requested, postage prepaid, or (c) sent by a nationally recognized courier service (e.g., Federal Express) for next-day delivery, to be confirmed in writing by such courier, addressed as set forth in Sections 1.1.8 and 1.1.9 of the Basic Lease Information with respect to Tenant and as follows with respect to Landlord: American National Insurance Company One Moody Plaza Galveston, Texas 77550 Attention: Real Estate Department with a copy to each of the following: Gibson Speno Property Management Company 1731 Technology Drive, Suite 340 San Jose, California 95110 Hill, Farrer & Burrill 445 South Figueroa Street, 34th Floor Los Angeles, California 90071 Attention: Michelle A. Meghrouni, Esq. Either party hereto may change the address or addresses to which notices, demands and other communications shall thereafter be sent by giving notice to the other party as aforesaid. Notices, demands and other communications given as aforesaid shall be deemed complete when actually delivered to or refused by the party to whom sent, unless mailed as aforesaid, in which event same shall be deemed complete on the day of actual delivery as shown by the return receipt or at the expiration of the third (3rd) business day after the date of mailing, whichever first occurs. 28. Personal Property Taxes. Tenant shall pay before delinquency all taxes, assessments, license fees and other charges (collectively, "taxes") that are levied and assessed against Tenant's trade fixtures and other personal property installed or located in or on the Premises. On demand by 10 Landlord, Tenant shall furnish Landlord with satisfactory evidence of such payments. If any taxes are levied against Landlord or Landlord's property, or if the assessed value of the Premises is increased by the inclusion of a value placed on Tenant's personal property, as determined by Landlord, and if Landlord pays such taxes or the tax based on such increased assessment, Tenant, on demand, shall reimburse Landlord for such taxes and the tax resulting from such increase in Landlord's assessment. Landlord shall have the right to pay these amounts regardless of the validity of the levy. 29. Interest and Late Charges. Any amount not paid by Tenant to Landlord when due hereunder shall bear interest at a rate (the "Interest Rate") equal to the lesser of (a) the rate per annum announced from time to time by Bank of America, N.A. as its prime rate (or, if such bank fails to announce such a rate, then the prime rate announced by The Chase Manhattan Bank, N.A.) plus four (4) percentage points, or (b) the maximum rate permitted by law, from the due date until paid, unless otherwise specifically provided herein, but the payment of such interest shall not excuse or cure any such failure by Tenant under this Lease. In addition to such interest, if any amount is not paid within ten (10) days after same is due, a late charge equal to five percent (5%) of such amount shall be assessed, which late charge Tenant hereby agrees is a reasonable estimate of the damages Landlord shall suffer as a result of Tenant's late payment, which damages include Landlord's additional administrative and other costs associated with such late payment. The parties agree that it would be impracticable and extremely difficult to fix Landlord's actual damages in such event. Such interest and late charges are separate and cumulative and are in addition to and shall not diminish or represent a substitute for any or all of Landlord's rights or remedies under any other provision of this Lease. Notwithstanding any provision of this Lease to the contrary, if a late charge is payable hereunder, whether or not collected, for any three (3) installments of Base Rent during any twelve (12) month period, then all further Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, until such time as two (2) timely quarterly payments have been made and provided there have been no other uncured defaults by Tenant under this Lease. 30. Successors and Assigns. Subject to Sections 10 and 24 above, the provisions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 31. Attorneys' Fees. In any litigation or other action arising herefrom between the parties hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred therein. 32. Light and Air. Tenant covenants and agrees that no diminution of light, air or view by any structure which may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease or Tenant's obligations hereunder. 33. Signs and Directory. 33.1 Tenant shall have the right to place, construct and maintain on or about the Premises signage identifying or relating to Tenant's business conducted on the Premises. Tenant shall be responsible for the cost of installation and removal of all such signage, and maintenance of such signage shall be included in Operating Expenses. The installation and removal of Tenant's signage shall be completed in a good, workmanlike, diligent, prompt and expeditious manner in compliance with all applicable laws. Tenant shall provide Landlord with the specific locations of and plans for all such signage. 34. Parking. Tenant shall have parking rights hereunder with respect to the parking facilities at the Premises. Tenant may not sell, assign or transfer its parking rights hereunder, except pursuant to a permitted sublease or assignment of this Lease. All responsibility for any loss or damage to vehicles, or to any personal property therein, is assumed by the owners thereof. 35. Brokers. Landlord has entered into an agreement with the real estate broker specified as Landlord's broker in Section 1.1.11 of the Basic Lease Information ("Landlord's Broker") pursuant to which Landlord has granted to Landlord's Broker the exclusive right to lease the Premises. Landlord shall pay any commissions or fees that are payable to Landlord's Broker with respect to this Lease in accordance with the provisions of a separate commission contract. Landlord shall have no further or separate obligation for payment of commissions or fees to any other real estate broker, finder or intermediary. Tenant represents that it has not had any dealings with any real estate broker, finder or intermediary with respect to this Lease, other than Landlord's Broker and Tenant's broker ("Tenant's Broker"), if any, specified in Section 1.1.12 of the Basic Lease Information. Any commissions or fees payable to Tenant's Broker with respect to this Lease shall be paid exclusively by Landlord's Broker and/or Tenant. Subject to the foregoing, each party hereto shall indemnify and hold harmless the other party hereto from and against any and all losses, damages, liabilities, costs and expenses (including, but not limited to, reasonable attorneys' fees and related costs) resulting from any claims that may be asserted against such other party by any real estate broker, finder or intermediary arising from any act of the indemnifying party in connection with this Lease. 36. Authority; Joint and Several Liability. 36.1 If Tenant is a corporation, limited liability company, trust or partnership, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to so execute and deliver this Lease. If Tenant is a corporation, limited liability company, trust or partnership, it shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority. If Tenant is a corporation, it shall, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (a) good standing in Tenant's state of incorporation, and (b) qualification to do business in California. 36.2 All parties comprising Tenant herein shall be jointly and severally liable for each and every obligation of Tenant under this Lease. 37. Option to Renew. 37.1 Tenant shall have three (3) options (the "Extension Options") to extend the term of this Lease, as to not less than 11 the entire Premises and each for a period (the "Option Periods") of five (5) years commencing upon the date such term would otherwise expire, upon the same terms and conditions previously applicable, except for the grant of the subject Extension Option, the Work Agreement (which shall no longer be executory), and rent (which shall be determined as set forth below). Each Extension Option may be validly exercised only by notice in writing delivered by certified mail and received by Landlord not earlier than nine (9) months, and not later than six (6) months, prior to commencement of the subject Option Period (the "Option Notice"); provided, however, that the Extension Option may be validly exercised only if (a) Tenant is not then or at any time thereafter until such commencement in default hereunder, (b) any and all prior Extension Options have been validly exercised and this Lease continues in full force and effect until such commencement, and (c) inasmuch as the Extension Options shall be personal to the original Tenant hereunder, Tenant does not assign, sublease or otherwise transfer any interest herein or in the Premises, or enter into any agreement to do same, or then intend to do any of the foregoing, at any time prior to such attempted exercise or thereafter until such commencement. If Tenant does not exercise an Extension Option during the exercise period set forth above in strict accordance with the provisions hereof, that Extension Option and all subsequent Extension Options shall forever terminate and be of no further force or effect. 37.2 Base Rent during each Option Period shall be equal to the Fair Market Rental Rate (as hereinafter defined) as of commencement of the subject Option Period. Tenant's obligation to pay Direct Costs during the Option Period shall remain unchanged. For purposes hereof, "Fair Market Rental Rate" shall mean the rent and other charges being charged to new tenants for comparable space in similar buildings in the vicinity of the Premises with similar amenities, taking into consideration the size, location, the proposed term of the Option Period, the extent of the services in each instance to be provided, the parking privileges and any other relevant terms and conditions, but disregarding in each instance any "tenant concessions" (including, without limitation, tenant improvement allowance, lease takeover and abatement provisions reflecting free rental), if any, then being offered to prospective new tenants such comparable buildings. 37.3 Landlord and Tenant shall, by using their good faith judgment, attempt to agree upon the Fair Market Rental Rate within twenty (20) days after Landlord receives the Option Notice. If Landlord and Tenant fail to reach agreement within such twenty (20) day period, then each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser, with an MAI designation and at least five (5) years full time commercial appraisal experience in the area in which the Premises are located to appraise and set the Fair Market Rental Rate for the subject Option Period. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the Fair Market Rental Rate for the subject Option Period. If the two appraisers are appointed by the parties as stated in this Section 37.3, they shall meet promptly and attempt to set the Fair Market Rental Rate for the subject Option Period. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications set forth above within ten (10) days after the last day the two appraisers are given to set the Fair Market Rental Rate. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can file a petition with the American Arbitration Association solely for the purpose of selecting a third appraiser who meets the qualifications stated in this paragraph. Each party shall bear half the cost of the American Arbitration Association appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the Fair Market Rental Rate for the subject Option Period. If the majority of the appraisers are unable to set the Fair Market Rental Rate within the stipulated period of time, the three appraisals shall be added together and their total divided by three; the resulting quotient shall be the Fair Market Rental Rate for the Premises during the subject Option Period. In setting the Fair Market Rental Rate for the subject Option Period, the appraiser or appraisers shall consider the use to which the Premises are restricted under this Lease and shall not consider the highest and best use of the Premises contained in this Lease. If, however, the low appraisal and/or the high appraisal is/are more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals should be added together and their total divided by two; the resulting quotient shall be the Fair Market Rental Rate for the Premises during the subject Option Period. If both the low appraisal and the high appraisal are disregarded as stated in this Section 37.3, the middle appraisal shall be Fair Market Rental Rate for the Premises during the subject Option Period. After the Fair Market Rental Rate for the subject Option Period has been set, the appraiser shall immediately notify the parties. (b) The arbitrators shall, within thirty (30) days of the appointment of the third (3rd) arbitrator, reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Fair Market Rental Rate and shall notify Landlord and Tenant of such determination. (c) The decisions of the arbitrators shall be binding upon Landlord and Tenant, except as provided below. (d) If Landlord and Tenant fail to appoint an arbitrator, then the appointment of the arbitrator shall be made by the Presiding Judge of the Los Angeles Superior Court, or, if he or she refuses to act, by any judge having jurisdiction over the parties. (e) The cost of arbitration shall be paid by Landlord and Tenant equally. 38. Miscellaneous. 38.1 If Landlord waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any other breach of the same or of any other term, covenant or condition contained herein. Furthermore, the acceptance of rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepted such rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or to affect the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by Landlord of any term, covenant or condition contained in this Lease may only be made by a written document signed by Landlord. 38.2 Any voluntary or other surrender of this Lease by Tenant, mutual termination hereof or termination hereof by Landlord shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. 38.3 This Lease shall not be recorded; no memorandum hereof shall be recorded without Landlord's prior written consent. 38.4 Rent and all other sums payable under this Lease must be paid in lawful money of the United States of America. 38.5 This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease. 38.6 Nothing contained in this Lease shall be construed to create the relationship of principal and agent, partnership, joint venture or any other relationship between the parties hereto, other than the relationship of landlord and tenant. 38.7 Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain in full force and effect. 12 38.8 The term "Premises" shall be deemed to include (unless, based on the context, such meaning would be clearly unintended) the space demised and improvements now or at any time hereafter comprising or built in such space. 38.9 The term "Tenant" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations. 38.10 The section headings herein are for convenience of reference only and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease. 38.11 In any case where this Lease is entered into by co-tenants, the obligations of such co-tenants hereunder shall be joint and several. 38.12 Time is of the essence of this Lease and all of its provisions. 38.13 This Lease shall in all respects be governed by the laws of the State of California. In any action or proceeding arising herefrom, Tenant hereby consents to (a) the jurisdiction of any competent court within the State of California, (b) service of process by any means authorized by California law, and (c) trial without a jury. 38.14 This Lease contains the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any previous negotiations. There have been no representations made by Landlord or any representative thereof or understandings made between the parties other than those set forth in this Lease. Without limiting the generality of the foregoing, neither Landlord nor any broker, agent or representative thereof has made any warranty or representation with respect to the profitability or suitability for Tenant's use, except as may otherwise be specifically set forth herein. 38.15 This Lease may not be modified, except by a written document executed by the parties hereto. 38.16 If any guarantee of this Lease is required by Landlord, such guarantee shall be in form and content acceptable to Landlord. 38.17 The words "person" and "persons" as used herein shall include individuals, firms, partnerships, associations and corporations. 38.18 The language in all parts of this Lease shall be in all cases construed simply according to its fair meaning, and not strictly for or against Landlord or Tenant. Any reference to any Section herein shall be deemed to include all subsections thereof unless otherwise specified or reasonably required from the context. Any reference to "days" or "months" herein shall refer to calendar days or months, respectively, unless specifically provided to the contrary. Unless clearly inconsistent with the context, any reference herein to "the term hereof" or "the term of this Lease" shall refer to the term of this Lease as the same may be extended pursuant to any extension option(s) contained herein. The terms "herein," "hereunder" and "hereof" as used in this Lease shall mean "in this Lease," "under this Lease" and "of this Lease," respectively, except as otherwise specifically set forth in this Lease. 38.19 Any and all exhibits, addenda and riders referred to in this Lease shall be deemed to be incorporated herein as a part hereof. 38.20 The submission of this Lease by Landlord or its agent or representative for examination or execution by Tenant does not constitute an option or offer to lease the Premises upon the terms and conditions contained herein or a reservation of the Premises in favor of Tenant, it being intended hereby that this Lease shall become effective only upon the execution hereof by Landlord and delivery of a fully executed counterpart hereof to Tenant. 38.21 Tenant hereby warrants and represents that neither its execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant agrees to indemnify Landlord against any loss, cost, damage or liability including, without limitation, reasonable attorneys' fees and related costs arising out of Tenant's breach of this warranty and representation. 38.22 Rent shall not be abated, nor may this Lease be terminated by Tenant, except as may otherwise be expressly provided herein. 38.23 Tenant covenants by and for itself, its successors and assigns, and all persons claiming under or through them, and this Lease is made and accepted upon and subject to the following conditions: That there shall be no discrimination against or segregation of any person or group of persons, on account of sex, marital status, age, race, color, religion, creed, national origin or ancestry, in the leasing, subleasing, renting, transferring, use, occupancy, tenure or enjoyment of the Premises herein leased, nor shall Tenant itself, or any person claiming under or through it, establish or permit such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, sublessees, subtenants or vendees in the Premises. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date first hereinabove set forth. TENANT INTEGRATED DEVICE TECHNOLOGY, INC., a Delaware corporation By: /s/ Tom Wroblewski ---------------------------------------- Its: Vice President ______________________________ By: _______________________________________ Its: ______________________________ [SIGNATURES CONTINUED] 13 [SIGNATURES CONTINUED] LANDLORD AMERICAN NATIONAL INSURANCE COMPANY, a Texas corporation By: /s/ Scott Brast _______________________________________ Its: Assistant Vice President ______________________________ By: _______________________________________ Its: ______________________________ THIS LEASE HAS BEEN PREPARED FOR TENANT'S REVIEW AND FOR TENANT'S SUBMISSION TO ITS LEGAL AND/OR TAX CONSULTANT. NO REPRESENTATION OR RECOMMENDATION IS MADE BY LANDLORD OR BROKER, OR THE AGENTS OR EMPLOYEES OF EITHER, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTIONS RELATING HERETO. A5212\060\LEASE3.AGT 14 OUTLINE OF PREMISES NONE EXHIBIT "A" Page 1 of 1 FORM OF NOTICE OF LEASE TERM DATES AND AREAS ___________________________ ___________________________ ___________________________ ___________________________ Attention: ________________ Re: Lease Term Dates and Areas Gentlemen: The undersigned, as Landlord under that certain Lease (the "Lease") dated ______________, 19__, with you, as Tenant, relating to certain premises designated as __________ (the "Premises") located at 3250 Olcott Street, Santa Clara, California, hereby notifies you of the following: 1. The undersigned has tendered possession of the Premises to you, with any work to be performed by the undersigned substantially completed, and you have accepted and do occupy the Premises. 2. The term of the Lease commenced on _________________, 19__, and shall expire on _________________, _____, unless sooner terminated pursuant to any provision thereof. 3. The rentable area of the Premises is _______________ square feet. 4. The monthly and annual amounts of Base Rent (as defined in Section 3.1 of the Lease) are $________________ and $_______________, respectively, subject to any period of free rent and any adjustment provided for in the Lease. 5. The initial security deposit referred to in Section 5 of the Lease shall be $_________. Please acknowledge your agreement with the foregoing by executing the enclosed copy hereof and returning same to the undersigned. Dated: ____________, 19__. AMERICAN NATIONAL INSURANCE COMPANY, A TEXAS CORPORATION By _____________________________ Its__________________________ By _____________________________ Its__________________________ AGREED TO AND ACCEPTED ----------------------- EXHIBIT "B" Page 1 of 1 WORK AGREEMENT 1. Landlord's Work. Upon execution hereof, Landlord shall, in compliance with all applicable codes, laws, regulations and ordinances, including, without limitation, all applicable governmental requirements included within Title 24 Regulations, Handicapped Access and the Americans with Disability Act (1988), make such repairs as may be necessary to deliver to Tenant the following in good order and condition; (a) foundation and structural portions of the Premises, including the roof and roof membrane; (b) air conditioning and ventilation systems; (c) ceiling tiles; (d) fire protection system; (d) existing fixtures; (e) plumbing; (f) mechanical, electrical and lighting systems; and (g) water-tight windows. Further, Landlord shall make such repairs or renovation as may be necessary to bring the restroom facilities in the Premises into compliance with all currently existing applicable codes, laws, regulations and ordinances. Landlord shall paint the exterior walls of the Premises in a color to be mutually agreed upon by Landlord and Tenant. All of the foregoing shall be at Landlord's cost and expense. If any qualified consultant conducting an environmental audit of the Premises recommends any environmental remediation to the building located on the Premises in connection with the construction of the Tenant Improvements, Landlord shall bear the cost and expense of such remediation; provided, however, if the reasonable estimated cost of such remediation is economically infeasible in Landlord's sole discretion, then Landlord shall have the right to terminate this Lease upon written notice thereof to Tenant within fifteen (15) days after Landlord's receipt of the remediation estimate, in which event Landlord and Tenant shall be automatically and fully released from any and all liabilities relative to this Lease without further instrument. 2. Construction Representatives. Tenant has designated the Tenant's Construction Representative as the sole representative with respect to the matters set forth in this Work Agreement with full authority and responsibility to act on behalf of the Tenant as required in this Work Agreement. Landlord has designated the Landlord's Construction Representative as the sole representative with respect to the matters set forth in this Work Agreement with full authority and responsibility to act on behalf of Landlord as required in this Work Agreement. Either party may change the representative under this Work Agreement at any time by giving ten (10) days' written notice to the other party. 3. Plans and Specifications. (a) Landlord shall cooperate with Tenant and Tenant's space planner, architect and engineer with respect to preparation of space plans for leasehold improvement to the Premises (the "Tenant Improvements"), which plans shall include, without limitation, the location of doors, partitions, electrical and telephone outlets, plumbing fixtures, heavy floor loads and other special requirements. Tenant's space planner shall prepare, at Tenant's sole expense, preliminary space plans. Landlord shall approve or disapprove the space plans in writing (specifying in detail the reasons for any disapproval) within seven (7) days after receipt thereof. If Landlord disapproves the space plans, Tenant shall resubmit the plans with changes reasonably required by Landlord, utilizing the same delivery and approval periods set forth above. (b) Based on the approved space plans, Tenant shall cause its space planner, architect and engineer to prepare detailed plans and specifications for construction of Tenant Improvements. Landlord shall approve or disapprove the plans in writing (specifying in detail the reasons for any disapproval) within seven (7) business days after receipt thereof. If Landlord disapproves the detailed plans, Tenant shall resubmit the detailed plans with changes reasonably required by Landlord, utilizing the same delivery and approval periods set forth above. The final, approved detailed plans and specifications shall be referred to herein as the "Plans." (c) If Tenant desires any substantial or material changes, alterations, or additions to the Plans, Tenant must submit a detailed written request for approval thereof to Landlord ("Change Order"). If construction of the portion of the Tenant Improvements Tenant seeks to change has not commenced and if the requested changes are reasonable and practical and generally consistent with the Plans, Landlord shall approve the Change Order. However Tenant is obligated to reimburse Landlord for all reasonable costs incurred by Landlord as a result of changes in accordance with the procedure set forth below and for additional expenses incurred by Landlord as a result of Tenant Delays, including, without limitation, loss of rents due from Tenant as a result of a delay in the Commencement Date, architecture fees, increases in construction costs (which amount shall be paid from the Tenant Improvement Allowance as defined in Section 4(d)(i) below), and other proper charges caused by Tenant Delays. If any additional plans, drawings of specifications, or modifications of those items are required as a result of a Change Order, they will be prepared and approved in the manner set forth in Section 3(a) and (b) of this Work Agreement. (d) Any approval of Landlord required under this Section 3 shall not be unreasonably withheld. 4. Construction of Tenant Improvements and Allocation of Costs. (a) Promptly following finalization and approval of the Plans, Tenant shall apply for and use reasonable efforts to obtain the necessary permits and approvals to allow construction of the Tenant Improvements and Landlord shall cooperate with Tenant in connection therewith. (b) Tenant agrees to diligently construct and complete the Tenant Improvements in a good and workmanlike manner in conformity with the Plans. No substantial or material changes from the approved Plans shall be incorporated without the prior written approval of Landlord. EXHIBIT "C" Page 1 of 3 (c) Prior to completion of the approved Plans, Tenant shall have identified a general contractor who shall construct the Tenant Improvements. Such contractor shall have substantial experience in the general construction industry in the area of the Premises, shall be bonded and shall be licensed in the State of California. The construction contract shall have been competitively bid and Landlord shall have access to all of the information available in connection with the bids submitted to Tenant and the construction contract executed by Tenant. (d) The cost of the Tenant Improvements shall be allocated as follows: (i) Landlord shall provide Tenant with a tenant improvement allowance of Nine Hundred Sixty-Five Thousand and No/100 Dollars ($965,000.00), which sum shall be allocated to the actual cost of design and installation of the Tenant Improvements (the "Tenant Improvement Allowance"), including a reasonable fee for Landlord's construction management, standard tenant improvements, base building improvements (expressly excluding therefrom those items to be completed by Landlord pursuant to Section 1 of this Work Agreement), design development, mechanical and engineering drawings, architectural fees, construction permitting and test planning fees. (ii) In addition to the Tenant Improvement Allowance, Landlord agrees to make available to Tenant an additional sum of Two Hundred Forty-One Thousand Three Hundred Seventy-Five and No/Dollars ($241,375.00) for such Tenant Improvements (the "Additional Tenant Improvement Allowance"). The parties acknowledge and agree that the Base Rent provided for herein is based upon the calculation that the Tenant Improvement Allowance will be sufficient to fund the Tenant Improvements. In the event Tenant utilizes any portion of the Additional Tenant Improvement Allowance, the full amount of the Additional Tenant Improvement Allowance utilized by Tenant shall be charged to Tenant upon completion of all such Tenant Improvements by an increase in the Base Rent payable by Tenant hereunder based upon an amortization of such Additional Tenant Improvement Allowance over the term of the Lease (without considering any Extension Option) at the rate of ten percent (10%) per annum. (iii) Notwithstanding anything herein to the contrary, should the existing building located on the Premises require alterations or repairs (including, but not limited to, any alterations or repairs required pursuant to the Americans with Disabilities Act of 1990 and any other state, local or municipal laws and ordinances) as a condition precedent to the issuance of the Certificate of Occupancy, Landlord shall be responsible for such alteration or repair. Landlord shall pay for the cost of any such alteration or repair and such cost shall not be deducted from the Tenant Improvement Allowance; provided, however, if any such alteration or repair is required as a result of any specialized or non-standard improvements required by Tenant, Tenant shall pay for the cost therefor either immediately upon demand for same by Landlord or, at Tenant's election, by deduction from the Tenant Improvement Allowance. (e) Subject to the limitations set forth in Section 4(d) of this Work Agreement, upon presentation by Tenant to Landlord of invoices from Tenant's general contractor, Landlord shall pay Tenant the total amount indicated on such invoices less a retainage equal to ten percent (10%) of the total invoices so requested to be paid. The retainage amount shall be disbursed to or for the benefit of Tenant's general contractor upon the full and satisfactory substantial completion of all Tenant Improvements, which shall not be unreasonably withheld or delayed. 5. Tenant Delay; Unavoidable Delay. (a) The term "Tenant Delay" shall mean any of the following: (i) any delay resulting from Tenant's failure to approve any matters requiring approval in a timely manner; (ii) any delay resulting from change orders, including any delay resulting from the need to revise any drawings as a result of any Change Order; or (iii) any delay of any other kind or nature in the completion of the Tenant Improvements caused by Tenant (or Tenant's agents or employees) or resulting from the performance of Tenant's Work. (b) The term "Unavoidable Delay" shall mean any delay due to acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy and stormy weather, inability to obtain supplies, materials, fuels or permits, delays of contractors or subcontractors, or other causes or contingencies beyond the reasonable control of Landlord. 6. Liens, Indemnification. (a) It is understood and agreed by the parties hereto that each and every provision of Section 9 of this Lease shall apply to the work to be performed pursuant to this Work Agreement. (b) Tenant does hereby agree, at its sole cost and expense, to unconditionally indemnify, defend and hold Landlord, its affiliates, agents, representatives, officers, directors, attorneys, successors and assigns harmless against any loss, liability, damage (whether direct or consequential), expenses, claims, penalties, fines, injunctions, suits, proceedings, disbursements or expenses (including, without limitation, attorneys' and experts' fees and disbursements and court costs) (collectively the "Liabilities") incurred by or asserted against Landlord directly or indirectly in connection with or relating to the installation or construction of the Tenant Improvements performed by or on behalf of Tenant. EXHIBIT "C" Page 2 of 3 7. Substantial Completion. When the Tenant Improvements are substantially complete, Tenant shall prepare and deliver in duplicate to Landlord a certificate certifying that the Tenant Improvements are substantially complete in accordance with the Plans and the date of that completion (the "Landlord's Certificate"), and Tenant shall deliver to Landlord a copy of a certificate of occupancy, or the reasonable equivalent thereof, issued by the local governmental authority responsible therefor (the "Certificate of Occupancy"). The Tenant's Certificate and the Certificate of Occupancy shall collectively be referred to herein as the "Completion Certificate." The Tenant's Certificate must be certified by Tenant's Architect. Upon receipt by Landlord of the Completion Certificate, the Premises will be deemed delivered to Tenant for all purposes of the Lease, including without limitation, Commencement Date and other obligations. Notwithstanding the foregoing, if the substantial completion of the Tenant Improvements is delayed as a result of any Tenant Delay or Unavoidable Delay lasting ten (10) days or less ("Minimal Unavoidable Delay"), the term of the Lease and Tenant's obligation to pay Base Rent and Direct Costs will be accelerated by the number of days of the Tenant Delays and/or Minimal Unavoidable Delay, and Tenant must reimburse Landlord for any additional reasonable costs and expenses incurred by Landlord as a result of the Tenant Delays. Notwithstanding anything in the foregoing to the contrary, the Premises shall be deemed substantially complete for all purposes of this Lease, including but not limited to the Commencement Date, on the date Tenant commences physical occupancy of the Premises, regardless of the issuance of the Landlord's Certificate and/or the Certificate of Occupancy. Tenant shall be responsible for the completion of any minor details of construction or decoration or mechanical adjustments that do not materially interfere with Tenant's occupancy of the Premises. 8. Effect of Delays. Any delay in any of time periods or performance obligations of Landlord set forth herein (including any item that must be redone due to Tenant's disapproval) will automatically delay all subsequent deadlines by the same amount of time. To the extent that any delay has been caused by Tenant, the Commencement Date for all purposes under the Lease will be the date the Tenant Improvements would have been substantially completed absent the Tenant Delays. 9. No Agency. Nothing contained in this Work Agreement will make or constitute Tenant as the agent of Landlord. 10. Miscellaneous. All references in this Work Agreement to a number of days means to calendar days unless otherwise expressly provided herein. In all instances where Landlord's approval is required, if no written notice of disapproval is given within the applicable time period, at the end of that period Landlord will be deemed to have given approval and the next succeeding time period will commence. If any item requiring approval is disapproved by Landlord in a timely manner, the procedure for preparation of that item and approval will be repeated, unless otherwise expressly provided herein. EXHIBIT "C" Page 3 of 3 FORM OF ESTOPPEL CERTIFICATE ___________________________ ___________________________ ___________________________ ___________________________ Attention: ________________ Re: Estoppel Certificate Gentlemen: The undersigned, as Tenant under that certain Lease (the "Lease") dated ___________, 19__, made with American National Insurance Company, a Texas corporation, as Landlord ("Landlord"), relating to certain premises designated as ____________ (the "Premises") located at 3250 Olcott Street, Santa Clara, California, hereby certifies that, as of the date hereof and subject to only those exceptions, if any, noted below: 1. A true, correct and complete copy of the Lease is attached as Exhibit "A" hereto. There have been no amendments, modifications, extensions, assignments or subleases of or relating to the Lease. The Lease is in full force and effect, and Tenant hereby reaffirms all of its obligations thereunder. 2. No more than one (1) month's rent has been paid in advance, a security deposit in the amount set forth in the Lease has been paid, and no other amounts have been paid in advance to Landlord or deposited therewith by the undersigned. 3. No defense or offset to the enforcement of the Lease by Landlord exists. Landlord is not in default under the Lease and has not committed any breach thereunder, nor has any event occurred which, with the passage of time or the giving of notice, or both, would constitute a default or breach thereunder by Landlord. Furthermore, Landlord has fully performed all of its accrued obligations under the Lease and any and all agreements relating to the Lease or the Premises (including, but not limited to, its obligations under the Work Agreement constituting a part of the Lease and any inducement obligations). 4. The undersigned does not have any option or preferential right to purchase all or any part of the Premises or any right, title or interest with respect to the Premises other than as Tenant under the Lease. The undersigned acknowledges that you are relying hereon and warrants, represents and declares, for your benefit and that of your successors and assigns, that each of the foregoing certifications is true, correct and complete, subject to only the following exceptions, if any: Dated: _______________, 19___. _________________________________ _________________________________ By _____________________________ Its__________________________ By _____________________________ Its__________________________ EXHIBIT "D" Page 1 of 1 EX-11 5 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
Year Ended 31-Mar-96 2-Apr-95 3-Apr-94 Primary: Weighted average shares outstanding 77,026 69,684 60,832 Net effect of dilutive stock options 4,871 5,081 5,400 -------- -------- -------- Total 81,897 74,765 66,232 ======== ======== ======== Income before extraordinary item $118,249 $ 78,302 $ 40,165 ======== ======== ======== Net income $120,170 $ 78,302 $ 40,165 ======== ======== ======== Primary earnings per share: Income before extraordinary item $ 1.44 $ 1.05 $ 0.61 ======== ======== ======== Net income $ 1.47 $ 1.05 $ 0.61 ======== ======== ======== Fully diluted: Weighted average shares outstanding 77,026 69,684 60,832 Net effect of dilutive stock options 4,871 5,742 6,428 Assumed conversion of convertible subordinated notes 5,856 -------- -------- -------- Total 87,753 75,426 67,260 ======== ======== ======== Income before extraordinary item $118,249 $ 78,302 $ 40,165 Net income $120,170 $ 78,302 $ 40,165 Add: Convertible subordinated notes interest and related expenses, net of taxes $ 6,596 -------- -------- -------- Adjusted net income $126,766 $ 78,302 $ 40,165 ======== ======== ======== Fully diluted earnings per share: Income before extraordinary item $ 1.42 $ 1.04 $ 0.60 ======== ======== ======== Net income $ 1.44 $ 1.04 $ 0.60 ======== ======== ======== On August 24, 1995, the Company's Board of Directors approved a two-for-one stock split in the form of a stock dividend for stockholders of record on August 25, 1995. The distribution of additional shares was on September 15, 1995. Share information for all periods presented has been retroactively adjusted to reflect this stock dividend.
EX-21.1 6 LIST OF REGISTRANTS SUBSIDIARIES EX 21.1 LIST OF REGISTRANT'S SUBSIDIARIES
State or Other Jurisdiction Owned of Incorporation by Registrant Centaur Technology, Inc. California 100 Integrated Device Technology, Asia Ltd. Hong Kong 100 IDT ASIA, Ltd. Hong Kong 100 IDT Europe Limited United Kingdom 100 IDT France S.A.R.L France 100 IDT Foreign Sales Corporation Barbados 100 Integrated Device Technology, AB Sweden 100 Integrated Device Technology, Europe, Inc. California 100 Integrated Device Technology GmbH Germany 100 Integrated Device Technology Italia S.r.l. Italy 100 Integrated Device Technology (Malaysia) SDN. BHD Malaysia 100 Integrated Device Technology Realty Holdings, Inc. Philippines 40 Integrated Device Technology Holding, Inc. Philippines 40 Integrated Device Technology (Philippines), Inc. Philippines 100 Nippon IDT K.K. Japan 100
EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-46831, 33-34458 and 33-54937) of Integrated Device Technology, Inc. of our report dated April 19, 1996, listed in the index appearing under Item 8 of the Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California May 15, 1996 EX-27 8 FDS
5 1000 12-MOS MAR-31-1996 MAR-31-1996 157228 104046 89606 4580 46630 447300 660918 245704 939434 161100 182558 77 0 0 549650 939434 679497 679497 293695 293695 222069 0 9269 173896 55647 118249 0 1921 0 120170 1.47 1.44