-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EduVxxG8ZvKW7JnxZ0ihlw9RpMc44E6ixmDgcItpKZ22aS/W3tHLPFgmVvNOKeGY wKiczEjOimi38K38tuaHmQ== 0000950005-98-000527.txt : 19980609 0000950005-98-000527.hdr.sgml : 19980609 ACCESSION NUMBER: 0000950005-98-000527 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980608 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED DEVICE TECHNOLOGY INC CENTRAL INDEX KEY: 0000703361 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942669985 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12695 FILM NUMBER: 98644038 BUSINESS ADDRESS: STREET 1: 2975 STENDER WAY CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4087276116 MAIL ADDRESS: STREET 1: 2975 STENDER WAY CITY: SANTA CLARA STATE: CA ZIP: 95054 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Check One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended March 29, 1998 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. ( ) The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $929,883,000 as of April 26, 1998, based upon the closing sale price of $13.00 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 81,613,000 shares of the Registrant's Common Stock issued and outstanding as of April 26, 1998. DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12, and 13 of Part III incorporate information by reference from the Proxy Statement for the 1998 Annual Meeting of Stockholders to be held on August 27, 1998. PART I All non-historical information contained in the following discussion constitutes forward looking statements within the meaning of Section 27a of the Securities Act of 1933, as amended, and Section 21e of the Securities Exchange Act of 1934, as amended. These statements are not guarantees of future performance and involve a number of risks and uncertainties, including but not limited to operating results, new product introductions and sales, including the WinChip(TM) microprocessor, competitive conditions, capital expenditures and capital resources, manufacturing capacity utilization, customer demand, customer inventory levels and protection of intellectual property in the semiconductor industry. Factors that could cause actual results to differ materially are included in, but are not limited to, those identified in "Factors Affecting Future Results." The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof. ITEM 1. BUSINESS Integrated Device Technology, Inc. ("IDT" or the "Company") designs, develops, manufactures and markets a broad range of high-performance semiconductor products and modules for its key markets. Applications for IDT's products include: data and telecommunications equipment, such as routers, hubs, switches, cellular base stations and other devices; personal computers; and shared network devices, such as workstations, servers, and printers. IDT provides its customers with a product mix designed to optimize the cost and performance of their systems which includes communications products, high-speed SRAMs (static random access memories), high-performance logic products, embedded RISC microprocessors, x86 microprocessors for personal computer (PC) applications, and other semiconductor products. IDT fabricates substantially all of its semiconductor wafers using advanced CMOS (complementary metal oxide silicon) process technology. In fiscal 1998, to increase the available supply of its WinChip x86 microprocessor products, IDT contracted with International Business Machines Corporation ("IBM") for x86 microprocessor wafer manufacturing services beginning in fiscal 1999. The Company markets its products on a worldwide basis primarily to OEMs (original equipment manufacturers) through a variety of channels, including a direct sales force, distributors and independent sales representatives. The Company's end-user customers include Alcatel, Ascend Communications, Apple Computer, Bay Networks, Cabletron, Celestica, Cisco Systems, Compaq Computer, EchoStar, EMC, Ericsson, Evergreen, FORE Systems, Hewlett-Packard, Italtel, IBM, Lucent Technologies, Motorola, NEC, Nokia, Siemens, Solectron, 3Com and WebTV. The Company attempts to differentiate itself from competitors through unique architecture, enhanced performance, reduced system cost 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 The Company offers over 1,100 products in more than 5,500 product configurations to its target markets in four primary product families: communications products, including FIFO (first in first out) memories, multiport memories and network communication products; SRAM components and modules; logic circuits and high-performance logic circuits; and microprocessors, both RISC (reduced instruction set computing), primarily used in embedded control applications, and x86 for PC applications. During fiscal 1998, these product families accounted for 37%, 30%, 20% and 13%, respectively, of total revenues of $587.1 million. The Company markets its products primarily to OEMs in the communications and desktop and distributed computing markets. IDT's product design efforts are focused on differentiated components and integration of its components into single devices, modules or subsystems to meet the needs of its customers. 2 Communications Products The Company's proprietary communications products include FIFO memories, multi-port memories, and network products that offer high-performance features that allow communications and networking systems to operate more effectively. FIFO memories are used as rate buffers to transfer large amounts of data at high speeds between separate devices or pieces of equipment operating at different speeds within a system, when the order of the data to be transferred needs to be controlled. Multi-port memory products are used to speed data transfers and act as the link between multiple microprocessors or between microprocessors and peripherals. These products are currently used primarily in peripheral interface, communications and networking products, including bridges, hubs, routers and switches. IDT's network products family uses emerging network technology designed to support faster transmission, higher quality images, audio and data. The network products family includes segmentation and reassembly, physical interface and muxing/demuxing devices that are used in networks that interconnect computers and facilitate data transmission. IDT is a leading supplier of both synchronous and asynchronous FIFO memories and has increasingly focused its resources on the design of synchronous FIFO memories. Synchronous FIFO memories have been gaining greater market acceptance because they are faster and provide an easier user interface than asynchronous FIFO memories. IDT's family of 9-bit, 18-bit and 36-bit Sync FIFO memories are being used in many newer networking products. IDT has added SuperSync(TM) FIFO memories to the FIFO product family, which add additional features at reduced cost. The Company is also a leading supplier of multi-port memory products. IDT's family of multi-port memories is composed of dual-port asynchronous devices, four-port products, synchronous dual-port devices and products that combine the flexibility of a multi-port product with the ease of a FIFO product. SRAMs SRAMs are memory circuits used for storage and retrieval of data during a computer or communication 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 (dynamic random access memories), resulting in higher production costs for a given amount of memory, and generally command higher selling prices than the equivalent density traditional DRAM products. The market for SRAMs is fragmented by differing demands for speed, power, density, organization and packaging. As a result, there are a number of niche markets for SRAMs. Historically, the Company focused primarily on the cache memory segment of the SRAM market. 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. The SRAM cache memory market available to IDT has decreased. Some x86 microprocessors, which account for the greatest portion of the microprocessor market, are being sold in integrated chip modules that include SRAM cache memory, which IDT does not supply, or are being designed with SRAM cache memory integrated into the processor itself. The SRAM products that the Company is currently offering and developing are geared toward solving memory issues unique to the communications market. In fiscal 1997, IDT announced the first of a family of Zero Bus Turnaround(TM) (ZBT(TM)) SRAMs which eliminate wait states between read and write cycles. In fiscal 1998, IDT introduced SWITCHStAR(TM), which is an integrated network switching solution based upon memory technology. As capacity becomes more fully utilized, IDT expects to reduce that portion of its SRAM product mix that is commodity-like in nature. IDT's new products are being designed to operate at higher speeds and provide greater levels of product integration. 3 To provide SRAM products that meet the varying needs of its customers, IDT uses CMOS process technology and offers 16K, 64K, 256K, 1 Megabit and 4 Megabit SRAMs in a number of speed, organization, power and packaging configurations. 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 circuits products that support bus and backplane interfaces, memory interfaces and other logic support applications where high-speed and low power are critical. IDT's logic circuits are used in a broad range of markets. IDT's 16-bit logic products are available in small, thin packages, enabling board area to be reduced. These products are designed for applications in which small size, low power and extra low noise are as important as high speed. IDT also supplies a series of 8-bit and 16-bit, 3.3-volt logic products and 3.3-volt to 5-volt translator circuits directed at 3.3-volt systems in the notebook and laptop computer market. The Company also offers a family of clock drivers and clock generators. These devices, placed at critical positions in a system, correct the degradation of timing that occurs the further the impulses travel from the main system clock. The Company recently introduced Advanced Low Voltage CMOS (ALVC) and Low Voltage CMOS (LVC) logic products. Microprocessors RISC COMPONENTS. IDT is a licensed manufacturer of MIPS(R) RISC microprocessors. IDT manufactures both 32-bit and 64-bit microprocessors based on the MIPS architecture and derivative products for the communications, networking and multimedia markets. The Company focuses its RISC microprocessor marketing efforts primarily on the embedded controller market. Embedded controllers are microprocessors that control a single device such as a network switch, printer or set-top box. The Company sells several proprietary 32-bit and 64-bit embedded controllers, including devices with on-circuit SRAM cache memory and floating point functions. The Company's RISC microprocessor products include the RC5000, IDT's first 64-bit superscalar microprocessor, which is available with clock speeds up to 200 MHz and the RC4600(TM) microprocessor, which is capable of clock speeds up to 200 MHz. The RC5000 and RC4600 are higher performance derivatives of the 64-bit R4000 and R4400 microprocessors developed by MIPS Technologies ("MIPS"), which was subsequently acquired by Silicon Graphics Inc. ("SGI"). The RC5000 was developed for SGI by Quantum Effect Design, Inc. ("QED"), an approximately 34% equity owned affiliate of IDT. Through agreements with SGI, IDT obtained a license to manufacture and sell the RC5000. The RC4600 was developed for the Company by QED. X86 COMPONENTS. The WinChip microprocessor is IDT's first product of a planned x86 microprocessor product family. The products are compatible with similar products manufactured and sold by Intel Corporation ("Intel"), Advanced Micro Devices, Inc. and National Semiconductor Corporation, which recently acquired Cyrix Corporation. The IDT WinChip microprocessor features a small die size and low power dissipation, which is achieved by simplifying the architecture and eliminating or reducing complex logic found in other processors. The IDT WinChip microprocessor is offered in a 296-pin Ceramic Pin Grid Array (CPGA), Socket 7-compatible package, which enables PC manufacturers to leverage the Intel-compatible, established and cost effective Socket 7 - ------------------------------- (TM) SuperSync, WinChip, RC4600, SWITCHStAR, Zero Bus Turnaround, and ZBT are trademarks of Integrated Device Technology, Inc. All other trademarks are property of their respective owners. 4 motherboard, chipset and BIOS infrastructure. IDT's WinChip microprocessor was developed to deliver a high level of performance running Windows(R) business applications in PC configurations typically found at sub-$1,000 price points, while providing full compatibility for all Windows and x86 software. In fiscal 1998, IDT's WinChip processor was marketed to buyers that purchase systems and motherboards through distribution and the reseller channel and also through an OEM which markets processor upgrade kits through PC retail channels. In fiscal 1998, the IDT WinChip microprocessor was sold with clock speeds of 150MHz, 180MHz, 200MHz and 225MHz. In fiscal 1998, IDT announced its second x86 microprocessor product which is designed to provide enhanced technical performance and greater clock speeds. IDT manufactures its x86 wafers at facilities in San Jose, California and Hillsboro, Oregon and has contracted with IBM for additional capacity to manufacture these products. Important additional information about IDT's x86 microprocessor products is included below under "Competition" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." CUSTOMERS The Company markets and sells its products on a worldwide basis primarily to OEMs in the communications and desktop and distributed computing markets. Customers often purchase products from more than one of the Company's product families. In fiscal 1998 and 1997, no one OEM customer accounted for 10% or greater of the Company's revenue. 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: COMMUNICATIONS COMPUTING ---------------------------------------------------------------------- Alcatel Lucent Technologies Apple Computer Ascend Communications Motorola Celestica Bay Networks Newbridge Compaq Computer Cabletron NEC EMC Cisco Systems Nokia Evergreen EchoStar Siemens Groupe Bull Ericsson Solectron Hewlett-Packard FORE Systems 3Com IBM Italtel WebTV ICL Seagate 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 65 direct sales personnel in the United States at March 29, 1998. Such personnel are based at the Company's headquarters and in 18 sales offices in Alabama, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon and Texas, and are primarily responsible for marketing and sales in those areas. IDT also utilizes three national distributors, Hamilton Hallmark, Wyle Laboratories and Insight Electronics, Inc., and several regional distributors in the United States. Hamilton Hallmark accounted for 17%, 14% and 11% of the Company's revenues in fiscal 1998, 1997 and 1996, 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. 5 In addition, the Company had 39 direct sales personnel and 12 sales offices located outside of the United States as of March 29, 1998. Sales activities outside North America are generally conducted by IDT's subsidiaries located in France, Germany, Hong Kong, Israel, Italy, Korea, Japan, Singapore, Sweden and the United Kingdom. The Company also has sales offices in Taiwan, Malaysia and Finland. The Company continues to emphasize its direct marketing efforts to OEMs in Europe and to United States companies with operations in the Asia/Pacific area. A significant portion of export sales continues to be made through international distributors. During fiscal 1998, 1997 and 1996, non-U.S. sales accounted for 39%, 38% 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 13 of Notes to Consolidated Financial Statements contained elsewhere in this Form 10-K. Export sales are subject to certain risks, including currency controls and fluctuations, changes in local economic and political conditions, import and export control, and changes in tax laws, tariffs and freight rates. The Company's distributors typically maintain an inventory of a wide variety of products, including products offered by IDT's competitors, and often handle small or rush orders. A portion of the Company's sales is made to distributors under agreements which allow certain rights of return and price protection on products unsold by the distributors. Related gross profits thereon are deferred until the products are resold by the distributors. MANUFACTURING IDT believes that maintaining its own wafer fabrication capability facilitates the implementation of advanced process technologies and new higher-performance product designs, provides the Company with a reliable source of supply of semiconductors and allows it to be more flexible in shifting production according to product demand. The Company currently operates sub-micron wafer fabrication facilities in Hillsboro, Oregon and San Jose and Salinas, California. The Oregon facility first contributed to revenues beginning in the second quarter of fiscal 1997. The 192,000 square foot facility contains a 48,000 square foot, class 1 (less than one particle 0.5 micron or greater in size per cubic foot), eight-inch wafer fabrication line. The San Jose facility includes a 24,000 square foot, class 1, six-inch wafer fabrication line that was first placed in production in March 1991. 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. Additionally, in fiscal 1998, IDT contracted with IBM for x86 microprocessor wafer manufacturing services using IBM's CMOS process technology. IDT intends, during fiscal 1999, to begin to utilize IBM's manufacturing services to also increase the available volume of WinChip microprocessors. The Company believes the location 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. In fiscal 1998 and 1997, as a result of current market conditions, the Company's production volumes at its wafer fabrication facilities did not increase sufficiently to take full advantage of the additional capacity resulting from the completion of the Oregon facility, and, as a result, the Company's results of operations were adversely affected. The WinChip(TM) microprocessor product family may provide IDT an opportunity to improve utilization of its fabrication facilities; however, additional spending for capital equipment and set-up time is required to process substantial volumes of these products. Historically, SRAM products have been produced at the Oregon facility and the Company is unable to predict whether demand for industry standard SRAM products or IDT's share of the available market will improve. Should IDT's production volumes, especially at its fabrication facilities, remain constant or decline, IDT's results of operations could continue to be adversely affected. The Company faces a number of risks in order to accomplish its goals to increase production in its existing plants, especially the Oregon facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IDT also operates component assembly and test facilities which aggregate 145,000 square feet in Penang, Malaysia and a 176,000 square-foot facility near Manila, the Philippines. Substantially all of the Company's test operations and a significant portion of its assembly operations are performed at its Malaysian and Philippines facilities. The facility in the Philippines first contributed to revenue during fiscal 1997. IDT also uses subcontractors, principally in Korea, the Philippines and Malaysia, to perform certain assembly operations. If IDT were unable to assemble or test 6 products offshore, or if air transportation to these locations were curtailed, the Company's operations could be materially adversely affected. Additionally, foreign manufacturing exposes IDT to certain risks generally associated with doing business abroad, including foreign governmental regulations, currency controls and fluctuation, changes in local economic and political conditions, import and export controls, and changes in tax laws, tariffs and freight rates. In addition to this offshore assembly and test capability, the Company has the capacity for low-volume, quick-turn assembly in Santa Clara, California as well as limited test capabilities in Santa Clara, San Jose and Salinas. Assembly and test of memory modules takes place both domestically and offshore. In fiscal 1996, the Company operated its wafer fabrication facilities in Salinas and San Jose and its assembly operations in Malaysia at approximate installed equipment capacity. Considering the capacities of its facilities in Oregon and the Philippines, the Company believes it is positioned to accommodate growth. In view of current and anticipated capacity requirements, and to operate its facilities more efficiently and effectively, IDT anticipates capital expenditures of approximately $150 million in fiscal 1999, principally in connection with continued installation of equipment in the Oregon facility, other capacity improvements and improved information systems. The Company utilizes proprietary CMOS process technology permitting sub-micron geometries in its fabrication facilities. The majority of IDT's current products are manufactured using its proprietary 0.65, 0.5 and 0.35 micron processes and a number of 0.24-micron test wafers have been processed. The Company continues to develop its sub-0.25 micron CMOS processes. Wafer fabrication involves a highly sophisticated, complex process that is extremely sensitive to contamination. Integrated circuit manufacturing costs are primarily determined by circuit size because the yield of good circuits per wafer generally increases as a function of smaller die. Other factors affecting costs include wafer size, number of process steps, costs and sophistication of manufacturing equipment, packaging type, process complexity and cleanliness. IDT's manufacturing process is complex, involving a number of steps including wafer fabrication, plastic or ceramic packaging, burn-in and final test. The Company continually makes changes to its manufacturing process to lower costs and improve yields. From time to time, the Company has experienced manufacturing problems that have caused delays in shipments or increased costs. Manufacturing problems at its wafer fabrication, assembly or test facilities could materially adversely affect the Company's results of operations. The Company generally has been able to arrange for multiple sources of raw materials, but the number of vendors capable of delivering certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases is very limited. Some of the Company's packages, while not unique, have very long lead times and are available from only a few suppliers. From time to time, vendors have extended lead times or limited supply to the Company due to capacity constraints. These circumstances could recur and materially adversely affect IDT's results of operations. BACKLOG IDT manufactures and markets both standard products and products with limited or no second sources. Sales are generally made pursuant to purchase orders, which are frequently revised to reflect changes in the customer's requirements. The Company has also entered into master purchase agreements with many of its OEM customers. These agreements do not require the OEMs to purchase minimum quantities of the Company's products. Product deliveries are scheduled upon the Company's receipt of purchase orders under the related OEM agreements. Generally, these purchase orders and OEM agreements, especially those for standard products, also allow customers to reschedule delivery dates and cancel purchase orders without significant penalties. Orders, especially for industry standard products, are frequently rescheduled, revised or canceled. In addition, distributor orders are subject to price adjustments both prior to and after shipment. For these reasons, IDT believes that its backlog, while useful for scheduling production, is not necessarily a reliable indicator of future revenues. 7 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 significantly impacted research and development expenditures in fiscal 1997. Research and development expenditures, as a percentage of revenues, were 21%, 28% and 20% in fiscal 1998, 1997 and 1996, 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 specialty memory products area, IDT's efforts are concentrated on the development of advanced synchronous FIFO memories and more sophisticated multi-port memory products for the communications market. The Company continues its research into applications of Fusion Memory(TM) technology, with the goal of expanding its specialty memory product offerings. Fusion Memory products use DRAM technology and function with comparable speed to SRAM-technology based products. Additionally, the Company continues its efforts to develop a family of specialty products for the network products market and a family of lower voltage logic devices for a broad range of applications. In the SRAM family, IDT is utilizing its memory expertise to develop a family of communications-oriented memories. The Company is emphasizing the design of RISC microprocessors for embedded control applications, such as printers, telecommunications switches and television set-top boxes. IDT continues its efforts to develop x86 processors and related 3D graphics capability which offer greater performance than its current products at reduced cost for PC applications. The Company also continues to refine its CMOS process technology to increase the speed and density of circuits in order to provide customers with advanced products at competitive prices. The Company continues to refine its CMOS process technology focusing on sub-0.3 micron geometry processes, including a sub-0.25 micron process, and converting the production of many products to newer generation processes. The Company has an equity interest in QED, a separate corporation. Pursuant to a development agreement between QED and the Company, QED developed the RC4600 microprocessor for IDT. QED also designed the RC5000 for SGI, and through agreements with SGI, IDT obtained a license to manufacture and sell the RC5000. The RC5000 is targeted at 3-D visualization, internetworking and office automation applications. Except for the RC5000, the Company owns the intellectual property rights for its RISC 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 RC5000, SGI owns the intellectual property rights. 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 than its competitors products. Price competition, introductions of new products by IDT's competitors, delays in product introductions by IDT or other competitive factors could have a material adverse effect on the Company in the future. 8 In the third quarter of fiscal 1998, the Company commenced shipments of the WinChip microprocessor, IDT's first member of its planned x86 microprocessor product family. This product represents the Company's first offering to the PC microprocessor market, which is characterized as a large market dominated by Intel, with a very limited number of other competitors. Intel has held its dominant position over all other x86 microprocessor competitors for a substantial period of time, and has significantly greater financial, technical, manufacturing and marketing strength than does IDT. Currently, Intel's dominant market position allows it to set and control x86 microprocessor standards and, therefore, dictate many aspects of the products which PC manufacturers require in this market. IDT's initial x86 microprocessor product is targeted at the low-cost desktop and mobile product categories of the microprocessor market. Intel also offers products which are purchased by PC manufacturers in these market categories. Intel's financial strength and market dominance have enabled it to reduce prices on its microprocessor products within a short period of time following their introduction or offer additional performance at low introductory price points, which reduces the margins and profitability of its competitors. Further, Intel's marketing resources are far greater than IDT's. Therefore, Intel's pricing and marketing strategies in the categories of the microprocessor market targeted by IDT significantly impact IDT's efforts to serve this market and, therefore, IDT's results of operations. In order for customers to purchase IDT's x86 microprocessors, IDT's products must be compatible with other components supplied to PC manufacturers such as core-logic chip sets, motherboards, basic input/output system (BIOS) software and others which are manufactured or produced by other companies, including Intel and companies in which Intel has strategic investments. In addition, these companies are able to produce chip sets, motherboards, BIOS software and other components to support each new generation of Intel's microprocessors only to the extent that Intel makes its related proprietary technology available. Intel has announced that the new versions of its microprocessor products, including its commercially released Pentium II products, will be sold only in the form of a chip module that is not compatible with Socket 7 motherboards currently used with most x86 microprocessors. Therefore, Intel may cease supporting the Socket 7 motherboard infrastructure as it transitions to its latest generation microprocessors. Because IDT's processor is designed to be Socket 7 compatible, and will not work with motherboards designed for Intel's new chip module, should IDT and other companies serving the x86 microprocessor market not be successful in offering products which extend the life of the Socket 7 infrastructure, IDT would be required to expend potentially significant resources to redesign its microprocessor product offerings. There can be no assurance that the Company would be successful in such efforts. In addition to Intel, AMD and National Semiconductor (which recently acquired Cyrix Corporation) also currently offer commercial quantities of x86 microprocessors for sale. From time to time, intellectual property rights disputes have arisen between companies competing in the x86 microprocessor market. In markets where IDT competes to sell industry standard SRAM components, market supply and pricing strategies of competitors significantly impact the price the Company receives for its products. In fiscal 1998 and 1997, a significant increase in market supply of industry standard SRAM parts was attributable to IDT's principally foreign competitors shifting additional production capacity to these parts. The decline in average selling prices for industry standard SRAM parts in and since fiscal 1997 was, therefore, attributable to increases in available SRAM supply from competitors such as Samsung, Winbond, UMC, other Taiwanese and Korean companies as well as U.S.-based and other companies with Taiwanese and Korean sourced SRAM wafers, and their market pricing strategies, at a time when market demand slowed as customers reduced the level of inventories carried. INTELLECTUAL PROPERTY AND LICENSING IDT has obtained 120 patents in the United States and 19 abroad and has 187 inventions in various stages of the patent application process. The Company intends to continue to seek to increase the breadth of its patent portfolio. The Company also relies on trade secret, copyright and trademark laws to protect its products. A number of the Company's circuit designs are registered pursuant to the Semiconductor Chip Protection Act of 1984. This Act gives protection similar to copyright protection for the patterns which appear on integrated circuits and prohibits competitors from making photographic copies of such circuits. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, that the rights granted thereunder will provide 9 competitive advantages to the Company, or that the Company's efforts generally to protect its intellectual property rights will be successful. In recent years, there has been a growing trend of companies to resort to litigation to protect their semiconductor technology from unauthorized use by others. In the past, the Company has been involved in patent litigation which adversely affected its operating results. Although the Company has obtained patent licenses from certain semiconductor manufacturers, the Company does not have licenses from a number of semiconductor manufacturers who have a broad portfolio of patents. IDT has been notified that it may be infringing patents issued to certain 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 from any such claimant be unavailable, or not be available on terms acceptable to the Company, the Company may be required to discontinue its use of certain processes or the manufacture, use and sale of certain of its products, to incur significant litigation costs and damages, or to develop non-infringing technology. If IDT is unable to obtain any necessary licenses, pass any increased cost of patent licenses on to its customers or develop non-infringing technology, the Company could be materially adversely affected. In addition, IDT has received patent licenses from several companies that expire over time, and the failure to renew or renegotiate certain of these licenses as they expire or significant increases in amounts payable under these licenses could have a material adverse effect on the Company. 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 include other agreed-upon changes. On December 10, 1992, IDT and Texas Instruments Incorporated ("TI") entered into a five-year patent cross-license agreement, which expired in fiscal 1998. 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. Lump-sum amounts due at the end of the license term are reduced by an amount of royalty income associated with TI's sales of IDT's products. ENVIRONMENTAL REGULATION Federal, State and local provisions regulate the discharge and disposal into the environment of certain materials used in the semiconductor manufacturing process. The Company's manufacturing and assembly and test facilities are designed to comply with existing regulations, and the Company believes that its activities conform to present regulations. The Company has been conducting its operations with all necessary permits and without material adverse impact attributable to environmental regulation. However, there can be no assurance that future additions or changes to environmental regulations will not impose upon the Company the requirement for significant capital expenditure. Further, any failure by the Company to control the use of, or to restrict adequately the discharge of hazardous materials under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended. In addition, IDT could be held financially responsible for remedial measures if its properties were found to be contaminated whether or not the Company was responsible for such contamination. 10 EMPLOYEES At March 29, 1998, IDT and its subsidiaries employed 4,979 people worldwide, of whom 1,632 were in Malaysia and 995 were in the Philippines. IDT's success depends in part on its ability to attract and retain qualified personnel, who are generally in great demand. Since its founding, the Company has implemented policies enabling its employees to share in IDT's success such as participation in stock option, stock purchase, profit sharing and special bonus plans for key contributors. IDT has never had a work stoppage. No employees are represented by a collective bargaining agreement, and the Company considers its employee relations to be good. ITEM 2. PROPERTIES The Company presently occupies nine major facilities in California, Oregon, Malaysia and the Philippines:
LOCATION FACILITY USE SQUARE FEET - --------------------------------- ------------------------------------------------- ---------------------- Salinas Wafer fabrication, SRAM and multiport memory 98,000 operations Santa Clara Logic operations 62,000 Santa Clara Administration and RISC microprocessor 43,700 operations Santa Clara Administration and other operations 50,000 Santa Clara Administration 48,300 Penang, Malaysia Assembly and test operations 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 Canlubang, the Philippines Assembly and test operations 176,000
Through the second quarter of fiscal 1997, the Company leased its Salinas facility from Carl E. Berg, a director of the Company, under a lease expiring in 2005. In fiscal 1996, IDT entered into an agreement with Mr. Berg to acquire the Salinas facility in a transaction structured as a tax free reorganization and completed the transaction in fiscal 1997. 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 is provided in Note 8 of Notes to Consolidated Financial Statements. The Company owns its Malaysian, Philippines and San Jose facilities, although the Malaysian facilities are subject to long-term ground leases, the Company has an interest in but does not own the Philippines land, 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, Helsinki, Hong Kong, London, Milan, Munich, Paris, Seoul, Singapore, Stockholm, Taipei, Tel Aviv and Tokyo. IDT also leases offices for its design centers in Georgia, North Carolina and Texas. ITEM 3. LEGAL PROCEEDINGS On July 17, 1997, IDT filed a complaint against Hewlett-Packard Company (HP) in Santa Clara Superior Court, Case Number CV767581, seeking a declaratory judgment regarding the validity of IDT's rights to use and sublicense certain advanced printer technology ("TrueRes") which HP acquired from DP-TEK Development Company, LLC (DP-TEK), a Kansas limited liability company. On March 3, 1998, IDT amended its complaint to join DP-TEK and to seek damages from HP. In a related action, on November 17, 1997, DP-TEK filed a petition for declaratory relief and damages for breach of contract in an amount of approximately $25 million against IDT in Kansas. The case was recently removed to federal court, Case Number 97-1541-FGT. DP-TEK alleges that IDT's license to TrueRes technology is no longer valid, that IDT failed to develop new products with DP-TEK as required 11 by contract, and that DP-TEK sold its technology and assets to HP for approximately $25 million less than it could have had IDT met its obligations. Discovery in both cases is not complete. IDT has filed a cross-claim in that action seeking damages for breach of contract and other misconduct by DP-TEK. The Company does not believe that this litigation will result in a material adverse impact on its financial condition or results of operations. From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. The Company is not currently aware of any legal proceedings that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's financial condition or results of operations. 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 29, 1998. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, and their respective ages as of April 26, 1998, are as follows:
Name Age Position - ----------------------------- ------- ------------------------------------------------------------ D. John Carey 61 Chairman of the Board Leonard C. Perham 55 President & Chief Executive Officer Raymond J. Farnham 50 Executive Vice President Jerry Taylor 49 Executive Vice President, Manufacturing and Memory Products Glenn Henry 55 Senior Vice President, President of Centaur Technology Brian Boisseree 40 Vice President, Treasurer David Cote 43 Vice President, Marketing Michael Hunter 46 Vice President, Worldwide Manufacturing Alan F. Krock 37 Vice President and Chief Financial Officer Daniel L. Lewis 49 Vice President, Sales Chuen-Der Lien 42 Vice President, Chief Technical Officer Jack Menache 54 Vice President, General Counsel and Secretary
Mr. Carey was elected to the Board of Directors in 1980 and has been Chairman of the Board since 1982. He served as Chief Executive Officer from 1982 until his resignation in April 1991 and was President from 1982 until 1986. Mr. Carey was a founder of Advanced Micro Devices in 1969 and was an executive officer there until 1978. Mr. Perham joined IDT in 1983 as Vice President and General Manager, SRAM Division. In 1986, Mr. Perham was appointed President and Chief Operating Officer and a director of the Company. In 1991, Mr. Perham was elected Chief Executive Officer. Prior to joining IDT, Mr. Perham held executive positions at Optical Information Systems Incorporated and Zilog Inc. Mr. Farnham joined IDT in July 1996 as Executive Vice President. Previously, Mr. Farnham spent 21 years at National Semiconductor and last served as President of the company's communications and computing group 12 through May, 1993. Mr. Farnham also served as President and Chief Executive Officer of OPTi, Inc. from March, 1994 through February 1995 before joining IDT. Mr. Taylor joined the Company as Vice President, Manufacturing and Memory Products in June 1996, and was elected Executive Vice President, Manufacturing and Memory Products, in January 1998. Prior to joining the Company, Mr. Taylor held engineering positions at Mostek, Fairchild Semiconductor, Benchmarq Microelectronics, Plano ISD and Lattice Semiconductor. Mr. Taylor was with Benchmarq Microelectronics from 1987 to 1992, with Plano ISD from October 1993 through April 1995 and with Lattice Semiconductor from April 1995 through June 1996. Mr. Henry joined IDT in March 1995 as President of Centaur Technology, IDT's x86 microprocessor design subsidiary. Mr. Henry was elected Senior Vice President in January 1998. Prior to joining IDT, Mr. Henry was a vice president at Dell Computer Corporation. Mr. Boisseree joined IDT in February 1996 as Treasurer and was elected Vice President, Treasurer in 1998. Prior to joining IDT, Mr Boisseree served in management positions at Tandem Computer Corporation. Mr. Cote joined IDT in April 1997 as Vice President, Marketing. Prior to joining IDT, he was Vice President of Marketing with Meridian Data from June 1996 through December 1996 and Zeitnet, Inc. from January 1995 through June 1996. Mr. Cote was also previously with Synoptics, Inc. from April 1991 through December 1994 where he achieved the level of Director of Marketing. Mr. Hunter was promoted to Vice President, Worldwide Manufacturing in February 1998. Previously he was Vice President, California Silicon Manufacturing, and has been with IDT since January 1996. Prior to coming to IDT, Mr. Hunter was Vice President of Fabrication Operations at Chartered Semiconductor from July 1994 through January 1996 and achieved Executive Vice President level at Fujitsu Persona while with that company from October 1989 through June 1994. Mr. Krock joined IDT in February 1996 as Corporate Controller and was elected a Vice President in July 1997. In January 1998 he was elected Vice President, Chief Financial Officer. Prior to joining IDT, Mr. Krock was Corporate Controller at Rohm Corporation and held management positions at Price Waterhouse. 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. Effective May 8, 1998, Mr. Lewis resigned as an executive officer. Dr. Lien joined IDT in 1987 and was elected Vice President, Technology Development in 1992 and was elected Vice President, Chief Technical Officer in April 1996. Prior to joining the Company, he held engineering positions at Digital Equipment Corporation and AMD. Mr. Menache joined IDT as Vice President, General Counsel and Secretary in 1989. In 1989 until joining IDT, he was General Counsel of Berg & Berg Developers. From 1986 to 1989, he was Vice President, General Counsel and Secretary of The Wollongong Group Inc. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock The Common Stock of the Company is traded on the Nasdaq National Market under the symbol IDTI. The following table sets forth the high and low last reported sales prices for the Common Stock as reported by the Nasdaq National Market during the fiscal quarters indicated: High Low ------------------------------------------------------------ Fiscal 1998 First Quarter $15.00 $ 9.69 Second Quarter 14.13 10.19 Third Quarter 13.56 9.13 Fourth Quarter 16.13 9.19 Fiscal 1997 First Quarter 15.50 10.13 Second Quarter 11.00 7.38 Third Quarter 14.25 7.75 Fourth Quarter 14.06 9.38 As of April 26, 1998, there were approximately 1,190 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. 14 ITEM 6. SELECTED FINANCIAL DATA The data set forth below are qualified in their entirety by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
STATEMENTS OF OPERATIONS DATA Fiscal Year Ended ---------------------------------------------------------- In thousands, except per share amounts March 29, March 30, March 31, April 2, April 3, 1998 1997 1996 1995 1994 ---------------------------------------------------------- Revenues $ 587,136 $ 537,213 $ 679,497 $ 422,190 $ 330,462 Asset impairment and other -- 45,223 -- -- -- Research and development expenses 121,449 151,420 133,317 78,376 64,237 Income (loss) before extraordinary item 8,247 (42,272) 118,249 78,302 40,165 Net income (loss) 8,247 (42,272) 120,170 78,302 40,165 Basic earnings per share: Income (loss) before extraordinary item 0.10 (0.54) 1.54 1.12 0.66 Net (loss) income 0.10 (0.54) 1.56 1.12 0.66 Diluted earnings per share: Income (loss) before extraordinary item 0.10 (0.54) 1.42 1.05 0.61 Net income (loss) 0.10 (0.54) 1.44 1.05 0.61 Shares used in computing net income (loss) per share: Basic 80,359 78,454 77,026 69,684 60,832 Diluted 84,022 78,454 87,753 74,765 66,232 BALANCE SHEET AND OTHER DATA ------------------------------------------------------------------------ In thousands, except employee data March 29, March 30, March 31, April 2, April 3, 1998 1997 1996 1995 1994 ------------------------------------------------------------------------ Total assets $968,955 $903,584 $939,434 $561,975 $349,571 Long-term obligations, excluding current portion 56,640 52,622 36,682 36,595 37,462 Convertible subordinated notes, net of issuance costs 183,756 183,157 182,558 -- -- Stockholders' equity 546,391 524,238 549,727 414,531 224,367 Number of employees 4,979 4,236 3,828 2,965 2,615
15 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 29, 1998, March 30, 1997 and March 31, 1996.
Fiscal Year Ended ------------------------- March 29, March 30, March 31, 1998 1997 1996 ----- ----- ----- Revenues 100.0% 100.0% 100.0% Cost of revenues 62.0 60.6 43.2 Asset impairment and other -- 8.4 -- ----- ----- ----- Gross profit 38.0 31.0 56.8 Operating expenses: Research and development 20.7 28.2 19.6 Selling, general and administrative 15.1 15.0 13.1 ----- ----- ----- Total operating expenses 35.8 43.2 32.7 ----- ----- ----- Operating income (loss) 2.2 (12.2) 24.1 Interest expense (2.4) (2.2) (1.4) Interest income and other, net 2.2 2.9 2.9 ----- ----- ----- Income (loss) before income taxes 2.0 (11.5) 25.6 Provision (benefit) for income taxes 0.6 (3.7) 8.2 Income (loss) before extraordinary item 1.4 (7.8) 17.4 ----- ----- ----- Extraordinary item: Gain from early extinguishment of debt, net of taxes -- -- 0.3 ----- ----- ----- Net income (loss) 1.4% (7.8)% 17.7% ===== ===== =====
In the information that follows, all references are to the Company's fiscal years ended March 29, 1998, March 30, 1997 and March 31, 1996, unless otherwise indicated. These fiscal year financial results may not be indicative of the financial results of future periods. All non-historical information contained in the following discussion constitutes forward looking statements within the meaning of Section 27a of the Securities Act of 1933, as amended, and Section 21e of the Securities Exchange Act of 1934, as amended. These statements are not guarantees of future performance and involve a number of risks and uncertainties, including but not limited to operating results, new product introductions and sales, including the IDT WinChip(TM) microprocessor, competitive conditions, capital expenditures and capital resources, manufacturing capacity utilization, customer demand, customer inventory levels and protection of intellectual property in the semiconductor industry. Factors that could cause actual results to differ materially are included in, but are not limited to, those identified in "Factors Affecting Future Results." The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof. OVERVIEW Fiscal 1998 can be characterized as a year of continuing transition for IDT. During fiscal 1998, revenue increased 9.3% to $587.1 million, compared to $537.2 million during the immediately prior fiscal year. Revenue increased across all IDT product lines, reflecting greater total unit shipments at a lower overall average selling price per unit. IDT recorded net income of $8.2 million in fiscal 1998, compared to a net loss of $42.3 million in the prior fiscal year. Improved profitability in fiscal 1998 reflects: higher revenue; the absence of a charge for asset impairment (recorded in fiscal 1997); and IDT's relatively fixed base of manufacturing expenses, which are allocated between cost of revenues and process research and development expenditures based upon activities performed. 16 In fiscal 1998, the Company continued product and market diversification programs begun several years ago, while transitioning away from dependence upon the commodity semiconductor memory markets it historically served. IDT is focused on producing value-added products such as its communications products, x86 and embedded RISC microprocessors, high-speed static random access memories (SRAMs) and modules, and high-performance logic products. In both fiscal 1998 and 1997, during the period of transition, IDT's financial results were adversely impacted by several factors. These included industry-wide excess commodity semiconductor memory capacity, resultant inability to fully utilize capacity at the Company's wafer fabrication plants and low selling prices for industry-standard semiconductor products. Also in these years, in connection with product enhancements and transitions, included as operating expenses are significant research and development (R&D) and other expenditures related to: developing new process technologies; introducing enhanced products in existing markets; funding new product development; and start-up costs incurred in markets traditionally not served by the Company, especially x86 microprocessors for PC applications. During fiscal 1998, sales of IDT WinChip x86 microprocessors did not represent a major portion of IDT's total revenue. The size of the x86 marketplace represents a significant opportunity to IDT, and the Company plans to grow its WinChip business. The Company also believes that costs associated with this product family will continue to increase in future quarters as the Company continues to execute its product introduction strategy. Because the Company is in the early stages of developing its x86 microprocessor business, it does not have significant experience in manufacturing, marketing and selling large quantities of these products. Risks associated with IDT's WinChip initiative and other aspects of the Company's business are included in the discussion which follows. On June 2, 1998, the Company announced that it expects that as a result of product transitions, general economic conditions in the semiconductor industry, and other conditions described in this section, that revenues for the first quarter (June) of fiscal 1999 will decline approximately ten percent compared with the same period in fiscal 1998. This revenue shortfall would result in a first-quarter pre-tax loss from operations of approximately $15 million. In addition, first quarter results are expected to include a non-recurring charge relating primarily to excess SRAM manufacturing capacity, certain technology matters, as well as other miscellaneous items. Based upon current information, the Company estimates the amount of the pre-tax charge will approximate $25 to $45 million, greater than half of which is expected to be non-cash. The Company believes that some improvement in operating financial performance may occur in the second quarter. However, because of current limited order visibility, and the seasonal weakness which typically characterizes the September quarter, the outlook for the second quarter remains uncertain. RESULTS OF OPERATIONS REVENUES. As noted above, total fiscal 1998 revenues increased 9.3% to $587.1 million from $537.2 million in fiscal 1997. The Company began its production ramp of WinChip x86 microprocessors, recording sales of approximately $7 million, primarily during the last quarter of fiscal 1998. Fiscal 1996 revenues were $679.5 million, reflecting higher selling prices of commodity SRAM components in that period, primarily because of strong demand for secondary cache in the PC market. Subsequently, throughout fiscal 1998 and fiscal 1997, commodity SRAM prices fell 80% or more below the highest prices realized for comparable products in fiscal 1996. In fiscal 1998, total units shipped increased 47.9% over fiscal 1997 quantities, which were up 15.7% when compared to fiscal 1996. During these periods, the average selling price per unit realized by IDT declined significantly, again primarily due to lower commodity semiconductor memory prices. Looking forward, the Company believes that the proportion of its total sales which are represented by new products, including the WinChip x86 microprocessor, will increase. The WinChip microprocessor is IDT's first product of a planned x86 microprocessor product family. The products shipped are compatible with similar products manufactured and sold by Intel Corp. ("Intel"), Advanced Micro Devices, Inc. ("AMD") and National Semiconductor Corp. ("National Semiconductor") (which recently acquired Cyrix Corp.). Other new or enhanced products announced in fiscal 1998 include: Zero Bus Turnaround(TM) (ZBT(TM)) memory, an advanced SRAM architecture that significantly improves performance of communications applications requiring frequent switches between reads and writes; SWITCHStAR(TM) products, which provide a memory and controller based network switching solution, and other communications memory products; RISC embedded control products; and logic products. The Company is taking steps to increase the available supply of its WinChip and other new products; 17 however, there are risks, described below, that the Company will not be successful in its efforts to do so, or that market demand or prices will change. In the future, the Company believes that the proportion of its total sales represented by commodity SRAM memory products will decrease. With respect to commodity SRAM supply, demand and prices, IDT is uncertain as to whether these market factors for commodity products will change, primarily because the Company cannot anticipate how its competitors will react to current low market prices for SRAM components, or economic issues currently impacting the Asian semiconductor market. Information on risks associated with the expansion of IDT's product families and market prices of semiconductor products is included below in "Factors Affecting Future Results," including "Risks Associated with Expansion of Product Families - - x86 Microprocessors." GROSS PROFIT. Gross profit in fiscal 1998 increased $56.5 million over fiscal 1997 to $222.8 million. Gross profit in fiscal 1996 was $385.8 million. As a percentage of revenue (gross margin), gross margin improved to 38% in fiscal 1998, compared to 31% in fiscal 1997. Gross margin in fiscal 1996 was 57%. In fiscal 1997, the Company recorded asset impairment charges of $45.2 million which were specifically identified in the Company's Statements of Operations as reducing gross profit. Additionally, the Company recorded $9.7 million in charges which relate to the write-off of certain technology investments and other miscellaneous items, which have been classified in the Company's Consolidated Statements of Operations in accordance with the nature of the charge, including cost of revenues. The $45.2 million charge related principally to recording reserves against the carrying value of manufacturing assets, including the Company's oldest wafer fabrication plant in Salinas, California, and other items. Excluding the $45.2 million charge for asset impairment and other reserves in fiscal 1997, gross profit in fiscal 1997 was 39.4%. The increase in gross profit in fiscal 1998 compared to fiscal 1997 was primarily attributable to the absence of the charge for asset impairment described above recorded in fiscal 1997. Higher gross profit and gross margin in fiscal 1996 reflects the benefit associated with higher SRAM prices in that period, which were up to 80% higher than prices realized for comparable products in fiscal 1998 and 1997. Costs associated with the eight-inch wafer fabrication facility in Hillsboro, Oregon adversely impacted gross margins for both fiscal 1998 and 1997, as these costs were not fully absorbed by additional revenues. In fiscal 1999, in an effort to achieve more efficient and effective capacity utilization and increase IDT's available supply of WinChip microprocessors, the volumes of production and the level of expense associated with the Oregon fabrication facility is expected to increase. The anticipated increase in expense is mostly associated with the installation of new equipment. In fiscal 1998, and in future years, the percentage of these costs recorded as cost of revenues, versus process engineering research and development, has and may continue to change based upon production volumes and activities performed. Additionally, in fiscal 1998, IDT contracted with International Business Machines Corp. ("IBM") for x86 microprocessor wafer manufacturing services using IBM's CMOS process technology. IDT intends, during fiscal 1999, to begin to utilize IBM's manufacturing services to increase the available volume of WinChip microprocessors. IDT's Oregon facility provides the Company with significant additional available production capacity, but, to date, as a result of current market conditions for commodity semiconductor memory products, the Company's production volumes at its wafer fabrication facilities have not increased sufficiently to take full advantage of the additional capacity. The WinChip microprocessor product family provides IDT with the opportunity to improve utilization of its fabrication facilities; however, additional spending for capital equipment and set up time is required to process substantial volumes of these products. Historically, SRAM products have been produced at the Oregon facility and the Company is unable to predict whether demand for industry standard SRAM products or IDT's share of the available market will improve. Should IDT's production volumes, especially at its fabrication facilities, remain constant or decline and should the Company be unable to otherwise decrease costs-per-unit sold, the Company's gross profit could continue to be adversely impacted. Further, if prices on industry-standard SRAM products do not improve or the Company is not able to manufacture and sell other products at comparable or better margins, and if a greater percentage of the Oregon facility's operating costs are allocated to cost of goods sold based on activities performed, then gross margin may not improve, or may decrease. 18 RESEARCH AND DEVELOPMENT. R&D expenses decreased in absolute spending and as a percentage of revenues for fiscal 1998 when compared to fiscal 1997. R&D expenses for fiscal 1998 were $121.4 million, a decrease of $30.0 million compared to fiscal 1997. As a percentage of revenues, R&D expenses were 20.7% in fiscal 1998, a decrease of 7.5 percentage points compared to fiscal 1997. For fiscal 1996, R&D expense was $133.3 million, or 19.6% of revenues. The Company's policy is not to capitalize pre-operating costs associated with new manufacturing facilities, and in fiscal 1997 and 1996, significant facility start-up and staffing expenses were incurred at the new eight-inch wafer fabrication facility in Oregon. The increase in R&D expense in fiscal 1997 and 1996 is principally attributable to process engineering research costs of approximately $32.7 million and $18.5 million, respectively, incurred at the Oregon wafer fabrication plant. In fiscal 1998, a greater proportion of manufacturing facility costs, including those related to the Oregon fabrication plant, were classified as cost of goods sold, rather than process engineering R&D, based on the nature of activities performed. Further, in fiscal 1998, the level of spending on process R&D at the Oregon facility was generally consistent with the level of R&D spending at IDT's other fabrication facilities. In fiscal 1996, substantially all Oregon plant expenses were charged to R&D expense. IDT believes that high levels of R&D investment are required to support its strategy of providing products to its customers that are not readily available from its competitors. However, there can be no assurance that additional research and development investment will result in new product offerings, that any new offerings can be manufactured at gross margins comparable to or greater than the Company's current products, or that any new offerings will achieve market acceptance. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses increased 9.5% or $7.7 million in fiscal 1998 to $88.5 million, compared to fiscal 1997. In fiscal 1997, SG&A decreased 9% to $80.8 million from $88.8 million in fiscal 1996. However, as a percentage of revenue, SG&A was essentially unchanged in fiscal 1998 from fiscal 1997. SG&A expenses as a percentage of revenues were 13.1% in fiscal 1996. The fiscal 1998 increase and 1997 decrease in absolute dollars were primarily attributable to variable selling expenses associated with the year-over-year revenue changes, and changes in employee profit sharing and management bonuses which vary in relation to profitability. In addition, SG&A expenses in fiscal 1998 include initial marketing costs associated with the WinChip microprocessor, and SG&A expenses for both fiscal 1998 and 1997 include expenses associated with initiatives to implement enterprise-wide management information systems. Relative to fiscal 1996, SG&A expenses in fiscal 1998 and 1997 increased as a percentage of sales due primarily to lower levels of revenues earned in fiscal 1998 and 1997 when compared to revenues earned in fiscal 1996. In fiscal year 1999, IDT anticipates that it will increase sales and marketing related costs for the WinChip microprocessor to develop the target marketplace that it seeks to serve. Also in fiscal 1999, IDT plans to continue its installation of enterprise-wide management information systems. Therefore, the Company anticipates that SG&A expenses measured in absolute dollars will increase. INTEREST EXPENSE. Interest expense was $14.1 million in fiscal 1998 compared with $12.0 million in fiscal 1997 and $9.3 million in fiscal 1996. Interest expense is primarily associated with the 5.5% Convertible Subordinated Notes, due in 2002 (the "Notes") and $21.0 million of secured equipment financing agreements completed September 1996. The increase in interest expense for fiscal 1998 over fiscal 1997 is primarily attributable to the cessation of capitalizing interest in the second quarter of fiscal 1997 in connection with the construction of the fabrication plant in Oregon. Additionally, interest expense for fiscal 1998 includes a full year of interest related to secured equipment financing agreements, which were not completed until the end of the second quarter of fiscal 1997. INTEREST INCOME AND OTHER, NET. Interest income and other, net, decreased $3.1 million to $12.7 million in fiscal 1998. In fiscal 1997, interest income and other amounted to $15.8 million compared to $19.4 million for fiscal 1996. Also included in interest income and other, net, is the Company's share of net earnings or losses of unconsolidated affiliates. In fiscal 1998, IDT's share of net losses realized on affiliate investments increased by $4.4 million over fiscal 1997, reducing the overall net balance. In fiscal 1997, interest income decreased primarily as a result of the Company liquidating short-term investments to pay for significant capital expenditures in fiscal 1997. Also included in interest income and other for fiscal 1997 is a loss in the amount of $2.0 million related to the write-off of an equity investment. Management anticipates that average short-term investment balances will decline 19 in fiscal 1999, associated with payments for significant capital expenditures causing the interest income component of interest income and other, net to decrease in absolute dollars when compared to fiscal 1998. TAXES. The effective tax rates for fiscal 1998, 1997 and 1996 of 28%, (32%) and 32%, respectively, differed from the U.S. statutory rate of 35% primarily due to earnings from foreign subsidiaries, considered permanently invested, being taxed at lower average rates than the U.S. statutory rate; changes in valuation allowances for deferred tax assets; and the utilization of certain tax credits. Historically, income taxes in state jurisdictions have not been significant due to available tax credits. The Company has consumed substantially all of the tax benefits associated with its Malaysian subsidiary; however, IDT is currently enjoying tax benefits in the Philippines associated with incentives for establishing a manufacturing subsidiary there. See Note 12 of Notes to Consolidated Financial Statements. STOCK-BASED COMPENSATION PLANS. 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 Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation." SFAS No. 123 provides an alternative to APB 25 and was effective for IDT's 1997 fiscal year. As permitted by SFAS No. 123, the Company continues to account for its stock plans in accordance with APB 25. See Note 10 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES At March 29, 1998, the Company's principal sources of liquidity were cash, cash equivalents and short-term investments which aggregated approximately $220.6 million, as compared to $190.9 million at March 30, 1997. The Company generated $195.6 million of cash from operations in fiscal 1998, up from $41.8 million during fiscal 1997. Cash provided by operating activities primarily reflected net income adjusted for the add back of depreciation and amortization, non-cash charges for asset impairment and other and changes to working capital. Increased depreciation and amortization charges in fiscal 1998 were associated with new facilities, improvements to existing facilities and new equipment. Significant changes in operating assets and liabilities resulted from the timing of collection of accounts receivable, timing of payments for accounts payable, accrued payroll and bonus, and receipt of cash for income tax refunds receivable. During fiscal 1998, the Company's net cash used in investing activities was $211.3 million with $164.2 million used for capital equipment and property and plant improvements. Cash used for the purchase of short-term investments, net of sales of short-term investments, was $38.2 million. In addition, at March 29, 1998, the Company had $57.1 million of restricted securities pledged as collateral under a Tax Ownership Operating Lease entered into in January 1995 related to the construction of the eight-inch wafer fabrication facility in Oregon. The Company's total fiscal 1998 capital expenditures were approximately $164.2 million. Fiscal 1998 capital additions were principally in connection with continued installation of equipment in the Oregon fabrication facility plus continued capital expenditures for manufacturing equipment at the Philippines assembly and test plant and other capacity improvements. In September 1996, the Company completed secured equipment financing agreements which total approximately $21.0 million for equipment purchased for the Oregon fabrication facility. The borrowing arrangements fully amortize over the 60 month terms of the loans. Additionally, in September 1996 and December 1996, the Company completed equipment sale and lease back arrangements with several leasing companies. Equipment purchased by the Company for the Oregon fabrication facility with a net book value of $52.6 million was sold to the leasing companies and leased back for use at the Oregon facility under leases classified as operating leases. The Company's foreign subsidiaries have lines of credit for working capital financing aggregating approximately $3.5 million with various banks in the respective countries in which they operate. At March 29, 1998, bank guarantees in the amount of $324,000 were outstanding. In fiscal 1996, the Company completed the sale of $201.3 million of the 5.5% Convertible Subordinated Notes, netting $196.7 million in proceeds. The Notes are convertible into shares of common stock at $28.625 per share. 20 During fiscal 1996, the Company completed the repurchase of approximately $15.0 million of the Notes at a price of approximately $790 per bond. The Company does not anticipate making additional repurchases of debt in fiscal 1999. In view of current and anticipated capacity requirements, IDT anticipates capital expenditures of approximately $150 million in fiscal 1999, principally in connection with continued installation of equipment in the Oregon facility, the Philippines plant and other capacity improvements. The Company intends to finance such capital expenditure through a combination of use of its existing cash, investments and borrowings under various lease and equipment financing arrangements. The Company's ability to invest to satisfy its capacity requirements is in part dependent on the Company's ability to generate cash from operations. Cash flow from operations depends significantly on the average selling prices of the Company's products, variable cost per unit and other industry conditions which the Company cannot predict. Future declines in selling prices for industry-standard SRAM products or other products manufactured by the Company, which cannot be otherwise offset, will adversely impact the Company's ability to generate funds from operations. If the Company is not able to generate sufficient funds from operations or other sources to fund its capacity and R&D requirements, the Company's results from operations, cash flows and financial condition will be adversely impacted. The Company believes that existing cash and cash equivalents, cash flow from operations and credit facilities available to the Company will be sufficient to meet its working capital, mandatory debt repayment and anticipated capital expenditure requirements for the next 12 months. While the Company is reviewing all operations with respect to cost savings opportunities, there can be no assurance that the Company will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to the Company. If the Company is required to seek other financing sooner, the unavailability of financing on terms satisfactory to IDT could have a material adverse effect on the Company. FACTORS AFFECTING FUTURE RESULTS The Company's results of operations and financial condition are subject to the following risk factors: FLUCTUATIONS IN OPERATING RESULTS. IDT's operating results have been, and in the future may be, subject to fluctuations due to a wide variety of factors including the timing of or delays in new product and process technology announcements and introductions by the Company or its competitors; competitive pricing pressures, particularly in the SRAM commodity semiconductor memory 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. Additionally, many of the preceding factors also impact the recoverability of the cost of manufacturing and other assets, and as business conditions change, future writedowns or abandonment of these assets may occur. Further, there can be no assurance that the Company will be able to compete successfully in the future against existing or potential competitors or that the Company's operating results will not be adversely affected by increased competition. CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY. The semiconductor industry is highly cyclical. Early in fiscal 1996, 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, however, a number of companies, principally foreign, shifted manufacturing capacity to commodity 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 which historically have been dependent on SRAM revenues. In fiscal 1998, SRAM average selling prices and ASPs of other product lines continued to decline compared to fiscal 1997, although not as dramatically as the pace at which they declined between fiscal 1997 and fiscal 1996. Market conditions characterized by excess supply of SRAMs relative to demand and resultant pricing declines have occurred in the past and may occur in the future. Although some competitors have recently made adjustments to the rate at which they will implement capacity expansion 21 programs, the Company is unable to accurately estimate the amount of worldwide production capacity dedicated to industry-standard commodity SRAM products which it produces. A material increase in industry-wide production capacity, shift in industry capacity toward products competitive with the Company's products, reduced demand, or other factors could result in material declines in product pricing and could especially adversely affect that portion of the Company's operating results derived from the sale of industry-standard products. The Company seeks to manage costs, but there can be no assurance that these efforts will be sufficient to sustain profitability. The Company ships a substantial portion of its products in the last month of a quarter. If anticipated shipments in any quarter do not occur, the Company's operating results for that quarter could be adversely affected. In addition, a substantial percentage of the Company's products, which include SRAM products, are incorporated into computer and computer-related products, which have historically been characterized by significant fluctuations in demand. Demand for certain of the Company's products is dependent upon growth in the communications market. Any slowdown in the computer and related peripherals or communications markets could adversely affect the Company's operating results. In order to achieve more full and effective use of the facilities, the Company continues to install new equipment at all of its fabrication and assembly and test facilities. Additional planned production capacity and yield improvements by the Company's competitors could dramatically increase the worldwide supply of products which compete with the Company's products and could, if customer demand does not absorb increased product quantities, create further downward pressure on pricing. RISKS ASSOCIATED WITH EXPANSION OF PRODUCT FAMILIES - X86 MICROPROCESSORS. The Company commenced shipments of the WinChip microprocessor, IDT's first member of its x86 microprocessor product family in the third quarter of fiscal 1998. This product represents the Company's first offering to the PC microprocessor market, which is characterized as a large market dominated by Intel, with a very limited number of other competitors. IDT's success in competing in this market, and therefore the financial results associated with selling products to this market, are subject, but not limited to, the following significant risks and uncertainties: Competition. Intel holds a dominant position in the market for PC microprocessors. Intel has held its dominant position over all other x86 microprocessor competitors for a substantial period of time, and has significantly greater financial, technical, manufacturing and marketing strength than IDT does. Currently, Intel's dominant market position allows it to set and control x86 microprocessor standards and, therefore, dictate many aspects of the products that PC manufacturers require in this market. In addition, IDT's initial x86 microprocessor product is targeted at the low cost desktop and mobile product categories of the microprocessor market. Intel also offers products which are purchased by PC manufacturers in these market categories. Intel's financial strength and market dominance have enabled it to reduce prices on its microprocessor products within a short period of time following their introduction, which reduces the margins and profitability of its competitors. Further, Intel's marketing resources are far greater than IDT's. Therefore, Intel's pricing and marketing strategies in the categories of the microprocessor market targeted by IDT significantly impact IDT's efforts to serve this market and, therefore, IDT's results of operations. In order for customers to purchase IDT's x86 microprocessors, IDT's products must be compatible with other components supplied to PC manufacturers such as core-logic chip sets, motherboards, basic input/output system (BIOS) software and others which are manufactured or produced by other companies, including Intel and companies in which Intel has strategic investments. In addition, these companies are able to produce chip sets, motherboards, BIOS software and other components to support each new generation of Intel's microprocessors only to the extent that Intel makes its related proprietary technology available. Intel has announced that the new versions of its microprocessor product will be sold only in the form of a chip module that is not compatible with "Socket 7" motherboards currently used with most x86 microprocessors. Therefore, Intel may cease supporting the Socket 7 motherboard infrastructure as it transitions to its latest generation microprocessors. Because IDT's processor is designed to be Socket 7 compatible, and will not work with motherboards designed for Intel's new chip module, should IDT and other companies serving the x86 microprocessor market not be successful in offering products which extend the life of the Socket 7 infrastructure, IDT would be required to expend potentially significant resources to redesign its microprocessor product offerings. There can be no assurance that the Company would be successful in such efforts. 22 In addition to Intel, AMD and National Semiconductor's Cyrix subsidiary also currently offer commercial quantities of x86 microprocessors for sale. From time to time, intellectual property rights disputes have arisen between companies competing in the x86 microprocessor markets (See Intellectual Property Risks discussion below). Manufacturing. The pace at which IDT is able to enter its target market category for x86 microprocessors depends, in part, on how quickly it is able to ramp production of its microprocessor products in its wafer fabrication and assembly and test facilities. Before fiscal 1998, the Company had not previously manufactured x86 microprocessors and has processed only limited quantities of x86 microprocessors to date. Therefore, as production volumes of x86 microprocessors increase, the Company may encounter unexpected production problems or delays as a result of, among other things, changes required to process technologies, product design limitations, installation of equipment, and development of programs and methodologies which test overall product quality. If IDT is unable to ramp production of its x86 microprocessor successfully, the Company's operating results would be adversely affected. As described above, in fiscal 1998, IDT contracted with IBM for x86 microprocessor wafer manufacturing services using IBM's CMOS process technology. IDT intends, during its fiscal 1999, to begin to utilize IBM's manufacturing services to increase the available volume of WinChip microprocessors. The terms and conditions of the IBM manufacturing services agreement require IDT to forecast in advance production quantities that it will purchase and, once production quantities are ordered, the contract limits IDT's ability to change desired quantities of IBM manufactured products. Products purchased under the IBM manufacturing services agreement must meet certain agreed to acceptance criteria. However, these acceptance criteria do not include the number of usable WinChip processors per wafer nor the speed at which they will operate. Should IDT not accurately forecast the demand for IBM manufactured WinChip products, or should the number of good WinChip processors per IBM manufactured wafer and the speed at which they operate not meet or exceed these and other characteristics of IDT manufactured products, IDT's results of operations will be adversely impacted. Compatibility With Software and Performance Certifications. For its current product offering, IDT has obtained certifications from Microsoft Corp. and other appropriate certifications from recognized testing organizations. Failure to obtain and maintain such certifications for future microprocessor products could substantially impair the Company's ability to market and sell its future x86 products. PC Market. Because IDT's target market for its x86 microprocessor product is initially limited to certain segments of the PC industry, the growth and acceptance of the product is closely tied to trends in and growth of the PC industry. The Company believes that PC manufacturers will continue their trend towards accepting and using microprocessor products manufactured by companies other than Intel and that generally the market for PCs and related components will continue to grow. However, should these industry trends and growth patterns not occur or IDT not be able to produce products which meet customers needs, for whatever reason, IDT's ability to sell x86 microprocessor products would be impaired. Rights of Others. In exchange for payments towards product development costs, IDT licensed the right to make, use and sell the WinChip C6(TM) microprocessor to a third party. Further, the license with the third party limits the number of additional licenses that IDT may grant. Thus, the Company may face competition from the third party in the future and may be limited in its ability to license the part to others. Future Products. IDT's ability to bring future x86 products to market depends on several primary factors including the following three: First, it must be able to finance such future development. Second, to compete with Intel and other competitors in the market for future generation x86 microprocessors, IDT must be able to design and develop the microprocessors themselves, and must ensure they can be used in PC platforms, including motherboards, designed to support future Intel or other microprocessors. Third, a failure, for whatever reason, of the designers and producers of motherboards, chip sets and other system components to support IDT's x86 microprocessor offerings, including Socket 7 compatibility, would limit IDT's ability to sell products to the PC market. RISKS ASSOCIATED WITH PLANNED EXPANSION; MANUFACTURING RISKS. Historically, the Company has utilized subcontractors for the majority of its incremental assembly requirements, typically at higher costs than its own Malaysian and Philippines assembly and test operations. The Company expects to continue utilizing subcontractors 23 extensively to supplement its own production volume capacity. Due to production lead times, any failure by the Company to adequately forecast the mix of product demand could adversely affect the Company's sales and operating results. The Company is increasing the production capacity of its Oregon facility to manufacture IDT WinChip products. This capacity expansion program in Oregon faces a number of substantial risks including, but not limited to, equipment delays or shortages, power interruptions or failures, and manufacturing start-up or process problems. From time to time, the Company has experienced production difficulties that have caused delivery delays and quality problems. 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, and ramping production and installing new equipment at its facilities, including the facility in Oregon. Further, the Company's older wafer fabrication facilities are located relatively near each other in Northern California. If the Company were unable to use these facilities, as a result of a natural disaster or otherwise, the Company's operations would be materially adversely affected until the Company was able to obtain other production capability. In fiscal 1997, in response to reduced protection offered at economically justifiable rates by the Company's insurance carrier, the Company eliminated earthquake insurance coverage on all facilities. The Company's capacity additions have resulted in a significant increase in fixed and variable operating expenses which may not be fully offset by additional revenues for some time. Historically, the Company has expensed the operating expenses associated with bringing a new fabrication facility to commercial production status as R&D in the period such expenses were incurred. However, as commercial production at a new fabrication facility commences, the operating costs are classified as cost of revenues, and the Company begins to recognize depreciation expense relating to the facility. Accordingly, as the Oregon fabrication facility now contributes to revenues, the Company recognizes substantial operating expenses associated with the facility as cost of revenues, which has reduced gross margins. As commercial production continues in fiscal 1999, the Company anticipates incurring substantial additional operating costs and depreciation expenses relating to this facility. Accordingly, if revenue levels do not increase sufficiently to offset these additional expense levels, or if the Company is unable to achieve gross margins from products produced at the Oregon facility that are comparable to the Company's current products, the Company's future results of operations could be adversely impacted. DEPENDENCE ON NEW PRODUCTS. New products and process technology costs associated with the Oregon wafer fabrication facility will continue to require significant R&D expenditures. However, there can be no assurance that the Company will be able to develop and introduce new products in a timely manner, that new products will gain market acceptance or that new process technologies can be successfully implemented. If the Company is unable to develop new products in a timely manner, and to sell them at gross margins comparable to the Company's current products, the future results of operations could be adversely impacted. DEPENDENCE ON LIMITED SUPPLIERS. The Company's manufacturing operations depend upon obtaining adequate raw materials on a timely basis. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. In addition, certain packages used by the Company require long lead times and are available from only a few suppliers. From time to time, vendors have extended lead times or limited supply to the Company due to capacity constraints. The Company's results of operations would be adversely affected if it were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials. IDT has been significantly dependent on the design capabilities of Quantum Effect Design, Inc. ("QED"), an equity affiliate, for the design and development of derivatives of 64-bit MIPS(R) RISC-based microprocessors. Currently there are no development contracts in effect between QED and IDT, and the Company is now designing and developing derivatives of MIPS RISC-based microprocessors in-house. As with all new products, there is significant risk that the Company will not do so successfully. See "Business -- Products and Markets" and "-- Research and Development." CAPITAL NEEDS. The semiconductor industry is extremely capital intensive. To remain competitive, the Company must continue to invest in advanced manufacturing and test equipment. In fiscal 1999, the Company expects to expend approximately $150 million in capital expenditures, and anticipates significant continuing capital expenditures, especially in connection with the introduction of products for the WinChip microprocessor family, 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 24 financing is required and if such financing is not available on terms satisfactory to the Company, its operations could be materially adversely affected. INTELLECTUAL PROPERTY RISKS. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. In recent years, there has been a growing trend by companies to resort to litigation to protect their semiconductor technology from unauthorized use by others. The Company in the past has been involved in patent litigation, which adversely affected its operating results. Although the Company has obtained patent licenses from certain semiconductor manufacturers, the Company does not have licenses from a number of semiconductor manufacturers who have a broad portfolio of patents. The Company has been notified that it may be infringing on patents issued to certain semiconductor manufacturers and other parties and is currently involved in several license negotiations. There can be no assurance that additional claims alleging infringement of intellectual property rights will not be asserted in the future. The intellectual property claims that have been made or that may be asserted against the Company could require that the Company discontinue the use of certain processes or cease the manufacture, use and sale of infringing products, to incur significant litigation costs and damages and to develop non-infringing technology. There can be no assurance that the Company would be able to obtain such licenses on acceptable terms or to develop non-infringing technology. Further, the failure to renew or renegotiate existing licenses, or significant increases in amounts payable under the current or future contracts, or the inability to obtain a license, could have a material adverse effect on the Company. RISKS OF INTERNATIONAL OPERATIONS. A substantial percentage of the Company's revenues are derived from non-U.S. sales. In addition, the Company's offshore assembly and test operations incur payroll, facilities and other expenses in local currencies. Accordingly, movements in foreign currency exchange rates, such as those seen recently in the Far East, can impact both pricing and demand for the Company's products as well as its cost of goods sold. The Company's offshore operations and export sales are also subject to risks associated with foreign operations, including political instability, currency controls and fluctuations, changes in local economic conditions and import and export controls, as well as changes in tax laws, tariffs and freight rates. Contract pricing for raw materials used in the fabrication and assembly processes, as well as for subcontract assembly services, can be impacted by currency exchange rate fluctuations. ENVIRONMENTAL RISKS. The Company is subject to a variety of regulations related to hazardous materials used in its manufacturing process. Any failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous materials under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended. VOLATILITY OF COMMON STOCK AND NOTES PRICES. The Company's Common Stock and Notes have 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 and the Notes. IMPACT OF YEAR 2000 ON THE COMPANY'S OPERATIONS. The Company utilizes numerous software programs throughout its operations which include dates and make date-sensitive calculations based on two-digit fields which are assumed to begin with the year 1900. Software programs written based on this assumption are vulnerable, as the year 2000 approaches, to miscalculations and other operational errors which may be significant to their overall effectiveness. In addition, the Company relies upon products and information from critical suppliers, large customers and other outside parties, in the normal course of business, whose software programs are also subject to the same problem. Should miscalculations or other operational errors occur as a result of the Year 2000 issue, the Company or the parties on which it depends may be unable to produce reliable information or process routine transactions. Furthermore, in the worse case, the Company or the parties on which it depends may, for an extended period of time, be incapable of conducting critical business activities, which include but are not limited to, manufacturing and shipping products, invoicing customers and paying vendors. 25 The Company is assessing the extent to which Year 2000 issues may be incorporated into certain products which it sells to its customers. The Company has also initiated communications with its critical suppliers, large customers and other outside parties in an effort to identify and mitigate Year 2000 matters originating from dependent third parties which may adversely affect the Company. Based on the Company's continuing assessment, IDT needs to replace or materially modify many of its software applications, including those critical to the Company's normal operations, in order to both avoid significant Year 2000 issues and meet the Company's business requirements. The Company will continue to execute its existing plans to upgrade or replace software. While Year 2000 compliance is an important software feature which the Company considers when purchasing software, the system upgrades and replacements purchased by the Company also contain important functional improvements which are necessary for IDT to be competitive as a multinational semiconductor manufacturing company. By the year 2000, over a five-year period, the Company will have replaced substantially all of its enterprise wide systems. The Company has not allocated a portion of the total project cost to the Year 2000 issue. IDT does not believe the incremental project cost associated with Year 2000 compliance to be material, as this feature is included with software purchased by the Company to satisfy its business needs. During the process of replacing, upgrading and reprogramming internal software programs, the Company has formed, and continues to form, internal and external teams who are devoted to upgrading, replacing or modifying IDT's existing programs, including those which are not Year 2000 compliant. These teams also test the results of their work to ensure effectiveness. There can be no assurance, that all critical Year 2000 problems have or will be identified or that the Company will be able to procure all of the resources necessary to replace all critical Year 2000-deficient software applications on a timely basis. There can also be no assurance that the critical Year 2000-deficient software programs of the parties on which the Company depends will be converted on a timely basis or not converted to systems which are incompatible with the Company's systems. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 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 29, 1998 and March 30, 1997 Consolidated Statements of Operations for each of the three fiscal years in the period ended March 29, 1998 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended March 29, 1998 Consolidated Statements of Stockholders' Equity for each of the three fiscal years in the period ended March 29, 1998 Notes to Consolidated Financial Statements Financial Statement Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. 27 - -------------------------------------------------------------------------------- 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 29, 1998 and March 30, 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 29, 1998, 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 17, 1998 28 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) March 29, March 30, 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 146,114 $ 155,149 Short-term investments 74,481 35,747 Accounts receivable, net of allowance for returns and doubtful accounts of $11,110 and $7,351 68,840 77,600 Inventories, net 60,737 47,618 Deferred tax assets 52,252 44,493 Income tax refund receivable 7,309 34,055 Prepayments and other current assets 14,870 19,148 --------- --------- Total current assets 424,603 413,810 Property, plant and equipment, net 475,440 424,217 Other assets 68,912 65,557 --------- --------- Total assets $ 968,955 $ 903,584 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 57,572 $ 44,875 Accrued compensation and related expenses 15,853 15,612 Deferred income on shipments to distributors 51,835 42,084 Other accrued liabilities 28,724 25,022 Current portion of long-term obligations 5,097 6,049 --------- --------- Total current liabilities 159,081 133,642 Convertible subordinated notes, net of issuance costs 183,756 183,157 --------- --------- Long-term obligations 56,640 52,622 --------- --------- Deferred tax liabilities 23,087 9,925 --------- --------- Commitments and contingencies (Notes 8 and 9) 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; 81,367,847 and 79,654,104 shares issued and outstanding 81 80 Additional paid-in capital 318,542 304,840 Retained earnings 228,964 220,717 Cumulative translation adjustment (1,196) (886) Unrealized loss on available-for-sale securities, net -- (513) --------- --------- Total stockholders' equity 546,391 524,238 --------- --------- Total liabilities and stockholders' equity $ 968,955 $ 903,584 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 29 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Fiscal Year Ended -------------------------------------------------------- March 29, 1998 March 30, 1997 March 31, 1996 -------------- -------------- -------------- Revenues $ 587,136 $ 537,213 $ 679,497 Cost of revenues 364,291 325,668 293,695 Asset impairment and other -- 45,223 -- --------- --------- --------- Gross profit 222,845 166,322 385,802 --------- --------- --------- Operating expenses: Research and development 121,449 151,420 133,317 Selling, general and administrative 88,528 80,812 88,752 --------- --------- --------- Total operating expenses 209,977 232,232 222,069 --------- --------- --------- Operating income (loss) 12,868 (65,910) 163,733 Interest expense (14,088) (12,018) (9,269) Interest income and other, net 12,674 15,764 19,432 --------- --------- --------- Income (loss) before income taxes 11,454 (62,164) 173,896 Provision (benefit) for income taxes 3,207 (19,892) 55,647 --------- --------- --------- Income (loss) before extraordinary item 8,247 (42,272) 118,249 Extraordinary item: Gain from early extinguishment of debt (net of tax provision of $904) -- -- 1,921 --------- --------- --------- Net income (loss) $ 8,247 $ (42,272) $ 120,170 ========= ========= ========= Basic net income (loss) per share: Income (loss) before extraordinary item $ 0.10 $ (0.54) $ 1.54 Net income (loss) 0.10 (0.54) 1.56 Diluted net income (loss) per share: Income (loss) before extraordinary item $ 0.10 $ (0.54) $ 1.42 Net income (loss) 0.10 (0.54) 1.44 Weighted average shares: Basic 80,359 78,454 77,026 Diluted 84,022 78,454 87,753 The accompanying notes are an integral part of these consolidated financial statements.
30 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended -------------------------------------------------- March 29, 1998 March 30, 1997 March 31, 1996 -------------- -------------- -------------- OPERATING ACTIVITIES Net income (loss) $ 8,247 $ (42,272) $ 120,170 Adjustments: Depreciation and amortization 114,136 102,897 53,782 Asset impairment and other -- 45,223 -- Gain from early extinguishment of debt -- -- (1,921) Changes in assets and liabilities: Accounts receivable, net 8,760 7,425 (11,920) Inventories, net (13,119) (1,618) (9,171) Net deferred tax assets (7,759) (5,223) (7,719) Income tax refund receivable 26,746 (34,055) -- Other assets 9,226 1,718 (12,514) Accounts payable 12,697 (31,295) 39,651 Accrued compensation and related expense 241 (13,625) 6,348 Deferred income on shipments to distributors 9,751 10,759 8,977 Income taxes payable and deferred tax liabilities 16,457 (5,747) 12,004 Other accrued liabilities 10,233 7,624 3,228 --------- --------- --------- Net cash provided by operating activities 195,616 41,811 200,915 --------- --------- --------- INVESTING ACTIVITIES Purchases of property, plant and equipment (164,206) (192,747) (287,878) Proceeds from sale of property, plant and equipment 367 54,196 387 Purchases of short-term investments (45,975) (22,639) (215,097) Proceeds from sales of short-term investments 7,754 90,323 200,618 Purchases of equity investments (9,224) (6,960) -- Proceeds from sales (purchases) of investments collateralizing facility lease -- 10,662 (57,333) --------- --------- --------- Net cash used for investing activities (211,284) (67,165) (359,303) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of common stock, net 12,468 7,615 6,608 Proceeds from issuance of convertible subordinated notes, net of issuance costs -- -- 196,721 Proceeds from secured equipment financing -- 20,959 -- Payments on capital leases and other debt (5,835) (5,299) (17,924) --------- --------- --------- Net cash provided by financing activities 6,633 23,275 185,405 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (9,035) (2,079) 27,017 Cash and cash equivalents at beginning of period 155,149 157,228 130,211 --------- --------- --------- Cash and cash equivalents at end of period $ 146,114 $ 155,149 $ 157,228 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 12,748 $ 12,266 $ 7,457 Income taxes paid, net of refunds (32,584) 11,285 54,616 The accompanying notes are an integral part of these consolidated financial statements.
31 INTEGRATED DEVICE TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
Common Stock Unrealized ----------------------- Gain (Loss) Additional Cumulative On Total Paid-In Retained Translation Securities, Stockholders' Shares Amount Capital Earnings Adjustment Net Equity ------------ -------- ------------- ------------ ------------- -------------- --------------- 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 Issuance of common stock 2,157,271 3 16,121 -- -- -- 16,124 Tax benefits of stock option transactions -- -- 1,655 -- -- -- 1,655 Translation adjustment -- -- -- -- (381) -- (381) Changes in unrealized loss on available-for-sale securities, (615) net -- -- -- -- -- (615) Net loss -- -- -- (42,272) -- -- (42,272) ------------ -------- ----------- ------------ ------------- -------------- --------------- Balance, March 30, 1997 79,654,104 80 304,840 220,717 (886) (513) 524,238 Issuance of common stock 1,713,743 1 12,467 -- -- -- 12,468 Tax benefits of stock option transactions -- -- 1,235 -- -- -- 1,235 Translation adjustment -- -- -- -- (310) -- (310) Changes in unrealized loss on available-for-sale securities, net -- -- -- -- -- 513 513 Net income -- -- -- 8,247 -- -- 8,247 ------------ -------- ----------- ------------ ------------- -------------- --------------- Balance, March 29, 1998 81,367,847 $ 81 $318,542 $ 228,964 $ (1,196) $ -- $ 546,391 ============ ======== =========== ============ ============= ============== =============== The accompanying notes are an integral part of these consolidated financial statements.
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary Of Significant Accounting Policies THE COMPANY. Integrated Device Technology, Inc. ("IDT" or the "Company") designs, develops, manufactures and markets a broad range of high-performance semiconductor products and modules for its key markets: data communications and telecommunications equipment, such as routers, hubs, switches, cellular base stations and other devices; personal computers; and shared network devices, such as workstations, servers and printers. FISCAL YEAR. The Company's fiscal year ends on the Sunday nearest March 31. Fiscal 1998, 1997 and 1996 each included 52 weeks. 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 periods in 1998 and 1997 were not significant. CONSOLIDATION. The consolidated financial statements include the accounts of 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 short-term investments are classified as available-for-sale at March 29, 1998 and March 30, 1997. 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. For the periods ended March 29, 1998 and March 30, 1997, realized gains and losses on available-for-sale investments were not material. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates the classification at each reporting date. INVENTORIES. Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of the assets, which generally range from three to five years. Leasehold improvements and leasehold interests are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Accelerated methods of depreciation are used for tax computations. ACCOUNTING FOR LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets," the Company reviews long-lived assets held and used by the Company for impairment whenever events or changes in circumstances indicate that the net book value of an asset will not be recovered through expected future cash flows (undiscounted and before interest) from use of the asset. The amount of impairment loss is measured as the difference between the net book value of the assets and the estimated fair value of the related assets. In the third quarter of fiscal 1997, the Company determined that changes in circumstances had given rise to such an impairment (See Note 4). REVENUE RECOGNITION. Revenues from product sales are generally recognized upon shipment, and a reserve is provided for estimated returns and discounts. A portion of the Company's sales are made to distributors under agreements 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 SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 is an asset and liability approach which requires that the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. No provision for U.S. income taxes is provided on unremitted earnings of foreign subsidiaries, to the extent such earnings are deemed to be permanently reinvested. 33 NET INCOME (LOSS) PER SHARE. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share," and other related Interpretations and is effective for the periods ended after December 15, 1997. Under SFAS No. 128, all prior-period earnings per share amounts have been restated. Basic earnings per share is based upon weighted-average common shares outstanding. Diluted earnings per share is computed using the weighted-average common shares outstanding plus any potentially dilutive securities. Dilutive securities include stock options, warrants and restricted stock using the treasury stock method, and convertible debt and convertible preferred stock using the if converted method. Following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented below:
Fiscal Year Ended -------------------------------------------- March 29, March 30, March 31, (In thousands except per share amounts) 1998 1997 1996 -------------------------------------------- Basic: Net income (loss) (numerator) $ 8,247 $(42,272) $ 120,170 ============================================ Weighted average shares outstanding (denominator) 80,359 78,454 77,026 ============================================ Net income (loss) per share $ .10 $ (.54) $ 1.56 ============================================ Diluted: Net income (loss) $ 8,247 $(42,272) $ 120,170 Add: Convertible subordinated notes interest and expenses -- -- 6,596 -------------------------------------------- Adjusted net income (loss) (numerator) $ 8,247 $(42,272) $ 126,766 ============================================ Weighted average shares outstanding 80,359 78,454 77,026 Net effect of dilutive stock options 3,663 -- 4,871 Conversion of convertible subordinated notes -- -- 5,856 -------------------------------------------- Total shares (denominator) 84,022 78,454 87,753 ============================================ Net income (loss) per share $ .10 $ (.54) $ 1.44 ============================================
Options to purchase approximately 1.6 million, 15.0 million and 1.0 million shares were outstanding at fiscal year-ends 1998, 1997 and 1996, respectively, but have been excluded from the computation because they were antidilutive. TRANSLATION OF FOREIGN CURRENCIES. Accounts denominated in foreign currencies have been translated in accordance with SFAS No. 52, "Foreign Currency Translation." 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, cash equivalents and short-term investments approximate cost due to the short period of time until maturity. Fair values of long-term investments, 34 long-term debt and currency forward contracts are based on quoted market prices or pricing models using current market rates. CONCENTRATION OF CREDIT RISK. The Company markets 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 and generally does not require collateral. Management believes that risk of significant loss is significantly reduced due to the diversity of its products, customers and geographic sales areas. The Company maintains a provision for potential credit losses and write-offs of accounts receivable which were insignificant in each of the three years ended March 29, 1998. One distributor's receivable balance represented 17% and 15% of total accounts receivable at March 29, 1998 and March 30, 1997, respectively. If the financial condition and operations of this distributor deteriorate below critical levels, the Company's operating results could be adversely affected. STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock option plans and its employee stock purchase plan in accordance with provisions of the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company provides additional pro forma disclosures in Note 10. 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. In September 1996, the Company completed a two-for-one stock split of its common stock in the form of a 100% stock dividend. Historical share and per share amounts have been restated to reflect the stock dividend. Certain reclassifications have been made to prior-year balances, none of which affected the Company's financial position or results of operations, to present the financial statements on a consistent basis. NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards for reporting and displaying comprehensive income within the financial statements. This Statement requires the Company to report additional information on comprehensive income to supplement the reporting of income. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Comparative financial statements provided for earlier periods are required to be reclassified so that comprehensive income is displayed in a comparative format for all periods presented. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), establishes standards for reporting information about operating segments in annual and interim financial statements. This Statement also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company will adopt SFAS No. 130 for the first quarter of fiscal 1999. The Company will also adopt SFAS No. 131 in fiscal 1999. The Company believes that these statements will require additional disclosure but will not have a material effect on the Company's financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance for determining whether computer software is in fact for internal use, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company has not yet determined the impact, if any, of adopting SOP 98-1, which will be effective for IDT's fiscal 2000 financial statements. PRODUCTS AND MARKETS. The Company operates in predominantly one industry segment (See Note 13) within the semiconductor industry. Significant technological changes in the industry could adversely affect operating results. The semiconductor industry is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production over capacity and accelerated erosion of average selling prices. Therefore, the average selling price the Company receives for industry standard products is 35 dependent upon industry-wide demand and capacity, and such prices have historically been subject to rapid change. While the Company considers industry technological change and industry wide demand and capacity in estimating necessary allowances, such estimates could change in the future. MATERIALS. The Company's manufacturing operations depend upon obtaining adequate raw materials. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. The Company's results of operations would be adversely affected if it were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials. Note 2 - Balance Sheet Components INVENTORIES, NET March 29, 1998 March 30, 1997 -------------- -------------- (in thousands) Raw materials $ 6,647 $ 4,800 Work-in-process 40,276 22,893 Finished goods 13,814 19,925 --------- --------- $ 60,737 $ 47,618 ========= ========= PROPERTY, PLANT AND EQUIPMENT March 29, 1998 March 30, 1997 -------------- -------------- (in thousands) Land $ 24,385 $ 12,885 Machinery and equipment 780,555 653,903 Building and leasehold improvements 102,151 91,845 Construction-in-progress 3,166 3,013 --------- --------- 910,257 761,646 Less accumulated depreciation and amortization (434,817) (337,429) --------- --------- $ 475,440 $ 424,217 ========= ========= In fiscal 1998, the Company capitalized no interest expense ($1.8 million in fiscal 1997) in connection with the construction of the Hillsboro, Oregon plant. 36 AVAILABLE-FOR-SALE SECURITIES March 29, 1998 March 30, 1997 -------------- -------------- (in thousands) U.S. government agency securities $ 26,628 $ 25,553 State and local government securities 55,289 30,723 Corporate securities 102,347 111,281 Others 35,705 19,642 --------- --------- Total debt and equity securities 219,969 187,199 Less cash equivalents (145,488) (151,452) --------- --------- Short-term investments $ 74,481 $ 35,747 ========= ========= Short-term investments of $56.2 million mature in less than one year and $18.3 million have maturities between one and four years. Note 3 -- Other Assets--Intangibles During fiscal 1993, IDT entered into various royalty-free patent cross-license agreements. The patent licenses granted to IDT under these agreements were recorded at their cost of approximately $8.2 million and amortized on a straight-line basis over five years. The amortization relating to patent licenses was $867,000 in fiscal 1998 and $1.7 million in each of fiscal 1997 and 1996. At March 29, 1998, these assets had been fully amortized. Note 4 -- Impairment of Long-Lived Assets In fiscal 1997, the Company recorded charges related to the impairment of certain older manufacturing assets and other adjustments of $45.2 million. These adjustments related primarily to the carrying value of manufacturing assets, including the Company's oldest wafer fabrication plant in Salinas, California. As a result of significant changes in the semiconductor industry, such as the rapid erosion of SRAM average selling prices, and the Company's emphasis on communications-oriented products, the Company has accelerated the use of more advanced manufacturing processes to produce its products. The use of these more advanced processes and available information on future demand for the Company's products indicated that the carrying value of these selected older manufacturing assets was not fully recoverable. The fair value of manufacturing assets was based principally upon third-party estimates of fair values. Separately, the Company recorded charges of approximately $9.7 million relating to the write-down of certain technology investments and other miscellaneous items in fiscal 1997. 37 Note 5 - Long-Term Debt and 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: March 29, 1998 March 30, 1997 -------------- -------------- (in thousands) Machinery and equipment $ 30,012 $ 30,755 Less accumulated depreciation and amortization (16,509) (11,952) -------- -------- $ 13,503 $ 18,803 ======== ======== The capital lease agreements and equipment financings are collateralized by the related leased equipment. Future minimum payments under capital leases and equipment financing agreements, at varying interest rates (8.7-8.8%) are as follows: (in thousands) Fiscal Year 1999 $ 5,370 2000 5,154 2001 5,154 2002 2,783 2003 and thereafter - -------------------------- Total minimum payments 18,461 Less interest (2,525) -------------------------- Present value of net minimum payments 15,936 Less current portion (4,193) -------------------------- $ 11,743 ========================== 38 Long-term debt consisted of the following: March 29, 1998 March 30, 1997 -------------- -------------- (in thousands) Mortgage payable bearing interest at 9.625% due in monthly installments of $142 including interest through April 1, 2005, secured by related property and improvements $ 8,730 $ 9,551 Less current portion (904) (821) ======= ======= $ 7,826 $ 8,730 ======= ======= The fair value of the mortgage payable, based on current rates and time to maturity, was $9.3 million at March 29, 1998. Principal payments required in the next five years and beyond are as follows (in thousands): $904 (1999), $995 (2000), $1,095 (2001), $1,205 (2002) and $4,531 (2003 and beyond). Note 6 -- 5.5% Convertible Subordinated Notes In May 1995, the Company issued $201.3 million of 5.5% Convertible Subordinated Notes ("Notes"), due in 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 ($4.6 million) have been netted against the Notes balance in the consolidated balance sheet and are being amortized over the seven-year term of the Notes using the straight-line method which approximates the effective interest method. Interest on the Notes is payable semi-annually on June 1 and December 1 commencing December 1, 1995. Based upon quoted market prices, the fair value of the Notes was approximately $166.7 million at March 29, 1998. During fiscal 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, was recorded as an extraordinary item. The per share amount of the gain on early retirement of debt, net of related income tax effect, was $0.02 in fiscal 1996 on both a basic and diluted basis. Note 7 - Lines of Credit The Company's Malaysian subsidiary has a secured facility for the issuance of bank guarantees up to approximately $2.0 million with a local bank. The Company can use this facility until it is cancelled by either party. At March 29, 1998, bank guarantees in the amount of $324,000 were outstanding. In fiscal 1998, the Company's Japanese subsidiary had a secured revolving line of credit that allowed borrowings of up to approximately $1.5 million. The line of credit automatically extends until the Company requests termination. As of March 29, 1998, 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 29, 1998, this short-term borrowing rate was 1.63%. 39 The Company also has foreign exchange facilities used for hedging arrangements with several banks that allow the Company to enter into foreign exchange contracts of up to $85 million, of which $59.9 million was available at March 29, 1998. Note 8 -- Commitments LEASE COMMITMENTS. The Company leases most of its administrative and some manufacturing facilities under operating lease agreements which expire at various dates through fiscal 2004. Through the second quarter of fiscal 1997, one facility was leased from a stockholder and director. The Company recorded rental expense for the facility leased from the stockholder and director of $517,000 and $1,058,000 in fiscal 1997 and 1996, respectively. In fiscal 1996, the Company entered into an agreement to acquire this facility for $8.5 million in a transaction structured as a tax-free reorganization and completed the transaction in the third quarter of fiscal 1997, by issuing 782,445 unregistered shares of the Company's Common Stock at $10.875 per share. In fiscal 1995, the Company entered into a five-year $60 million (revised to $64 million in fiscal 1996) Tax Ownership Operating Lease transaction to lease the wafer fabrication facility in Oregon. This lease requires monthly payments which vary based on the London Interbank Offered Rate (LIBOR) plus 0.3% (6.3% at March 29, 1998). The aggregate minimum rent commitment under this lease which began in January 1996 is approximately $4.1 million per year at the current LIBOR rate plus 0.3%. This lease also provides the Company with the option of either acquiring the building at its original cost or arranging for the building to be acquired at the end of the 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) at 89.25% of the lessor's construction costs. Restricted securities, included in other non-current assets, collateralizing this lease were $57.1 million at both March 29, 1998 and March 30, 1997. The Company is also contingently liable under a first-loss clause for up to 85% of the construction costs of the building, or $54.4 million. In addition, the Company must maintain compliance with certain financial covenants. In fiscal 1997, the Company completed several sale and leaseback transactions with various leasing companies. The sale and leaseback transactions generated financing proceeds of $53.0 million. The aggregate minimum rent commitments under these leases were approximately $9.6 million per year. Under these leasing arrangements, equipment purchased for the Oregon fabrication facility with a net book value at the time of the sale and leaseback transaction of $52.6 million was sold to the leasing companies and leased back for use at the Oregon facility under leases classified as operating leases. As of March 29, 1998, the aggregate future minimum rent commitments under all operating leases, including the Oregon facility, were as follows: (in thousands) Fiscal Year 1999 $ 17,641 2000 16,227 2001 12,180 2002 11,339 2003 11,472 2004 and thereafter 6,433 -------------------------- $ 75,292 ========================== Rent expense for the years ended March 29, 1998, March 30, 1997 and March 31, 1996 totaled approximately $7.6 million, $7.8 million and $4.6 million, respectively. 40 As of March 29, 1998, one secured standby letter of credit was outstanding in the amount of $8.4 million. This letter of credit is required for international purchases and expires on June 1, 1998. As of March 29, 1998, the Company had commitments of approximately $86.6 million for equipment purchases. Note 9 - Litigation From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. The Company is not currently aware of any legal proceedings that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's financial condition or results of operations. During the normal course of business, the Company is notified of claims that it may be infringing on patents issued to other parties and is currently involved in license negotiations. Should the Company elect to enter into license agreements with other parties or should the other parties resort to litigation, the Company may be obligated in the future to make payments or to otherwise compensate these third parties. Note 10 - Stockholders' Equity STOCK-BASED COMPENSATION PLANS. At March 29, 1998, the Company had four stock-based compensation plans which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these plans. STOCK OPTION PLANS. Shares of common stock reserved for issuance under the Company's stock option plans include 13,500,000 shares under the 1994 Employee Stock Option Plan, as amended, 2,500,000 shares under the 1997 Employee Stock Option Plan, and 108,000 shares under the 1994 Director Stock Option Plan. At March 29, 1998, a total of 5,017,000 options were available but unissued under these plans. Also outstanding and exerciseable at March 29, 1998 were options initially granted under previous stock option plans which have not been cancelled or exercised. Under the plans, options are issued with an exercise price equal to the market price of the Company's common stock on the date of grant, and the maximum option term is 10 years. Plan participants typically receive an initial grant that vests in annual and/or monthly increments over four years. Thereafter, participants often receive a smaller annual grant which historically vests 4 years from the date of grant. Following is a summary of the Company's stock option activity and related weighted average exercise prices for each category:
Fiscal 1998 Fiscal 1997 Fiscal 1996 ---------------------------- ------------------------------ --------------------------- Shares Price Shares Price Shares Price -------------- ------------- -------------- --------------- -------------- ------------ (shares in thousands) Beginning options outstanding 15,000 $ 8.09 14,021 $ 7.42 10,938 $ 6.64 Granted 5,156 11.16 3,556 10.90 10,907 14.30 Exercised (1,242) 6.31 (815) 3.49 (1,034) 2.86 Canceled (1,724) 10.48 (1,762) 10.56 (6,790) 17.92 -------------- ------------- -------------- --------------- -------------- ------------ Ending options outstanding 17,190 $ 8.90 15,000 $ 8.09 14,021 $ 7.42 Ending options exerciseable 7,564 $ 6.40 6,335 $ 5.16 4,120 $ 3.03
41 In 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. Under SFAS No. 123, the Company is required to estimate the fair value of each option on the date of grant. Accepted option valuation models, such as the Black-Scholes and Binomial models, were developed in order to value freely traded options under ideal market conditions. The Company's stock option awards differ significantly since they always have vesting restrictions and generally are not transferable. Models such as Black-Scholes also require highly subjective assumptions, including expected time until exercise and future stock price volatility. The calculated fair value of an option on the grant date is highly sensitive to changes in these subjective assumptions. The Company has applied the Black-Scholes model to estimate the grant-date fair value of stock option grants in fiscal 1998, 1997 and 1996, based upon the following weighted-average assumptions: expected volatility of 60.0 to 62.5%, expected time-to-exercise of 1.5 to 2.0 years from vest date, risk-free interest rates of 5.1 to 6.7% and a dividend yield of 0%. The weighted-average fair value per stock option granted in fiscal 1998, 1997 and 1996, as defined by SFAS No. 123, was $6.29, $6.21 and $6.63, respectively. Following is summary information about stock options outstanding at March 29, 1998 (shares in thousands):
Options Outstanding Options Exerciseable -------------------------------------------------- --------------------------------- Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Life Average Exerciseable Average Exercise Prices (in years) Exercise Price Exercise Price - ------------------------------ --------------- ------------------ ---------------- ---------------- ---------------- $ 1.63 - $ 1.88 2,154 3.4 $ 1.83 2,154 $ 1.83 2.06 - 6.00 1,139 4.8 3.75 1,134 3.74 6.19 - 9.13 2,230 5.2 8.05 1,311 7.34 9.44 - 9.88 4,725 3.4 9.86 2,285 9.87 10.00 - 11.94 4,722 5.8 10.64 452 10.74 12.38 - 14.00 1,469 5.1 12.86 146 13.25 14.06 - 15.81 715 5.5 14.56 77 14.59 18.03 - 32.75 36 7.2 26.27 5 25.63
EMPLOYEE STOCK PURCHASE PLAN. The Company is authorized to issue up to 5,050,000 shares of its common stock under its amended and restated 1984 Employee Stock Purchase Plan. All domestic employees are eligible to participate. The purchase price of the stock is 85% of the lower of the closing price at the beginning or at the end of each offering period (typically fiscal quarters). Eligible employees can have up to 10% of base earnings withheld to purchase the Company's common stock under the Plan. 42 Following is a summary of activity under the Employee Stock Purchase Plan:
Fiscal 1998 Fiscal 1997 Fiscal 1996 -------------------- --------------------- ------------------- (shares in thousands) Number of shares issued 470 560 246 Average issuance price $9.81 $8.52 $14.32 Number of shares available at year-end 584 54 614
Under SFAS No. 123, the Company must estimate the fair value of employees' purchase rights under the Employee Stock Purchase Plan ("ESPP rights"). Valuing ESPP rights involves the use of option valuation models which are incapable of addressing transferability and vesting restrictions inherent in the Company's Employee Stock Purchase Plan. Estimating the value of ESPP rights requires that the Company make highly subjective assumptions about future events, such as stock price volatility, and the resulting estimates are quite sensitive to changes in these assumptions. The Company has estimated the fair value of ESPP rights using the Black-Scholes option valuation model with the following weighted-average assumptions: an expected life equal to the offering period (typically one fiscal quarter); expected volatility of 60.0 to 62.5%; risk-free interest rate of 5.1 to 5.9% and a dividend yield of 0%. The weighted-average fair value per ESPP right granted in fiscal 1998, 1997 and 1996, as defined by SFAS No. 123, was $4.09, $3.84 and $5.02, respectively. PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE. Following is a pro forma calculation of the amounts to which the Company's net income (loss) and income (loss) per share would have been reduced, had the Company recorded compensation costs based on the estimated grant-date fair value, as defined by SFAS No. 123, of awards granted under its Stock Option Plans and Employee Stock Purchase Plan. The pro forma amounts include compensation costs related to fiscal 1998, 1997 and 1996 stock option grants only. In future years, the annual compensation expense will increase relative to the fair value of stock options granted in those future years.
(in thousands, except per share Fiscal 1998 Fiscal 1997 Fiscal 1996 amounts) ---------------------- ---------------------- ---------------------- Pro forma net income (loss): Basic $ (7,455) $ (61,585) $ 109,317 Diluted (7,455) (61,585) 115,913 Pro forma net income (loss) per share: Basic $ (0.09) $ (0.78) $ 1.42 Diluted (0.09) (0.78) 1.25
STOCKHOLDER RIGHTS PLAN. The Company has a Stockholder Rights Plan. During fiscal 1992, under the plan, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding 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 December 1998. 43 Note 11 - Employee Benefits Plans The Company has a Profit Sharing Plan which is available to all employees who have at least six months of service. Under this plan, all eligible employees receive profit sharing contributions of 7% of pre-tax earnings in cash, and an additional 1% of pre-tax earnings is divided equally among all domestic employees and contributed to the Company's 401(k) plan. Administrative expenses are netted against the Profit Sharing Plan contribution. The cash contributions for the years ended March 29, 1998 and March 31, 1996 for this plan were $910,000 and $14.1 million respectively. There was no cash contribution to this plan for the year ended March 30, 1997. The Company pays an annual cash bonus to certain executive officers and other key employees based on the pre-tax earnings of the Company and the employee's individual performance. In fiscal 1998, the amount accrued under the bonus plan was 6% of operating income. In fiscal 1996, the amount accrued under the 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 29, 1998 and March 31, 1996 for this plan was $774,000 and $9.1 million respectively. There was no performance bonus recorded for the year ended March 30, 1997. Note 12 - Income Taxes The components of income before provision (benefit) for income taxes were as follows:
(in thousands) March 29, 1998 March 30, 1997 March 31, 1996 ------------------------ ----------------------- ---------------------- United States $ (7,010) $ (75,138) $ 161,209 Foreign 18,464 12,974 12,687 ------------------------ ----------------------- ---------------------- $ 11,454 $ (62,164) $ 173,896 ======================== ======================= ====================== The provision (benefit) for income taxes consisted of the following: (in thousands) March 29, 1998 March 30, 1997 March 31, 1996 ------------------------ ----------------------- ---------------------- Current: United States $ (4,712) $ (15,262) $ 63,829 State -- (13) 1,517 Foreign 2,516 606 2,293 ------------------------ ----------------------- ---------------------- (2,196) (14,669) 67,639 ------------------------ ----------------------- ---------------------- Deferred: United States 5,423 (9,357) (11,340) State -- 4,134 (652) Foreign (20) -- -- ------------------------ ----------------------- ---------------------- 5,403 (5,223) (11,992) ------------------------ ----------------------- ---------------------- Provision (benefit) for income taxes $ 3,207 $ (19,892) $ 55,647 ======================== ======================= ======================
44 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets and liabilities were as follows:
(in thousands) March 29, 1998 March 30, 1997 -------------------------------- ------------------------------- Deferred tax assets: Deferred income on shipments to distributors $ 20,336 $ 16,510 Non-deductible accruals and reserves 25,991 27,676 Capitalized inventory and other expenses 4,197 7,687 Other 3,164 (1,597) Net operating loss & credit carryforwards 13,509 6,320 -------------------------------- ------------------------------- Gross deferred tax assets 67,197 56,596 -------------------------------- ------------------------------- Deferred tax liabilities: Depreciation and amortization (23,087) (11,564) -------------------------------- ------------------------------- Valuation allowance (14,945) (10,464) -------------------------------- ------------------------------- Net deferred tax assets $ 29,165 $ 34,568 ================================ ===============================
At the end of fiscal 1998 and 1997, management provided a valuation allowance for deferred tax assets for which it is more likely than not that such assets will not be realized. The valuation allowance is primarily attributable to state deferred tax assets net of state deferred tax liabilities. The provision (benefit) for income taxes differs from the amount computed by applying the U.S. statutory income tax rate of 35% to income before the provision (benefit) for income taxes as follows:
(in thousands) March 29, 1998 March 30, 1997 March 31, 1996 ------------------------ ----------------------- ---------------------- Provision (benefit) at U.S. statutory rate $ 4,009 $ (21,758) $ 60,864 Earnings of foreign subsidiaries considered permanently reinvested, less foreign taxes (1,943) (2,580) (2,327) General business credits (1,820) (1,840) (1,994) Tax exempt interest -- (1,264) (1,982) State tax, net of federal benefit -- (6,342) 865 Valuation allowance -- 10,464 -- Net operating loss carryback limitation 5,094 -- -- Other (2,133) 3,428 221 ------------------------ ----------------------- ---------------------- Provision (benefit) for income taxes $ 3,207 $ (19,892) $ 55,647 ======================== ======================= ======================
The Company provided foreign income taxes with respect to its Malaysian manufacturing subsidiary for the first time in fiscal 1998. The Company utilized government tax depreciation grants to reduce its Malaysian tax rate below the 28% statutory rate for fiscal 1998. Under existing Malaysian law, the Company has certain available carried forward tax benefits and expects that these benefits will be available in future periods to reduce its local tax obligations. 45 The Company's manufacturing subsidiary in the Philippines operates under a tax holiday which expires in November 2000. The Company has applied for a two-year extension of the holiday. The Company's intention is to permanently reinvest its earnings in all of its foreign subsidiaries. Accordingly, U.S. taxes have not been provided on approximately $63.4 million of unremitted earnings. 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. Examination by the IRS of the Company's income tax returns for the fiscal years 1995 and 1996 began in fiscal 1997. Management believes that the ultimate resolution of these examinations will not have any material adverse impact on the Company's financial condition or results of operations. 46 Note 13 - Industry Segment, Foreign Operations And Significant Customers IDT operates predominantly in one industry segment (See Note 1). The Company offers products in four product categories: communications products, SRAM components and modules, logic circuits and microprocessors. Sales through a national distributor accounted for 17%, 14% and 11% of net revenues for fiscal 1998, 1997 and 1996, 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 the Philippines and sales subsidiaries in Japan, the Pacific Rim and throughout Europe. At March 29, 1998 and March 30, 1997, total liabilities for operations outside of the United States were $54.0 million and $70.8 million, respectively. The following is a summary of IDT's foreign operations by geographic areas for fiscal 1998, 1997 and 1996:
Transfers Sales To Between In thousands Unaffiliated Geographic Operating Identifiable Customers Areas Net Revenues Income (Loss) Assets - --------------------------------------------------------------------------------------------------------------------- Fiscal year ended March 29, 1998 United States $ 358,373 $ 130,867 $ 489,240 $ 8,412 $ 644,434 Europe 113,914 -- 113,914 18,353 81,740 Japan 55,477 -- 55,477 630 12,181 Asia-Pacific 59,372 80,604 139,976 18,342 112,048 Elimination -- (211,471) (211,471) 1,439 (148,403) Corporate -- -- -- (34,308) 266,955 ---------------- --------------- --------------- --------------- --------------- Consolidated $ 587,136 $ -- $ 587,136 $ 12,868 $ 968,955 ================ =============== =============== =============== =============== Fiscal year ended March 30, 1997 United States $ 330,578 $ 130,014 $ 460,592 $ (61,512) $ 624,306 Europe 93,167 -- 93,167 12,949 64,687 Japan 73,385 -- 73,385 1,040 15,216 Asia-Pacific 40,083 72,029 112,112 12,448 109,130 Elimination -- (202,043) (202,043) 151 (137,790) Corporate -- -- -- (30,986) 228,035 ---------------- --------------- --------------- --------------- --------------- Consolidated $ 537,213 $ -- $ 537,213 $ (65,910) $ 903,584 ================ =============== =============== =============== =============== Fiscal year ended March 31, 1996 United States $ 404,994 $ 150,769 $ 555,763 $ 149,206 $ 574,287 Europe 144,154 -- 144,154 39,274 28,478 Japan 72,530 -- 72,530 3,405 21,482 Asia-Pacific 57,819 46,870 104,689 8,466 72,703 Elimination -- (197,639) (197,639) 89 (42,633) Corporate -- -- -- (36,707) 285,117 ---------------- --------------- --------------- --------------- --------------- Consolidated $ 679,497 $ -- $ 679,497 $ 163,733 $ 939,434 ================ =============== =============== =============== ===============
47 Note 14 - Related Party Transactions The Company holds an equity interest of approximately 34% in Quantum Effect Design Inc. ("QED"). A stockholder and director of the Company also holds an equity interest of approximately 3% in QED. The Company paid royalty expenses of $3.2 million and $2.6 million to QED in fiscal 1998 and 1997, respectively. The Company holds an equity interest of approximately 36% (87% on an as converted basis) in Clear Logic, Inc. , a corporation founded by a former IDT executive officer. The Company increased its investment by $12.1 million in fiscal 1998. During fiscal 1998, a director of IDT acted as an uncompensated agent on behalf of a subsidiary of the Company in acquiring parcels of land for future corporate development. Note 15 - Derivative Financial Instruments The Company has foreign subsidiaries which operate and sell or manufacture the Company's products in various global markets. As a result, the Company is exposed to changes in foreign currency exchange rates. The Company primarily utilizes forward exchange contracts to hedge against the short-term impact of foreign currency fluctuations on certain assets or liabilities denominated in foreign currencies. The total amount of these contracts is offset by the underlying assets or liabilities denominated in foreign currencies. The gains or losses on these contracts are included in income as the exchange rates change. Management believes that these forward contracts do not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts are offset by losses and gains on the underlying asset and transactions being hedged. Forward exchange contracts related to firm purchase commitments are considered identifiable hedges and realized and unrealized gains and losses are deferred until settlement of the underlying commitments. At March 29, 1998 and March 30, 1997, deferred gains and losses were not material. Foreign exchange hedge positions, which include buy and sell positions generally with maturities of less than three months, were as follows: March 29, 1998 March 30, 1997 ------------------- ------------------- (in thousands of U.S. dollars) Buy Sell Buy Sell ------- ------- ------- ------- Japanese Yen $ 410 $ 8,320 $ -- $13,802 British Pound Sterling -- 280 945 4,054 Malaysian Ringgits 4,120 2,056 5,440 2,861 Netherlands Guilders 9,114 -- -- -- Philippines Pesos -- 718 -- -- Singapore Dollars 129 -- -- -- ------- ------- ------- ------- $13,773 $11,374 $ 6,385 $20,717 ======= ======= ======= ======= The Company is exposed to credit-related losses if counterparties to financial instruments fail to perform their obligations. However, the Company does not expect any counterparties, which presently have high credit ratings, to fail to meet their obligations. The Company controls credit risk through credit approvals, limits and monitoring procedures including the use of high credit quality counterparties. 48 SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share data)
Fiscal Year Ended March 29, 1998 ---------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------------------------- Revenues $ 148,873 $ 143,807 $ 144,235 $ 150,221 Asset impairment and other -- -- -- -- Gross profit 56,336 55,164 55,042 56,303 Net income 1,891 2,601 2,381 1,374 Basic earnings per share: Net income 0.02 0.03 0.03 0.02 Diluted earnings per share: Net income 0.02 0.03 0.03 0.02 Fiscal Year Ended March 30, 1997 ---------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------------------------- Revenues $ 142,539 $ 120,485 $ 130,992 $ 143,197 Asset impairment and other -- -- 45,223 -- Gross profit 70,923 38,194 2,146 55,059 Net income (loss) 8,869 (10,334) (42,918) 2,111 Basic earnings per share: Net income (loss) 0.11 (0.13) (0.55) 0.03 Diluted earnings per share: Net income (loss) 0.11 (0.13) (0.55) 0.03
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to the Company's Directors is incorporated herein by reference from the Company's Proxy Statement for the 1998 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 29, 1998, and the information required by this item with respect to the Company's executive officers is incorporated herein by reference from the section entitled "Executive Officers of the Registrant" in Part I, Item 4A of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. 50 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 29, 1998 and March 30, 1997 - Consolidated Statements of Operations for each of the three fiscal years in the period ended March 29, 1998 - Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended March 29, 1998 - Consolidated Statements of Stockholders' Equity for each of the three fiscal years in the period ended March 29, 1998 - Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 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 2.1* Agreement and Plan of Reorganization dated as of October 1, 1996, by and among the Company, Integrated Device Technology Salinas Corp. and Baccarat Silicon, Inc. (previously filed as Exhibit 2.1 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended December 29, 1996). 2.2* Agreement of Merger dated as of October 1, 1996, by and among the Company, Integrated Device Technology Salinas Corp. and Baccarat Silicon, Inc. (previously filed as Exhibit 2.2 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended December 29, 1996). 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). 51 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* Assignment of Lease dated October 30, 1985 between the Company and Synertek Inc. relating to 2975 Stender Way, Santa Clara, California (previously filed as Exhibit 10.4 to Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990). 10.2* Assignment of Lease dated October 30, 1985 between the Company and Synertek Inc. relating to 3001 Stender Way, Santa Clara, California (previously filed as Exhibit 10.5 to Annual Report on Form 10-K for Fiscal Year Ended April 1, 1990). 10.3* Lease dated October 23, 1989 between Integrated Device Technology International Inc. and RREEF USA FUND - III relating to 2972 Stender Way, Santa Clara, California (previously filed as Exhibit 10.6 to Annual Report on Form 10-K for the Fiscal Year Ended April 1, 1990). 10.4* 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). 10.5* 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).** 10.6* 1994 Stock Option Plan, as amended through April 25, 1996 (previously filed as Exhibit 4.5 to the Registration Statement on Form S-8 (File Number 333-15871) filed on November 8, 1996).** 10.7* 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).** 10.8* 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).** 10.9* 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). 10.10* 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). 10.11* Patent License Agreement between the Company and American Telephone and Telegraph Company ("AT&T") dated May 1, 1992 (previously filed as Exhibit 19.1 to Quarterly Report on Form 10-Q for the Quarter Ended June 28, 1992) (Confidential Treatment Granted). 10.12* Patent License Agreement dated September 22, 1992 between the Company and Motorola, Inc. (previously filed as Exhibit 19.1 to Quarterly Report on Form 10-Q for the Quarter Ended September 27, 1992) (Confidential Treatment Granted). 10.13* 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). 10.14* 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). 52 10.15* 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). 10.16* 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). 10.17* 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). 10.18* 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).** 10.19* 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). 10.20* 1995 Executive Performance Plan (previously filed as Exhibit 10.22 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 1, 1995).** 10.21* Letter amending Patent License Agreement between the Company and AT&T dated December 4, 1995 (previously filed as Exhibit 10.23 to the Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1996) (Confidential Treatment Granted). 10.22* Lease dated July 1995 between Integrated Device Technology, Inc. and American National Insurance Company relating to 3250 Olcott Street, Santa Clara, California (previously filed as Exhibit 10.25 to the Annual Report for the Fiscal Year Ended March 31, 1996). 10.23* Registration Rights Agreement dated as of October 1, 1996 among the Company, Carl E. Berg and Mary Ann Berg (previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Fiscal Quarter Ended December 29, 1996). 10.24 1997 Stock Option Plan. 10.25 Custom Sales Agreement between the Company and International Business Machines Corporation effective January 19, 1998. (Portions have been omitted and filed separately with the Commission in reliance on Rule 24b-2 and the Registrant's request for confidential treatment). 21.1 Subsidiaries of the Company. 23.1 Consent of Price Waterhouse LLP. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule. 27.3 Restated Financial Data Schedule. 27.4 Restated Financial Data Schedule. * These exhibits were previously filed with the Commission as indicated and are incorporated herein by reference. ** These exhibits are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 14 (c) of Form 10-K. (b) Reports on Form 8-K Not applicable. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTEGRATED DEVICE TECHNOLOGY, INC. Registrant June 2, 1998 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 June 2, 1998 ----------------------- /s/ Leonard C. Perham Chief Executive Officer and Director June 2, 1998 ----------------------- (Principal Executive Officer) /s/ Alan F. Krock Vice President, Chief Financial Officer June 2, 1998 ----------------------- (Principal Financial and Accounting Officer) /s/ Carl E. Berg Director June 2, 1998 ----------------------- /s/ John C. Bolger Director June 2, 1998 ----------------------- /s/ Federico Faggin Director June 2, 1998 -----------------------
54 SCHEDULE II INTEGRATED DEVICE TECHNOLOGY, INC. VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Charged Beginning of to Cost and Recoveries and Balance at End Period Expenses Write-offs of Period (in thousands) Allowance for returns and doubtful accounts Year ended March 31, 1996 $ 3,830 $ 808 $ (58) $ 4,580 Year ended March 30, 1997 4,580 2,464 307 7,351 Year ended March 29, 1998 7,351 3,849 (90) 11,110
55 EX-10.24 2 1997 STOCK OPTION PLAN INTEGRATED DEVICE TECHNOLOGY, INC. 1997 STOCK OPTION PLAN As Adopted October 30, 1997 1. PURPOSE. The purpose of the Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent, Subsidiaries and Affiliates, by offering them an opportunity to participate in the Company's future performance through awards of stock options. Capitalized terms not defined in the text are defined in Section 19. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 14, the total number of Shares reserved and available for grant and issuance pursuant to Awards under the Plan shall be 2,500,000 Shares. Subject to Sections 2.2 and 14, Shares that are subject to issuance upon exercise of an Award but cease to be subject to such Award for any reason other than exercise of such Award will again be available for grant and issuance under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, or by a Corporate Transaction (as defined in Section 14.1) then, unless such change results in the termination of all outstanding Awards as a result of the Corporate Transaction, (a) the number of Shares reserved for issuance under the Plan and (b) the Exercise Prices of and number of Shares subject to outstanding Awards shall be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share shall not be issued but shall either be paid in cash at Fair Market Value or shall be rounded up to the nearest Share, as determined by the Committee; and provided, further, that the Exercise Price of any Award may not be decreased to below the par value of the Shares. 3. ELIGIBILITY. All Awards issued under the Plan shall be Nonqualified Stock Options. Awards may be granted to employees, consultants, independent contractors and advisors of the Company or any Parent, Subsidiary or Affiliate of the Company; provided that such employees, consultants, independent contractors and advisors are not officers or directors of the Company or any Parent, Subsidiary of Affiliate of the Company who are subject to Section 16 of the Securities Exchange Act of 1934; and provided further that such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. A person may be granted more than one Award under the Plan. Each person is eligible to receive up to an aggregate maximum of 100,000 Shares per fiscal year. 4. ADMINISTRATION. 4.1 Committee Authority. The Plan shall be administered by the Committee. Subject to the general purposes, terms and conditions of the Plan, the Committee shall have full power to implement and carry out the Plan. The Committee shall have the authority to: (a) construe and interpret the Plan, any Stock Option Agreement and any other agreement or document executed pursuant to the Plan; (b) prescribe, amend and rescind rules and regulations relating to the Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares subject to Awards; (f) determine whether Awards will be granted in replacement of, or as alternatives to, other Awards under the Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary or Affiliate of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting and exercisability of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Award or any Stock Option Agreement; (j) determine the disposition of Awards in the event of a Participant's divorce or dissolution of marriage; and (k) make all other determinations necessary or advisable for the administration of the Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under the Plan to Participants who are not Insiders of the Company. 5. STOCK OPTIONS. The Committee may grant Awards to eligible persons and shall determine the number of Shares subject to the Award, the Exercise Price of the Award, the period during which the Award may be exercised, and all other terms and conditions of the Award, subject to the following: 2 5.1 Form of Option Grant. Each Award granted under the Plan shall be evidenced by a Stock Option Agreement and shall be in such form and contain such provisions (which need not be the same for each Participant) as the Committee shall from time to time approve, and which shall comply with and be subject to the terms and conditions of the Plan. 5.2 Date of Grant. The date of grant of an Award shall be the date on which the Committee makes the determination to grant such Award, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of the Plan will be delivered to the Participant within a reasonable time after the granting of the Award. 5.3 Exercise Period. Awards shall be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement; provided, however, that no Award shall be exercisable after the expiration of ten (10) years from the date the Award is granted. The Committee also may provide for the exercise of Awards to become exercisable at one time or from time to time, periodically or otherwise, in such number or percentage as the Committee determines. 5.4 Exercise Price. The Exercise Price shall be determined by the Committee when the Award is granted and shall be not less than 100% of the Fair Market Value of the Shares on the date of grant. 5.5 Method of Exercise. Awards may be exercised only by delivery to the Company of a written exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Award shall always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then Participant may exercise such Participant's Awards only to the extent that such Awards would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such longer time period not exceeding five years as may be determined by the Committee), but in any event, no later than the expiration date of the Awards. (b) If the Participant is terminated because of death or Disability (or the Participant dies within three months of such termination), then Participant's Awards would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than (i) 3 twelve (12) months after the Termination Date in the case of disability or (ii) eighteen (18) months after the Termination Date in the case of death (or such longer time period not exceeding five years as may be determined by the Committee), but in any event no later than the expiration date of the Awards. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Award; provided that such minimum number will not prevent Participant from exercising the Award for the full number of Shares for which it is then exercisable. 5.8 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Awards and authorize the grant of new Awards in substitution therefor; provided that any such action may not, without the written consent of Participant, impair any of Participant's rights under any Award previously granted. The Committee may reduce the Exercise Price of outstanding Awards without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of the Plan for Awards granted on the date the action is taken to reduce the Exercise Price; and provided, further, that the Exercise Price shall not be reduced below the par value of the Shares, if any. 6. PAYMENT FOR SHARE PURCHASES. Payment for Shares purchased pursuant to the Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by surrender of Shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such Shares); or (2) were obtained by Participant in the public market; (b) by waiver of compensation due or accrued to Participant for services rendered; (c) provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (a "NASD Dealer") whereby the Participant irrevocably elects to exercise the Award and to sell a portion of the Shares so purchased in order to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from Participant and a NASD Dealer whereby Participant irrevocably elects to exercise the Award and to pledge the Shares so 4 purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (d) by any combination of the foregoing. 7. WITHHOLDING TAXES. 7.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under the Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under the Plan, payments in satisfaction of Awards are to be made in cash, such payment shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 7.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Committee. 8. PRIVILEGES OF STOCK OWNERSHIP. 8.1 Voting and Dividends. No Participant shall have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant shall be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares. 8.2 Financial Statements. The Company shall provide financial statements to each Participant prior to such Participant's purchase of Shares under the Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company shall not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 9. TRANSFERABILITY. Subject to Section 4.1(j), Awards granted under the Plan, and any interest therein, shall not: (a) be transferable or assignable by the Participant, (b) be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Stock Option Agreement provisions relating thereto or (c) during the lifetime of the 5 Participant, be exercisable by anyone other than the Participant, and any elections with respect to an Award, may be made only by the Participant. 10. CERTIFICATES. All certificates for Shares or other securities delivered under the Plan shall be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed. 11. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in the Plan, the Company shall have no obligation to issue or deliver certificates for Shares under the Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) completion of any registration or other qualification of such shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company shall have no liability for any inability or failure to do so. 12. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted under the Plan shall confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 13. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares or other consideration, based on such terms and conditions as the Committee and the Participant shall agree. 14. CORPORATE TRANSACTIONS. 14.1 Corporate Transactions. In the event of a Corporate Transaction (as defined in this Section 14.1), the exercisability of each Award shall be automatically accelerated so that each Award shall, immediately before the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of Shares and may be exercised for all or any portion of such Shares; provided, that an Award shall not be accelerated if and to the extent that such Award is, in connection with 6 the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof. The determination of comparability shall be made by the Committee, and the Committee's determination shall be final, binding and conclusive. Upon the consummation of a Corporate Transaction, all outstanding Awards shall, to the extent not previously exercised or assumed by the successor corporation or its parent, terminate and cease to be exercisable. "Corporate Transaction" means (a) a merger or acquisition in which the Company is not the surviving entity (except for a transaction the principal purpose of which is to change the State in which the Company is incorporated), (b) the sale, transfer or other disposition of all or substantially all of the assets of the Company or (c) any other corporate reorganization or business combination that is not approved by the Board and in which the beneficial ownership of 50% or more of the Company's outstanding voting stock is transferred. 14.2 Change in Control. Notwithstanding any provision in Section 14.1 to the contrary, in the event of a Change in Control (as defined in this Section 14.2), each Award shall automatically accelerate effective fifteen (15) days following the effective date of the Change in Control, so that each Award shall become fully exercisable with respect to the total number of Shares and may be exercised for all or any portion of such Shares. Upon a Change in Control, all outstanding Awards accelerated shall remain fully exercisable until the expiration or sooner termination of the Award term specified in the Stock Option Agreement. A "Change in Control" shall be deemed to occur: (a) should a person or related group of persons, other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with the Company, becomes the beneficial owner (within the meaning of Rule 13d-3 of the General Rules and Regulations under the Exchange Act) of 25% or more of the Company's outstanding voting stock pursuant to a tender or exchange offer that the Board does not recommend and that the stockholders of the Company accept; or (b) on the first date within any period of twenty-four (24) consecutive months or less on which there is effected a change in the composition of the Board by reason of a contested election such that a majority of the Board members cease to be comprised of individuals who either (i) have been members of the Board continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. 14.3 Dissolution. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Participant at least fifteen (15) days prior to such proposed action. To the extent that Awards have not been previously exercised, such Awards will terminate immediately prior to the consummation of such proposed action. 14.4 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other 7 company or otherwise, by either (a) granting an Award under the Plan in substitution of such other company's award, or (b) assuming such award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award shall remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Award rather than assuming an existing option, such new Award may be granted with a similarly adjusted Exercise Price. 15. ADOPTION AND STOCKHOLDER APPROVAL. The Plan shall become effective on the date that it is adopted by the Board (the "Effective Date"). 16. TERM OF PLAN. Unless earlier terminated as provided herein, the Plan will terminate ten (10) years from the Effective Date. 17. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend the Plan in any respect, including without limitation amendment of any form of Stock Option Agreement or instrument to be executed pursuant to the Plan, provided, however, that no amendment may be made to outstanding Awards without the consent of the Participant. 18. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board, nor any provision of the Plan, shall be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 19. DEFINITIONS. As used in the Plan, the following terms shall have the following meanings: "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. "Award" means an award of a nonqualified stock option to purchase Shares. "Stock Option Agreement" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "Board" means the Board of Directors of the Company. 8 "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee appointed by the Board to administer the Plan, or if no committee is appointed, the Board. "Company" means Integrated Device Technology, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation. "Disability" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Price" means the price at which a holder of an Award may purchase the Shares issuable upon exercise of the Award. "Fair Market Value" means the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market the closing price on the Nasdaq National Market System on the trading day immediately preceeding the date on which Fair Market Value is determined, or, if no such reported sale takes place on such date, the closing price on the next preceding trading date on which a reported sale occurred; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, the closing price or, if no reported sale takes place on such date, the closing price on the next preceding trading day on which a reported sale occurred; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on such date, as reported by The Wall Street Journal, for the over-the-counter market; or (d) if none of the foregoing is applicable, by the Board in good faith. "Insider" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under the Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9 "Participant" means a person who receives an Award under the Plan. "Plan" means this Integrated Device Technology, Inc. 1997 Stock Option Plan, as amended from time-to-time. "SEC" means the Securities and Exchange Commission. "Shares" means shares of the Company's Common Stock $0.001 par value, reserved for issuance under the Plan, as adjusted pursuant to Sections 2 and 14, and any successor security. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Termination" or "Terminated" means, for purposes of the Plan with respect to a Participant, that the Participant has ceased to provide services as an employee, director, consultant, independent contractor or adviser, to the Company or a Parent, Subsidiary or Affiliate of the Company, except in the case of sick leave, military leave, or any other leave of absence approved by the Committee; provided, that such leave is for a period of not more than ninety (90) days, or reinstatement upon the expiration of such leave is guaranteed by contract or statute. The Committee shall have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). 10 EX-10.25 3 CUSTOM SALES AGREEMENT [Portions have been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and the Registrant's request for confidential treatment.] CUSTOM SALES AGREEMENT BASE AGREEMENT Custom Sales Agreement No. X0718 Integrated Device Technology, Inc. International Business Machines Corporation 281 Winters Street Waltham, MA 02254 Agreement No. X0718 Customer: Integrated Device Technology, Inc. 2975 Stender Way Santa Clara, CA 95054 This Custom Sales Agreement, which consists of this Base Agreement and Statement of Work Attachments, shall be referred to as the "Agreement". The term of this Agreement commences on January 19, 1998 and expires on January 31, 2001. By signing below, the parties each agree to be bound by the terms and conditions of this Agreement and the initial Statement of Work, Attachment No. 1, and no additional signature on the initial Statement of Work is required. Subsequent Statement of Work Attachments under this Agreement must be signed by the parties to become effective. Upon signature by both parties, it is agreed this Agreement constitutes the complete and exclusive agreement between them superseding any prior agreements, written or oral, relating to the subject matter notwithstanding anything contained in any document issued by either party. Purchase orders may not vary the terms of this Agreement. Additional, different and/or conflicting terms and conditions on a purchase order shall be of no effect unless mutually agreed to in writing. This Agreement may not be amended or modified except by a written amendment signed by both parties. The parties expressly acknowledge that they have received and are in possession of a copy of any referenced item which is not physically attached to the Agreement and any such item will be treated as if attached. Accepted and Agreed To: Integrated Device Technology, Inc. International Business Machines Corporation By:__________________________ By:_______________________________ Name: Len Perham Name: Peter Hansen Title: CEO and President Title: V. P. of North American Sales Date:_________________________ Date:______________________________ 1.0 DEFINITIONS Capitalized terms in this Agreement have the following meanings. An Attachment may define additional terms; however, those terms apply only to that Attachment. 1.1 "Item" shall mean any part, specification, design, document, report, data or the like which Customer delivers to IBM under this Agreement. 1.2 "Product" shall mean production units to be sold or purchased under this Agreement. Products shall not include Prototypes. 1 1.3 "Prototype" shall mean a preliminary version of a Product which may or may not be functional, is intended for internal use and testing and not for resale, and is not suitable for production in commercial quantities. 1.4 "Purchase Order Lead Time" shall mean the required minimum amount of time between IBM's receipt of the purchase order issued by Customer and the requested shipment date necessary to accommodate manufacturing cycle time. 1.5 "Related Company" of a party hereunder shall mean a corporation, company or other entity which controls or is controlled by such party or by another Related Company of such party, where control means ownership or control, direct or indirect, of more than fifty (50) percent of: (i) the outstanding voting shares or securities (representing the right to vote for the election of directors or managing authority), or (ii) the ownership interests representing the right to make decisions for such a corporation, company or other entity (as the case may be in partnership, joint venture or unincorporated association having no outstanding shares or securities). However, any such corporation, company or other entity shall be deemed to be a Related Company of such party only so long as such ownership or control exists. 1.6 "Service" shall mean any manufacturing activity or design, or engineering work IBM performs. 1.7 "Shipment Date" shall mean IBM's estimated date of shipment. 2.0 AGREEMENT STRUCTURE 2.1 This Agreement consists of: (i) the Base Agreement which defines the basic terms and conditions of the relationship between the parties; and (ii) Attachments which specify the details of a specific work task. An Attachment may include additional or differing terms and conditions, however such terms and conditions apply only to that Attachment. Attachments also include any specification documents agreed to by the parties applicable to the specific work under that Attachment. 2.2 If there is a conflict among the terms and conditions of the various documents, Attachment terms and conditions govern. 2.3 Purchase orders will be used to convey information only and any terms and conditions on those are void and replaced by this Agreement. 2.4 Either party may include its Related Companies under this Agreement by written agreement with the other party. 3.0 ORDER AND DELIVERY 3.1 Customer shall order Products and Services by issuing written purchase orders, which are subject to acceptance by IBM. Purchase orders for Products must be received by IBM in advance, with at least the Purchase Order Lead Time specified in the applicable Attachment. 3.2 Products will be shipped to Customer FOB plant of manufacture, except for Products shipped outside the United States which will be shipped EXWORKS (as defined in ICC INCOTERMS). 3.3 Title to the Products and risk of loss shall pass to the Customer upon delivery to the carrier for shipment to the Customer. 4.0 CANCELLATION AND RESCHEDULING 4.1 If IBM's supply of the Product and/or Services ordered hereunder becomes constrained, IBM will reduce the quantities of Products and/or Services to be supplied to the Customer in proportion to the reduction in quantities of products and/or services of the same technology or utilizing the same manufacturing process to be supplied to satisfy others. Receipt of such allocated supply and later delivery of all undelivered ordered quantities shall constitute Customer's exclusive remedy in the event of such a supply constraint. 4.2 Customer may cancel or reschedule an order for Products and/or Services only upon prior written notice to IBM. In the event of a cancellation or reschedule which exceeds the rescheduling rights set forth in an applicable Attachment, Customer shall pay the quoted price for Products and/or Services delivered or tendered and refused and the cancellation charges for binding 2 portions of Customer's forecast and any cancelled work-in-progress as set forth in the applicable Attachment. 4.3 Customer agrees that if Customer decreases the total quantity of an order that has a unit price based on an agreed to quantity Customer will pay an applicable higher unit price for new shipments. 5.0 PAYMENT 5.1 Prices for Products and Services shall be as set forth in an applicable Attachment. IBM shall invoice Customer after the Products have been shipped or the Services provided. Payment by the Customer will be due within thirty (30) days from the date of invoice. Late payment of invoices will be assessed a charge equal to the lesser of one percent (1.0%) per month or the statutorily maximum rate of interest in accordance with the laws of the State of New York. In addition, if Customer's account balance exceeds its credit limit with IBM, or becomes delinquent, IBM may stop shipments to Customer or ship to Customer on a prepaid basis until the account is current again. 6.0 TERMINATION 6.1 If either party materially breaches a term of this Base Agreement or an Attachment, the other party may, at its option, terminate this Agreement or any or all Attachments provided the party in breach is given written notice and fails to cure such breach within 30 days or immediately in the event of (i) insolvency, dissolution or liquidation by or against either party, (ii) any assignment of either party's assets for the benefit of creditors, (iii) any act or omission of an act by a party demonstrating its inability to pay debts generally as they become due, or (iv) if IBM has a reasonable basis to believe any of the Items infringe intellectual property rights. In addition, IBM may terminate this Agreement upon twelve (12) months prior written notice if Customer transfers all or substantially all of its business assets to a third party. 6.2 If IBM terminates this Agreement or an Attachment, IBM shall be entitled to treat any or all applicable outstanding purchase orders as if cancelled by Customer and Customer shall pay the quoted price applicable for any affected Products and/or Services delivered or tendered and refused, and the cancellation charges for binding portions of Customer's forecast and any cancelled work-in-progress as set forth in the applicable Attachment or Attachments. Monies owing IBM shall become immediately due and payable. 6.3 If Customer terminates this Agreement or an Attachment, IBM will fill all applicable previously accepted purchase orders for Products, but IBM shall not be obligated to accept further applicable purchase orders after receiving notice. 6.4 This Base Agreement will continue after its termination or expiration with respect to any Attachments already in place until they expire, are terminated or completed. Provided that no monies are due IBM, applicable Items shall be disposed of as directed by Customer in writing at Customer's expense after a termination or expiration. 7.0 CONFIDENTIAL INFORMATION 7.1 With the exception of prices and quantities of Products and/or Services hereunder, no information exchanged between the parties shall be considered confidential and/or proprietary to either party, or to any third party except as may be specified pursuant to Section 7.2 below. 7.2 In the event IBM or Customer needs to disclose specific confidential information to the other in order for IBM to furnish Products and/or Services hereunder, such information shall be disclosed only pursuant to the terms of a confidential information exchange agreement executed by the parties. 8.0 LICENSE 8.1 No license, immunity or other right is granted herein by one party to the other whether directly or by implication, estoppel or otherwise, with respect to any patent, trademark, copyright, mask work, trade secret or other intellectual 3 property right to such party, with the exception of Customer's right to use or resell any Product sold by IBM to Customer pursuant to this Agreement and with the further exception that IBM shall have all rights and licenses necessary to manufacture Products and Prototypes for Customer and to provide Services to Customer in accordance with this Agreement. 9.0 TRADEMARK 9.1 Nothing in this Agreement grants either party any rights to use the other party's trademarks or trade names, directly or indirectly, in connection with any product, service, promotion, or to make any publication or publicity without prior written approval of the other party or owner. 10.0 INTELLECTUAL PROPERTY AND INDEMNIFICATION 10.1 IBM agrees to indemnify Customer against damages assessed against Customer as a result of a final judgment of a court of competent jurisdiction holding that any Product sold or Service provided by IBM to Customer hereunder infringes a patent or copyright of a third party in any country in which IBM sells or provides similar products or services, up to the amount paid by Customer for Products or Services provided hereunder; PROVIDED THAT Customer (1) promptly notifies IBM, in writing, of the charge of infringement; or (2) allows IBM to control and cooperates with IBM in the defense and any related settlement action; and (3) upon the written request of IBM (a) allows IBM to modify or replace the Product, or (b) returns the Product to IBM for a credit equal to Customer's purchase price for the Product, provided Customer has followed generally accepted accounting principles. Such indemnification does not apply to a claim of infringement involving any Product sold or Service provided by IBM to Customer which has been modified by Customer, used in combination with any product not sold by IBM to Customer, or made, modified or provided by IBM in compliance with Customer's specification(s). Customer agrees to indemnify IBM against all damages and costs resulting from such a claim of infringement. The foregoing states the entire obligation and exclusive remedy of IBM and Customer regarding any claim of patent or copyright infringement relating to any Product sold or Service provided hereunder. 10.2 Customer warrants that it is the originator, rightful owner or licensee of all Items supplied to IBM hereunder and that to the best of Customer's knowledge no part of such Items infringes any intellectual property rights. 11.0 LIMITATION OF LIABILITY 11.1 Neither party shall be entitled to indirect, incidental, consequential or punitive damages, including lost profits based on any breach or default of the other party, including those arising from infringement or alleged infringement of any patent, trademark, copyright, mask work, or any other intellectual property. 11.2 Except for nonpayment, no action, regardless of form, arising from this Agreement may be brought by either party more than one (1) year after the cause of action has arisen. IBM's liability for any and all causes of action shall be limited in the aggregate to the greater of: (1) $50,000.00 or (2) the applicable IBM price to Customer for the specific Products and/or Services that caused the damages or that are the subject matter of, or directly related to, the cause of action. 11.3 The limitation of Section 11.2 does not apply to: (1) payments referred to in Section 10.1 and (2) damages for bodily injury (including death) and damage to real property and tangible personal property caused by IBM's negligence. 11.4 Under no circumstances is IBM liable for any of the following: (A) third party claims against Customer for losses or damages other than those in 11.3(1) and (2) above; or (B) loss of, or damage to, Customer's or another parties' records or data; or (C) when the Products and/or Services are used in conjunction with medical devices or nuclear materials. 12.0 WARRANTIES 4 12.1 IBM warrants all Products delivered hereunder shall conform to the specifications set forth in Part A of the applicable Attachment and shall be free from defects in material and workmanship for a period of one (1) year from the date of shipment unless otherwise stated in an Attachment applicable to such Products. Customer acknowledges that the functionality of Products is contingent on Customer's designs and, therefore, such warranty does not apply to the functionality of Products fabricated under this Agreement. All Prototypes are provided "As Is" without warranty of any kind. 12.2 THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS OR USAGE FOR PARTICULAR PURPOSE. 12.3 No course of dealing, course of performance, usage of trade, or description of Product, Prototype or Service shall be deemed to establish a warranty, express or implied. 12.4 If Customer claims that any Products and any incidental Services are nonconforming, Customer shall (1) promptly notify IBM, in writing, of the basis for such nonconformity; (2) follow IBM's instructions for the return of the Products; and (3) return such Products freight collect to IBM's designated facility. If IBM determines the Products are nonconforming, IBM will, at its option, repair or replace the defective Products, or issue a credit or rebate for the purchase price. 12.5 IBM's sole liability and Customer's sole remedy for breach of warranty shall be limited as stated in this Section 12. 13.0 TAXES 13.1 IBM shall bill Customer for all applicable sales, use and gross receipts taxes, unless Customer provides IBM with appropriate exemption certificates. 14.0 NOTICES 14.1 All communications and notices between the parties concerning this Agreement shall be given to the appropriate individual listed in the applicable Attachment and shall be deemed sufficiently made on the date if given by personal service, sent via mail, facsimile or electronic data interchange. Communication by facsimile or electronic data interchange is acceptable as a "writing". The autographs of representatives of the parties, as received by facsimile or electronic data interchange, shall constitute "original" signatures. 15.0 INDEPENDENCE OF ACTION 15.1 Each party agrees that this Agreement will not restrict the right of either party to enter into agreements with other parties for same or similar work, or to make, have made, use, sell, buy, develop, market or otherwise transfer any products or services, now or in the future, so long as confidential information is not disclosed. IBM shall not sell, market or otherwise transfer to any third party any Products using the trademark or trade name of Customer without prior written consent. 16.0 This Section Reserved. 17.0 GENERAL 17.1 Neither party shall be responsible for failure to fulfill its obligations under this Agreement due to fire, flood, war or other such cause beyond its reasonable control and without its fault or negligence (excluding labor disputes or payment obligations) provided it promptly notifies the other party. 17.2 The substantive laws of the State of New York govern this Agreement without regard to conflict of law principles. Both parties agree to waive their right to a jury trial in any dispute arising out of this Agreement and agree any action concerning this Agreement shall be brought in a court of competent jurisdiction in the State of New York. 17.3 Neither party may assign its rights (except that IBM may assign its rights for payment) or delegate or subcontract its duties hereunder without the 5 prior written consent of the other party, except that either party may freely assign its rights or delegate or subcontract its duties hereunder if all or substantially all of the assets of the business unit connected with this Agreement are sold or otherwise transferred to a third party. 17.4 No delay or failure by either party to act in the event of a breach or default hereunder shall be construed as a waiver of that or any subsequent breach or default of any provision of this Agreement. 17.5 If any part, term or provision of this Agreement is declared unlawful or unenforceable, by judicial determination or performance, the remainder of this Agreement shall remain in full force and effect. 17.6 Any terms of this Agreement which by their nature extend beyond expiration or termination of this Agreement shall remain in effect until fulfilled and shall bind the parties and their legal representatives, successors, heirs and assigns. 17.7 The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 17.8 Each party will comply, at its own expense, with all applicable federal, state and local laws, regulations and ordinances including, but not limited to, the regulations of the U.S. Government relating to export and re-export. Customer agrees that it is responsible for obtaining required government documents and approvals prior to export and re-export of any commodity, machine, software or technical data. 17.9 The UN Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. Signature Copy Attachment No. 1 Integrated Device Technology, Inc. Custom Sales Agreement X0718 IDTSow7.lwp Page 1 of Semiconductor Contract Manufacturing Attachment No. 1 Custom Sales Agreement No. X0718 When signed by the parties below, the following Statement of Work shall be incorporated into Custom Sales Agreement No. X0718 as Attachment No. 1 effective on January 19, 1998. Attachments are governed by the terms and conditions of the Base Agreement. Statement of Work CUSTOM SEMICONDUCTOR MANUFACTURING TASK ORDER Definitions "Wafer Acceptance Criteria" means the engineering specifications, referenced in Part A of this Statement of Work, which sets forth the technology parameters and physical criteria to which the Product will conform at the time of delivery. 1.0 Scope of Work 1.1 IBM will manufacture photomasks and Products in accordance with Part A of this Statement of Work. 1.2 Subject to the terms and conditions of this Statement of Work, Customer will provide IBM with the Customer's Items and cooperate with IBM to enable IBM to perform foundry services in accordance with this Agreement. 1.3 Customer may, at any time and from time to time, by written notice to IBM, request changes to the part numbers, specifications, or work scope. IBM will submit a written report to Customer setting forth the probable effect, if any, 6 of such requested change on prices, payment or delivery. IBM shall not proceed with any change until authorized in writing by Customer. The parties shall promptly amend this Attachment to incorporate any agreed changes. 1.4 IBM may implement engineering changes required to satisfy governmental standards, protect Product or system integrity, or for environmental, health or safety reasons. Customer will use reasonable efforts to incorporate such changes in Products already shipped by IBM. IBM may implement engineering changes that result in cost reductions to Product with prior approval of Customer, which will not be unreasonably withheld. 2.0 Forecasting Initial Forecast. Each Attachment shall contain an initial forecast of Customer's anticipated unit production demand requirements for Product(s) for at least the twelve (12) month period immediately following execution of the Attachment. The initial forecast will not become binding on either party until Customer submits the first purchase order for Product pursuant to Section 3 of this Attachment. The first purchase order shall, at a minimum, cover the first four (4) months of the twelve (12) month forecast. Subsequent Forecasts. Customer shall provide an updated forecast in writing to IBM, on a monthly basis by no later than the fifth (5th) day of each month during the term of the Attachment. Each such forecast will cover at least a rolling twelve (12) month period (not to exceed the term of this Attachment), and will be reviewed for acceptance by IBM. Within ten (10) business days after receipt IBM shall notify Customer with written notice of whether such forecast has been accepted or rejected. With each updated forecast Customer shall submit a purchase order ( pursuant to Section 3). This purchase order shall be for the quantity of Products forecast for the fourth (4th) month of the rolling forecast (months one (1) through three (3) having already been committed under purchase order(s) pursuant to previous forecast(s)). Customer agrees that if it does not submit purchase orders for accepted forecasts, as discussed in Section 6 of the Attachment, then Customer shall be subject to the cancellation charges described there. All purchase orders submitted are subject to the terms of Section 4.0 of the Agreement. IBM will accept purchase orders for months _*_ of any forecast, provided the forecast has been accepted by IBM, the orders are placed in accordance with Section 3 and the quantities requested are within _*_ the previously accepted forecast for said months or if Customer's orders constitute less than an average of _*_ wafer starts per day averaged over the three (3) previous month(s), IBM will accept purchase orders for quantities up to _*_ of previously forecasted quantities for such month(s). IBM will accept purchase orders for months _*_ provided the forecast has been accepted by IBM. Customer shall pay no cancellation charge for a decrease in forecasted quantities for months _*_. 3.0 Orders After the parties have executed an Attachment, Customer will request delivery of Products by issuing written purchase orders to IBM by the fifth (5th) day of each calendar month. As set forth in Section 2, Customer will maintain a minimum of four (4) months rolling purchase orders on IBM and may place purchase order(s) for months five (5) and six (6) of each forecast. Purchase orders are subject to, and IBM will accept and ship against purchase orders that comply with, the terms and conditions of the Agreement and this Attachment, and are - --------- [* Confidential treatment has been requested with respect to certain information contained within this document. Confidential portions are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.] 7 consistent with the most recently accepted forecasts and the most recent Customer credit limit as granted by IBM. Customer will request delivery of Products by issuing written purchase orders to the IBM ordering location identified in Section 7.0 of this Attachment. Purchase orders shall only specify: a) Customer's purchase order number b) Customer's tax status - exempt or non-exempt c) ship to location - complete address d) bill to location - complete address e) order from location - complete address f) NRE Services and/or Product part numbers and quantities being ordered (in increments of the Minimum Order Quantity ("MOQ"); g) NRE Charges and/or the Product's applicable unit price; h) shipping instructions, including preferred carrier. i) requested shipment dates j) the Agreement Number of this Agreement. k) Name of customer contact. 4.0 Customer Product Requirements 4.1 Technology: CMOS _*_ 4.2 Levels of metal: 5 4.3 Special features: Salicide block Fuse Blow 4.4 Test time: TBD (two pass testing required) 4.5 Package: Not applicable 5.0 Delivery 5.1 Product: The Purchase Order Lead Time for the Products and/or Services is nine (9) weeks after receipt of Customer's Purchase Order. 5.2 Prototypes: The lead time will forty-five (45) days after receipt of Customer's Purchase Order or the receipt of the DRC clean GDS II tape, whichever is received later. 6.0 Pricing Customer agrees to pay the following prices for NRE Services: 6.1 Services 6.1.1 Mask build and Prototype delivery _*_ - Design center technical and logistical support - Manufacturing slot and 2 prototype wafer - CMOS _*_ design groundrules - Processing of the GDSII tape - Mask build (_*_ masks) 6.1.2 Wafer Test - _*_ _*_ - Cantilever probes _*_ - Fuse blow debug _*_ 6.1.3 SUBSEQUENT METAL PERSONALIZATION REVISIONS - Engineering charge per revision _*_ - Per mask charge _*_ 6.2 Payment Schedule: Subject to credit terms granted to Customer by IBM, NRE services will be invoiced as follows: - 50% with purchase order placement by Customer - 50% on the date of shipment or completion of the NRE service 6.3 Price Quantity Matrix: 6.3.1 Prototype wafer pricing: - up to 12 untested wafers _*_ /wafer 6.3.2 Product unit pricing: _*_ 6.3.3 Wafer test _*_ Test time is TBD, _*_ Fuse Blow: _*_/wafer Minimum Order quantity: _*_ per shipment Minimum Shipment quantity _*_ per shipment 7.0 Cancellation Charges In accordance with Section 4 of the Base Agreement, the following charges will apply for failure to order against accepted forecasts and any cancelled Customer order or portion thereof. The "Cancellation Charge" referred to below is the percentage to be applied to the prices stated above in Section 5 of this Attachment. a) For a purchase order which is more than thirty (30) days, but less than sixty (60) days, from its scheduled shipment date, Customer may request in writing a one-time deferral of the scheduled shipment date not to exceed thirty (30) days, with no cancellation charge imposed. b) If Customer cancels an order or reduces an order or exceeds the foregoing Product shipment rescheduling rights in this Section 6, Customer agrees to pay the Product cancellation charges as described below. Canceled or Changed Forecast - --------- [* Confidential treatment has been requested with respect to certain information contained within this document. Confidential portions are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.] 8 a) If Customer fails to order forecasted quantities of Product for months _*_ of any accepted forecast, as described in Section 2 of the Agreement, Customer will pay _*_ of the wafer price for all Product that was not ordered; however, there shall be no charge for a given month if Customer orders at least _*_ of the forecasted quantities listed in the most recently accepted forecast, for that month. Canceled or Changed Purchase Orders a) If any purchase order is canceled prior to wafer start date, Customer shall pay _*_ of the wafer price, b) If any purchase order is canceled after wafer start, Customer shall pay _*_ of wafer price. 8.0 Ordering Location, Ship To / Bill To IBM Ordering Location: Ship To: Bill To: International Business Per Purchase Order Per Purchase Order Machines Corporation 1055 Joaquin Rd. Mountain View, CA 94043 Attention: Michele Young Fax: 415-694-3157 9.0 Coordinators/Administrators Technical Coordinators: Integrated Device Technology, Inc. IBM Microelectronics Director of Foundry Operations 2975 Stender Way I000 River Street Santa Clara, California 95054 Essex Junction, VT 05452 FAX: 408-456-2458 FAX: 802-769-6206 Attn: Gary Kennedy Attn: Mike Schwartz Contract Administrators: Integrated Device Technology, Inc. IBM Microelectronics Director of Foundry Operations 2975 Stender Way I000 River Street Santa Clara, California 95054 Essex Junction, VT 05452 FAX: 408-456-2458 FAX: 802-769-2441 Attn: Gary Kennedy Attn: April Johnson 10. Unique Terms and Conditions The following terms and conditions are applicable to this Attachment only. Referring to the Base Agreement: Not applicable. Agreed to: Agreed to: - --------- [* Confidential treatment has been requested with respect to certain information contained within this document. Confidential portions are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.] 9 INTERNATIONAL BUSINESS INTEGRATED DEVICE TECHNOLOGY, INC. MACHINES CORPORATION By: _________________________ By: ______________________________ Authorized Signature Authorized Signature Peter Hansen Len Perham V. P. of North American Sales CEO and President Dated: Dated: Part A 1.0 PRODUCT NAME AND DESCRIPTION: Centaur Microprocessor 2.0 PRODUCT SPECIFICATIONS: IBM will process the IDT design for the Centaur Microprocessor in the IBM CMOS _*_ technology based on Engineering Specification #08J1973. 3.0 CUSTOMER'S ITEMS: 3.1 Technology: CMOS _*_ 3.2 Levels of metal: 5 3.3 Special features: Salicide block Fuse Blow 3.4 Test time: TBD (_*_ testing required) 4.0 PRODUCT DEMAND FORECAST: Wafers Year: 1998 Month: Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. * * * * * * * * * * * * --- --- --- --- --- --- --- --- --- --- --- --- Exhibit A Wafer Acceptance Criteria (for tested wafers) 1. Nothing in this Exhibit modifies or expands Customer's warranty rights under the Agreement. - --------- [* Confidential treatment has been requested with respect to certain information contained within this document. Confidential portions are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.] 10 2. IBM Products, with the reasonable cooperation of the Customer, will be subject to the following quality standards. A) Wafer Specifications a. Wafer Size: IBM will ship 8 inch diameter wafers. b. Wafer Thickness and Finish: IBM and Customer will agree upon specifications for wafer thickness and back finish. c. Die Layout: IBM will be responsible for the reticle layout and stepping of the Customer's die, consistent with IBM's normal defect monitoring strategy. d. Packing: 1. Tested wafers: Tested wafers will be shipped in containers using shipping methods approved by the Customer, which approval will not be unreasonably withheld. 2. Damaged Goods: The Customer will provide feedback on wafers damaged during transit which are related to inadequate packing. IBM will then take reasonable corrective action if the damages were caused by IBM. Customer may return the wafer using IBM's RMA process. B) Wafer Yields: a. Circuit limited yield loss is solely the responsibility of the Customer so long as IBM manufactures the Product in accordance with the CMOS _*_ process technology's process parameters as defined by the SPICE decks. b. Minimum Yields: Wafers with process yields less than _*_ of the wafer target yield will not be shipped, unless agreed to in writing by the Customer. C) Visual Criteria: The Customer's production Product will meet the IBM's outgoing wafer inspection criteria including wafer warpage, thickness, back finish, passivation integrity, visual defect inspection criteria and packing integrity. D) Electrical Criteria: a. Parametrics: Product will be screened via parametric test probe scribe level sample testing. This is consistent with IBM's active Statistical Process Control program for the purposes of controlling and reducing the variability of key device parametrics including voltage thresholds, breakdown voltages, poly lengths and drive currents. For products that require special processing (e.g. split lots), IBM and Customer will reasonably agree in writing, in advance, on the data to be collected. E) Prototypes: a. Prototypes and other similar non-production material will be accepted by the Customer and may not meet the quality criteria described herein. Customer may not use this material for production shipments. F) Documentation: a. In order to assist in yield, performance and reliability problem solving efforts, wafer lot documentation can be made available to the Customer upon Customer's written request. Documentation that is available includes, a listing of the parametric test probe data, wafer lot ID, device ID, total wafers shipped, wafer thickness, and when applicable, special notices of exception - --------- [* Confidential treatment has been requested with respect to certain information contained within this document. Confidential portions are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.] 11 and/or comment (for example, non-standard processing, non-production status, special instructions, etc.). G) Test: Electrical test using functional, scan and memory based tests will be done as reasonably mutually agreed between IBM and Customer. The details to be identified after the completion of the first prototype wafers. - --------- [* Confidential treatment has been requested with respect to certain information contained within this document. Confidential portions are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.] 12 EX-21.1 4 LIST OF REGISTRANT'S SUBSIDIARIES EX 21.1 LIST OF REGISTRANT'S SUBSIDIARIES State or Other Jurisdiction Owned by of Incorporation Registrant Centaur Technology, Inc. California 100% Clear Logic, Inc. California 36 Baccarat Coyote, Inc. California 100 Baccarat Silicon, 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 IDT International Holdings, Inc. California 100 Integrated Device Technology, Inc. Cayman Islands 100 Integrated Device Technology, AB Sweden 100 Integrated Device Technology, Europe, Inc. California 100 Integrated Device Technology GmbH Germany 100 Integrated Device Technology (Israel) Ltd. Israel 100 Integrated Device Technology Italia S.r.l. Italy 100 Integrated Device Technology Korea, Inc. Korea 100 Integrated Device Technology (Malaysia) SDN. BHD Malaysia 100 Integrated Device Technology Realty Holdings, Inc. Philippines 40 Integrated Device Technology Holding, Inc. Philippines 40 Integrated Device Technology (Philippines), Inc. Philippines 100 Integrated Device Technology Singapore (1997) Pte. Ltd. Singapore 100 Nippon IDT K.K. Japan 100 EX-23.1 5 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, 33-54937, 33-63133, 333-15871, 333-36601 and 333-45245) of Integrated Device Technology, Inc. of our report dated April 17, 1998, listed in the index appearing under Item 8 of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California June 2, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS of INTEGRATED DEVICE TECHNOLOGY, INC. and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS MAR-29-1998 MAR-31-1997 MAR-29-1998 146,114 74,481 79,950 11,110 60,737 424,603 910,257 434,817 968,955 159,081 183,756 0 0 81 546,310 968,955 587,136 587,136 364,291 364,291 121,449 0 14,088 11,454 3,207 8,247 0 0 0 8,247 0.10 0.10 Item represents basic earnings per share
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF INTEGRATED DEVICE TECHNOLOGY, INC. and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS 12-MOS MAR-30-1997 MAR-31-1996 APR-01-1996 APR-03-1995 MAR-30-1997 MAR-31-1996 155,149 157,228 35,747 104,046 84,951 89,606 7,351 4,580 47,618 46,630 413,810 447,300 761,646 660,918 337,429 245,704 903,584 939,434 133,642 161,100 183,157 182,558 0 0 0 0 80 77 524,158 549,650 903,584 939,434 537,213 679,497 537,213 679,497 325,668 293,695 370,891 293,695 151,420 133,317 0 0 12,018 9,269 (62,164) 173,896 (19,892) 55,647 (42,272) 118,249 0 0 0 1,921 0 0 (42,272) 120,170 (0.54) 1.56 (0.54) 1.44
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS of INTEGRATED DEVICE TECHNOLOGY, INC. and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 6-MOS 9-MOS MAR-29-1998 MAR-29-1998 MAR-29-1998 MAR-31-1997 MAR-31-1997 MAR-31-1997 JUN-29-1997 SEP-28-1997 DEC-28-1997 148,975 177,738 151,047 45,109 47,485 62,583 84,931 74,793 77,509 10,534 10,786 11,466 49,647 52,135 54,121 401,438 406,309 397,701 810,012 836,415 875,712 367,063 392,968 422,321 921,411 925,484 925,033 148,752 149,852 145,356 183,306 183,455 183,606 0 0 0 0 0 0 80 80 81 527,858 532,255 538,999 921,411 925,484 925,033 148,873 292,680 436,915 148,873 292,680 436,915 92,537 181,180 270,373 92,537 181,180 270,373 29,822 60,454 91,748 0 0 0 3,743 7,255 10,770 2,626 6,239 9,546 735 1,747 2,673 1,891 4,492 6,873 0 0 0 0 0 0 0 0 0 1,891 4,492 6,873 0.02 0.06 0.09 0.02 0.05 0.08
EX-27.4 9 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS of INTEGRATED DEVICE TECHNOLOGY, INC. and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 6-MOS 9-MOS MAR-30-1997 MAR-30-1997 MAR-30-1997 APR-01-1996 APR-01-1996 APR-01-1996 JUN-30-1996 SEP-29-1996 DEC-29-1996 109,427 142,207 107,428 93,461 77,481 76,872 87,899 73,694 82,381 4,825 6,605 7,032 48,743 49,410 47,825 388,879 403,535 396,636 740,260 752,659 745,223 262,872 281,260 311,297 934,749 947,750 896,163 146,499 151,136 130,947 182,708 182,858 183,007 0 0 0 0 0 0 78 78 79 559,840 551,271 519,310 934,749 947,750 896,163 142,539 263,024 394,016 142,539 263,024 394,016 71,616 153,907 237,530 71,616 153,907 282,753 39,085 76,838 117,366 0 0 0 1,926 4,738 8,350 13,042 (2,737) (66,244) 4,173 (1,272) (21,861) 8,869 (1,465) (44,383) 0 0 0 0 0 0 0 0 0 8,869 (1,465) (44,383) 0.11 (0.02) (0.57) 0.11 (0.02) (0.57)
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