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INTEGRATED DEVICE TECHNOLOGY INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This report contains 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. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking. Forward-looking statements, which are generally identified by words such as "anticipates," "expects," "plans," "intends," "seeks," "targets," "believes," "can," "may," "might," "could," "should," "would," "will" and similar terms, include statements related to, among others, revenues and gross profit, research and development activities, selling, general and administrative expenses, restructuring costs, intangible expenses, interest income and other, taxes, capital spending and financing transactions, as well as statements regarding successful development and market acceptance of new products, industry and overall economic conditions and demand, and capacity utilization. Forward-looking statements are based upon current expectations, estimates, forecasts and projections that involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to: global business and economic conditions; operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; product performance; intellectual property matters; mergers and acquisitions and integration activities; and the risk factors set forth in Part II, Item 1A "Risk Factors" to this Report on Form 10-Q. As a result of these risks and uncertainties, actual results could differ significantly from those expressed or implied in the forward-looking statements. Unless otherwise required by law, we undertake no obligation to publicly revise these statements for future events or new information after the date of this Report on Form 10-Q. This discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes included in this report and the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended April 3, 2011 filed with the SEC. Operating results for the three months ended July 3, 2011 are not necessarily indicative of operating results for an entire fiscal year. In the first quarter of fiscal 2012, we recorded an out of period adjustment to reverse accruals related to cost of revenues and operating expenses. The correction of these errors resulted in an increase of $0.7 million to our net income for the three months ended July 3, 2011. Management assessed the impact of these errors and concluded that the amounts are not material, either individually or in the aggregate, to any of the previously reported annual or interim financial statements. This adjustment did not change the reported net income per share for the three months ended July 3, 2011. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates and assumptions are based on historical experience and other factors that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates and assumptions. For a discussion of our critical accounting policies, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended April 3, 2011. We believe that these accounting policies are "critical," as defined by the SEC, in that they are both highly important to the portrayal of our financial condition and results, and they require difficult management judgments, estimates and assumptions about matters that are inherently uncertain. We believe that there have been no significant changes during the three months ended July 3, 2011 to the items that we disclosed as our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 3, 2011. 24 -------------------------------------------------------------------------------- Table of Contents The Company's fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31. In a 52-week year, each fiscal quarter consists of thirteen weeks. In a 53-week year, the additional week is usually added to the third quarter, making such quarter consist of fourteen weeks. The first quarter of fiscal 2012 and fiscal 2011 was a thirteen week period. Strategy and Business We design, develop, manufacture and market a broad range of low-power, high-performance mixed signal semiconductor solutions for the advanced communications, computing and consumer industries. Currently, we offer communications solutions for customers within the enterprise, data center and wireless markets. Our computing products are designed specifically for desktop, notebook, sub-notebook, storage and server applications, optimized gaming consoles, set-top boxes, digital TV and smart phones for consumer-based clients. Ultimately, we envision equipping every digital system with an interface based on our silicon. We are focused on the following: · aggressively managing, maintaining and refining our product portfolio including focus on the development and growth of new applications; · maintaining existing customers, pursuing and winning new customers; · developing and marketing new products in a timely and efficient manner; · differentiating and enhancing our products; · deploying research and development investment in the areas of displays, silicon timing, power management, signal integrity and radio frequency; and · rationalizing our manufacturing operations including the transition to wholly outsourced wafer fabrication operations. For more information on our business, please see Part I, Item 1, "Business," in our Annual Report on Form 10-K for the fiscal year ended April 3, 2011. Results of Operations Our reportable segments include the following: · Communications segment: includes clock and timing solutions, Serial Rapid IO switching solutions, crystal oscillator replacements, radio frequency (RF), signal path products, flow-control management devices, first in and first out (FIFOs), integrated communications processors, high-speed static random access memory (SRAM), digital logic and telecommunications products. · Computing and Consumer segment: includes clock generation and distribution † products, PCI Express switching and bridging solutions, high-performance server memory interfaces, multi-port products, touch controller, signal integrity products, PC audio, power management and video products. Revenues (in thousands) Three months ended July 3, 2011 June 27, 2010 Communications $ 69,922 $ 70,665 Computing and Consumer 81,565 87,608 Total $ 151,487 $ 158,273 25-------------------------------------------------------------------------------- Table of Contents Communications Segment Revenues in our Communications segment decreased $0.7 million, or 1% in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 due to the weakness in our communication end market. Revenues from SRAM and digital logic products decreased 10% due to softness in the communication integrated circuit market. Revenues from our communications timing products decreased 1% due to reduced demand for our timing products in the communications market. Partially offsetting these decreases was an increase in our flow control management products as a result of improved demand for our Rapid I/O switching solutions products. In addition, ramp up in our all-silicon oscillator products contributed to revenues in the first quarter of fiscal 2012 as a result of our acquisition of Mobius Microsystems in January 2010. Computing and Consumer Segment Revenues in our Computing and Consumer segment decreased $6.0 million, or 7% in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 driven by lower demand from computing market and increased competition in the consumer market. Revenues from our analog and power products decreased 18% primarily attributable to lower demand for our personal computer and consumer timing products. In addition, revenue within our video and display division decreased year over year. Revenues within our Enterprise Computing division increased 19%, due to the continued growth in our Data Double Rate 3 (DDR3) products partially offset by the decline in revenues from our Advanced Memory Buffer (AMB) products. Revenues by Region Revenues in the Asia Pacific region ("APAC"), Americas, Japan and Europe accounted for 68%, 13%, 8% and 11%, respectively, of consolidated revenues in the first quarter of fiscal 2012 compared to 68%, 14%, 9% and 9%, respectively, of our consolidated revenues in the first quarter of fiscal 2011. The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in that region. Deferred Income on Shipments to Distributions Included in the Balance Sheet caption "Deferred income on shipments to distributors" are amounts related to shipments to certain distributors for which revenue is not recognized until our product has been sold by the distributor to an end customer. The components as of July 3, 2011 and April 3, 2011 are as follows: (in thousands) July 3, 2011 April 3, 2011 Gross deferred revenue $ 17,566 $ 15,463 Gross deferred costs (2,831 ) (2,610 ) Deferred income on shipments to distributors $ 14,735 $ 12,853 The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory. Based on our history, the amount ultimately recognized as revenue is generally less than the gross deferred revenue as a result of ship from stock pricing credits, which are issued in connection with the sell through of the product to an end customer. As the amount of price adjustments subsequent to shipment is dependent on the overall market conditions, the levels of these adjustments can fluctuate significantly from period to period. Historically, the price adjustments have represented an average of approximately 25% of the list price billed to the customer. As these credits are issued, there is no impact to working capital as this reduces both accounts receivable and deferred revenue. The gross deferred costs represent the standard costs (which approximate actual costs) of products we sell to the distributors. The deferred income on shipments to distributors increased $1.9 million or 15% in the first quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011. The increase was primarily attributable to increase in shipments to distributors. 26 -------------------------------------------------------------------------------- Table of Contents Gross Profit Three Months Ended (in thousands) July 3, 2011 June 27, 2010 Gross Profit $ 81,392 $ 82,166 Gross Profit Percentage 54 % 52 % Gross profit decreased $0.8 million, or 1% in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 driven by the lower revenues in the first quarter of fiscal 2012. Gross profit percentage increased to 54% in first quarter of fiscal 2012 from 52% in the first quarter of fiscal 2011. Our gross profit percentage was positively impacted by a favorable shift in the mix of products sold and manufacturing cost reduction initiatives including cost savings from the closure of our test facility in Singapore and consolidation of our test operations in Malaysia. Our manufacturing capacity in Oregon was fully utilized in the first quarter of fiscal 2012 and 2011. However, utilization in first quarter of fiscal 2012 benefited from inventory build in anticipation of the transfer to third party foundries. In addition, our gross profit percentage in the first quarter of fiscal 2011 was negatively impacted by the sale of acquired inventory valued at fair market value, less an estimated selling cost, associated with our acquisition of IKOR in April 2010, while we had no such charges in first quarter of fiscal 2012. Operating Expenses The following table presents our operating expenses: Three Months Ended July 3, % of Net June 27, % of Net (in thousands) 2011 Revenues 2010 Revenues Research and development $ 46,006 30 % $ 43,736 28 % Selling, General and administrative $ 26,829 18 % $ 27,358 17 % Research and Development ("R&D") R&D expense increased $2.3 million, or 5%, to $46.0 million in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 primarily due to $1.0 million increase in product development and R&D material expense, $1.2 million increase in consulting service and outside service and $0.5 million increase in equipment expenses as we continue to increase our development efforts to bring products to market to meet customer requirements. Our labor and benefit expense increased $1.4 million due to increased headcount. Partially offsetting these increases was a $1.7 million decrease in performance related bonus expense associated with our acquisitions. Selling, General and Administrative ("SG&A") SG&A expenses decreased $0.5 million, or 2%, to $26.8 million in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 due to $0.6 million decrease in tax, legal, consulting and outside services expenses, $0.4 million decrease in intangible assets amortization expense as some of intangible assets acquired from previous acquisitions were fully amortized and $0.3 million decrease in incentive compensation expense and performance bonus associated with acquisitions. Partially offsetting these decreases were a $0.5 million increase in labor and benefit expense and $0.4 million increase in sales conference, trade show and promotion material expenses. Restructuring As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, we reduced our workforce and consolidated our facilities. The resulting restructuring expenses were comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities. 27 -------------------------------------------------------------------------------- Table of Contents In connection with the discontinuing test operations at our Singapore facility in the fourth quarter of fiscal 2010, we exited the leased facility in Singapore in the first quarter of fiscal 2011. As a result, we recorded lease impairment charges of approximately $0.5 million in fiscal 2011, which represented the future rental payments under the agreements, reduced by an estimate of sublease income, and discounted to present value using an interest rate applicable to us. These charges were recorded as cost of goods sold. Since the initial restructuring, we have made lease payments of $0.3 million. As of July 3, 2011, the remaining accrued lease liabilities were $0.2 million. We expect to pay in full our facility lease obligations by the third quarter of fiscal 2013. In connection with the divestitures of our Silicon Logic Engineering business in the third quarter of fiscal 2010, we exited our leased facility in Wisconsin. As a result, we recorded lease impairment charges of approximately $0.5 million, which represented the future rental payments under the lease agreements, reduced by an estimate of sublease income, and discounted to present value using an interest rate applicable to us. These charges were recorded as SG&A expense. Since the initial restructuring, we have made lease payments of $0.3 million related to the vacated facility. As of July 3, 2011, the remaining accrued lease liabilities were $0.2 million. We expect to pay in full our facility lease obligations by the first quarter of fiscal 2013. In addition, in connection with our plan to transition the manufacture of products to TSMC, our management approved a plan to exit wafer production operations at our Oregon fabrication facility. As a result, we accrued restructuring expenses of approximately $4.8 million for severance payments and other benefits associated with this restructuring action in fiscal 2010. We expect to complete this restructuring action in the third quarter of fiscal 2012. During the second quarter of fiscal 2006, we completed the consolidation of our Northern California workforce into our San Jose headquarters and exited a leased facility in Salinas, California. We recorded lease impairment charges of approximately $2.1 million, of which $0.6 million was recorded as cost of revenues, $0.9 million was recorded as R&D expense and $0.6 million was recorded as SG&A expense. Since the initial restructuring, we have made lease payments of $1.5 million related to the vacated facility in Salinas. As of July 3, 2011, the remaining accrued lease liabilities were $0.6 million. We expect to pay in full our facility lease obligations by the third quarter of fiscal 2014. Interest Income and Other, Net The components of interest income and other, net are summarized as follows: Three Months Ended (in thousands) July 3, 2011 June 27, 2010 Interest income $ 66 $ 249 Other income (expense), net (22 ) 15 Interest income and other, net $ 44 $ 264 Interest income decreased $0.2 million in first quarter of fiscal 2012 compared to the first quarter of fiscal 2011, primarily attributable to lower average interest rates and lower cash and investment balances during the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011. Other income (expense), net decreased $37,000, primarily attributable to a decrease in gains recognized in the value of the deferred compensation plan assets partially offset by a decrease in foreign currency loss in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011. 28 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense We recorded an income tax expense of $0.9 million in the first quarter of fiscal 2012 and fiscal 2011. The income tax expense in the first quarter of fiscal 2012 and fiscal 2011 was attributable to estimated U.S. and state taxes and foreign income taxes. As of July 3, 2011, we continued to maintain a valuation allowance against our net U.S. deferred tax asset, as we could not conclude that it is more likely than not that we will be able to realize our U.S. deferred tax assets in the foreseeable future. We will continue to evaluate the release of the valuation allowance on a quarterly basis. As of July 3, 2011, we were subject to the IRS examination in the U.S. federal tax jurisdiction for the fiscal years 2009 and 2010. To date, we have not been notified by the IRS that a field audit will be conducted. The statute of limitations to assess tax for fiscal 2009 expires in December 2012. The general practice of the IRS is to notify taxpayers of a field audit months before the statute of limitations expire. If we are audited by the IRS based on currently available information, we believe that the ultimate outcome will not have a material adverse effect on our financial position, cash flows or results of operations. Liquidity and Capital Resources Our cash and cash equivalents and short-term investments were $287.2 million at July 3, 2011, a decrease of $12.0 million compared to April 3, 2011. The decrease was primarily attributable to the payments of $23.8 million to repurchase our common stock and $8.2 million to purchase capital equipment, partially offset by $14.9 million of cash from operations in the first quarter of fiscal 2012. We had no outstanding debt at July 3, 2011 and April 3, 2011. Cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase. We maintain the cash and cash equivalents with reputable major financial institutions. Deposits with these banks may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits or similar limits in foreign jurisdictions. These deposits typically may be redeemed upon demand and, therefore, bear minimal risk. In addition, a significant portion of cash equivalents is concentrated in money market funds which are invested primarily in U.S. government treasuries. While we monitor daily the cash balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit fails or is subject to other adverse conditions in the financial markets. As of July 3, 2011, we had not experienced any loss or lack of access to our invested cash or cash equivalents in our operating accounts. However, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. See Part II, Item 1A"Risk Factors: Global market and economic conditions, including those related to the credit markets, may adversely affect our business and results of operations." In addition, as much of our revenues are generated outside the U.S., a significant portion of our cash and investment portfolio accumulates in the foreign countries in which we operate. At July 3, 2011, we had cash, cash equivalents and investments of approximately $192.2 million invested overseas in accounts belonging to various IDT foreign operating entities. While these amounts are primarily invested in U.S. dollars, a portion is held in foreign currencies, and all offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts may be subject to tax and other transfer restrictions. All of our short-term investments which are classified as available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. This determination requires significant judgment. For publicly traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including a review of the closing price over the length of time, general market conditions and our intent and 29 -------------------------------------------------------------------------------- Table of Contents ability to hold the investment for a period of time sufficient to allow for recovery or maturity. Currently, a significant portion of our short-term investments that we hold are in a separate portfolio limited to securities of, or unconditionally guaranteed by, the United Statement government and with a maturity of less than one year. Although we believe the portfolio continues to be comprised of sound investments due to high credit ratings and government guarantees of the underlying investments, a further decline in the capital and financial markets would adversely impact the market values of its investments and their liquidity. We continually monitor the credit risk in our portfolio and future developments in the credit markets and make appropriate changes to our investment policy as deemed necessary. We did not record any other-than-temporary impairment charges related to our short-term investments in the first quarter of fiscal 2012 and fiscal 2011. We recorded net income of $7.7 million in the first quarter of fiscal 2012 compared to net income of $10.4 million in the first quarter of fiscal 2011. Net cash provided by operating activities decreased $12.1 million, or 45%, to $14.9 million in the first quarter of fiscal 2012 compared to $27.0 million in the first quarter of fiscal 2011. A summary of the significant non-cash items included in net income are as follows: · Amortization of intangible assets was $4.2 million in the first quarter of fiscal 2012 compared to $4.9 million in the first quarter of fiscal 2011. The decrease was due to a large portion of intangible assets related to the acquisitions prior to fiscal 2009 being fully amortized. · Depreciation expense was $4.7 million in the first quarter of fiscal 2012 compared to $4.6 million in the first quarter of fiscal 2011. The decrease is primarily attributable to a large portion of our manufacturing equipment being fully depreciated and our continuous efforts to control capital asset purchases. Net cash used by working capital related items was $5.8 million in the first quarter of fiscal 2012, compared to net cash provided by working capital related items of $2.4 million in the first quarter of fiscal 2011. A summary of significant working capital items that used relatively more cash in the first quarter of fiscal 2012 included: · An increase in inventory of $6.5 million in the first quarter of fiscal 2012 compared to a decrease of $2.0 million in the first quarter of fiscal 2011. The increase in the first quarter of fiscal 2012 was due to increased inventory in work in process to support increased higher shipment levels combined with our build-ahead of inventory in anticipation of our wafer fabrication transition to third party foundry. The decrease in the first quarter of fiscal 2011 was primarily attributable to our efforts to align our inventory levels to meet current and future demand. · A decrease in accounts payable of $5.3 million in the first quarter of fiscal 2012 compared to an increase in accounts payable of $2.2 million in the first quarter of fiscal 2011. The decrease in the first quarter of fiscal 2012 was primarily attributable to the timing of payments. The increase in the first quarter of fiscal 2011 was due to the timing of payments and increase in the volume of foundry and subcontractor activity. · A decrease in accrued compensation of $2.6 million in the first quarter of fiscal 2012 compared to an increase of $1.9 million in the first quarter of fiscal 2011. The decrease in the first quarter of fiscal 2012 was primarily attributable to a reduction in accrual related to the incentive compensation program as a result of our year end payout in May 2011 and decrease in other employee bonus accrual associated with our acquisitions due to the payments made, partially offset by additional accruals related to our fiscal 2012 incentive compensation program and an increase in wage and payroll tax accrual due to the timing of our fiscal quarter end and payroll cycle. The increase in accrued compensation in the first quarter of fiscal 2011was primarily attributable to an accrual related to performance-related bonuses as we implemented our new annual incentive plan in the first quarter of fiscal 2011. · A decrease in prepayments and other assets of $2.3 million in the first quarter of fiscal 2012 compared to a decrease of $5.0 million in the first quarter of fiscal 2011. The decrease in the first quarter of fiscal 2012 was primarily attributable to normal recurring prepaid amortization, 30-------------------------------------------------------------------------------- Table of Contents partially offset by an increase in a value-added tax ("VAT") receivable and payments made for additional software maintenance and license agreements. The decrease in the first quarter of fiscal 2011 was primarily attributable to the normal recurring prepaid amortization, partially offset by additional software maintenance and license agreements signed and paid during the quarter. The factors listed above were partially offset by other working capital items that provided more cash during the first quarter of fiscal 2012 as compared to the first quarter of fiscal 2011: · A decrease in accounts receivable of $1.3 million in the first quarter of fiscal 2012 compared to an increase of $5.7 million in the first quarter of fiscal 2011. The decrease in the first quarter of fiscal 2012 was due to the timing of shipments and collection efforts. The increase in the first quarter of fiscal 2011 was primarily attributable to higher revenues in the first quarter of fiscal 2011 and the timing of shipments. · A decrease in income tax receivable/payable of $1.8 million in the first quarter of fiscal 2012 compared to a decrease of $0.8 million in the first quarter of fiscal 2011. The decrease in the first quarter of fiscal 2012 was due to the receipt of tax refund from the IRS. · An increase in other accrued liabilities and long term liabilities of $1.4 million in the first quarter of fiscal 2012 compared to a decrease of $5.7 million in the first quarter of fiscal 2011. The increase in the first quarter of fiscal 2012 was primarily attributable to an advanced payment received from a vendor for wafer purchases, partially offset by decrease in accruals related to our restructuring actions and decrease in other accruals due to payments made. The decrease in the first quarter of fiscal 2011 was primarily attributable to a decrease in accruals related to our restructuring actions and decreases in supplier obligations and miscellaneous payable due to payments made during the quarter. Net cash used by investing activities was $25.9 million in the first quarter of fiscal 2012, compared to net cash used by investing activities of $37.6 million in the first quarter of fiscal 2011. In the first quarter of fiscal 2012, net cash used to purchase short-term investments was $190.4 million, partially offset by cash proceeds from sales and maturity of short-term investments of $172.7 million. In addition, in the first quarter of fiscal 2012, we used approximately $8.2 million to purchase capital equipment. In the first quarter of fiscal 2011, net cash used to purchase short-term investments and non-marketable securities was $121.5 million, partially offset by cash proceeds from sale and maturity of short-term investments of $97.4 million. In addition, in the first quarter of fiscal 2011, we paid approximately $8.0 million for the IKOR acquisition including $1.8 million held in escrow for contingent consideration and used $5.4 million to purchase capital equipment. Net cash used in financing activities was $19.0 million in the first quarter of fiscal 2012, compared to net cash used by financing activities of $21.1 million in the first quarter of fiscal 2011. In the first quarter of fiscal 2012, we repurchased approximately $23.8 million of our common stock, partially offset by proceeds of approximately $4.9 million from the exercise of employee stock options and the issuance of stock under our employee stock purchase plan. In the first quarter of fiscal 2011, we repurchased approximately $24.2 million of common stock, partially offset by proceeds of approximately $3.1 million from the exercise of employee stock options and the issuance of stock under our employee stock purchase plan. We anticipate capital expenditures of approximately $20 million to $25 million during fiscal 2012 to be financed through cash generated from operations and existing cash and investments. This estimate includes $8.2 million in capital expenditures in the first quarter of fiscal 2012. On June 13, 2011, we entered into a Master Repurchase Agreement (the "Repurchase Agreement") with Bank of America, N.A. ("Bank of America"), pursuant to which we have the right, subject to the terms and conditions of the Repurchase Agreement, to sell to Bank of America up to 1,431 shares of Class A preferred shares of one of our wholly owned subsidiaries (the "Subsidiary"), in one or more transactions prior to June 13, 2012 for an aggregate purchase price of $135 million in cash. Pursuant to the Repurchase 31 -------------------------------------------------------------------------------- Table of Contents Agreement, to the extent we sell any such shares to Bank of America, we will be obligated to repurchase from Bank of America and Bank of America will be obligated to resell us, those preferred shares for the aggregate purchase price paid by Bank of America. In such case, and while such shares are outstanding, we will also be obligated to make monthly payments to Bank of America at a floating interest rate of LIBOR plus 2.125% and will have the right to accelerate the repurchase of all or any portion of the shares prior to June 13, 2016. The Repurchase Agreement also contains certain customary events of default. As of July 3, 2011, we have not sold any preferred stock to Bank of America. In connection with the Repurchase Agreement, we have entered into an agreement dated June 13, 2011 in favor of Bank of America and certain additional parties (the "IDTI Agreement"), which contains certain representations and various affirmative and negative covenants of us, including an obligation that we and our Subsidiary each maintain adequate capital in light of our contemplated business operations. This agreement contains certain agreements by us intended to maintain the status of our Subsidiary as an entity distinct from us and our other subsidiaries, with separate assets and liabilities, as well as an indemnity by us. We believe that existing cash and investment balances, combined with cash flows from operations and financing available to us under the Repurchase Agreement with Bank of America, will be sufficient to meet our working capital and capital expenditure needs through at least next twelve months. We may choose to investigate other financing alternatives; however, we cannot be certain that additional financing will be available on satisfactory terms. Off-balance Sheet Arrangements As of July 3, 2011, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii). Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, please see "Note 2 Recent Accounting Pronouncements" in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q. |