d10q.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)

/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 28, 2009

OR

/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                             .

Commission File No. 0-12695

INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
 
94-2669985
(I.R.S. Employer
Identification No.)
 
6024 SILVER CREEK VALLEY ROAD, SAN JOSE, CALIFORNIA
(Address of Principal Executive Offices)
 
 
95138
(Zip Code)


Registrant's Telephone Number, Including Area Code: (408) 284-8200

 
     
Title of each class
 
Name of each exchange on which registered
     
Common stock, $.001 par value
 
The NASDAQ Stock Market LLC
 
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
x  Large accelerated filer                            ¨  Accelerated filer                            ¨  Non-accelerated filer              ¨ Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
 
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of July 26, 2009, was approximately 165,571,519.
 



INTEGRATED DEVICE TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 28, 2009
TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION


Item 1.
     
      3  
      4  
      5  
      6  
Item 2.
    31  
Item 3.
    41  
Item 4.
    41  
           
PART II—OTHER INFORMATION
 
 
 
         
Item 1.
    42  
Item 1A.
    43  
Item 2.
    51  
Item 3.
    51  
Item 4.
    51  
Item 5.
    51  
Item 6.
    52  
    53  






PART I    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)

      Three months ended  
   
June 28,
2009
   
June 29,
2008
 
Revenues
  $ 115,954     $ 188,208  
Cost of revenues
    68,789       103,749  
                 
Gross profit
    47,165       84,459  
                 
Operating expenses:
               
Research and development
    36,315       43,619  
Selling, general and administrative
    25,435       32,965  
                 
Total operating expenses
    61,750       76,584  
                 
Operating income (loss)
    (14,585 )     7,875  
Interest expense
    (19 )     (18 )
Interest income and other, net
    1,425       1,465  
                 
Income (loss) before income taxes
    (13,179 )     9,322  
Provision for income taxes
    942       168  
                 
Net income (loss)
  $ (14,121 )   $ 9,154  
                 
Basic net income (loss) per share:
  $ (0.09 )   $ 0.05  
Diluted net income (loss) per share:
  $ (0.09 )   $ 0.05  
Weighted average shares:
               
Basic
    165,430       171,080  
Diluted
    165,430       171,366  


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)

 
June 28,
2009
 
March 29,
2009
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 165,095     $ 136,036  
Short-term investments
    140,893       160,037  
Accounts receivable
    51,339       54,894  
Inventories
    62,788       69,722  
Deferred tax assets
    1,696       1,696  
Prepayments and other current assets
    18,322       19,881  
                 
Total current assets
    440,133       442,266  
                 
Property, plant and equipment, net
    68,351       71,561  
Goodwill
    89,463       89,404  
Acquisition-related intangibles, net
    51,330       50,509  
Other assets
    21,830       24,627  
                 
Total assets
  $ 671,107     $ 678,367  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 31,533     $ 25,837  
Accrued compensation and related expenses
    16,168       18,820  
Deferred income on shipments to distributors
    14,771       16,538  
Income taxes payable
    939       457  
Other accrued liabilities
    21,041       21,206  
                 
Total current liabilities
    84,452       82,858  
                 
Deferred tax liabilities
    3,312       3,220  
Long-term income tax payable
    20,957       20,907  
Other long-term obligations
    14,324       14,314  
Total liabilities
    123,045       121,299  
                 
Commitments and contingencies (Notes 15 and 16)
               
Stockholders' equity:
               
Preferred stock; $.001 par value: 10,000 shares authorized; no shares issued
    --       --  
Common stock; $.001 par value: 350,000 shares authorized; 165,563 and 165,298 shares outstanding at June 28, 2009 and March 29, 2009, respectively
    166       165  
Additional paid-in capital
    2,287,901       2,283,601  
Treasury stock; at cost:  57,752 shares at June 28, 2009 and March 29, 2009, respectively
    (777,847 )     (777,847 )
Accumulated deficit
    (963,842 )     (949,721
Accumulated other comprehensive income
    1,684       870  
                 
Total stockholders' equity
    548,062       557,068  
                 
Total liabilities and stockholders' equity
  $ 671,107     $ 678,367  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)

      Three months ended  
   
June 28,
2009
   
June 29,
2008
 
Cash flows provided by operating activities:
           
Net income (loss)
  $ (14,121 )   $ 9,154  
Adjustments:
               
Depreciation
    6,030       6,566  
Amortization of intangible assets
    5,219       20,859  
Stock-based compensation expense, net of amounts capitalized in inventory
    4,260       8,129  
Note receivable net of deferred gain write off
    2,002       --  
Deferred tax provision
    92       195  
Changes in assets and liabilities (net of amounts acquired):
               
Accounts receivable, net
    3,555       348  
Inventories
    7,050       981  
Prepayments and other assets
    1,168       5,643  
Accounts payable
    5,636       664  
Accrued compensation and related expenses
    (2,652 )     (5,393 )
Deferred income on shipments to distributors
    (1,767 )     (1,627 )
Income taxes payable and receivable
    1,022       3,285  
Other accrued liabilities and long term liabilities
    217       1,121  
                 
Net cash provided by operating activities
    17,711       49,925  
                 
Cash flows provided by (used for) investing activities
               
Acquisitions, net of cash acquired
    (5,975 )     --  
Purchases of property, plant and equipment
    (3,017 )     (4,349 )
Purchases of short-term investments
    (69,712 )     (56,971 )
Proceeds from sales of short-term investments
    40,477       10,586  
Proceeds from maturities of short-term investments
    48,837       25,916  
                 
Net cash provided by (used for) investing activities
    10,610       (24,818 )
                 
Cash flows provided by (used for) financing activities
               
Proceeds from issuance of common stock
    2       4,623  
Repurchase of common stock
    --       (22,327 )
                 
Net cash provided by (used for) financing activities
    2       (17,704 )
                 
Effect of exchange rates on cash and cash equivalents 
    736       9  
Net increase in cash and cash equivalents
    29,059       7,412  
Cash and cash equivalents at beginning of period
    136,036       131,986  
Cash and cash equivalents at end of period
  $ 165,095     $ 139,398  
                 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Integrated Device Technology, Inc. (“IDT” or the “Company”) contain all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the interim financial information included therein.  The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the Company’s financial statements and the accompanying notes. Actual results could differ from those estimates.

These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 29, 2009.  Operating results for the three months ended June 28, 2009 are not necessarily indicative of operating results for an entire fiscal year.

In accordance with Statement of Financial Accounting Standards (SFAS) 165, Subsequent Events (SFAS 165), the Company has evaluated the period from June 28, 2009, the date of the financial statements, through August 6, 2009 the date of the issuance and filing of the financial statements for subsequent events. See Note 20 — “Subsequent Events” for further discussion.

Note 2
Significant Accounting Policies

Investments:

Available-for-Sale Investments.  Investments designated as available-for-sale include marketable debt and equity securities.  Available-for-sale investments are classified as short-term, as these investments generally consist of highly marketable securities that are intended to be available to meet near-term cash requirements.  Marketable securities classified as available-for-sale are reported at market value, with net unrealized gains or losses recorded in accumulated other comprehensive income, a separate component of stockholders' equity, until realized.  Realized gains and losses on investments are computed based upon specific identification and are included in interest income and other, net.

Trading Securities.  Trading securities are stated at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. The Company elects to classify as “trading” assets a portion of its marketable equity securities, which are contained in the “Other assets” line item in the non-current section of the Consolidated Balance Sheets. These investments consist exclusively of a marketable equity portfolio held to generate returns that seek to offset changes in liabilities related to certain deferred compensation arrangements. Gains or losses from changes in the fair value of these equity securities are recorded as non-operating earnings which is offset by losses or gains on the related liabilities recorded as compensation expense.

Non-Marketable Equity Securities.  Non-marketable equity securities are accounted for at historical cost or, if the Company has significant influence over the investee, using the equity method of accounting.



Other-Than-Temporary Impairment.  All of the Company’s available-for-sale investments and non-marketable equity securities 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 previous six months, general market conditions and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for recovery.  For non-marketable equity securities, the impairment analysis requires the identification of events or circumstances that would likely have a significant adverse effect on the fair value of the investment, including revenue and earnings trends, overall business prospects and general market conditions in the investees’ industry or geographic area.  Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

Inventories.   Inventories are recorded at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market value.  Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the product.  Inventory valuation include provisions for obsolete and excess inventory based on management’s forecasts of demand over specific future time horizons and reserves to value our inventory at the lower of cost or market which rely on forecasts of average selling prices (ASPs) in future periods.

Revenue Recognition.  The Company’s revenue results from semiconductors sold through three channels: direct sales to original equipment manufacturers (“OEMs”) and electronic manufacturing service providers (“EMSs”), consignment sales to OEMs and EMSs, and sales through distributors.   The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and its ability to collect is reasonably assured.  For direct sales, the Company recognizes revenue in accordance with the applicable shipping terms. Revenue related to the sale of consignment inventory is not recognized until the product is pulled from inventory stock by the customer.

For distributors outside of the Asia Pacific (“APAC”) region, who have stock rotation, price protection and ship from stock pricing adjustment rights, the Company defers revenue and related cost of revenues on sales to these distributors until the product is sold through by the distributor to an end-customer.  Subsequent to shipment to the distributor, the Company may reduce product pricing through price protection based on market conditions, competitive considerations and other factors.  Price protection is granted to distributors on the inventory that they have on hand at the date the price protection is offered.  The Company also grants certain credits to its distributors on specifically identified portions of the distributors’ business to allow them to earn a competitive gross margin on the sale of the Company’s products to their end customers.  As a result of its inability to estimate these credits, the Company has determined that the sales price to these distributors is not fixed or determinable until the final sale to the end-customer.

In the APAC region, the Company has distributors for which revenue is recognized upon shipment, with reserves recorded for the estimated return and pricing adjustment exposures.   The determination of the amount of reserves to be recorded for stock rotation rights requires the Company to make estimates as to the amount of product which will be returned by customers within their limited contractual rights.  The Company utilizes historical return rates to estimate the exposure in accordance with SFAS 48, Revenue Recognition When Right of Return Exists (SFAS 48).  In addition, from time-to-time, the Company is required to give pricing adjustments to distributors for product purchased in a given quarter that remains in their inventory.  These amounts are estimated by management based on discussions with customers, assessment of market trends, as well as historical practice.  

Based on the terms in the agreements with its distributors and the application of this policy, the Company recognizes revenue once the distributor sells our products to an end-customer for North American and European distributors and recognizes revenue upon shipment to Japanese and other Asian distributors.


Stock-based Compensation. The fair value of employee restricted stock units is equal to the market value of the Company’s common stock on the date the award is granted.  The Company estimates the fair value of employee stock options and the right to purchase shares under the employee stock purchase plan using the Black-Scholes valuation model, consistent with the provisions of the Financial Accounting Standards Board’s (FASB) SFAS 123 (revised 2004), Share-Based Payment  (SFAS 123(R)).  Option-pricing models require the input of highly subjective assumptions, including the expected term of options and the expected price volatility of the stock underlying such options.  In addition, the Company is required to estimate the number of stock-based awards that will be forfeited due to employee turnover based on historical trends.  The Company attributes the value of stock-based compensation to expense on an accelerated method.  Finally, the Company capitalizes into inventory a portion of the periodic stock-based compensation expense that relates to employees working in manufacturing activities.

The Company updates the expected term of stock option grants annually based on its analysis of the stock option exercise behavior over a period of time.  The interest rate is based on the average U.S. Treasury interest rate in effect during the applicable quarter.  The Company believes that the implied volatility of its common stock is an important consideration of overall market conditions and a good indicator of the expected volatility of its common stock.  However, due to the limited volume of options freely traded over the counter, the Company believes that implied volatility, by itself, is not representative of the expected volatility of its common stock.  Therefore, upon adoption of SFAS 123(R), the Company revised the volatility factor used to estimate the fair value of its stock-based awards which now reflects a blend of historical volatility of its common stock and implied volatility of call options and dealer quotes on call options, generally having a term of less than twelve months.  The Company has not paid, nor does it have current plans to pay dividends on its common stock in the foreseeable future.

Income Taxes.  The Company accounts for income taxes under an asset and liability approach that requires 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. Generally accepted accounting principles require the Company to evaluate the ability to realize the value of its net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Accordingly, the Company considers various tax planning strategies, forecasts of future taxable income and its most recent operating results in assessing the need for a valuation allowance. In the consideration of the ability to realize the value of net deferred tax assets, recent results must be given substantially more weight than any projections of future profitability. Since the fourth quarter of fiscal 2003, the Company determined that, under applicable accounting principles, it could not conclude that it was more likely than not that the Company would realize the value of its net deferred tax assets. The Company’s assumptions regarding the ultimate realization of these assets remained unchanged in the first quarter of fiscal 2010 and accordingly, the Company continues to record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.

On April 2, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No, 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the implementation of FIN 48, the Company recognizes the tax liability for uncertain income tax positions on the income tax return based on the two-step process prescribed in the interpretation. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires the Company to determine the probability of various possible outcomes. The Company evaluates these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit, and new exposures. If the Company later determines that the exposure is lower or that the liability is not sufficient to cover its revised expectations, the Company adjusts the liability and effect a related change in its tax provision during the period in which the Company makes such determination.


Note 3
Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (Codification), which officially launched July 1, 2009, to become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. All other accounting literature excluded from the Codification will be considered non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company is currently evaluating the impact of the pending adoption of SFAS 168 on its consolidated financial statements.

In May 2009, the FASB issued SFAS 165, Subsequent Events (SFAS 165), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. SFAS 165 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. This statement is effective for interim or annual reporting periods ending after June 15, 2009. The Company adopted this pronouncement in the first quarter of fiscal 2010. The adoption of SFAS 165 did not have a significant impact on the Company’s condensed consolidated financial statements or related footnotes. See Note 20 – “Subsequent Events” for further discussion.

In April 2009, the FASB issued FASB Staff Position (FSP) SFAS 107-1 and Accounting Principle Board Opinion (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends SFAS 107, Disclosures about Fair Value of Financial Instruments, (SFAS 107), to require an entity to provide interim disclosures about the fair value of all financial instruments within the scope of SFAS 107 as well as in annual financial statements.  Additionally, this FSP requires disclosures of the methods and significant assumptions used in estimating the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. This FSP is effective for interim and annual periods ending after June 15, 2009. The Company adopted this pronouncement in the first quarter of fiscal 2010. The adoption of this pronouncement did not have a material impact on the Company’s condensed consolidated financial position and results of operations.

In April 2009, the FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP SFAS 157-4). FSP SFAS 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 Fair Value Measurements. The FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS 157 states is the objective of fair value measurement ––to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The FSP is effective for interim and fiscal years beginning after June 15, 2009. The Company is currently evaluating the potential impact of FSP SFAS 157-4.

In April 2009, the FASB issued FSP SFAS 141(R)-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP SFAS 141(R)-1). FSP SFAS 141(R)-1 amends the provisions in SFAS 141(R) for the initial recognition and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. FSP SFAS 141(R)-1 eliminates the distinction between contractual and non-


contractual contingencies, including the initial recognition and measurement criteria in SFAS 141(R) and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP SFAS 141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the fiscal year beginning after December 15, 2008. The Company adopted this pronouncement in the first quarter of fiscal 2010.  See Note 11 – “Business Combinations” for further discussion.

 In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2 Recognition of Other-Than-Temporary-Impairments. This FSP amends the other-than-temporary impairment guidance for debt securities and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company adopted this pronouncement in the first quarter of fiscal 2010 and the adoption of this pronouncement did not have a material impact on our condensed consolidated financial position and results of operations.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company adopted this pronouncement in the first quarter of fiscal 2010 and the adoption of this pronouncement did not have a material impact on our condensed consolidated financial position and results of operations.

In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets (FSP SFAS 142-3). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the intangible asset. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company adopted this pronouncement in the first quarter of fiscal 2010.

In February 2008, FASB issued FSP SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP SFAS 157-1) and FSP SFAS 157-2, Effective Date of FASB Statement No. 157 (FSP SFAS 157-2). FSP SFAS 157-1 amends SFAS 157 to remove certain leasing transactions from its scope and was effective upon issuance. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2010. In October 2008, the FASB issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP SFAS 157-3), which clarifies the application of SFAS 157 as it relates to the valuation of financial assets in an inactive market. FSP SFAS 157-3 was effective upon issuance. The Company adopted FSP SFAS 157-2 in the first quarter of fiscal 2010.

In December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS 141(R)). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company adopted this pronouncement in the first quarter of fiscal 2010.  See Note 11 – “Business Combinations” for further discussion.


Note 4
Net Income (loss) Per Share

Net income per share has been computed using weighted-average common shares outstanding in accordance with SFAS 128, Earnings per Share.

   
Three months ended
 
(in thousands, except per share amounts)
 
 
June 28,
2009
   
June 29,
2008
 
Net income (loss)
  $ (14,121 )   $ 9,154  
                 
Weighted average common shares outstanding
    165,430       171,080  
Dilutive effect of employee stock options and restricted stock units
    --       286  
Weighted average common shares outstanding, assuming dilution
    165,430       171,366  
Basic net income (loss) per share
  $ (0.09 )   $ 0.05  
Diluted net income (loss) per share
  $ (0.09 )   $ 0.05  

Stock options to purchase 28.6 million shares and 29.6 million shares for the three month periods ended June 28, 2009 and June 29, 2008, respectively, were outstanding, but were excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and therefore, the effect would have been anti-dilutive. In addition, 0.6 million and 0.4 million unvested restricted stock units were excluded from the calculation for the three months ended June 28, 2009 and June 29, 2008 because they were anti-dilutive after considering unrecognized stock-based compensation expense. Net loss per share for the three month periods ended June 28, 2009 is based only on weighted average common shares outstanding. Stock options and restricted stock units of 0.1 million for the three month periods ended June 28, 2009 were excluded from the calculation of diluted earnings per share, as their effect would be anti-dilutive in a net loss period.

Note 5
Stock-Based Employee Compensation

Compensation Expense

The following table summarizes stock-based compensation expense by line items appearing in the Company’s Condensed Consolidated Statement of Operations:

   
Three months ended
 
 (in thousands)
 
June 28,
2009
   
June 29,
2008
 
Cost of revenue
  $ 626     $ 786  
Research and development
    2,745       5,152  
Selling, general and administrative
    889       2,191  
Total stock-based compensation expense
  $ 4,260     $ 8,129  

Stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations is based on awards ultimately expected to vest.  SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company attributes the value of stock-based compensation to expense on an accelerated method.


The following table summarizes stock-based compensation expense associated with each type of award:

   
Three months ended
 
 (in thousands)
 
June 28,
2009
   
June 29,
2008
 
Employee stock options
  $ 3,006     $ 6,128  
Employee stock purchase plan (“ESPP”)
    --       878  
Restricted stock units (“RSUs”)
    1,292       1,345  
Change in amounts capitalized in inventory
    (38 )     (222 )
Total stock-based compensation expense
  $ 4,260     $ 8,129  

On March 29, 2009, the Company’s 1984 ESPP plan expired.  No stock was issued under the employee stock purchase plan in the first quarter of fiscal 2010.

Valuation Assumptions

Assumptions used in the Black-Scholes valuation model and resulting weighted average grant-date fair values were as follows:

   
Three months ended
 
   
June 28,
2009
   
June 29,
2008
 
Stock option plans:
           
     Expected term
 
4.66 years
   
4.55 years
 
     Risk-free interest rate
    2.09 %     3.02 %
     Volatility
    46.6 %     39.3 %
     Dividend yield
    0.0 %     0.0 %
     Weighted average grant-date fair value
  $ 2.08     $ 4.34  
ESPP:
               
     Expected term
    --    
0.25 years
 
     Risk-free interest rate
    --       1.38 %
     Volatility
    --       35 %
     Dividend yield
    --       0.0 %
     Weighted average grant-date fair value
  $ --     $ 1.90  

Equity Incentive Programs

The Company currently issues awards under three equity based plans in order to provide additional incentive and retention to directors and employees who are considered to be essential to the long-range success of the Company.  These plans are further described below.

1994 Stock Option Plan (1994 Plan)

In May 1994, the Company’s stockholders approved the 1994 Plan.  In September 2000, the Company’s stockholders elected to extend the plan to expire on July 26, 2010.  Under the 1994 Plan, 13,500,000 shares of common stock have been made available for issuance as stock options to employees, officers, directors, consultants, independent contractors and advisors of the Company and its affiliates.  Shares issuable upon exercise of stock options granted pursuant to the Company’s 1985 Incentive and Nonqualified Stock Option Plan that expire or become unexercisable for any reason without having been exercised in full are also available for distribution under the 1994 Plan (not to exceed 10,000,000 shares).  Options granted by the Company under the 1994 Plan generally expire seven years from the date of grant and generally vest over a four-year period from the date of grant.  The exercise price of the options granted by the Company


under the 1994 Plan shall not be less than 100% of the fair market value for a common share subject to such option on the date the option is granted.  As of June 28, 2009, 1,206,268 shares remain available for future grant under the 1994 Plan.

2004 Equity Plan (2004 Plan)

In September 2004, the Company’s stockholders approved the 2004 Plan.  Under the 2004 Plan, 28,500,000 shares of common stock have been made available for issuance as stock options, restricted stock awards, stock appreciation rights, performance awards, restricted stock unit awards, and stock-based awards to employees, directors and consultants, of which a maximum of 4,000,000 shares are eligible for non-option “full value” awards.  The 2004 Plan allows for time-based and performance-based vesting for the awards.  Options granted by the Company under the 2004 Plan generally expire seven years from the date of grant and generally vest over a four-year period from the date of grant, with one-quarter of the shares of common stock vesting on the one-year anniversary of the grant date and the remaining shares vesting monthly for the 36 months thereafter.  The exercise price of the options granted by the Company under the 2004 Plan shall not be less than 100% of the fair market value for a common share subject to such option on the date the option is granted.  Full value awards made under the 2004 Plan shall become vested over a period of not less than three years (or, if vesting is performance-based, over a period of not less than one year) following the date such award is made; provided, however, that full value awards that result in the issuance of an aggregate of up to 5% of common stock available under the 2004 Plan may be granted to any one or more participants without respect to such minimum vesting provisions.  As of June 28, 2009, 7,345,200 shares remain available for future grant under the 2004 Plan.

Restricted stock units available for grant by the Company under the 2004 Plan generally vest over a 48-month period from the grant date.  Prior to vesting, participants holding restricted stock units do not have shareholder rights.  Shares are issued on or as soon as administratively practicable following the vesting date of the restricted stock units and upon issuance, recordation and delivery, the participant will have all the rights of a shareholder of the Company with respect to voting such stock and receipt of dividends and distributions on such stock.  As of June 28, 2009, 1,793,548 restricted stock unit awards were outstanding under the 2004 Plan.

The following table summarizes the Company’s stock option activities for the three months ended June 28, 2009:

         
(in thousands, except per share amounts)
 
 
Shares
 
Weighted Average Exercise Price
 
Options outstanding as of March 29, 2009
27,544
 
$
12.30
 
Granted
2,673
   
5.05
 
Exercised
(1)
   
1.68
 
Canceled, forfeited or expired
(576)
   
14.67
 
Options outstanding as of June 28, 2009
29,640
   
11.60
 
Options exercisable at June 28, 2009
21,462
 
$
12.45
 

As of June 28, 2009, the weighted average remaining contractual life of options outstanding was 3.6 years and the aggregate intrinsic value was $3.7 million.  The weighted average remaining contractual life of options exercisable was 2.7 years and the aggregate intrinsic value was $0.1million.  Unrecognized compensation cost related to non-vested stock-based awards, net of estimated forfeitures was $12.2 million and will be recognized over a weighted average period of 1.4 years.

As of June 28, 2009, stock options vested and expected to vest totaled approximately 28.3 million shares, with a weighted-average exercise price of $11.78 per share and a weighted average remaining contractual life of 3.4 years.  The aggregate intrinsic value was approximately $2.9 million.



(in thousands)
 
Three months ended
 
   
June 28, 2009
   
June 29, 2008
 
Net cash proceeds from options exercised
  $ 2     $ 1,255  
Total intrinsic value of options exercised
  $ 4     $ 145  
Realized excess tax benefits from options exercised (1)
  $ 0     $ 0  

(1) Excess tax benefits from the exercise of stock options, if any, are presented in the Company’s Condensed Consolidated Statement of Cash Flows as financing cash flows rather than operating expenses.

The following table summarizes the Company’s restricted stock unit activities for the three months ended June 28, 2009:

 
(in thousands, except per share amounts)
 
Shares
   
Weighted Average Grant Date Fair Value
 
RSU’s outstanding as of March 29, 2009
    1,238     $ 12.09  
Granted
    859       5.05  
Released
    (264 )     13.25  
Forfeited
    (39 )     12.97  
Outstanding at June 28, 2009
    1,794     $ 8.53  

As of June 28, 2009, there was approximately $7.5 million of unrecognized compensation cost related to restricted stock units granted under the Company’s equity incentive plans.  The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.0 years.

As of June 28, 2009, restricted stock units vested and expected to vest totaled approximately 1.4 million shares, with a weighted average remaining contractual life of 1.9 years.  The aggregate intrinsic value was approximately $8.2 million.

1984 ESPP

In July 1984, the Company’s stockholders approved the 1984 Employee Stock Purchase Plan (“1984 ESPP”) under which eligible employees could purchase shares of the Company’s common stock through payroll deductions (not to exceed 15% of such employee’s compensation) at no lower than 85% of the fair market value of the common stock on the first day or the last day of each fiscal quarter, whichever is lower.  Under the 1984 ESPP, 15,100,000 shares of common stock have been made available for issuance.  The 1984 ESPP, as amended, expired in accordance with its terms on March 29, 2009.  Therefore, no stock was issued under the plan in the first quarter of fiscal 2010.  On June 18, 2009, the Board approved implementation of the 2009 Employee Stock Purchase Plan (“2009 ESPP”) and authorized the reservation and issuance of up to 9,000,000 shares of the Company’s common stock, subject to shareholder approval at the Annual Meeting of Stockholders scheduled for September 17, 2009.  The 2009 ESPP is intended to be implemented by successive quarterly purchase periods commencing on the first day of each fiscal quarter of the Company.  In order to maintain its qualified status under Section 423 of the Internal Revenue Code, the 2009 ESPP imposes certain restrictions, including the limitation that no employee is permitted to participate in the 2009 ESPP if the rights of such employee to purchase common stock of the Company under the 2009 ESPP and all similar purchase plans of the Company or its subsidiaries would accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time the right is granted) for each calendar year.


Note 6
Balance Sheet Detail

(in thousands)
 
Inventories
 
June 28,
2009
   
March 29,
2009
 
Raw materials
  $ 5,792     $ 6,876  
Work-in-process
    31,374       35,252  
Finished goods
    25,622       27,594  
   Total inventories
  $ 62,788     $ 69,722  
                 
Other long-term obligations
               
Deferred compensation related liabilities
  $ 12,031     $ 10,946  
Long-term portion of deferred gain on equipment sales
    270       940  
Long-term portion of lease impairment obligations
    835       890  
Long-term portion of supplier obligations
    1,053       1,384  
Other
    135       154  
   Total other long-term obligations
  $ 14,324     $ 14,314  
                 

Note 7
Deferred Income on Shipments to Distributors

Included in the caption “Deferred income on shipments to distributors” on the Condensed Consolidated Balance Sheets are amounts related to shipments to certain distributors for which revenue is not recognized until the Company’s product has been sold by the distributor to an end customer. The components at June 28, 2009 and March 29, 2009 were as follows:

(in thousands)
 
Three months ended
 
   
June 28,
2009
   
March 29,
2009
 
Gross deferred revenue
  $ 18,870     $ 21,302  
Gross deferred costs
    4,099       4,764  
Deferred income on shipments to distributors
  $ 14,771     $ 16,538  

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.  The amount ultimately recognized as revenue will be lower than this amount as a result of future price protection and ship from stock pricing credits which are issued in connection with the sell through of the Company’s products to end customers. Historically this amount has represented an average of approximately 25% of the list price billed to the customer. The gross deferred costs represent the standard costs, which approximate actual costs of products, the Company sells to the distributors.  Although the Company monitors the levels and quality of inventory in the distribution channel, the experience is that product returned from these distributors are able to be sold to a different distributor or in a different region of the world.  As such, inventory write-downs for product in the distribution channel have not been significant.

Note 8
Fair Value Measurement

SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing assets or liabilities.  When determining the fair value measurements for assets and


liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact.

Fair Value Hierarchy

SFAS 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy which prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions are as follows:

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measure date.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instrument’s valuation.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of June 28, 2009:

   
Fair Value at Reporting Date Using:
 
(in thousands)
 
Level 1
   
Level 2
   
Total Balance
 
Cash Equivalents and Short Term Investments:
                 
US government treasuries and agencies securities
  $ 73,879     $ --     $ 73,879  
Money market funds
    25,575       --       25,575  
Bank deposits
    --       119,717       119,717  
Corporate bonds
    --       40,130       40,130  
Corporate commercial paper
    --       31,939       31,939  
Asset-backed securities
    --       26       26  
Other Assets:
                       
Assets related to non-qualified deferred compensation plan
    --       10,467       10,467  
Total assets measured at fair value
  $ 99,454     $ 202,279     $ 301,733  
Liabilities:
                       
Foreign currency forward contract
    --       206       206  
Non-qualified deferred compensation obligations
    --       12,031       12,031  
    $ --     $ 12,237     $ 12,237  



The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of March 29, 2009:

   
Fair Value at Reporting Date Using:
 
(in thousands)
 
Level 1
   
Level 2
   
Total Balance
 
Cash Equivalents and Short Term Investments:
                 
US government treasuries and agencies securities
  $ 108,935     $ --     $ 108,935  
Money market funds
    75,531       --       75,531  
Bank deposits
    --       10,110       10,110  
Corporate bonds
    --       47,436       47,436  
Corporate commercial paper
    --       39,637       39,637  
Municipal bonds
    --       1,056       1,056  
Asset-backed securities
    --       146       146  
Other Assets:
                       
Assets related to non-qualified deferred compensation plan
    --       9,668       9,668  
Total assets measured at fair value
  $ 184,466     $ 108,053     $ 292,519  
Liabilities:
                       
Non-qualified deferred compensation obligations
    --       10,946       10,946  
Total liabilities measured at fair value
  $ --     $ 10,946     $ 10,946  

The Company’s cash equivalent, short term investment and derivative instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotation, spot rates or alternative pricing sources with reasonable levels of price transparency.  The securities in Level 1 are highly liquid and actively traded in exchange markets or over-the-counter markets. The securities in Level 2 represent securities with quoted prices in markets that are not as active or for which all significant inputs are observable.

The Company maintains an unfunded deferred compensation plan to provide benefits to executive officers and other key employees.  Under the plan, participants can defer any portion of their salary and bonus compensation into the plan and may choose from a portfolio of funds from which earnings are measured.  Participant balances are always 100% vested.   The deferred compensation plan obligation is recorded at fair value based on the quoted prices of the underlying mutual funds and included in Other long-term obligations on the Company’s Condensed Consolidated Balance Sheets. Increases or decreases related to the obligations are recorded in operating expenses.  Additionally, the Company has set aside assets in a separate trust that is invested in corporate owned life insurance intended to substantially offset the liability under the plan.  The Company has identified both its assets and liability related to the plan within Level 2 in the fair value hierarchy as these valuations are based on observable market data obtained directly from the dealer or observable price quotes for similar assets such as the underlying mutual fund pricing.  .

Cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase. The Company maintains its 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.  While the Company monitors daily the cash balances in its operating accounts and adjusts the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which the Company deposits fails or is subject to other adverse conditions in the financial markets.  As of today, the Company has not experienced any loss in its operating accounts.


All of the Company’s 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 the Company’s intent and ability to hold the investment for a period of time sufficient to allow for recovery. Although the Company believes its 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. The Company continually monitors the credit risk in its portfolio and future developments in the credit markets and makes appropriate changes to its investment policy as deemed necessary.  The Company did not record any impairment charges related to its short-term investments in the first quarter of fiscal 2010.

Note 9
Investments

Available for Sale Securities

Available-for-sale investments at June 28, 2009 were as follows:

 
(in thousands)
 
 
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Fair Value
 
Corporate commercial paper
  $ 31,940     $ 2     $ (2 )   $ 31,939  
U.S. government agency securities
    73,538       341       --       73,879  
Money market funds
    25,575       --       --       25,575  
Bank deposits
    119,717       --       --       119,717  
Corporate bonds
    39,923       216       (9 )     40,130  
Asset-backed securities
    26       --       --       26  
Total available-for-sale investments
    290,719       559       (11 )     291,267  
Less amounts classified as cash equivalents
    (150,376 )     --       (2 )     (150,374 )
   Short-term investments
  $ 140,343     $ 559     $ (9 )   $ 140,893  

Available-for-sale investments at March 29, 2009 were as follows:

 
(in thousands)
 
 
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Fair Value
 
U.S. government treasuries and agency securities
  $ 108,528     $ 445     $ (38 )   $ 108,935  
Money market funds
    75,531       --       --       75,531  
Corporate bonds
    47,452       102       (118 )     47,436  
Corporate commercial paper
    39,634       3       --       39,637  
Bank deposits
    10,110       --       --       10,110  
Municipal bonds
    1,027       29       --       1,056  
Asset-backed securities
    145       1       --       146  
Total available-for-sale investments
    282,427       580       (156 )     282,851  
Less amounts classified as cash equivalents
    (122,818 )     (1 )     5       (122,814 )
   Short-term investments
  $ 159,609     $ 579     $ (151 )   $ 160,037  



The cost and estimated fair value of available-for-sale debt securities at June 28, 2009, by contractual maturity, were as follows:

(in thousands)
 
Cost
   
Estimated Fair Value
 
Due in 1 year or less
  $ 253,978     $ 254,303  
Due in 1-2 years
    31,772       32,036  
Due in 2-5 years
    4,969       4,928  
Total investments in available-for-sale debt securities
  $ 290,719     $ 291,267  

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of June 28, 2009, aggregated by length of time that individual securities have been in a continuous loss position.

   
Less than 12 months
   
12 months or Greater
   
Total
 
 
(in thousands)
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
Corporate bonds
  $ 13,025     $ (9 )   $ --     $ --     $ 13,025     $ (9 )
Corporate commercial paper
    2,500       (1 )     --       --       2,500       (1 )
Total
  $ 15,525     $ (10 )   $ --     $ --     $ 15,525     $ (10 )

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of March 29, 2009, aggregated by length of time that individual securities have been in a continuous loss position.

   
Less than 12 months
   
12 months or Greater
   
Total
 
 
(in thousands)
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
Corporate bonds
  $ 28,629     $ (105 )   $ 795     $ (13 )   $ 29,424     $ (118 )
U.S. government agency securities
    19,212       (38 )     --       --       19,212       (38 )
Total
  $ 47,841     $ (143 )   $ 795     $ (13 )   $ 48,636     $ (156 )

Currently, a significant portion of our available-for-sale investments that the Company holds are all high grade instruments.  As of June 28, 2009, the unrealized losses on our available-for-sale investments represented an insignificant amount in relation to our total available-for-sale portfolio. Substantially all of our unrealized losses on our available-for-sale marketable debt instruments can be attributed to fair value fluctuations in an unstable credit environment that resulted in a decrease in the market liquidity for debt instruments.  Because the Company has the ability to hold these investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at June 28, 2009 and March 29, 2009.

Trading securities

Trading securities are stated at fair value, with gains or losses resulting from changes in fair value recognized currently in non-operating earnings. As of June 28, 2009 and March 29, 2009, the deferred compensation plan assets were approximately $10.5 million and $9.7 million, which were included in other assets in the Condensed Consolidated Balance Sheets. The Company recorded net gains of $0.8 million during and net losses $0.1 million during the first quarter of fiscal 2010 and fiscal 2009 in interest income and other, net in the Condensed Consolidated Statement of Operations.

Non-Marketable Equity Securities

In conjunction with the merger with Integrated Circuit Systems, Inc. (ICS), the Company acquired an investment in Best Elite International Limited (“Best Elite”). Best Elite is a private company, which owns a


wafer fabrication facility in Suzhou, China.  The Company purchases wafers from Best Elite’s wafer fabrication facility for certain legacy ICS products.  In accordance with Accounting Principle Board Opinion 18, The Equity Method of Accounting for Investment in Common Stock (APB 18), the Company accounts for this investment under cost method. This investment is subject to periodic impairment review.  In determining whether a decline in value of its investment in Best Elite has occurred and is other than temporary, an assessment was made by considering available evidence, including the general market conditions in the wafer fabrication industry, Best Elite’s financial condition, near-term prospects, market comparables and subsequent rounds of financing.   The valuation also takes into account the Best Elite’s capital structure, liquidation preferences for its capital and other economic variables. The valuation methodology for determining the decline in value of non-marketable equity securities is based on inputs that require management judgment. The carrying value of the Company’s investment in Best Elite was approximately $2.0 million and is classified within Other assets on the Company’s Condensed Consolidated Balance Sheets as of June 28, 2009 and March 29, 2009.

Note 10
Derivative Financial Instruments

As a result of its international operations, sales and purchase transactions, the Company is subject to risks associated with fluctuating currency exchange rates. The Company may use derivative financial instruments to hedge these risks when instruments are available and cost effective in an attempt to minimize the impact of currency exchange rate movements on its operating results and on the cost of capital equipment purchases.  The Company may enter into hedges of forecasted transactions when the underlying transaction is highly probable and reasonably certain to occur within the subsequent twelve months. Examples of these exposures would include forecasted expenses of a foreign manufacturing plant, design center or sales office. The Company may additionally enter into a derivative to hedge the foreign currency risk of a capital equipment purchase if the capital equipment purchase order is executed and designated as a firm commitment. As of June 28, 2009 and March 29, 2009, the Company did not have any outstanding foreign currency contracts that were designated as hedges of forecasted cash flows or capital equipment purchases.  The Company does not enter into derivative financial instruments for speculative or trading purposes.

The Company may also utilize currency forward contracts to hedge currency exchange rate fluctuations related to certain short term foreign currency assets and liabilities. The foreign currency forward contracts are not designated as special hedge accounting under SFAS 133; however, they are considered hedging instruments for purpose of SFAS 161 reporting.  The outstanding currency forward contract as of June 28, 2009 is as follow:

(in thousands)
 
Notional Value
Local Currency
   
Notional Value USD
   
Fair Value
loss USD (a)
 
Canadian Dollar
 
$
50,000     $ 43,407     $ (206 )
    $ 50,000     $ 43,407     $ (206 )

(a) The fair value loss is recorded as accrued liability in the Company’s Condensed Consolidated Balance Sheets.

Gains and losses on these undesignated derivatives substantially offset gains and losses on the assets and liabilities being hedged and the net amount is included in Interest income and other, net in the Condensed Consolidated Statements of Operations. The Company did not have any outstanding foreign currency contracts that were designated as hedges of certain short term foreign currency assets and liabilities at the end of the fourth quarter of fiscal 2009.  An immaterial amount of net gains and losses were included in Interest income and other, net during the first three months of fiscal 2010 and 2009.


Besides foreign exchange rate exposure, the Company’s cash and investment portfolios are subject to risks associated with fluctuations in interest rates.  While the Company’s policies allow for the use of derivative financial instruments to hedge the fair values of such investments, the Company has yet to enter into this type of hedging arrangement.

Note 11
Business Combinations
 
Acquisition of certain assets of Leadis Technology, Inc. (“Leadis”)

On June 10, 2009, the Company completed its acquisition of certain sensor technology and related assets from Leadis, along with members of the Leadis’ engineering team. The total purchase price was $6.3 million. Approximately $ 0.2 million of transaction costs was expensed as selling, general and administrative expenses in the first quarter of fiscal 2010. A summary of the total purchase price is as follows:

(in millions)
 
     
Cash paid
  $ 6.1  
Hold back payment due within 45 days
    0.2  
Total purchase price
  $ 6.3  

In accordance with SFAS 141(R), Business Combinations, the Company has allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The acquisition provided the Company with a touch sensor technology, team of engineers, certain assets and a product line involving touch sensor technology. The Company believes these technologies will allow it to address a broader range of multimedia applications with highly integrated processing, interfacing and connectivity solutions. This transaction is intended to enable the Company to provide OEMs and ODMs with lower power, higher functionality Application-Specific Standard Products (ASSPs) that will enable them to provide consumers with a richer, more complete digital media experience. These opportunities, along with the ability to sell touch sensor products to the existing base of the Company’s customers, were significant contributing factors to the establishment of the purchase price. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management estimates and assumptions, including third-party valuations that utilize established valuation techniques appropriate for the high-technology industry. The goodwill as a result of this acquisition is expected to be deductible for tax purposes over 15 years. In accordance with SFAS 142, Goodwill and Intangible Assets, goodwill is not amortized but will be reviewed at least annually for impairment. Purchased intangibles with finite lives are being amortized over their respective estimated useful lives on a straight line basis.

The purchase price has been allocated as follows:

(in millions)
 
 
Fair Value
 
Net tangible assets acquired
  $ 0.2  
Amortizable intangible assets
    6.0  
Goodwill
    0.1  
Total purchase price
  $ 6.3  



A summary of the allocation of amortizable intangible assets is as follows:

   
Fair Value
(in millions)
 
Amortizable intangible assets:
     
    Existing Technologies
  $ 4.6  
    Customer Relationships
    1.1  
    In-process research and development (IPR&D)
    0.3  
Total
  $ 6.0  
 
Useful lives are primarily based on the underlying assumptions used in the discounted cash flow (DCF) models.
 
Net Tangible Assets
 
Assets were reviewed and adjusted, if required, to their estimated fair value.

Amortizable Intangible Assets
 
Existing technologies consists of products that have reached technological feasibility. The Company valued the existing technologies utilizing a DCF model, which used forecasts of future revenues and expenses related to the intangible assets. The Company utilized discount factor of 42% and 44% for existing technologies and is amortizing the intangible assets on a straight-line basis over 7 years.
 
The value of the customer relationships intangible asset was estimated using a DCF model, which used forecasts of future revenues and expenses related to the intangible assets. The Company utilized a discount factor of 42% to 45% and is amortizing this intangible asset on a straight-line basis over 5 years.

Projects that qualify as IPR&D represent those at the development stage and require further research and development to determine technical feasibility and commercial viability. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications, including functions, features, and technical performance requirements. The value of IPR&D was determined by considering the importance of each project to the Company’s overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value based on the percentage of completion of the IPR&D projects. The Company utilized the DCF method to value the IPR&D, using a discount factor of 45% and 46% and will amortize this intangible asset once the projects are complete. Currently, the Company expects to complete these projects within the next twelve months.

The results of operations of the acquired business are included in the accompanying Condensed Consolidated Statement of Operations from the closing date of the acquisition on June 28, 2009. Pro forma earnings information has not been presented because the effect of the acquisition of business is not material.
 
Acquisition of certain assets of Silicon Optix

On October 20, 2008, the Company completed its acquisition of certain video signal processing technology and related assets along with members of the Silicon Optix’s engineering teams. The total purchase price was approximately $20.1 million, including approximately $0.7 million of acquisition-related transaction costs.  A summary of the total purchase price is as follows:

(in millions)
 
     
Cash paid
  $ 19.4  
Acquisition-related transaction costs
    0.7  
Total purchase price
  $ 20.1  



In accordance with SFAS 141, Business Combinations, the Company has allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed, including in-process research and development, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The acquisition provided the Company with a video signal processing technology, team of engineers, certain assets and a product line involving video technologies. The Company believes these technologies will allow it to pursue expanded opportunities, particularly in the emerging high-definition video market. These opportunities, along with the ability to sell video products to the existing base of IDT customers, were significant contributing factors to the establishment of the purchase price. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management estimates and assumptions, including third-party valuations that utilize established valuation techniques appropriate for the high-technology industry. As of June 28, 2009, approximately $0.9 million of the total goodwill is expected to be deductible for tax purposes over 15 years. In accordance with SFAS 142, Goodwill and Intangible Assets, goodwill is not amortized but will be reviewed at least annually for impairment. Purchased intangibles with finite lives are being amortized over their respective estimated useful lives on a straight line basis. The purchase price has been allocated as follows:

(in millions)
 
 
Fair Value
 
Net tangible assets acquired
  $ 0.6  
Amortizable intangible assets
    4.7  
IPR&D
    5.6  
Goodwill
    9.2  
Total purchase price
  $ 20.1  

A summary of the allocation of amortizable intangible assets is as follows:

   
Fair Value
(in millions)
 
Amortizable intangible assets:
     
    Existing Technologies
  $ 3.7  
    Customer Relationships
    0.5  
    Trade Name
    0.5  
Total
  $ 4.7  
 
Useful lives are primarily based on the underlying assumptions used in the discounted cash flow (DCF) models.
 
Net Tangible Assets
 
Assets were reviewed and adjusted, if required, to their estimated fair value.

Amortizable Intangible Assets
 
Existing technologies consists of products that have reached technological feasibility. The Company valued the existing technologies utilizing a DCF model, which used forecasts of future revenues and expenses related to the intangible assets. The Company utilized discount factor of 24% and 32% for existing technologies and is amortizing the intangible assets on a straight-line basis over 3 to 7 years.
 
The value of the customer relationships intangible asset was estimated using a DCF model, which used forecasts of future revenues and expenses related to the intangible assets. The Company utilized a discount factor of 24% and is amortizing this intangible asset on a straight-line basis over 3 years.
 
The Silicon Optix’s trade names were valued using the relief from royalty method, which represents the benefit of owning this intangible asset rather than paying royalties for its use. The Company utilized a discount factor of 27% and is amortizing this intangible asset on a straight-line basis over 7 years.


IPR&D

Of the total purchase price, $5.6 million was allocated to IPR&D. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications, including functions, features, and technical performance requirements. The value of IPR&D was determined by considering the importance of each project to the Company’s overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value based on the percentage of completion of the IPR&D projects. The Company utilized the DCF method to value the IPR&D, using a discount factor of 32%.

Note 12
Goodwill and Other Intangible Assets

Goodwill and identified intangible asset balances are summarized as follows:

   
June 28, 2009
 
       
 
(in thousands)
 
Gross assets
   
Accumulated amortization
   
Net assets
 
Goodwill
  $ 89,463     $ --     $ 89,463  
                         
Identified intangible assets:
                       
Existing technology
    241,093       (202,051 )     39,042  
Trademarks
    9,360       (8,896 )     464  
Customer relationships
    139,409       (127,867 )     11,542  
Foundry & Assembler relationships
    64,380       (64,376 )     4  
Non-compete agreements
    52,958       (52,958 )     --  
IPR&D
    278       --       278  
Other
    31,053       (31,053 )     --  
Subtotal, identified intangible assets
    538,531       (487,201 )     51,330  
Total goodwill and identified intangible assets
  $ 627,994     $ (487,201 )   $ 140,793  


   
March 29, 2009
 
       
 
(in thousands)
 
Gross assets
   
Accumulated amortization
   
Net assets
 
                   
Goodwill
  $ 89,404     $ --     $ 89,404  
                         
Identified intangible assets:
                       
Existing technology
    236,423       (198,133 )     38,290  
Trademarks
    9,360       (8,878 )     482  
Customer relationships
    138,317       (126,586 )     11,731  
Foundry & Assembler relationships
    64,380       (64,374 )     6  
Non-compete agreements
    52,958       (52,958 )     --  
Other
    31,053       (31,053 )     --  
Subtotal, identified intangible assets
    532,491       (481,982 )     50,509  
Total goodwill and identified intangible assets
  $ 621,895     $ (481,982 )   $ 139,913  



Amortization expense for identified intangibles is summarized below:

   
Three months ended
 
 (in thousands)
 
June 28,
2009
   
June 29,
2008
 
             
Existing technology
  $ 3,918     $ 14,094  
Trademarks
    18       303  
Customer relationships
    1,281       5,910  
Foundry & assembler relationships
    2       351  
Non-compete agreements
    --       134  
Other
    --       67  
Total
  $ 5,219     $ 20,859  

Based on the identified intangible assets recorded at June 28, 2009, the future amortization expense of identified intangibles for the next five fiscal years is as follows (in thousands):

Fiscal year
 
Amount
 
Remainder of FY 2010
  $ 13,195  
2011
    14,840  
2012
    10,439  
2013
    5,448  
2014
    2,886  
Thereafter
    4,244  
Total
  $ 51,052  

Note 13
Comprehensive Income

The components of comprehensive income were as follows:

   
Three months ended
 
 (in thousands)
 
June 28,
2009
   
June 29,
2008
 
Net income (loss)
  $ (14,121 )   $ 9,154  
Currency translation adjustments
    687       31  
Change in net unrealized gain on investment
    127       (299 )
Comprehensive income (loss)
  $ (13,307 )   $ 8,886  

The components of accumulated other comprehensive income were as follows:

       
 
(in thousands)
 
June 28,
2009
   
March 29,
2009
 
Cumulative translation adjustments
  $ 1,133     $ 446  
Unrealized gain on available-for-sale investments
    551       424  
Total accumulated other comprehensive income
  $ 1,684     $ 870  



Note 14
Industry Segments

In the first quarter of fiscal 2010, as part of a refinement of its business strategy, the Company incorporated multi-port products from the Communications segment into the Computing and Consumer segment.  This change in segment reporting had no impact on the Company’s consolidated balance sheets, statements of operations, statements of cash flows or statements of stockholders’ equity for any periods.

The Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS 131.
 
The Company’s reportable segments include the following:
 
v  
Communications segment: includes network search engines (NSEs), Rapid I/O switching solutions, flow-control management devices, FIFOs, integrated communications processors, high-speed SRAM, military application, digital logic and telecommunications.
v  
Computing and Consumer segment: includes clock generation and distribution products, PCI Express switching solutions, high-performance server memory interfaces, multi-port products, PC audio and video products.

The tables below provide information about these segments:

Revenues by segment
   
Three months ended
 
 (in thousands)
 
June 28,
2009
   
June 29,
2008
 
Communications
  $ 57,655     $ 86,661  
Computing and Consumer
    58,299       101,547  
Total consolidated revenues
  $ 115,954     $ 188,208  

Income (loss) by segment
   
Three months ended
 
 (in thousands)
 
June 28,
2009
 
June 29,
2008
 
Communications
 
$
17,561
   
$
30,122
 
Computing and Consumer
   
(15,570
)
   
7,649
 
Unallocated expenses:
               
     Amortization of intangible assets
   
(5,219
)
   
(20,859
)
     Acquisition related costs and other
   
(3,593
)
   
3
 
     Severance and retention costs
   
(1,479
)
   
(834
)
     Facility closure costs
   
(23
)
   
(77
)
     Stock-based compensation expense
   
(4,260
)
   
(8,129
)
     Note receivable net of deferred gain write off
   
(2,002
)
   
--
 
     Interest income and other
   
1,425
     
1,465
 
     Interest expense
   
(19
)
   
(18
)
Income (loss) before income taxes
 
 $
(13,179
)
 
$
9,322
 

The Company does not allocate amortization of intangible assets, severance and retention costs, acquisition-related costs, stock-based compensation, interest income and other, and interest expense to its segments.  In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.


Note 15
Commitments and Guarantees

Guarantees
As of June 28, 2009, the Company’s financial guarantees consisted of guarantees and standby letters of credit, which are primarily related to the Company’s electrical utilities in Malaysia, utilization of non-country nationals in Malaysia and Singapore, consumption tax in Japan and value-added tax obligations in Singapore and Holland, and a workers’ compensation plan in the United States. The maximum amount of potential future payments under these arrangements is approximately $2.7 million.

The Company indemnifies certain customers, distributors, and subcontractors for attorney fees and damages awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Company’s indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. The Company cannot estimate the amount of potential future payments, if any, that might be required to make as a result of these agreements. The Company has not paid any claim or been required to defend any claim related to its indemnification obligations, and accordingly, the Company has not accrued any amounts for its indemnification obligations. However, there can be no assurances that the Company will not have any future financial exposure under these indemnification obligations.

The Company maintains an accrual for obligations it incurs under its standard product warranty program and customer, part, or process specific matters. The Company’s standard warranty period is one year, however in certain instances the warranty period may be extended to as long as two years.  Management estimates the fair value of the Company’s warranty liability based on actual past warranty claims experience, its policies regarding customer warranty returns and other estimates about the timing and disposition of product returned under the standard program.  Customer, part, or process specific reserves are estimated using a specific identification method.  Historical profit and loss impact related to warranty returns activity has been minimal. The total accrual was $0.4 million and $0.5 million as of June 28, 2009 and March 29, 2009, respectively.

Note 16
Litigation

On October 24, 2006, the Company was served with a civil antitrust complaint filed by Reclaim Center, Inc., et. al. as plaintiffs in the U.S. District Court for the Northern District of California against us and 37 other entities on behalf of a purported class of indirect purchasers of Static Random Access Memory (SRAM) products. The Complaint alleges that the Company and other defendants conspired to raise the prices of SRAM, in violation of Section 1 of the Sherman Act, the California Cartwright Act, and several other states’ antitrust, unfair competition, and consumer protection statutes. Shortly thereafter, a number of other plaintiffs filed similar complaints on behalf of direct and indirect purchasers of SRAM products. Given the similarity of the complaints, the Judicial Panel on Multidistrict Litigation transferred the cases to a single judge in the Northern District of California and consolidated the cases for pretrial proceedings in February 2007. The consolidated cases are captioned In re Static Random Access Memory (SRAM) Antitrust Litigation. In August 2007, direct purchasers of SRAM products and indirect purchasers of SRAM products filed separate Consolidated Amended Complaints. The Company was not named as a defendant in either complaint. Pursuant to tolling agreements with the indirect and direct purchaser plaintiffs, the statute of limitations was tolled until January 10, 2009 as to potential claims against the Company.  The tolling agreements have now expired and the statute of limitations is running on potential claims against the Company.  Both cases are in the discovery stage.  The Company intends to vigorously defend itself against these claims.


In April 2008, LSI Corporation and its wholly owned subsidiary Agere Systems Inc. (collectively “LSI”) instituted an action in the United States International Trade Commission (ITC or “Commission”), naming the Company and 17 other respondents.  The ITC action seeks an exclusion order to prevent importation into the U.S. of semiconductor integrated circuit devices and products made by methods alleged to infringe an LSI patent relating to tungsten metallization in semiconductor manufacturing. LSI also filed a companion case in the U.S. District Court for the Eastern District of Texas seeking an injunction and damages of an unspecified amount relating to such alleged infringement. Since the initiation of both actions, five additional parties have been named as respondents/defendants in the respective actions. Some of the defendants in the action have since settled the claims against them. The action in the U.S. District Court has been stayed pending the outcome of the ITC action.  The hearing in the ITC action was conducted July 20 through July 27, 2009.  The Initial Determination of the Administrative Law Judge is currently due by September 21, 2009.  That determination is subject to review by the Commission, with a Final Determination due by January 21, 2010. The Company cannot predict the outcome or provide an estimate of any possible losses.  The Company will continue to vigorously defend itself against the claims in these actions.

Note 17
Restructuring

The following table shows the breakdown of the restructuring charges and the liability remaining as of June 28, 2009:

 (in thousands)
 
Cost of goods sold
   
Operating Expenses
 
   
Restructuring
   
Restructuring
 
Balance as of March 29, 2009
  $ 575     $ 3,649  
Provision
    55       1,421  
Cash payments
    (274 )     (2,578 )
Balance as of June 28, 2009
  $ 356     $ 2,492  

As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, the Company took restructuring actions through June 28, 2009, to reduce its workforce and consolidate facilities.  The Company’s restructuring expenses have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of its workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.  The Company accounted for each of these costs in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) or SFAS 112, Employer’s Accounting for Post Employment Benefits (SFAS 112).   The determination of when the Company accrues for severance costs, and which standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement as defined by SFAS 146 or under an on-going benefit arrangement as described by SFAS 112.

During the fourth quarter of fiscal 2009, the Company initiated a restructuring action intended to align its spending with demand that has weakened in the slowing economy. The restructuring action included a reduction of approximately 124 positions across multiple divisions worldwide. In March 2009, after carefully considering the market, revenues and prices for search engines, the Company decided to restructure its NWD division.  As part of this restructuring action, the Company reduced approximately 56 positions in this division and ceased investment in new search engine product development.  In addition, the Company initiated restructuring actions, which affected its sales personnel in Germany and Japan.  During the first quarter of fiscal 2010, the Company reduced an additional 8 positions related to these actions.  As a result, the Company recorded restructuring expenses of $1.5 million and $5.3 million for severance payments, payments under federal, state and province notice statutes and retention and other benefits associated with these restructuring actions in the first quarter of fiscal 2010 and the fourth quarter of fiscal 2009.  The Company expects to complete these restructuring actions in the second quarter of fiscal 2010.


During the third quarter of fiscal 2009, the Company initiated restructuring actions, which primarily affected its military business and Corporate Technology Group. These restructuring actions were taken to better allocate its engineering resources to maximize revenue potential. These actions resulted in the reduction of approximately 26 positions. The Company recorded restructuring expenses of approximately $0.7 million for severance benefits associated with these restructuring actions in fiscal 2009. During the first quarter of fiscal 2010, the Company incurred additional restructuring expenses of less than $0.1 million related to these restructuring actions. The Company expects to complete this restructuring plan in the second quarter of fiscal 2010.

During the second quarter of fiscal 2006, the Company completed the consolidation of its Northern California workforce into its San Jose headquarters and exited leased facility in Salinas. Upon exiting the building the Company recorded lease impairment charges of approximately $2.3 million, which represented the future rental payments under the agreement, reduced by an estimate of sublease income, and discounted to present value using an interest rate applicable to the Company. These charges were recorded as cost of revenues of $0.7 million, research and development (R&D) of $0.9 million and selling, general and administrative (SG&A) of $0.7 million. In fiscal 2008, the Company entered into a sublease agreement for this facility, resulting in a reduction to its accrued lease liabilities by $0.2 million.  Since the initial restructuring, the Company has made lease payments of $1.0 million related to vacated facility in Salinas.  As of June 28, 2009, the remaining accrued lease liabilities were $1.1 million.

Note 18
Income Taxes

The Company recorded an income tax provision of approximately $0.9 million in the first quarter of fiscal 2010 compared to an income tax provision of approximately $0.2 million in the first quarter of fiscal 2009.   The provision for income taxes in the first quarter of fiscal 2010 reflects estimated foreign income and withholding taxes and estimated U.S. and state taxes. On May 27, 2009, the Ninth Circuit Court of Appeals issued its ruling in the case of Xilinx, Inc. v. Commissioner (“Xilinx Case”), holding that stock-based compensation was required to be included in certain transfer pricing arrangements between a U.S. company and its foreign subsidiary. As a result of the ruling in the Xilinx Case, certain tax attributes were reduced and the Company recognized an incremental income tax expense of $0.6 million during the three months ended June 28, 2009.  The provision for income taxes for the first quarter of fiscal 2009 was determined using the annual effective tax rate method for jurisdictions whose effective tax rate could be estimated. The Company computed one entity’s tax provision using a discrete approach as a reliable estimate of the effective tax rate for this jurisdiction could not be made. In addition, the income tax provision in the first quarter of fiscal 2009 included a one-time tax benefit of $0.6 million as a result of the approval of a tax holiday from the Malaysian government, which allows the Company to obtain full tax exemption on certain components of statutory income for a period of 10 years.

In February 2009, the Internal Revenue Service (IRS) commenced a tax audit for fiscal year 2006 through 2008.  The IRS audit is still in the preliminary stages and the Company has received various information requests from the IRS. Although the final outcome is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations

As of June 28, 2009 and March 29, 2009, the Company was subject to examination in various state and foreign jurisdictions for tax years 2004 forward, none of which were individually material.



Note 19
Share Repurchase Program

On January 18, 2007, the Company’s Board of Directors initiated a $200 million share repurchase program. During fiscal 2008, the Company’s Board of Directors approved a $200 million expansion of the share repurchase program to a total $400 million.  In fiscal 2008 and 2007, the Company repurchased approximately 28.9 million and 1.6 million shares at an average price of $11.60 per share and $15.95 per share for a total purchase price of $334.8 million and $25.0 million, respectively.  On April 30, 2008, the Company’s Board of Directors approved an additional $100 million expansion of the share repurchase program to a total $500 million.  In fiscal 2009, the Company repurchased approximately 8.4 million shares at an average price of $7.46 per share for a total purchase price of $62.3 million.  The Company did not repurchase any shares in the first quarter of fiscal 2010.  As of June 28, 2009, approximately $77.9 million was available for future purchase under the share repurchase program.  Share repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity.  

Note 20
Subsequent Events
 
On August 3, 2009, the Company entered into a Foundry Agreement (the “Agreement”) with Taiwan Semiconductor Manufacturing Co., Ltd., a company duly incorporated under the laws of the Republic of China, and TSMC North America, a California corporation (together with Taiwan Semiconductor Manufacturing Co., Ltd., “TSMC”). The Agreement sets forth the terms by which TSMC will manufacture certain of the Company's semiconductor products and provide certain foundry services to the Company. On August 3, 2009, in connection with the plan to transition the manufacture of products to TSMC, the Company's management, with prior approval of the Board of Directors, approved a plan to exit wafer production operations at its Oregon fabrication facility. The transition is expected to take approximately two years to complete. If unsuccessful in its efforts to sell the Oregon facility to a buyer that can continue fabrication operations, the Company estimates it will incur total charges of approximately $15 million to $25 million to exit the facility. These aggregate exit costs are expected to consist primarily of expenses related to employee severance, retention, and post-employment benefits, and expenses associated with the decommissioning of equipment and the facility. The Company estimates it will incur costs of approximately $10 million in severance, retention, and post-employment benefits, of which approximately $4 million to $6 million is expected to be recorded in the second quarter of fiscal 2010. Costs of approximately $5 million to $15 million associated with closure activities related to decommissioning of equipment and the facility are expected to be recorded in future periods as incurred. Substantially all of the exit costs are expected to result in cash expenditures.
 
On July 17, 2009, the Company completed the sale of certain assets related to its network search engine business (the "NWD Assets") to NetLogic Microsystems, Inc ("Netlogic"), pursuant to an Asset Purchase Agreement by and between the Company and NetLogic dated April 30, 2009 (the "Agreement"). Upon closing of the transaction, NetLogic paid the Company $100 million in cash consideration, which included inventory valued at approximately $10 million (subject to adjustment) and assumed specified liabilities related to these assets. In connection with the sale of NWD Assets, the Company impaired a note receivable net of deferred gain and recognized a loss of $2.0 million in the first quarter of fiscal 2010.  The note receivable was related to foundry services as such the impairment charge was recorded to cost of goods sold.

On June 29, 2009, the Company completed its acquisition of Tundra Semiconductor Corporation, a Canadian Public Company based in Ottawa ("Tundra"), pursuant to the Arrangement Agreement, dated as of April 30, 2009, by and between the Company and Tundra, whereby Tundra became an indirect, wholly owned subsidiary of IDT. Pursuant to the Arrangement Agreement and the Plan of Arrangement implemented in connection therewith, total consideration to be paid for each common share of Tundra was CDN $6.25 per share. The total aggregate consideration for the acquisition consisted of CDN $120.8 million funded by IDT's existing cash on hand. In addition, as part of the consideration in the acquisition of Tundra, (i) IDT assumed options to purchase up to 802,850 shares of IDT common stock and (ii) Tundra made a payment of approximately CDN $1.83 million in connection with the cash-out of specified "in-the-money options" to purchase Tundra common stock and restricted share units.

On June 29, 2009, the Company initiated a restructuring plan to reduce its workforce by approximately 4.1%. The Company has taken this action following its acquisition of Tundra and an assessment of ongoing personnel needs in light of the acquisition. In connection with these actions, the Company estimates that it will incur approximately $7.8 million to $8.2 million in connection with cash expenditures for severance and related costs. Of the approximately $7.8 million to $8.2 million, approximately $7.1 million will result in cash expenditures in the second quarter of fiscal 2010 ending September 27, 2009 and approximately $0.7 million to $1.1 million will result in cash expenditures in the third quarter of fiscal 2010 ending December 27, 2009. The Company expects to complete this restructuring initiative by the end of the third quarter of fiscal 2010 ending December 27, 2009.



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements involve a number of risks and uncertainties.  These 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; 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 from those anticipated 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 March 29, 2009 filed with the SEC. Operating results for the three months ended June 28, 2009 are not necessarily indicative of operating results for an entire fiscal year.

Forward-looking statements, which are generally identified by words such as “anticipates,” “expects,” “plans,” and similar terms, include statements related to revenues and gross profit, research and development activities, selling, general and administrative expenses, 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.

Results of Operations

We design, develop, manufacture and market a broad range of high-performance, mixed-signal semiconductor solutions for the advanced communications, computing and consumer industries.  This is achieved by developing detailed systems-level knowledge, and applying our fundamental semiconductor heritage in high speed serial interfaces, timing, switching and memory to create solutions to compelling technology problems faced by customers.

In the first quarter of fiscal 2010, as part of a refinement of our business strategy, we incorporated multi-port products from the Communications segment into the Computing and Consumer segment.  This change in segment reporting had no impact on our consolidated balance sheets, statements of operations, statements of cash flows or statements of stockholders’ equity for any periods. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS 131.

Our reportable segments include the following:

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Communications segment: includes network search engines (NSEs), Rapid I/O switching solutions, flow-control management devices, FIFOs, multi-port products, integrated communications processors, high-speed SRAM, military application, digital logic, and telecommunications.
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Computing and Consumer segment: includes clock generation and distribution products, PCI Express switching solutions, high-performance server memory interfaces, PC audio and video products.



Revenues

(in thousands)
 
Three months ended
 
   
June 28, 2009
   
June 29, 2008
 
Communications
  $ 57,655     $ 86,661  
Computing and Consumer
    58,299       101,547  
Total
  $ 115,954     $ 188,208  

Communications Segment
Revenues in our Communications segment decreased $29.0 million, or 33% in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 due to the overall weakness in our communications end market which was negatively impacted by the economic downturn.  The decrease was primarily driven by revenue declines in our networking division, related to decreased consumption of search engines from one of our largest customers.  Revenues from our SRAM and digital logic products decreased 39% year over year due to the softness in the communications IC market.  Revenues from our communications timing and telecom products decreased 19% due to reduced demand for our timing products in the communications markets. Our military products also decreased 16% year over year.

Computing and Consumer Segment
Revenues in our Computing and Consumer segment decreased $43.2 million, or 43% in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 as a result of the global economic downturn and increased competition in the consumer market.  Revenues within our Computing and Multimedia division decreased 43%, driven by weaker demand for our personal computing and consumer products and erosion of average selling prices.  Revenues within our Enterprise Computing division decreased 45%, driven by the continued ramp down of our Advanced Memory Buffer (AMB) products. Partially offsetting these decreases was an increase in our Video and Display division as a result of the Silicon Optix acquisition in the third quarter of fiscal 2009.

Revenues in Asia Pacific (APAC), North America, Japan and Europe accounted for 65%, 20%, 8% and 7%, respectively, of our consolidated revenues in the first quarter of fiscal 2010 compared to 61%, 21%, 10% and 8%, respectively, in the first quarter of fiscal 2009.  The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in the APAC region.

Revenues (recent trends and outlook).  We currently anticipate overall revenues to grow moderately in the second quarter of fiscal 2010, primarily due to seasonality within our PC and consumer products and some early signs of recovery in the economic environment.

Included in the caption “Deferred income on shipments to distributors” on the Condensed Consolidated Balance Sheets 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 of June 28, 2009 and March 29, 2009 are as follows:

(in thousands)
 
Three months ended
 
   
June 28,
 2009
   
March 29, 2009
 
Gross deferred revenue
  $ 18,870     $ 21,302  
Gross deferred costs
    4,099       4,764  
Deferred income on shipments to distributors
  $ 14,771     $ 16,538  

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 will be lower than this amount 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, this amount has 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 decreased $1.8 million or 11% for the first quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009.  The decrease was primarily attributable to the lower inventory levels in the channels as our distributors adjusted their inventory levels in light of challenges in the end markets.

Gross Profit

(in thousands)
 
Three months ended
 
   
June 28, 2009
   
June 29, 2008
 
Gross Profit
  $ 47,165     $ 84,459  
Gross Margin
    41 %     45 %

Gross profit for the first quarter of fiscal 2010 was $47.2 million, a decrease of $37.3 million compared to the first quarter of fiscal 2009. Gross margin for the first quarter of fiscal 2010 was 41% compared to 45% in the first quarter of fiscal 2009.  The decrease in gross margin was primarily driven by lower utilization of our fabrication facility and a shift in the mix of products sold. The utilization of our manufacturing capacity in Oregon decreased from approximately 71% of equipped capacity in the first quarter of fiscal 2009 to 55% of equipped capacity in the first quarter of fiscal 2010.  Our gross margin was negatively impacted by an unfavorable mix of products sold during the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009, as sales to the higher margin communication and networking end markets have declined, while our lower margin businesses grew year over year. In addition, our gross margin was negatively impacted by an impairment charge of $2.0 million, related to a note receivable net of deferred gain for the assets we sold to our subcontractor in fiscal 2007. Partially offsetting these decreases, our gross margin benefited from a $10.8 million decrease in intangible asset amortization as we wrote down the carrying value of the intangible assets in fiscal 2009.  In addition, a portion of the intangible assets are being amortized on an accelerated method, resulting in decreased amortization over time. Furthermore, our gross margin benefited from $0.7 million, $0.5 million and $2.1 million decreases in performance related bonuses, royalty expenses and equipment expenses, respectively, as a result of our cost control efforts in response to the challenging economic times.  Finally, in the first quarter of fiscal 2010 and 2009, gross profit benefited by approximately $2.4 million and $1.1 million, respectively, from the sale of inventory previously written down.

Operating Expenses

The following table shows our operating expenses:

   
Three months ended
 
(in thousands)
 
June 28,
2009
   
% of Net
Revenues
   
June 29,
2008
   
% of Net Revenues
 
Research and Development
  $ 36,315       31 %   $ 43,619       23 %
Selling, General and Administrative
  $ 25,435       22 %   $ 32,965       18 %

Research and development.  R&D expenses decreased $7.3 million, or 17%, to $36.3 million in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.  The decrease was primarily attributable to a $6.2 million decrease in employee-related expenses, primarily due to a Company-wide shutdown and lower headcount in the first quarter of fiscal 2010 as a result of our cost control efforts, $2.4 million decrease in performance related bonus, $2.4 million decrease in stock based compensation expenses as a result of lower valuation of new grants compared to the first quarter of fiscal 2009 due to lower stock prices along with lower headcount in the first quarter of fiscal 2010 and a $0.7 million decrease in 401(K) match expense as a result of the temporary suspension of our US 401(K) employer match program. Our indirect


material expense decreased $0.6 million primarily attributable to the lower product development activities.  Other expense, such as equipment expense, outside service and medical expense decreased $0.2 million, $0.3 million and $0.2 million, respectively, primarily attributable to our continuous efforts to control our costs. Partially offsetting these decreases was a $0.5 million incremental gain in the participant portfolio of the executive deferred compensation plan primarily due to the improved stock market in the first quarter of fiscal 2010 as compared to fiscal 2009.

We currently anticipate that R&D spending in the second quarter of fiscal 2010 will increase moderately as compared to the first quarter of fiscal 2010.

Selling, general and administrative.  SG&A expenses decreased $7.5 million, or 22% to $25.4 million in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.  The decrease was primarily attributable to a $4.8 million reduction in intangible asset amortization as we wrote down the fair value of intangible assets and a portion of intangible assets, which is being amortized on an accelerated method, resulting in decreased amortization expense over time.  In addition, employee-related expenses decreased $2.6 million, primarily attributable to a $1.3 million decrease in stock based compensation expense as a result of lower valuation of new grants and lower headcount in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 and lower headcount in the first quarter of fiscal 2010, $0.9 million reduction in performance related bonus and $0.3 million decrease in 401(K) match expense as a result of the temporary suspension of our US 401(K) employer match program as a result of our cost control efforts.  We also experienced a $2.6 million decrease in sales representative commissions attributable to lower revenues and commission rates in the first quarter of fiscal 2010 and $0.5 million decrease in travel and entertainment costs primarily driven by our efforts to control costs.  Partially offsetting these decreases was a $3.4 million increase in legal and consulting services spending primarily attributable to the increased third party services associated with the Tundra and Leadis acquisitions and divesture of our Network division.

We currently anticipate that SG&A spending in the second quarter of fiscal 2010 will increase moderately as compared to the first quarter of fiscal 2010.

Restructuring.    During the fourth quarter of fiscal 2009, we initiated a restructuring action intended to align our spending with demand that has weakened in the slowing economy. The restructuring action included a reduction of approximately 124 positions across multiple divisions worldwide. In March 2009, after carefully considering the market, revenues and prices for search engines, we decided to restructure our NWD division.  As part of this restructuring action, we reduced approximately 56 positions in this division and ceased investment in new search engine product development.  In addition, we initiated restructuring actions, which affected our sales personnel in German and Japan.  During the first quarter of fiscal 2010, we reduced additional 8 positions related to these actions.  As a result, we recorded restructuring expenses of $1.5 million and $5.3 million for severance payments, payments under federal, state and province notice statutes and retention and other benefits associated with these restructuring actions in the first quarter of fiscal 2010 and the fourth quarter of fiscal 2009.  We expect to complete these restructuring actions in the second quarter of fiscal 2010.

During the third quarter of fiscal 2009, we initiated restructuring actions, which primarily affected our military business and Corporate Technology Group. These restructuring actions were taken to better allocate its engineering resources to maximize revenue potential. These actions resulted in the reduction of approximately 26 positions. We recorded restructuring expenses of approximately $0.7 million for severance benefits associated with these restructuring actions in fiscal 2009. During the first quarter of fiscal 2010, we incurred additional restructuring expenses of less than $0.1 million related to these restructuring actions. We expect to complete this restructuring plan in the second quarter of fiscal 2010.

During the second quarter of fiscal 2006, we completed the consolidation of our Northern California workforce into our San Jose headquarters and exited leased facility in Salinas. Upon exiting the building we recorded lease impairment charges of approximately $2.3 million, 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 revenues of


$0.7million, research and development (R&D) of $0.9 million and selling, general and administrative (SG&A) of $0.7 million. In fiscal 2008, we entered into a sublease agreement for our Salinas facility, resulting in a reduction to our accrued lease liabilities by $0.2 million.  Since the initial restructuring, we have made lease payments of $1.0 million related to vacated facility in Salinas.  As of June 28, 2009, the remaining accrued lease liabilities were $1.1 million.

Interest income and other, net.    Changes in interest income and other, net are summarized as follows:

(in thousands)
 
Three months ended
 
   
June 28, 2009
   
June 29, 2008
 
Interest income
  $ 544     $ 1,594  
Other income (expense), net
    881       (129 )
Interest income and other, net
  $ 1,425     $ 1,465  

Interest income decreased $1.0 million in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.  The decrease is primarily attributable to a decrease in interest rates.  Other income (expense), net increased $1.0 million in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.  The increase is primarily attributable to a gain of $0.8 million on our investment portfolio of marketable equity securities related to deferred compensation arrangements in the first quarter of fiscal 2010 while we recorded a loss of $0.1 million in the first quarter of fiscal 2009.

Provision for income taxes.   We recorded an income tax provision of $0.9 million in the first quarter of fiscal 2010, an increase of $0.7 million compared to the first quarter of fiscal 2009.  The income tax provision in the first quarter of fiscal 2010 is attributable to estimated foreign income taxes and estimated U.S. and state taxes, partially offset by a refundable research and development tax credit in the U.S..  The refundable research and development tax credit was due to the American Recovery and Reinvestment Act of 2009 and Housing and Economic Recovery Act of 2008, which extended such tax credit through December 31, 2009. On May 27, 2009, the Ninth Circuit Court of Appeals issued its ruling in the case of Xilinx, Inc. v. Commissioner (“Xilinx Case”), holding that stock-based compensation was required to be included in certain transfer pricing arrangements between a U.S. company and its foreign subsidiary. As a result of the ruling in the Xilinx Case, certain tax attributes were reduced and we recognized an incremental income tax charge of $0.6 million during the three month ended June 28, 2009.  The provision for income taxes in Q1 2009 primarily reflects estimated foreign income and withholding taxes and estimated U.S. and state taxes.

As of June 28, 2009, we continued to maintain a full valuation allowance against our net U.S. deferred tax asset as we could not conclude that it was 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 June 28, 2009, we are subject to examination in the U.S. federal tax jurisdiction for the fiscal years beginning with 2004. In February 2009, the IRS commenced a tax audit for fiscal years beginning 2006 through 2008.  The audit is in its early stages; there have not been any notices of proposed audit adjustments.  Typically these field audits last from 12 to 18 months before taxpayers have an indication of the tax positions with which the IRS disagrees. Although the final outcome is uncertain, 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, cash equivalent and available for sale investments were $306.0 million as of June 28, 2009, an increase of $9.9 million compared to March 29, 2009.  The increase is primarily attributable to $17.7 million in cash from operations, offset by $6.0 million cash payments to purchase Leadis assets in the first quarter of fiscal 2010.  We had no outstanding debt at June 28, 2009 or March 29, 2009.


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 in U.S. government treasuries only. 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 today, we have 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.

In addition, as much of our revenues are generated outside the U.S., a significant portion of our cash and investment portfolio accumulates offshore locations. At June 28, 2009, we had cash, cash equivalents and investments of approximately $216.4 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 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 ability to hold the investment for a period of time sufficient to allow for recovery. 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 2010 and fiscal 2009.

We recorded a net loss of $14.1 million in the first quarter of fiscal 2010 compared to a net income of $9.2 million in the first quarter of fiscal 2009.  Net cash provided by operating activities decreased $32.2 million to $17.7 million for the first quarter of fiscal 2010 compared to $49.9 million for the first quarter of fiscal 2009.  A summary of the significant non-cash items included in net income and net loss are as follows:

·  
Amortization of intangible assets was $5.2 million in the first quarter of fiscal 2010 compared to $20.9 million in the same period one year ago.  The decrease is primarily attributable to the lower carrying value of intangible assets in the first quarter of fiscal 2010 as we recorded a significant impairment charges in the third and fourth quarter of fiscal 2009.  In addition, the decrease is due to a portion of intangible assets, which are being amortized on an accelerated method, resulting in decreased amortization expense over time.