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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 1, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19299
Integrated Circuit Systems, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2000174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2435 Boulevard of the Generals, Norristown, Pennsylvania 19403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 630-5300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 5, 2000, there were 64,519,257 shares of Common Stock,
$0.01 par value, outstanding.
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PART I
Item 1. BUSINESS
General
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Integrated Circuit Systems, Inc. was incorporated in Pennsylvania in 1976, and
began by designing and marketing custom application specific integrated circuits
("ASICs") for various industrial customers. In particular, we were noted for our
unique expertise in designing ASICs, which combined both analog and digital, or
"mixed-signal", technology. By 1988, we had adopted a strategy of developing
proprietary integrated circuits ("ICs") to capitalize on our complex mixed-
signal design technology and pioneered the market for frequency timing
generators ("FTGs") or silicon timing devices which provide the timing signals
or "clocks" necessary to synchronize high performance electronic systems.
Clocks replaced the multiple crystal oscillators and other peripheral circuitry
previously used to generate and synchronize timing signals, thus providing
savings in board space, power consumption and cost. Our Clock products were
initially used in video graphics applications in personal computers ("PCs"), but
subsequently expanded to include motherboards, PC peripheral devices such as
disk drives, audio cards, laser printers and other consumer electronics such as
digital set-top boxes and flat panel displays. More recently, we have further
extended into communications, which develops high performance clocking solutions
supporting networking, telecommunication, workstation and server applications.
Our initial public offering of common stock occurred in June 1991, at which time
our common stock commenced trading on the Nasdaq National Market under the
symbol ICST.
On May 11, 1999, we merged with ICS Merger Corp., a transitory merger company
formed and wholly owned by the affiliates of Bain Capital Inc. and Bear, Stearns
and Company Inc. (the "Equity Investors"). We refer to this event as the
recapitalization. We issued $100.0 million in aggregate principal amount of
senior subordinated notes in connection with the recapitalization and entered
into a $95.0 million senior credit facility. Our common stock was no longer
traded on the NASDAQ National Market. We no longer filed periodic reports with
the Securities and Exchange Commission until we filed the registration statement
filed in connection with the Exchange offer for the senior subordinated notes in
October 1999.
On May 22, 2000, we completed our initial public offering (IPO) of 12.5 million
shares of our common stock. We used the net proceeds of this initial offering to
repay our bank debt, close our tender offer for subordinated notes, and pay the
fees and expenses associated with the offering.
Products and Product Applications
---------------------------------
Core
Our Core segment (Clocks) supplies a broad line of Clock products for use in PC
motherboard and peripheral applications. These silicon timing devices control
multiple processes by providing and synchronizing the timing of the computer
system, including signals from the video screen, graphics controller, memory,
keyboard, microprocessor, disk drives and communication ports.
This product group also designs, develops and markets silicon timing devices for
non-PC motherboard applications such as digital videodisk players, digital set-
top boxes, digital cameras, laser printers, flat panel displays and digital TVs,
as well as cordless communications applications. Crystal oscillators have
traditionally served the timing requirements of these products. Crystal
oscillators are components manufactured from quartz that resonate at a single
set frequency. In situations where a single Clock can replace multiple crystal
oscillators, Clocks have emerged as both more cost-effective and technologically
superior solutions than the crystal-based standard. We view the $3.3 billion
crystal-
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based oscillator market as a future growth opportunity, as our Clock products
provide viable alternatives to the present crystal-based standard. Several
application segments are leading the conversion from crystal oscillators to
silicon timing devices, including digital set-top boxes, telecom and networking
equipment and mass storage systems.
A significant growth area in this product group is communications. As the
Internet usage expands there is a need for increased bandwidth and
infrastructure. This increased requirements is driving demands for silicon
timing. We currently have over 100 design specifications in broadband
communications with approximately 50 customers and overall we are working on
around 500 communications opportunities.
Non-Core
Our Non-Core (Non-Clocks) segment sells leading edge mixed-signal (analog and
digital) integrated circuits customized to the specific requirements of a broad
range of customers and applications. Custom mixed-signal products are used in
medical, consumer and industrial applications such as glucose measurement
devices, hearing aids and burglar alarm systems. Custom mixed-signal integrated
circuits are typically sold through development and product contracts of five
years or more, which generally provide a minimum purchase commitment by the
customer.
Our Non-Core segment includes a portfolio of transceiver integrated circuits
that transmit and receive electronic data between various PC systems. Our
transceivers are utilized in a wide variety of networking protocols including
Fast Ethernet, Asynchronous Transfer Mode and SONET applications. Our flagship
product, the ICS1890, was the industry's first single-chip integrated circuit
transceiver for the Fast Ethernet protocol.
On February 18, 1999, we sold certain intellectual property and equipment of our
Non-Core product group to 3Com Corporation for $16.0 million in cash. We decided
to reduce our ongoing investment in this product group in order to focus on our
Core technology.
The sale of certain assets of our Non-Core product group benefit us by
permanently eliminating certain fixed costs associated with research and
development while at the same time allowing us to retain the right to sell
certain of our existing and next generation transceiver products over their
remaining product life cycles. While revenue from this product group will
eventually decline over the next few years, the sale allows us to optimize this
product group's cost structure and contribution to operating margin while these
products continue to be sold.
Sales and Marketing
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We market our products through a direct sales force that manages a worldwide
network of independent sales representatives and distributors. We direct our
sales efforts through offices in Norristown, PA, San Jose, CA, Houston, TX,
Taipei, Taiwan, and Tokyo, Japan. We currently have more than 400 customers.
Maxtek Technology, a distributor in Taiwan accounted for 12% of our fiscal year
2000 revenue, but no single OEM end customer accounted for 10% or more of our
revenue in fiscal year ended July 1, 2000.
Foreign sales are directly conducted by sales representatives and distributors
located in the Pacific Rim and Europe, and managed by direct sales staff in the
Taiwan and Japan sales offices. Foreign sales are denominated in U.S. dollars
and are subject to risks common to export activities, including governmental
regulation and trade barriers.
Our backlog includes customer-released orders with firm schedules for shipment
within the next twelve months. These orders may not be canceled generally
without 30 days advance notice.
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Our revenues are subject to fluctuations primarily as a result of competitive
pressures on selling prices, changes in the mix of products sold, the timing and
success of new product introductions and the scheduling of orders by customers.
We generally warrant that our products will be free from defects in workmanship
and materials for a one-year period. Defective products returned to us within
the warranty period are replaced or refunded after a confirming evaluation by
our quality control staff. We have not experienced significant warranty claims
to date.
Manufacturing
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We qualify and utilize third party suppliers for the manufacture of silicon
wafers. All of our wafers currently are manufactured by outside suppliers, three
of which supply the substantial majority of our wafers. The manufactured wafers
are packaged at two primary assemblers. We typically agree upon production
schedules with our suppliers based on order backlog and demand forecasts for the
approaching three-month period.
We maintain a cash deposit with Chartered Semiconductor Manufacturing PTE Ltd.
("CSM"), a wafer fabrication operation owned by the Singapore government. In the
past, suppliers commonly used cash deposits when establishing customer
relationships. As of July 1, 2000, CSM held $9.9 million of this deposit. By
contractual agreement, CSM is required to return this balance to us by December
31, 2000.
During the fourth quarter of fiscal year 1997, we set up a test and drop-ship
facility in Singapore's Kolam Ayer Industrial Park to achieve faster delivery of
our products to customers throughout the Pacific Rim. The Singapore facility
handles wafer probe and final testing for various integrated circuits used in
personal computers, data storage devices and other peripheral applications. The
facility began testing devices in the first quarter of fiscal year 1998 and
shipments began in the second quarter of fiscal year 1998.
We believe that adequate capacity will be available to support our manufacturing
requirements. Our reliance, however, on multiple, offshore, outside
subcontractors involves several risks, including capacity constraints or delays
in timely delivery and reduced control over delivery schedules, quality
assurance and costs. We are continuously seeking to obtain additional sources of
supply and capacity for more advanced process technologies, although there can
be no assurance that such additional sources and capacity can be obtained. The
occurrence of any supply or other problems resulting from these risks could have
a material adverse effect on our operating results.
Research and Development
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The design process for our products is extremely complex and iterative,
involving the development of a prototype through computer-aided design, the use
of simulation methodology, the generation of photo masks for the manufacturing
process, the fabrication of wafers and the characterization of the prototype on
test systems before submission to customers for qualification. Research and
development efforts concentrate on the design and development of new leading-
edge products for our markets and the continual enhancement of our design
capabilities.
Over the last three fiscal years, we have developed and introduced to market
approximately 424 new products. For over twenty years, we have developed
libraries of proprietary mixed-signal integrated
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circuit designs and have invested in extensive computer-aided design and
engineering resources specifically designed to support the increasing complexity
and customized nature of silicon timing devices. Investments in research and
development were approximately $24.8 million, $21.3 million and $19.8 million in
fiscal years 2000, 1999 and 1998, respectively. Such expenses typically include
costs for engineering personnel, prototype and wafer mask costs, and investment
in design tools and support overhead related to new and existing product
development. As of July 1, 2000, our research and development staff comprised 93
people. We will continue to invest in research and new product development
within our Core product group.
Patents, Licenses and Trademarks
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We hold several patents, as well as copyrights, mask works, and trademarks with
respect to our various products and expect to continue to file applications for
the same in the future as a means of protecting our technology and market
position. Most of our earlier patents carry a 17-year life and begin expiring in
fiscal year 2009. In addition, we seek to protect our proprietary information
and know-how through the use of trade secrets, confidentiality agreements and
other security measures. To augment product feature sets or accelerate
development schedules, we license certain technologies. No single license,
however, is believed to be material to our consolidated business. In certain
instances, we have performed design services pursuant to an agreement by which
we transferred certain of our intellectual property rights in the final product
to our customers. Such transfers are also not deemed material to our
consolidated business. There can be no assurance, however, that these measures
and/or others will be adequate to safeguard our interests or preserve our
competitive position or protect us from allegations regarding potential patent
infringement.
As is typical in the semiconductor industry, we have, from time to time, been
notified that we may be infringing certain patents and other intellectual
property rights of others. Such matters are evaluated and reviewed with counsel.
To date, matters of this nature have not resulted in material litigation against
us. There can be no assurance, however, that litigation will not be commenced in
the future regarding any claim of infringement of any intellectual property
right, or that, if required, any licenses or other rights could be obtained on
acceptable terms.
See also Item 3 "Legal Proceedings".
Competition
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In general, the semiconductor and PC component industries are intensely
competitive and characterized by rapid technological changes, price erosion,
cyclical shortages of materials, and variations in manufacturing yields and
efficiencies. Our ability to compete in this dynamic and opportunistic
environment depends on factors both within and outside our control, including
new product introduction, product quality, product performance and price, cost-
effective manufacturing, general economic conditions, the performance of
competition and the growth and evolution of the industry in general. In the
latter regard there are several substantial entities, we not being one of them,
in the industry who could, and do, exert significant influence in determining
the pace and key trends in the development of PCs and PC components. Moreover,
some of our current and potential competitors have significantly greater
financial, technical, manufacturing and marketing resources. Competitors also
include privately owned and emerging companies attempting to secure a share of
the market for our products.
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Forward-Looking Statements
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This report contains forward-looking statements, including, without limitation,
statements concerning the conditions in the semiconductor and semiconductor
capital equipment industries, our operations, economic performance and financial
condition, including in particular statements relating to our business and
growth strategy and product development efforts. The words "believe," "expect,"
"anticipate," "intend" and other similar expressions generally identify forward-
looking statements. For such statements we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1985. The reader is cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. These forward-looking statements, are based largely on our current
expectations and are subject to a number of risks and uncertainties, including,
without limitation, those identified under the "Factors That May Affect Future
Results" section and elsewhere in this prospectus and other risks and
uncertainties indicated from time to time in our filings with the Securities and
Exchange Commission ("SEC"). Actual results could differ materially from these
forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in our business or growth strategy or an inability to execute
our strategy due to changes in our industry or the economy generally, the
emergence of new or growing competitors and various other competitive factors.
In light of these risks and uncertainties, there can be no assurance that the
matters referred to in the forward-looking statements contained in this
prospectus will in fact occur.
We do not undertake to update our forward-looking statements or risk factors to
reflect future events or circumstances.
Factors That May Affect Future Results
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You should carefully consider the following factors in addition to the other
information set forth in this 10-K in analyzing an investment in our Company.
The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we do not presently know about or that
we currently believe are immaterial may also inadvertently impact our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations will likely suffer. In such case,
the trading price of our common stock could fall, and you may lose all or part
of the money you paid to buy our common stock. This 10-K contains forward-
looking statements that involve risks and uncertainties. Actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
below, as well as those discussed elsewhere in this 10-K.
Fluctuation of Operating Results--Our future operating results are likely to
fluctuate and therefore may fail to meet expectations.
Our operating results have varied widely in the past and are likely to do so in
the future. In addition, our operating results may not follow any past trends.
Our future operating results will depend on many factors and may fail to meet
our expectations for a number of reasons, including those set forth in these
risk factors Factors that could cause our operating results to fluctuate that
relate to our internal operations include:
. the need for continual, rapid new product introductions;
. changes in our product mix; and
. our inability to adjust our fixed costs in the face of any declines in
sales.
Factors that could cause our operating results to fluctuate that depend on our
suppliers and customers include:
. the timing of significant product orders, order cancellations and
rescheduling;
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. the availability of production capacity and fluctuations in the
manufacturing yields at third parties' facilities that manufacture our
devices; and
. the cost of raw materials and manufacturing services from our suppliers.
Factors that could cause our operating results to fluctuate that are industry
risks include:
. the cyclical nature of the semiconductor, communications, and consumer
and business electronics industries; and
. intense competitive pricing pressures.
Cyclical Industry--Downturns in the business cycle could reduce the revenues and
profitability of our business.
The semiconductor, communications, and consumer and business electronics
industries are highly cyclical. In 1998, the semiconductor industry experienced
a downturn. Our markets may experience other, possibly more severe and
prolonged, downturns in the future. We may also experience significant changes
in our operating profit margins as a result of variations in sales, changes in
product mix, price competition for orders and costs associated with the
introduction of new products. The markets for our products depend on continued
demand for communications applications and consumer and business electronics.
There can be no assurance that these end-user markets will not experience
changes in demand that will adversely affect our business.
We Depend on Continuous Introduction of New Products Based on the Latest
Technology--Our inability to create new products could adversely affect our
business.
The markets for our products are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. Product life
cycles are continually becoming shorter, which may cause the gross margins of
semiconductor products to decline as the next generation of competitive products
is introduced. Therefore, our future success is highly dependent upon our
ability to continually develop new products using the latest and most cost-
effective technologies, introduce them in commercial quantities to the
marketplace ahead of the competition and have them selected for inclusion in
products of leading systems manufacturers. We cannot assure you that we will be
able to regularly develop and introduce such new products on a timely basis or
that our products, including recently introduced products, will be selected by
systems manufacturers for incorporation into their products. Our failure to
develop such new products, to have our products available in commercial
quantities ahead of competitive products or to have them selected for inclusion
in products of systems manufacturers would have a material adverse effect on our
results of operations and financial condition.
The market for communications applications is characterized by rapidly changing
technology and continuing process development. Our future success in the
communications applications market depends in part on our ability to design and
produce products that meet the changing needs of customers in this market. We
can not assure you that we will be able to regularly develop and introduce
products that will be selected by communications applications manufacturers for
incorporation into their products.
Competition--Our business is very competitive and increased competition could
adversely affect us.
The semiconductor and PC component industries are intensely competitive. Our
ability to compete depends heavily upon elements outside our control, such as
general economic conditions affecting the semiconductor and PC industries and
the introduction of new products and technologies by competitors. Many of our
competitors and potential competitors have significant financial, technical,
manufacturing and marketing resources. These competitors include major
multinational corporations possessing worldwide wafer fabrication and integrated
circuit production facilities and diverse,
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established product lines. Competitors also include emerging companies
attempting to obtain a share of the existing market for our current and proposed
products. To the extent that our products achieve market acceptance, competitors
typically seek to offer competitive products or embark on pricing strategies,
which, if successful, could have a material adverse effect on our results of
operation and financial condition.
We Depend on the PC Industry--Our business could be adversely affected by
decline in the PC market.
A substantial portion of the sales of our products depends largely on sales of
PCs and peripherals for PCs. The PC industry is subject to price competition,
rapid technological change, evolving standards, short product life cycles and
continuous erosion of average selling prices. Should the PC market decline or
experience slower growth, then a decline in the order rate for our products
could occur. A downturn in the PC market could also affect the financial health
of some of our customers, which could affect our ability to collect outstanding
accounts receivable from such customers.
We Depend on Outside Wafer Foundries and Assemblers--Our inability to obtain
wafers and assemblers could seriously affect our operations.
We currently depend entirely upon third-party suppliers for the manufacture of
the silicon wafers from which our finished integrated circuits are manufactured
and for the packaging of finished integrated circuits from silicon wafers. We
cannot assure you that we will be able to obtain adequate quantities of
processed silicon wafers within a reasonable period of time or at commercially
reasonable rates. In the past, the semiconductor industry has experienced
disruptions from time to time in the supply of processed silicon wafers due to
quality or yield problems or capacity limitations. Virtually all of our wafers
are manufactured by three outside foundries.. If one or more of these foundries
is unable or unwilling to produce adequate supplies of processed wafers on a
timely basis, it could cause significant delays and expense in locating a new
foundry and redesigning circuits to be compatible with the new manufacturer's
processes and, consequently, could have a material adverse effect on our results
of operations and financial condition. We also rely entirely upon third parties
for the assembly of our finished integrated circuits from processed silicon
wafers. We currently rely on four assemblers, two of which produce most of our
finished integrated circuits. While we believe that there is typically a greater
availability of assemblers than silicon wafer foundries, we could nonetheless
incur significant delays and expense if one or more of the assemblers upon which
we currently rely are unable or unwilling to assemble finished integrated
circuits from silicon wafers.
International Business Activities--Our business could be adversely affected by
changes in political and economic conditions abroad.
For the fiscal years 2000, 1999, and 1998, we generated approximately 70.7%,
68.8% and 58.8% of our revenue, respectively, from international markets. These
sales were generated primarily from customers in the Pacific Rim region and
included sales to foreign corporations, as well as to foreign subsidiaries of
U.S. corporations. We estimate that in fiscal year 2000, approximately one-half
of our sales in international markets were to foreign subsidiaries of U.S.
corporations, with the bulk of them being in Taiwan. In addition, certain of our
international sales are to customers in the Pacific Rim region, who in turn sell
some of their products to North America, Europe and other non-Asian markets. In
addition, two of our wafer suppliers and all of our assemblers are located in
the Pacific Rim region. There can be no assurance that the effect of an economic
crisis on our suppliers will not impact our wafer supply or assembly operations,
or that the effect on our customers in that region will not adversely affect
both the demand for our products and the collectibility of our receivables. Our
international business activities in general are subject to a variety of
potential risks resulting from certain political, economic and other
uncertainties including, without limitation, political risks relating to a
substantial number of our customers being in Taiwan. Certain aspects of our
operations are subject to governmental regulations in the countries in which we
do business, including those relating to
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currency conversion and repatriation, taxation of our earnings and earnings of
our personnel, and our use of local employees and suppliers. Our operations are
also subject to the risk of changes in laws and policies in the various
jurisdictions in which we do business, which may impose restrictions on us. We
cannot determine to what extent our future operations and earnings may be
affected by new laws, new regulations, changes in or new interpretations of
existing laws or regulations or other consequences of doing business outside the
U.S. Our activities outside the U.S. are subject to additional risks associated
with fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. Additionally, worldwide semiconductor pricing is
influenced by currency fluctuations and the devaluation of foreign currencies
could have a significant impact on the prices of our products if our competitors
offer products at significantly lower prices in an effort to maximize cash flows
to finance short-term, dollar denominated obligations; such devaluation could
also impact the competitive position of our customers in Taiwan and elsewhere,
which could impact our sales. Currently, we do not engage in currency hedging
activities as all transactions are denominated in U.S. dollars.
Risks Related to Future Acquisitions--We may make acquisitions, which could
subject us to a number of operational risks.
In order to grow our business and maintain our competitive position, we may
acquire other businesses in the future. We cannot predict whether or when any
acquisitions will occur. Acquisitions commonly involve certain risks, and we
cannot assure you that we will make any acquisitions or that any acquired
business will be successfully integrated into our operations or will perform as
we expect. Any future acquisitions could involve certain other risks, including
the assumption of additional liabilities, potentially dilutive issuances of
equity securities and diversion of management's attention from other business
concerns. Furthermore, we may issue equity securities or incur debt to pay for
any future acquisitions.. We may also enter into joint venture transactions.
Joint ventures have the added risk that the other joint venture partners may
have economic, business or legal interests or objectives that are inconsistent
with our interests and objectives. We may also have to fulfill our joint venture
partners' economic or other obligations if they fail to do so.
We Depend on Patents, Trade Secrets and Proprietary Technology--Our inability to
secure our intellectual property could adversely affect our business.
We hold several patents as well as copyrights, mask works and trademarks with
respect to various products and expect to continue to file applications for them
in the future as a means of protecting our technology and market position. In
addition, we seek to protect our proprietary information and know-how through
the use of trade secrets, confidentiality agreements and other similar security
measures. With respect to patents, there can be no assurance that any
applications for patent protection will be granted, or, if granted, will offer
meaningful protection. Additionally, there can be no assurance that competitors
will not develop, patent or gain access to similar know-how and technology, or
reverse engineer our products, or that any confidentiality agreements upon which
we rely to protect our trade secrets and other proprietary information will be
adequate to protect our proprietary technology. The occurrence of any such
events could have a material adverse effect on our results of operations and
financial condition.
Patents covering a variety of semiconductor designs and processes are held by
various companies. We have from time to time received, and may in the future
receive, communications from third parties claiming that we may be infringing
certain of such parties' patents and/or other intellectual property rights. Any
infringement claim or other litigation against or by us could have a material
adverse effect on our results of operations and financial condition.
Virtually all of our key engineers worked at other companies or at universities
and research institutions before joining us. Disputes may arise as to whether
technology developed by such engineers was first
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discovered when they were employed by or associated with other institutions in a
manner that would give third parties rights to such technology superior to our
rights, if any. Disputes of this nature have occurred in the past, and are
expected to continue to arise in the future, and there can be no assurance that
we will prevail in these disputes. To the extent that consultants, vendors or
other third parties apply technological information independently developed by
them or by others to our proposed products, disputes may also arise as to the
proprietary rights to such information, which may not be resolved in our favor.
We Depend upon Key Management--Our loss of certain key members of management
could negatively impact our business prospects.
We are dependent upon our ability to attract and retain highly skilled technical
and managerial personnel. We believe that our future success in developing
marketable products and achieving a competitive position will depend in large
part upon whether we can attract and retain skilled personnel. Competition for
such personnel is intense, and there can be no assurance that we will be
successful in attracting and retaining the personnel we require to successfully
develop new and enhanced products and to continue to grow and operate
profitably. Furthermore, retention of scientific and engineering personnel in
our industry typically requires us to present attractive compensation packages,
including stock option grants.
Product Liability Exposure and Potential Unavailability of Insurance--Some of
our products may be subject to product liability claims.
Certain of our custom integrated circuits products are sold into medical markets
for applications which include blood glucose measurement devices and hearing
aids. In certain cases, we have provided or received indemnities with respect to
possible third-party claims arising from these products. Although we believe
that exposure to third-party claims has been minimized, there can be no
assurance that we will not be subject to third-party claims in these or other
applications or that any indemnification or insurance available to us will be
adequate to protect us from liability. A product liability claim, product recall
or other claim, as well as any claims for uninsured liabilities or in excess of
insured liabilities, could have a material adverse effect on our results of
operations and financial condition.
Provisions of our charter documents and Pennsylvania law could discourage
potential acquisition proposals and could delay, deter or prevent a change in
control.
Provisions of our articles of incorporation and by-laws may inhibit changes in
control of our company not approved by our board of directors and would limit
the circumstances in which a premium may be paid for the common stock in
proposed transactions, or a proxy contest for control of the board may be
initiated. These provisions provide for:
. the authority of our board of directors to issue, without shareholder
approval, preferred stock with such terms as our board of directors
determines;
. classified board of directors;
. a prohibition on shareholder action through written consents;
. a requirement that special meetings of shareholders be called only by
our chief executive officer or board of directors; and
. advance notice requirements for shareholder proposals and nominations.
Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988
prohibits certain transactions with a 20% shareholder, an '' interested
shareholder,'' for a period of five years after the date any shareholder becomes
an interested shareholder unless the interested shareholder's acquisition of 20%
or more of the common stock is approved by our board of directors. This
provision may discourage potential acquisition proposals and limit the
circumstances in which a premium may be paid for our company.
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Future sales by our existing shareholders could adversely affect the market
price of our common stock.
Future sales of the shares of common stock held by existing shareholders could
have a material adverse effect on the market price of our common stock.
. 51,751,564 shares of common stock held by our existing shareholders will
be eligible for sale into the public market, subject to compliance with
the resale volume limitations and other restrictions of Rule 144 under
the Securities Act, beginning November 20, 2000.
Beginning November 20, 2000, the holders of an aggregate of approximately
51,751,564 shares of common stock will have limited rights to require us to
register their shares of common stock under the Securities Act at our expense.
Our stock price could be volatile and could drop unexpectedly.
Historically, stock prices and trading volumes for newly public companies
fluctuate widely for a number of reasons, including some reasons that may be
unrelated to their businesses or results of operations. This type of market
volatility could depress the price of our common stock without regard to our
operating performance. In addition, our operating results may be below the
expectations of public market analysts or investors. If this were to occur, the
market price of our common stock could decrease, perhaps significantly.
Employees
---------
As of July 1, 2000, we had 259 full-time employees, 93 of whom were engaged in
research and development, 23 in sales, 17 in marketing and technical support, 36
in finance and administration and 90 in manufacturing support and operations. We
have incentive programs to retain our key research and development staff. The
senior management team and many other employees own new common stock and
options, together representing up to approximately 21% of our common stock on a
fully diluted basis.
Item 2. PROPERTIES
Our corporate headquarters, covering 61,000 square feet, is located in
Norristown, Pennsylvania. We purchased this property in September 1992. On
January 18, 1999, we entered into an agreement of sale with BET Investments III,
L.P. to sell the land and property of our Norristown location for $5.5 million.
The sale transaction was completed on April 13, 1999. On January 29, 1999, we
signed a lease with BET Investments IV, L.P., the assignee of BET Investments
III, L.P., to lease back the Norristown building for a term of eight years
commencing upon the closing of the sale, with monthly rent beginning at
approximately $51,000 for the first year and progressively increasing each year
to approximately $63,000 in the eighth year. We also have a renewal option of
three or more years after the initial eight-year term.
We opened a 10,000 square foot design facility in Tempe, Arizona in January
2000. The lease term for this facility is five years with monthly rent beginning
at approximately $9,300 for the first year and progressively increasing each
year to approximately $10,100 in the fifth year.
We also utilize a facility located in Singapore for testing, warehousing, sales
and administration, which consist of 16,000 square feet of space leased pursuant
to an agreement, which expire in August 2003. The rent for this facility is
approximately $18,000 per month, increasing in December 2000 to approximately
$21,000.
11
<PAGE>
In November 1998, we relocated our San Jose operations to a new facility in San
Jose with 70,000 square feet of office space pursuant to a new lease agreement,
which will expire in December 2008. We believe that this new facility is
adequate to meet our requirements going forward. Monthly rent began at $100,100
per month, progressively increasing each year to approximately $130,608 in 2008.
Item 3. LEGAL PROCEEDINGS
From time to time, various inquiries, potential claims and charges and
litigation are made, asserted or commenced by or against us, principally arising
from or related to contractual relations and possible patent infringement. We
believe that any of these claims currently pending, individually and in the
aggregate, have been adequately reserved and will not have any material adverse
effect on our consolidated financial position or results of operations, although
no assurance can be made in this regard.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous written consent of the Company's shareholders effective May
22, 2000, the Company's shareholders resolved to (i) amend and restate the
Company's Amended and Restated Articles of Incorporation in their entirety, (ii)
amend and restate the Company's Amended and Restated By-laws in their entirety,
(iii) elect Henry Boreen, Prescott Ashe and David Dominik, Hock E. Tan, Michael
A. Krupka and John Howard as directors of the Company, (iv) approve an
indemnification agreement by and among the Company and its officers and
directors, (v) approve and adopt the Company's 2000 Long Term Equity Incentive
Plan, (vi) approve and adopt the Company's 2000 Employee Stock Purchase Plan,
(vii) approve and adopt the Company's Audit Committee Charter and (viii)
approve, confirm and ratify all of the lawful acts and proceedings of the
directors of the Company, for and on behalf of the Company, taken in connection
with the IPO.
12
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market on the Nasdaq National
Market System under the symbol ICST. Below are the quarterly high and low
closing sale prices of our common stock for the fiscal years ended 2000,
commencing on May 23, 2000, the day that our common stock commenced trading
following our initial public offering, as reported by The Nasdaq Stock Market.
Although our common stock was publicly traded before we completed our going
private transaction in May 1999, due to the intervening recapitalizations, our
capital structure before the recapitalization is not directly comparable to our
current capital structure. As a result, the presentation of common stock trading
prices from before the recapitalization is not considered meaningful.
Fiscal 2000
----------------------
High Low
----------------------
First quarter ended Oct 2 -- --
Second quarter ended Jan 1 -- --
Third quarter ended Apr 1 -- --
Fourth quarter ended Jul 1* 19.375 10.125
* Commencing May 23, 2000, the day our common stock began trading on the
Nasdaq Stock Market.
In December of 1999, we issued 5.6 million shares of $2.36 par value preferred
stock to Intel Corp, in exchange for $13.5 million. The sale of these securities
was exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act. The investor represented its intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the instruments representing such securities issued in such transaction. The
investor had adequate access, through its relationships with us, to information
about us.
On May 22, 2000, we completed our initial public offering of 12,500,000 shares
of common stock. The shares were registered pursuant a Registration Statement on
Form S-1, registration number 333-33318, which was declared effective by SEC on
May 22, 2000. All of the shares registered were sold in the offering for an
aggregate offering price of $162.5 million. The managing underwriters in the
offering were Credit Suisse First Boston, Robertson Stephens, Lehman Brothers,
Bear, Stearns & Co. Inc. and Pennsylvania Merchant Group. Total underwriting
discounts and commissions were $11.0 million, and total offering expenses were
approximately $5.4 million, which included a pay-out of our advisory agreements
of $2.7 million to Bain Capital and Bear, Stearns and Company. After
underwriting fees and other offering expenses, our initial public offering
generated net proceeds of 146.1 million. The net proceeds, together with $10.0
million from our new credit facility and cash on hand, was used for the
following purposes:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Purpose Amount of Proceeds
(in millions)
--------------------------------------------------------------------------------------------
<S> <C>
Repurchase of Outstanding Senior Subordinated Notes $ 93.0
--------------------------------------------------------------------------------------------
Payment of Prepayment Premiums and Unpaid Interest on $ 15.9
Outstanding Senior Subordinated Notes
--------------------------------------------------------------------------------------------
Repayment of Outstanding Senior Credit Facility Obligations $ 57.5
--------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Of the amount owed under our outstanding senior credit facility obligations,
approximately 12% was owed to an investment fund advised by Sankaty Advisors,
Inc., an affiliate of Bain Capital. In addition, approximately 15% of the
outstanding indebtedness was owed to Credit Suisse First Boston, an affiliate of
Credit Suisse First Boston Corporation, one of our underwriters.
14
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
Five Year Summary
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
July 1, July 3, June 27, June 28, June 29,
2000 1999 1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue:
Core $ 148,842 $ 107,710 $ 90,622 $ 63,280 $ 52,714
Non-core 16,679 31,353 70,012 41,079 38,616
Total revenue $ 165,521 $ 139,063 $ 160,634 $ 104,359 $ 91,330
Gross Margin 99,398 74,567 71,775 45,222 36,482
Research and development 24,848 21,316 19,797 13,521 10,547
Special charges (1) -- 15,051 -- 11,196 3,257
Operating income 50,946 18,406 32,300 4,851 4,025
Income (loss) from continuing operations 31,370 23,043 21,375 (7,510) 4,636
Loss from discontinued operations (2) -- -- -- (909) (721)
Loss from extraordinary item (3) (16,638) -- -- -- --
Net income (loss) 14,732 23,043 21,375 (8,419) 3,915
Diluted income per share (4) $ 0.30 $ 0.86 $ 0.96 $ (0.43) $ 0.20
Weighted average shares outstanding (diluted) (4) 49,871 26,277 22,264 19,439 19,639
July 1 July 3 June 27 June 28 June 29
2000 1999 1998 1997 1996
-----------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $ 57,104 $ 26,910 $ 65,113 $ 48,260 $ 48,023
Total assets 101,219 87,795 108,009 90,622 87,570
Long-term debt, less current portion (5) 835 169,000 1,380 1,503 1,631
Shareholders' equity (deficit) (5) 68,920 (106,912) 89,768 70,147 69,164
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) In connection with the recapitalization, we recorded a compensation
charge of $15.1 million related to the accelerated vesting, cash-out
and conversion of employee stock options. On February 28, 1997, we
acquired all of the capital stock of MicroClock. The acquisition was
accounted for under the purchase method of accounting and resulted in a
charge of $11.2 million related to the write-off of in-process research
and development costs. In fiscal 1996, we recorded a charge of $1.8
million for a facility closing and a $1.5 million write-off of in-
process research and development costs in connection with our Turtle
Beach subsidiary acquisition of ValueMedia.
2) In fiscal 1997, we sold our subsidiary, ARK Logic. Accordingly, we
presented ARK Logic as a discontinued operation and all prior year
periods were restated to reflect this presentation.
3) Represents an extraordinary charge of $16.6 (net of tax) relating to
(a) prepayment penalty, totaling $9.5 million (net of tax), associated
with the repurchase of the aggregate outstanding principal amount of
our senior subordinated notes and (b) the elimination of deferred
financing costs, totaling $7.2 million (net of tax) associated with the
repayment of our senior subordinated notes and senior credit facility
(c) purchase of $2.0 million of our senior subordinated notes below par
in September, resulting in a gain of $36,000 net of income taxes (d)
purchase of $5.0 million of our senior subordinated notes below par in
November resulting in a gain of $134,000 net of income taxes.
4) Diluted income per share and weighted average shares outstanding-
diluted have been adjusted to reflect the 1.6942-to-1 common stock-
split that occurred as of the pricing date of the initial public
offering for all periods shown.
5) On May 11, 1999, we merged with ICS Merger Corp., a transitory merger
company formed and wholly owned by the affiliates of Bain Capital Inc.
and Bear, Stearns and Company Inc. (the "Equity Investors"). We refer
to this event as the recapitalization. We issued $100.0 million in
aggregate principal amount of senior subordinated notes in connection
with the recapitalization and entered into a $95.0 million senior
credit facility.
15
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We are a worldwide leader in the design, development and marketing of silicon
timing devices for a number of high-growth application segments. Our silicon
timing devices are used in a variety of consumer and business electronics such
as personal computers, or PCs, digital cameras, digital set-top boxes, PC
peripherals and DVD players. Our products are increasingly being used in various
communications applications including routers, switches, fiber optics, cable
modems and ADSL equipment. Silicon timing devices are integrated circuits that
emit timing signals or pulses required to sequence and synchronize electronic
operations to ensure that information is interpreted at the right time and
speed. All digital devices require a timing signal and those with any degree of
complexity require silicon timing devices to time and synchronize their various
operations.
We currently operate through two product groups: our core silicon timing
business (Clocks), which includes products sold to the consumer and business
electronics and communications equipment industries, and our non-core business
(Non-Clocks), which includes integrated circuits called transceivers used
primarily to receive and transmit electronic data between PCs in networking
applications and custom mixed-signal integrated circuits that combine analog and
digital technology. While our core silicon timing business continues to grow, we
expect that the contribution from our non-core business will decline over time.
Substantially all of our research and development investment, as well as our
marketing and sales efforts, are focused, and will continue to focus, on our
core silicon timing business. Prices for our products are predominantly a
function of their position in the product life cycle, design complexity,
competitive environment, the price of alternative solutions such as crystal
oscillators and overall market demand. We recognize revenue upon shipment, and
substantially all of our sales are made on the basis of purchase orders rather
than long-term agreements.
Significant Transactions
Initial Public Offering.
On May 22, 2000, we completed our initial public offering (IPO) of 12.5 million
shares of our common stock. We used the net proceeds of this initial offering to
repay our bank debt, close our tender offer for our subordinated notes and pay
the fees and expenses associated with the offering and the tender offer.
The Recapitalization
In the recapitalization on May 11, 1999, affiliates of Bain Capital, an
affiliate of Bear Stearns and Co., Inc. and certain members of management made
an aggregate equity investment in our company of approximately $50 million as
part of agreements to redeem and purchase all of our outstanding shares of
common stock and vested options for consideration (including fees and expenses)
totaling $294.4 million.
Sale of Certain Assets from our Non-Core Business
On February 18, 1999, we sold certain intellectual property and equipment of our
non-core data communications business to 3Com Corporation for $16.0 million in
cash. We decided to eliminate our ongoing investment in this business in order
to focus on our core silicon timing business. We believe our core product groups
will continue to experience stronger growth and higher margins, as well as
represent a more favorable risk profile than our non-core business. Most
importantly, we believe we have several competitive advantages in our core
product groups that will enable us to sustain our leadership positions in these
markets.
The sale of certain assets from our non-core business benefits us by permanently
eliminating certain
16
<PAGE>
costs associated with research and development while at the same time allowing
us to retain the right to sell certain of our existing transceiver products over
their remaining product life cycles. While revenue from this product group will
decline over the next few years, this sale allows us to optimize this product
group's cost structure and profit contribution while these products continue to
be sold.
Growth in our business is being driven by our core silicon timing business.
Recent successes in the consumer and business electronics market, particularly
with our PC motherboards and digital set-top boxes, as well as our emerging
presence in communications equipment products, have helped drive this growth.
Our gross margin improvement in fiscal 2000 reflects our increasing volumes,
sales of higher margin products, cost savings at our third party fabrication and
assembly facilities and savings achieved by taking our testing procedures in-
house at our Singapore testing facility.
Annual Results of Operations
The following table sets forth statement of operations line items as a
percentage of total revenue for the periods indicated and should be read in
conjunction with the Consolidated Financial Statements and notes thereto.
(Expressed as a percentage of total revenue)
<TABLE>
<CAPTION>
Year Ended
------------------------------
July 1, July 3, June 27,
2000 1999 1998
------------------------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Core 89.9 77.5 56.4
Non-Core 10.1 22.5 43.6
Gross margin: 60.1 53.6 44.7
Research and development expense 15.0 15.3 12.3
Selling, general and administrative expense 14.3 14.3 12.3
Non-recurring special charge -- 10.8 --
------------------------------
Operating income 30.8 13.2 20.1
Interest and other income 0.7 1.6 1.2
Interest expense (10.0) (2.1) --
Gain on sale of assets -- 7.7 --
------------------------------
Income before income taxes from continuing operations 21.5 20.4 21.3
Income tax expense 2.6 3.8 8.0
------------------------------
Income from continuing operations 18.9 16.6 13.3
Extraordinary item (10.0) -- --
------------------------------
Net income 8.9% 16.6% 13.3%
==============================
</TABLE>
Fiscal Year 2000, as Compared to Fiscal Year 1999
Total revenue for fiscal year ended July 1, 2000, increased by $26.4 million to
$165.5 million as compared to the similar period in the previous year. The
increase is primarily due to the increase in revenue generated by our core
silicon timing business. The core silicon timing revenue increased by $41.1
million to $148.8 million for the year ended July 1, 2000, as compared to the
prior year period. The increase is principally attributable to strong demand for
our PC motherboard and digital set-top box products. We have also begun shipment
of products to the communications equipment industry. Core revenue contributed
approximately 89.9% of consolidated revenue for fiscal 2000, which represented
an increase from 77.5% for the prior year period. Non-core revenue decreased by
$14.7 million to $16.7 million for the year ended July 1, 2000, as compared to
the prior year period. Non-core revenue represented approximately 10.1% of total
revenue in the fiscal year 2000, as compared to 22.5% in the prior year period.
This is primarily due to shifting the focus to the core silicon timing business.
Foreign revenue (which includes shipments of integrated circuits to foreign
companies as well as offshore subsidiaries of US multinational companies) was
70.7% of total revenue for fiscal 2000 as
17
<PAGE>
compared to 68.8% of total revenue in the prior year period. While the
percentage increase reflected growing sales to the Pacific Rim markets, certain
of our international sales were to customers in the Pacific Rim, which in turn
sold some of their products to North America, Europe and other non-Asian
markets.
Despite a significant increase in total revenues, cost of sales only increased
$1.6 million to $66.1 million for fiscal 2000, as compared to the prior year
period, due to material cost savings in the manufacturing processes, cost
savings from our in-house testing and favorable product mix trends. Cost of
sales as a percentage of total revenue was 39.9% for fiscal 2000 as compared to
46.4% in the prior year period.
Research and development expense increased $3.5 million to $24.8 million for
fiscal 2000 from $21.3 million in the prior year period. As a percentage of
revenue, research and development decreased to 15.0% as compared to 15.3% in
fiscal 1999. Continued emphasis on research and development has contributed to
the increase in expense with greater spending in research and development for
the core silicon timing business which includes our expansion into supporting
networking, telecommunications, workstations and server applications. This
increase is slightly offset by the decreased expenses for the non-core business.
This increased expense represented a lower percentage of revenue due to the
significant increase in sales during fiscal 2000.
Selling, general and administrative expense, including goodwill amortization and
management fees, increased $3.8 million to $23.6 million for fiscal 2000 as
compared to the prior year period. The increase is primarily due to an
individual payment of $500,000 of court costs and fees in October 1999, and a
one-time $2.3 million payment in connection with a recently settled lawsuit
involving the establishment of our Phoenix design center. As a result of the
recapitalization in May 1999, we entered into a consulting agreement with both
Bain Capital and Bear Stearns and incurred management fees for fiscal year ended
July 1, 2000 equal to $0.9 million, or 0.6% of revenue. As a result of the
initial public offering, we paid $2.7 million to terminate these consulting
agreements. There was no management fee in the prior year period. As a
percentage of total revenue, selling, general and administrative expenses
remained flat at 14.3% of revenue as compared to the prior year period. Goodwill
amortization also remained flat at $0.2 million for both periods presented.
In dollar terms, operating income was $50.9 million in fiscal 2000 compared to
$18.4 million in the prior year period. Expressed as a percentage of revenue,
operating income was 30.8% and 13.2% in fiscal 2000 and fiscal 1999,
respectively. Fiscal 1999 include a special charge of $15.1 million relating to
the vesting of outstanding options arising from the recapitalization.
Accordingly, operating income before special charges was 24.0% of revenue in
fiscal year 1999.
Interest and other income was $1.2 million for fiscal year ended July 1, 2000
and $12.9 million in the prior year period. Interest income decreased as a
result of lower cash balances available for investing. In the third quarter of
fiscal year 1999, we sold intellectual property and engineering hardware and
software related to its data communications product line to 3Com Corporation for
approximately $16.0 million in cash, resulting in a gain of approximately $10.7
million.
Interest expense was $16.5 million in fiscal 2000 and $3.0 million in fiscal
1999. The increase in interest expense is attributable to the financing obtained
in connection with our May 1999 recapitalization.
In connection with the Initial Public Offering, we paid down all the outstanding
debt, which we had incurred as a result of the May 1999 recapitalization. As a
result, we recorded extraordinary losses on the early extinguishments of debt
resulting from the write-off of debt issuance costs and the incurrence of
prepayment penalties associated with the repurchase of our senior subordinated
notes of $11.7
18
<PAGE>
million and $15.4 million ($7.2 million and $9.5 million net of tax),
respectively. There were no extraordinary items in the prior year period. We
purchased $2.0 million of our senior subordinated notes below par in September,
resulting in a gain of $36,000 net of income taxes, and $5.0 million below par
in November resulting in a gain of $134,000 net of income taxes.
Our effective tax rate related to income from continuing operations was 11.9%
and 18.8% for fiscal years 2000 and 1999, respectively. The effective tax rate
for fiscal years 2000 and 1999 reflects the tax-exempt status of our Singapore
operation, which has been given pioneer status, or exemption of taxes on non-
passive income for five years. The significant decrease from fiscal years 1999
to 2000 is the result of the profitability of the Singapore operations being
larger than the domestic operations in fiscal year 2000. We do not currently
calculate deferred taxes on our investment in our Singapore operations, as all
undistributed earnings are permanently reinvested back into the Singapore
facility. If we were to record deferred taxes on our investment, the amount
would be a $12.8 million liability as of July 1, 2000.
Fiscal Year 1999 as compared to Fiscal Year 1998
We achieved revenue of $139.1 million in fiscal year 1999, as compared to $160.6
million in fiscal year 1998. This decrease in fiscal year 1999 revenue was
attributable to a decrease in revenue from the non-core product lines.
The core component revenue increased $17.1 million to $107.7 million for fiscal
year 1999 as compared to the prior year. The increase is attributable to strong
demand from PC motherboard OEM customers. Core products contributed
approximately 77.5% and 56.4% of total revenue in fiscal years 1999 and 1998,
respectively. In fiscal 1999 we were involved in the design of frequency timing
generators, or FTGs, a form of silicon timing device, for the next generation of
PC motherboards. In particular, our FTGs are being used for the Pentium III
(high-end motherboard), Whitney (sub-$1,000 PC motherboard) and Mobile BX (new
notebook motherboard) platforms, all of which were released in calendar 1999. We
continue to develop products for our existing clients and expand into high
performance timing solutions supporting networking, communication, workstation
and server applications.
Our non-core component revenue represented approximately 22.5% of total revenue
in fiscal year 1999, as compared to 43.6% in fiscal year 1998. This is due to
the decreased market share from network system suppliers of the single chip
10/100-Mb transceivers. In fiscal year 1998, we shifted our focus away from the
transceiver market to our core business. We sold certain intellectual property
and equipment of our non-core business to 3Com Corporation on February 18, 1999,
but will still continue to sell and support existing and the next generation
Fast Ethernet transceiver products.
Foreign revenue, which resulted primarily from sales to offshore customers was
68.8% and 58.8% of total revenue in fiscal years 1999 and 1998, respectively.
While the percentage increase reflected growing sales to the Pacific Rim
markets, certain of our international sales were to customers in the Pacific Rim
region who in turn sold some of their products to North America, Europe and
other non-Asian markets. Our sales are denominated in U.S. dollars.
Cost of sales as a percentage of total revenue was 46.4% in fiscal year 1999, as
compared to 55.3% in fiscal year 1998. We have continued to realize material
cost savings in the manufacturing processes. We have received price reductions
from their subcontractors and are also realizing savings from our internal
testing site in Singapore. These cost savings and favorable product mix trends
have helped to improve our gross margin.
Research and development expense expressed as a percentage of revenue was 15.3%
in fiscal year
19
<PAGE>
1999, as compared to 12.3% in fiscal year 1998. In dollar terms, research and
development spending increased 7.7% from fiscal year 1998 to 1999. The increase
is attributable to a compensation charge of $1.3 million arising from the
modifications of stock options owned by certain employees affected by the sale
of assets to 3Com. As a result of the sale of assets to 3Com, we expect that
there will be savings in research and development expenses, which will be offset
by additional expenses incurred to support our expansion into high performance
clocking solutions supporting networking, communication, workstation and server
applications.
Selling, general and administration expense, including goodwill amortization,
was 14.3% and 12.3% of total revenues in fiscal years 1999 and 1998,
respectively. In monetary terms, expenses have increased 0.6% from fiscal year
1998 to fiscal year 1999. The increase from 1998 to 1999 represents increased
charges for the proxy contest relating to our annual shareholders' meeting. We
were faced with a proxy contest that was waged by our former Chief Executive
Officer. As a result of the proxy contest, we incurred mailing, legal and
printing costs of approximately $0.8 million for our annual meeting, in excess
of those historically incurred for routine and annual shareholders' meetings,
during both the second and third quarters of fiscal year 1999. This was offset
by the decrease in variable selling expenses as a result of decreased revenues.
In connection with the recapitalization, we recorded a compensation charge of
$15.1 million related to the accelerated vesting, cash-out and conversion of
employee stock options.
Expressed as a percentage of revenue, operating income was 13.2% and 20.1% in
fiscal years 1999 and 1998, respectively. In dollar terms, operating income was
$18.4 million in fiscal year 1999 compared to $32.3 million in fiscal year 1998.
Fiscal year 1999 includes a special charge of $15.1 million relating to the
vesting of outstanding options arising from the recapitalization. Accordingly,
operating income before special charges was 24.0% of revenue in fiscal year 1999
as compared to 20.1% in fiscal year 1998.
In the third quarter of fiscal year 1999, we sold intellectual property and
engineering hardware and software from our non-core product line to 3Com
Corporation for $16.0 million in cash. We recognized $10.7 million as the gain
on the sale.
Interest and other income was $2.2 million in fiscal year 1999 and $2.0 million
in fiscal year 1998. Interest income increased as a result of higher cash
balances available for investing.
Interest expense was $3.0 million in fiscal year 1999 and $0.1 million in fiscal
year 1998. The increase in interest expense is attributable to the financing
obtained in connection with the recapitalization.
Our effective tax rate related to income from continuing operations was 18.8%
and 37.5% for fiscal years 1999 and 1998, respectively. The effective tax rate
for fiscal years 1999 and 1998 reflects the tax-exempt status of our Singapore
operation, which has been given pioneer status, or exemption of taxes on non-
passive income for five years. The significant decrease from fiscal years 1998
to 1999 is the result of the profitability of the Singapore operations being
larger than the domestic operations. We do not currently calculate deferred
taxes on our investment in our Singapore operations, as all undistributed
earnings are permanently reinvested back into the Singapore facility. If we were
to record deferred taxes on our investment, the amount would be a $4.3 million
liability.
Fiscal year 1999 reflects a net income of $23.0 million as compared to a net
income of $21.4 million for fiscal year 1998. Excluding special charges,
however, net income for fiscal year 1999 would have been $32.8 million. The
changes in income are disclosed in the previous paragraphs.
20
<PAGE>
Liquidity and Capital Resources
At July 1, 2000, our principal sources of liquidity included cash and
investments of $29.2 million as compared to the July 3, 1999 balance of $9.6
million. Net cash provided by operating activities was $18.5 million in fiscal
2000, as compared to $24.7 million in the prior year period. The cash provided
by operating activities decrease is primarily due to the premiums paid for
prepayment of our senior subordinated debt. Our days sales outstanding
decreased from 49 days in the fourth quarter of fiscal 1999 to 48 days in the
fourth quarter of fiscal 2000, while inventory turns decreased from 7.28 times
in fiscal 1999 to 6.96 times in the fiscal 2000.
Purchases for property and equipment were $4.4 million in fiscal 2000 as
compared to $7.7 million in the prior year period. The decrease is primarily due
to our relocation into our new facility in San Jose during the second quarter of
fiscal 1999. Purchases of property and equipment during fiscal 2000 in the
amount of $3.0 million were invested in the start-up of our new Arizona
facility. In fiscal 2000, Chartered Semiconductor PTE repaid $5.4 million,
extinguishing the balance outstanding for the first purchase commitment. The
purchase commitment made during fiscal 1999 expires December 31, 2000, and
accordingly, the remaining balance of $9.9 million is recorded as a current
asset.
On May 22, 2000, we completed our initial public offering (IPO) of 12.5 million
shares of our common stock. We used the net proceeds of this initial offering to
repay our bank debt, close our tender offer for subordinated notes, pay the fees
and expenses associated with the offering and the tender offer.
In connection with the initial public offering, we paid down all of our
outstanding debt that we had incurred as a result of the May 1999
recapitalization. We purchased $2.0 million of our senior subordinated notes
below par in September, resulting in a gain of $36,000 net of income taxes, and
$5.0 million below par in November, resulting in a gain of $134,000 net of
income taxes.
In June 2000, we secured a $30 million revolving credit facility with a
commercial bank. The facility expires in June 2002, with an option, at the
bank's sole discretion, to extend the facility for additional period and is
subject to certain covenants, including the maintenance of certain financial
ratios. At July 1, 2000, we were in compliance with the revolving credit
facility covenants. As of July 1, 2000, we had $10.0 million outstanding under
this agreement. Advances under the revolving credit facility bear interest at
LIBOR plus an applicable margin (7.65% at July 1, 2000).
We believe that the funds expected to be generated from our operations and
borrowings under our new revolving credit facility will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for at
least the next twelve months. Thereafter, we may need to raise additional funds
in future periods to fund our operations and potential acquisitions. We may also
consider conducting future equity or debt financings if we perceive an
opportunity to access the capital markets on a favorable basis, within the next
twelve months or thereafter. Any such additional financing, if needed, might
not be available on reasonable terms or at all. Failure to raise capital when
needed could seriously harm our business and results of operations. If
additional funds were raised through the issuance of equity securities or
convertible debt securities, the percentage of ownership of our shareholders
would be reduced. Furthermore, such equity securities or convertible debt
securities might have rights, preferences or privileges senior to our common
stock.
Inflation
Inflation has not had a significant impact on our results of operations.
21
<PAGE>
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, " Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
" Accounting for Derivative Instruments and Hedging Activities," which defers
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. We will adopt the requirements of this statement
in our first fiscal quarter in fiscal year 2001. We do not believe that the
adoption of this statement will have a material impact on our future operating
results.
In December 1999, the Securities and Exchange Commission ("SEC") issued staff
accounting bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. The subsequent issuance of SAB 101A and SAB
101B has deferred the timing of the adoption of the requirements until the
fourth quarter of fiscal year 2001. We believe that the adoption of SAB 101
will not have a material effect on our business, financial position or results
of operations.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exposures
Our sales are denominated in U.S. dollars, accordingly, we do not use forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes. The
effect of an immediate 10% change in exchange rates would not have a material
impact on our future operating results or cash flows.
Interest Rate Risk
Because our obligations under the bank credit facility bear interest at variable
rates, we are sensitive to changes in prevailing interest rates. We currently
do not engage in interest rate hedging activities. We manage our interest rate
risk by maintaining a low variable debt balance.
22
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports 24
Consolidated Balance Sheets - July 1, 2000 and July 3, 1999 26
Consolidated Statements of Operations -- Three Years Ended
July 1, 2000, July 3, 1999 and June 27, 1998 27
Consolidated Statements of Stockholders' Equity -
Three Years Ended July 1, 2000, July 3, 1999 and June
27, 1998 28
Consolidated Statements of Cash Flows -- Three Years Ended
July 1, 2000, July 3, 1999 and June 27, 1998 29
Notes to Consolidated Financial Statements 31
23
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Integrated Circuit Systems, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Integrated Circuit Systems, Inc. and its subsidiaries at July 1, 2000, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14 (a) (2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
July 28, 2000
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Integrated Circuit Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Integrated
Circuit Systems, Inc. and subsidiaries as of July 3, 1999, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years ended July 3, 1999 and June 27, 1998. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Circuit Systems, Inc. and subsidiaries as of July 3, 1999, and the results of
their operations and cash flows for each of the years ended July 3, 1999 and
June 27, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
August 4, 1999
25
<PAGE>
Integrated Circuit Systems, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
July 1, July 3,
Assets 2000 1999
---------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28,940 $ 9,285
Marketable securities 282 288
Accounts receivable, net 23,660 18,120
Inventory, net 10,718 8,736
Deferred income taxes 2,143 8,644
Prepaid income taxes 9,358 --
Prepaid assets 1,228 797
Other assets 820 523
Current portion of deposit on purchase contracts 9,877 3,973
---------------------------------------
Total current assets 87,026 50,366
Property and equipment, net 13,058 12,127
Deferred financing costs, net -- 12,767
Deposits on purchase contracts -- 11,348
Other assets 1,135 1,187
---------------------------------------
Total assets $ 101,219 $ 87,795
=======================================
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Note payable to bank $ 10,000 $ --
Current portion of long-term debt 435 1,030
Accounts payable 13,408 10,258
Accrued salaries and bonuses 2,267 2,056
Accrued expenses and other current liabilities 3,812 5,639
Income taxes payable -- 4,473
---------------------------------------
Total current liabilities 29,922 23,456
Long-term debt, less current portion 835 169,000
Deferred income taxes 734 789
Other liabilities 808 1,462
---------------------------------------
Total liabilities 32,299 194,707
---------------------------------------
Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred stock, authorized 5,000 shares, none issued -- --
Common stock, $0.01 par, authorized 300,000: issued
64,269 shares as July 1, 2000 643 --
Class A common stock, $0.01 par, authorized 45,743;
issued and outstanding 26,452 shares as July 3, 1999 -- 264
Class B common stock, $0.01 par, authorized 11,859;
issued and outstanding 9,577 shares as July 3, 1999 -- 96
Class L common stock, $0.01 par, authorized 5,083;
issued and outstanding 4,003 shares as July 3, 1999 -- 40
Additional paid in capital 199,018 34,556
Accumulated deficit (126,687) (141,413)
Notes receivable (286) (455)
Deferred compensation (3,768) --
---------------------------------------
Total shareholders' equity (deficit) 68,920 (106,912)
---------------------------------------
Total liabilities and shareholders' equity (deficit) $ 101,219 $ 87,795
=======================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
Integrated Circuit Systems, Inc.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
Revenue $ 165,521 $ 139,063 $ 160,634
Cost and expenses:
Cost of sales 66,123 64,496 88,859
Research and development 24,848 21,316 19,797
Selling, general and administrative 22,463 19,560 19,444
Special charges- Compensation Costs -- 15,051 --
Management fee 906 -- --
Goodwill amortization 235 234 234
---------------------------------------------------
Operating income 50,946 18,406 32,300
Gain on sale of assets -- (10,734) --
Interest and other income (1,200) (2,178) (1,984)
Interest expense 16,532 2,955 64
---------------------------------------------------
Income before income taxes and extraordinary items 35,614 28,363 34,220
Income tax expense 4,244 5,320 12,845
---------------------------------------------------
Income before extraordinary items 31,370 23,043 21,375
Extraordinary Items:
Early extinguishment of debt, net of $10.3 taxes (16,638) -- --
---------------------------------------------------
Net income $ 14,732 $ 23,043 $ 21,375
===================================================
Basic net income per share:
Income before extraordinary items $ 0.79 $ 0.87 $ 1.02
Loss from extraordinary items (0.42) -- --
---------------------------------------------------
Net Income $ 0.37 $ 0.87 $ 1.02
===================================================
Diluted net income per share:
Income before extraordinary items $ 0.63 $ 0.86 $ 0.96
Loss from extraordinary items (0.33) -- --
---------------------------------------------------
Net Income $ 0.30 $ 0.86 $ 0.96
===================================================
Weighted average share outstanding - basic 39,843 25,812 20,912
Weighted average share outstanding - diluted 49,871 26,277 22,264
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
--------------------------------------------------------------------------------
Integrated Circuit Systems, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Common Common Preferred Preferred
Stock Stock Class A Class A Class A Class A Class B Class B Class L Class L
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 28,
1997 21,084 $ 45,366 -- $ -- -- $ -- -- $ -- -- $ --
Shares issued upon
exercise of stock
options 1,108 7,014 -- -- -- -- -- -- -- --
Tax benefits related to
stock options -- 4,224 -- -- -- -- -- -- -- --
Purchase of common
stock -- -- -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Balance at June 27, 1998 22,192 56,604 -- -- -- -- -- -- -- --
Shares issued upon
exercise of stock
options 159 1,105 -- -- -- -- -- -- -- --
Tax benefits related to
stock options -- 234 -- -- -- -- -- -- -- --
Purchase of common
stock -- -- -- -- -- -- -- -- -- --
Recapitalization (13,193) (57,943) 15,613 156 -- -- 5,653 57 2,363 24
Effect of stock split (9,158) -- 10,839 108 -- -- 3,924 39 1,640 16
Net income -- -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Balance at July 3, 1999 -- -- 26,452 264 -- -- 9,577 96 4,003 40
Shares issued upon
exercise of stock
options -- -- 2,067 20 -- -- -- -- 3 --
Tax benefits related to
stock options -- -- -- -- -- -- -- -- -- --
Retirement of stock -- -- (76) (1) -- -- -- -- (8) --
Initial Public Offering 64,269 643 (28,443) (283) (3,367) (13,467) (9,577) (96) (3,998) (40)
Net income -- -- -- -- -- -- -- -- -- --
Deferred compensation -- -- -- -- -- -- -- -- -- --
Investment into the -- -- -- -- 3,367 13,467 -- -- -- --
Company
Other -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Balance at July 1, 2000 64,269 $ 643 -- $ -- -- $ -- -- $ -- -- $ --
======================================================================================================
<CAPTION>
(Accumulated) Total
Deferred Additional Deficit)/ Shareholders'
Notes Compen- Paid in Treasury Treasury Retained Equity
Receivable sation Capital Stock Shares Earnings (Deficit)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 28,
1997 $ -- $ -- $ -- $ (3,749) (286) $ 28,531 $ 70,148
Shares issued upon
exercise of stock
options -- -- -- -- -- -- 7,014
Tax benefits related to
stock options -- -- -- -- -- -- 4,224
Purchase of common
stock -- -- -- (12,993) (488) -- (12,993)
Net income -- -- -- -- -- 21,375 21,375
----------------------------------------------------------------------------------------------
Balance at June 27, 1998 -- -- -- (16,742) (774) 49,906 89,768
Shares issued upon
exercise of stock
options -- -- -- -- -- -- 1,105
Tax benefits related to
stock options -- -- -- -- -- -- 234
Purchase of common
stock -- -- -- (3,016) (229) -- (3,016)
Recapitalization (455) -- 34,719 19,758 1,003 (214,362) (218,046)
Effect of stock split -- -- (163) -- -- -- --
Net income -- -- -- -- -- 23,043 23,043
----------------------------------------------------------------------------------------------
Balance at July 3, 1999 (455) -- 34,556 -- -- (141,413) (106,912)
Shares issued upon
exercise of stock
options -- -- 53 -- -- -- 73
Tax benefits related to
stock options -- -- 301 -- -- -- 301
Retirement of stock -- -- (234) -- -- -- (235)
Initial Public Offering -- -- 160,341 -- -- -- 147,098
Net income -- -- -- -- -- 14,732 14,732
Deferred compensation -- (3,979) 3,979 -- -- -- --
Investment into the -- -- -- -- -- -- 13,467
Company
Other 169 211 22 -- -- (6) 396
----------------------------------------------------------------------------------------------
Balance at July 1, 2000 $ (286) $ (3,768) $ 199,018 $ -- -- $ (126,687) $ 68,920
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
================================================================================
Integrated Circuit Systems, Inc.
Consolidated Statements of Cash Flows
================================================================================
(In thousands)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
July 1, July 3, June 27,
2000 1999 1998
-------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,732 $ 23,043 $ 21,375
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,692 4,965 4,579
Amortization of deferred finance charge 1,494 203 --
Amortization of bond premiums 7 (78) (2)
Amortization of deferred compensation 234 -- --
Loss on sale of assets 17 (10,374) 633
Payment of deferred compensation (279) -- --
Extraordinary loss on deferred finance charge 11,668 -- --
Tax benefit of stock options 301 234 4,224
Purchase of trading securities -- (23,313) (12,930)
Sale of trading securities -- 23,669 11,911
Deferred income taxes 6,445 (6,995) (712)
Changes in assets and liabilities:
Accounts receivable (5,541) 2,215 355
Inventory (1,982) 4,103 703
Other assets, net (740) 794 (235)
Accounts payable, accrued expenses and other liabilities 3,344 678 81
Accrued interest expense (2,078) -- --
Income taxes payable (13,832) 5,540 (3,413)
-------------------------------------
Net cash provided by operating activities 18,482 24,684 26,569
-------------------------------------
Cash flows from investing activities:
Capital expenditures (4,358) (7,694) (8,139)
Proceeds from sale of fixed assets 151 200 10
Proceeds from sale of Datacom -- 16,000 --
Proceeds from sale of building -- 3,801 --
Proceeds from sales of marketable securities -- 18,450 1,358
Proceeds from maturities of marketable securities -- 29,347 21,069
Purchases of marketable securities -- (31,973) (30,499)
Deposits on purchase contracts -- (12,000) (2,000)
Refunds on purchase contracts 5,444 4,544 4,711
-------------------------------------
Net cash provided by (used in) investing activities 1,237 20,675 (13,490)
-------------------------------------
Cash flows from financing activities:
Borrowings under line of credit agreement 10,000 -- --
Repayments of long-term debt (170,065) (114) (186)
Proceeds from exercise of stock options 72 1,105 7,015
Retirement of common stock (235) -- --
Proceeds from long-term debt -- 170,030 --
Initial Public Offering 147,098 -- --
Recapitalization -- (247,104) --
Investment into the Company 13,467 -- --
Investment from the equity investors -- 30,655 --
Deferred financing charges (395) (12,970) --
Dividends (6) -- --
Purchase of treasury stock -- (3,016) (12,993)
-------------------------------------
Net cash used in financing activities (64) (61,414) (6,164)
-------------------------------------
Net increase (decrease) in cash 19,655 (16,055) 6,915
</TABLE>
29
<PAGE>
================================================================================
Consolidated Statements of Cash Flows (cont'd)
================================================================================
(In thousands)
Cash and cash equivalents:
Beginning of year 9,285 25,340 18,425
-------------------------
End of year $28,940 $ 9,285 $25,340
=========================
Supplemental disclosures of cash information:
Cash payments during the period for:
Interest $16,783 $ 151 $ 65
=========================
Income taxes $ 1,104 $ 6,408 $11,840
=========================
Supplemental disclosures for non-cash information:
Capital lease of equipment $ 1,304 $ -- $ --
=========================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
================================================================================
(1) Summary of Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of the
Company and our wholly owned subsidiaries, after elimination of all significant
intercompany accounts and transactions.
Reporting Periods
Our fiscal year is a 52/53 week operating cycle that ends on the Saturday
nearest June 30. Fiscal year 1999 represents a 53-week operating cycle. Fiscal
years 2000 and 1998 represent a 52-week operating cycles.
Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents at July
1, 2000 consist of cash, overnight retail repurchase agreements (collateralized
by U.S. Treasury obligations), money market funds and commercial paper.
Marketable Securities
Marketable securities at July 1, 2000 consist of debt securities. Under
Statement No. 115, we classify all of our debt securities as held to maturity,
which are recorded at amortized cost. In prior years, our equity securities were
classified as trading securities and unrealized holding gains and losses are
included in earnings. Trading Securities were carried at the present market
value, with realized gains or losses recorded in interest income on the
statement of operations.
Inventory
Inventory is stated at the lower of cost, (FIFO basis) or market.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets as follows:
Machinery & equipment 3 to 10 years
Furniture and fixtures 5 to 10 years
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.
Deferred Financing Costs
Costs incurred in connection with the issuance of the senior credit facility and
the senior subordinated notes (see Note 10), were being amortized over the
average term of the related debt instruments, which approximated 8 years at July
3, 1999.
In connection with the initial public offering in May 2000, we paid off all the
outstanding senior subordinated notes and senior credit facility. As a result,
$11.7 million ($7.2 million net of taxes) of our deferred financing costs were
written off
31
<PAGE>
Goodwill
The purchase price in excess of the fair value of net assets acquired is
amortized on a straight-line basis over 7 years. Accumulated amortization was
$0.8 million and $0.5 million as of July 1, 2000 and July 3, 1999, respectively.
Goodwill is recorded at a balance of $0.9 million and $1.2 million as of July
1, 2000 and July 3, 1999, respectively, in other assets on the consolidated
balance sheet.
Carrying Value of Long-Term Assets
In accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be disposed of," we periodically evaluate the
carrying value of long-term assets when events and circumstances warrant such
review. The carrying value of a long lived asset is considered impaired when
the anticipated undiscounted cash flows from such asset is separately
identifiable and is less than the carrying value. In that event a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined by
reference to quoted market prices, if available, or the utilization of certain
valuation techniques such as using the anticipated cash flows discounted at a
rate commensurate with the risk involved.
Revenue Recognition
Product sales are recognized as revenue upon shipment to the customer. We offer
a right of return to certain customers. Allowances are established to provide
for estimated returns at the time of sale. We recognize sales to these
customers, in accordance with the criteria of FASB No. 48, at the time of the
sale based on the following: the selling price is fixed at the date of sale, the
buyer is obligated to pay for the products, title of the products transfers at
our loading dock, the buyer has economic substance apart from us, we do not have
further obligations to assist the buyer in the resale of the product and the
returns can be reasonably estimated at the time of sale.
Concentration of Credit Risk
We sell our products primarily to original equipment manufacturers (OEMs) and
distributors in North America, Europe and the Pacific Rim. We perform ongoing
credit evaluations of our customers and maintain reserves for potential credit
losses. Concentrations of credit risk with respect to trade accounts receivable
from specific customers are limited due to the large number of customers and
their dispersion across many geographic areas; however, there is a substantial
concentration in the personal computer industry. Refer to Note 18 for geographic
information.
Income Taxes
Income taxes are computed in accordance with Statement of Financial Accounting
Standards No. 109. We file a consolidated federal tax return with our 80% or
more owned subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, revenues and expense, and the disclosure of contingent assets and
liabilities at the date of the financial statements. In addition, they affect
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates and assumptions.
Accounting for Stock-based Compensation
We have adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and
continue to apply APB 25 and related interpretation in accounting for its stock
options to employees and directors. Refer to Note 15 for pro forma disclosures.
32
<PAGE>
Reclassification of Accounts
Certain reclassifications have been made to conform prior year's balances to the
current year presentation. All per share data has been adjusted to reflect the
1.6942-to-1 common stock-split that occurred as of the pricing date of the
initial public offering.
Other Comprehensive Income
Our reported net income for all periods presented is the same as our
comprehensive income since there were no items of other comprehensive income or
loss for any of the periods covered by these financial statements.
New Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities," which
defers effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000. We will adopt the requirements of this statement in fiscal year 2001.
We do not believe that the adoption of this statement will have a material
impact on our future operating results.
In December 1999, the Securities and Exchange Commission ("SEC") issued staff
accounting bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. The subsequent issuance of SAB 101A and SAB
101B has deferred the timing of the adoption of the requirements until the
fourth quarter of fiscal year 2001. We believe that the adoption of SAB 101
will not have a material effect on our business, financial position or results
of operations.
(2) Initial Public Offering and Recapitalization
On May 22, 2000, we completed our initial public offering (IPO) of 12.5 million
shares of our common stock on NASDAQ (symbol ICST). We used the net proceeds of
this initial offering to repay our bank debt, close our tender offer for
subordinated notes, pay the fees and expenses associated with the offering, and
fund general corporate requirements. In connection with the repayment of the
bank debt and notes, we recorded extraordinary losses on the early
extinguishments of debt resulting from the write-off of debt issuance costs and
the incurrence of prepayment penalties associated with the repurchase of our
senior subordinated notes of $11.7 million and $15.4 million ($7.2 million and
$9.5 million net of tax), respectively.
On May 11, 1999, we merged with ICS Merger Corp., a transitory merger company
formed and wholly owned by the affiliates of Bain Capital Inc. and Bear, Stearns
and Company Inc. (the "Equity Investors"). We refer to this event as the
recapitalization. We issued $100.0 million in aggregate principal amount of
senior subordinated notes in connection with the recapitalization and entered
into a $95.0 million senior credit facility.
(3) Dispositions
In the third quarter of fiscal year 1999, we sold intellectual property and
engineering hardware and software related to our data communications product
line to 3Com Corporation for approximately $16.0 million in cash, resulting in a
gain of approximately $10.7 million. Under the agreement, we retain certain
licensing and technical support rights, and continue to sell and support our
existing and prospective Fast Ethernet transceiver product family to current and
new customers.
33
<PAGE>
(4) Purchase Commitments
During fiscal year 1998, under an existing wafer supply contract with Chartered
Semiconductor PTE ("CSM"), we advanced the final $2.0 million installment of our
deposit with CSM whereby CSM would supply an agreed minimum quarterly quantity
of wafers April 1996 through June 2002 at specified prices. This non-interest
bearing deposit was recorded as a long-term asset under the caption "Deposits on
purchase contract" and was to be progressively repaid from January 1, 1998, as
wafers were purchased. The remainder of this deposit was refunded during Fiscal
2000. On October 7, 1998, we assumed a third party's wafer purchase contract
with CSM. The agreement required us to advance $12.0 million as part of a
mutual commitment for CSM to supply and for us to purchase an agreed upon
minimum quarterly quantity of wafers over a twenty-seven month period from
October 1, 1998 to December 31, 2000. The agreement requires CSM to refund the
deposit to us in progressive quarterly installments based upon the volume of
purchases made by us, and they are contractually obligated to return our
deposit. On October 21, 1998, we funded the $12.0 million required by this
agreement. As of July 1, 2000 and July 3, 1999 amounts on deposit with CSM were
$9.9 million and $15.3 million, respectively. We had previously entered into a
similar agreement with American Microsystems, Inc., ("AMI") by which it placed a
$5.5 million deposit, which has been progressively repaid as wafer purchases
were made. We received $2.6 million from AMI in fiscal 1998 extinguishing the
balance of any outstanding deposit at AMI.
The following table summarizes activity relating to the purchase commitment from
CSM (in thousands):
<TABLE>
--------------------------------------------------------
<S> <C>
Balance 6/27/98 $ 7,864
--------------------------------------------------------
Deposits made 12,000
--------------------------------------------------------
Payments received (4,543)
--------------------------------------------------------
Balance 7/3/99 15,321
--------------------------------------------------------
Payments received (5,444)
--------------------------------------------------------
Balance 7/1/00 9,877
--------------------------------------------------------
Less: current portion 9,877
--------------------------------------------------------
Long term portion of deposit --
--------------------------------------------------------
</TABLE>
(5) Other Agreements
In fiscal year 1998, we entered into a non-transferable and non-exclusive
license with Philips Electronics to use their technical information for data
transmission systems. In consideration of the licenses and rights granted we
have expensed and paid approximately $1.0 million in royalty fees during fiscal
year 2000 and $0.5 million in fiscal year 1999 and expect to continue to make
ongoing payments. The expense is included in our research and development
expense on the Statements of Operations.
In fiscal year 1999, we entered into a non-exclusive and irrevocable license
with PhaseLink Laboratories for use of their technical data. In return, in July
1999, we paid a one-time fee of $200,000, which will be amortized over the
useful life of the technology estimated to be 5 years. This expense is also
included in our research and development expense on the Statement of
Operations.
(6) Marketable Securities
We invest in debt securities, which are classified as held to maturity. The
estimated fair value of each investment approximates the cost, and therefore,
there were no unrealized gains or losses as of July 1, 2000, July 3, 1999 and
June 27, 1998. Proceeds from the sale or maturity of the investments were
$71.5 million and $34.3 million in fiscal year 1999 and fiscal year 1998,
respectively. All investments
34
<PAGE>
are due within 90 days and therefore, are classified as current assets at July
3, 1999. In fiscal 2000, we did not invest in equity securities.
(7) Accounts Receivable
The components of accounts receivable are as follows (in thousands):
July 1, July 3,
2000 1999
------------------
Accounts receivable $ 25,352 $20,270
Less: allowance for returns and doubtful accounts (1,692) (2,150)
------------------
$ 23,660 $18,120
==================
(8) Inventory
The components of inventories are as follows (in thousands):
July 1, July 3,
2000 1999
------------------
Work-in-process $ 4,934 $ 8,211
Finished parts 9,306 5,665
Less: obsolescence reserve (3,522) (5,140)
------------------
Inventory, net $10,718 $ 8,736
==================
(9) Property and Equipment
Property and equipment consists of the following (in thousands):
July 1, July 3,
2000 1999
------------------
Machinery and equipment $ 20,120 $ 17,377
Furniture and fixtures 2,321 2,036
Leasehold improvements 4,274 3,735
Capital Leases 1,304 --
------------------
28,019 23,148
Less: accumulated depreciation and amortization (14,961) (11,021)
------------------
Property and equipment, net $ 13,058 $ 12,127
==================
Depreciation and amortization expense related to property and equipment was $4.5
million, $4.7 million and $4.3 million in 2000, 1999 and 1998, respectively.
(10) Debt
On May 10, 1999, our shareholders voted to approve the management-led buyout,
which was completed on May 11, 1999. In connection with the buyout, we obtained
financing consisting of: $100.0 million of senior subordinated notes (the
"Notes"), term A loans for $30.0 million and the term B loans for $40.0 million
and $3.9 million from a revolving credit facility. The term loans and revolving
credit facility combined made up the Senior Credit Facility.
On May 22, 2000, we completed our initial public offering (IPO) of 12.5 million
shares of our common stock on NASDAQ (symbol ICST). We used the net proceeds of
this initial offering to repay our bank
35
<PAGE>
debt, close our tender offer for subordinated notes, pay the fees and expenses
associated with the offering and the tender offer.
In June 2000, we secured a $30 million revolving credit facility with a
commercial bank. The facility expires in June 2002, with an option, at the
bank's sole discretion, to extend the facility for additional period and is
subject to certain covenants, including the maintenance of certain financial
ratios. At July 1, 2000, we were in compliance with the revolving credit
facility covenants. As of July 1, 2000, we had $10.0 million outstanding under
this agreement. Advances under the revolving credit facility bear interest at
LIBOR plus margin (7.65% at July 1, 2000).
Senior debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
----------------------------
<S> <C> <C>
Revolving credit facility at LIBOR plus 1 (7.65% at July $10,000 $ --
1, 2000)
Term A loans payable in varying installments through 2004 -- 27,500
at LIBOR plus 3 (8.295% at July 3, 1999)
Term A loans payable in varying installments through 2004 -- 2,500
at LIBOR plus 3 (8.1% at July 3, 1999)
Term B loans payable in varying installments through 2006 -- 37,500
at LIBOR plus 3.5 (8.795% at July 3, 1999)
Term B loans payable in varying installments through 2006 -- 2,500
at LIBOR plus 3.5 (8.6% at July 3, 1999)
11.5% exchangeable subordinated debentures due 2009 -- 100,000
Lease obligations and other 1,270 30
----------------------------
$11,270 $170,030
Less current portion 10,435 1,030
----------------------------
Long-term debt, less current portion $ 835 $169,000
============================
</TABLE>
Aggregate annual maturities of long-term debt as of July 1, 2000 (in thousands):
2000 $10,435
2001 418
2002 417
2003 --
2004 --
2005 and beyond --
-------
$11,270
=======
(11) Lease Obligations
We lease certain of our facilities under operating lease agreements, some of
which have renewal options.
On April 13, 1999, we sold the land and building at our Norristown location to
BET Investments III, L.P., a Pennsylvania limited partnership. The purchase
price for the property was $3.9 million and included the buyer's assumption of
our PIDA loan. BET Investments III, L.P. assigned its right to purchase the
building to BET Investments IV, L.P., a Pennsylvania limited Partnership, on
January 29, 1999. We signed a lease with BET Investments IV L.P., to lease back
the Norristown property for a term of eight years, which went into effect upon
closing of the sale of the property. We leased back the entire building with
monthly rent beginning at approximately $51,000 for the first year and
progressively
36
<PAGE>
increasing each year to approximately $63,000 in the eighth year. We also have a
renewal option of three more years subsequent to the initial eight-year term. We
recorded a $0.9 million deferred gain from this transaction. We will recognize
the gain over the original term of the lease. In fiscal year 2000, we received
$0.5 million in sublease income from this property, and $0.4 in fiscal 1999.
Rental expense under operating lease agreements was $2.5 million, $1.5 million
and $0.6 million in 2000, 1999 and 1998, respectively.
Future minimum lease commitments under our operating leases are as follows as of
July 1, 2000 (in thousands):
2001 $ 2,362
2002 2,289
2003 2,304
2004 2,213
2005 and after 8,716
-------
$17,884
=======
Sublease income under operating lease agreements was $1.1 million, $0.7 million
and $0.2 million in 2000, 1999 and 1998. Future amounts due under the subleases
are as follows as of July 1, 2000 (in thousands):
2001 $ 782
2002 500
2003 342
2004 200
2005 and after 84
------
$1,908
======
(12) Fair Value of Financial Instruments
Estimated fair value of financial instruments is provided in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". We have determined estimated fair value amounts using available
market information and appropriate methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop the
estimates of fair value.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable - The
carrying amounts of these items approximate their fair values at July 1,
2000 due to the short-term maturities of these instruments.
Marketable securities - The estimated fair value of each held to maturity
investment approximates the amortized cost and as such no unrealized gain
or loss has been recorded.
Long-term debt - Interest rates that are currently available to us for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which quoted market prices are not
available. The carrying value of this item is not materially different
from its fair value on July 1, 2000.
37
<PAGE>
(13) Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
--------------------------------------------------
<S> <C> <C> <C>
Current tax (benefit) expense:
Federal $(2,257) $10,549 $11,685
State (86) 1,571 1,837
Foreign 142 195 35
--------------------------------------------------
Total current $(2,201) $12,315 $13,557
--------------------------------------------------
Deferred tax expense (benefit):
Federal $ 6,405 $(6,907) $ (627)
State 40 (88) (85)
--------------------------------------------------
Total deferred 6,445 (6,995) (712)
--------------------------------------------------
Total income tax expense $ 4,244 $ 5,320 $12,845
==================================================
</TABLE>
The tax benefit allocated to the fiscal 2000 extraordinary charge was $10.3
million.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 584 $ 759 $ 664
Inventory valuation 1,135 1,843 1,208
Disqualified disposition exercises of
options -- 6,141 --
Other compensation charges 188 -- --
Net state operating loss carry forward 1,503 195 195
Capital loss carry forward 3,514 1,894 2,137
Basis in equity investment -- -- 692
Accrued expenses and other 290 529 318
---------------------------------------------
Gross deferred tax assets 7,214 11,361 5,214
Less: valuation allowance 5,071 2,717 3,145
---------------------------------------------
Deferred tax asset 2,143 8,644 2,069
Deferred tax liabilities:
Depreciation 325 501 1,018
Other 409 288 193
---------------------------------------------
Deferred tax liabilities 734 789 1,211
---------------------------------------------
Net deferred tax asset $1,409 $ 7,855 $ 858
=============================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization
38
<PAGE>
of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future
deductible amounts become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, potential limitations with respect to the
utilization of loss carry forwards, and tax planning strategies in making this
assessment. Based upon the projections for future taxable income over the
periods which deferred tax assets are deductible and the potential limitations
of loss and credit carry forwards, management believes it is more likely than
not that we will realize these deductible differences, net of existing valuation
allowances (both federal and state) at July 1, 2000. We periodically reassess
and re-evaluate the status of our recorded deferred tax assets.
The actual tax expense differs from the "expected" tax expense computed by
applying the statutory Federal corporate income tax rate of 35% in all fiscal
years to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
-------------------------------------------------
<S> <C> <C> <C>
Earnings before income taxes and extraordinary charge $35,614 $28,363 $34,220
-------------------------------------------------
Computed expected tax expense 12,465 9,927 11,977
State taxes (net of federal income tax benefit) (9) 964 1,248
Effect of lower foreign tax rates (8,411) (3,086) (1,012)
Capital contribution -- -- 346
Tax-exempt interest and dividends -- -- (13)
Utilization of capital loss carryforwards -- (3,233) --
Intangible amortization 82 185 82
Other 117 563 217
------------------------------------------------
$ 4,244 $ 5,320 $12,845
================================================
</TABLE>
As of July 1, 2000, we have state operating loss carry forwards of approximately
$23.2 million expiring through 2008. We also have a capital loss carry forward
of approximately $9.0 million expiring in 2003. We do not currently calculate
deferred taxes on our investment in our Singapore operations, as all
undistributed earnings are permanently reinvested back into the Singapore
facility. If we were to record deferred taxes on our investment, the amount
would be a $12.8 million liability as of July 1, 2000.
(14) Employee Benefit Plans
We have a bonus plan, which covers permanent full-time employees with at least
six months of service. Bonuses under this plan are based on achieving specified
revenue and profit objectives and on individuals meeting specified performance
objectives. Amounts charged to expense for the plan were $4.0 million, $3.9
million and $3.6 million in fiscal years 2000, 1999 and 1998, respectively.
We have a 401(k) employee savings plan, which provides for contributions to be
held in trust by corporate fiduciaries. Beginning in fiscal 2000, employees are
permitted to contribute up to 18 percent of their annual compensation. In prior
years, the amount was 12% of their annual compensation. Under the plan, we make
matching contributions equal to 150% of the first 1% contributed, 125% of the
second 1% contributed, 100% of the third 1% contributed, 75% of the fourth 1%
contributed and 50% of the next 2% up to a maximum of 6 percent of annual
compensation, subject to IRS limits. The
39
<PAGE>
matching amounts contributed and charged to expense were $0.6 in fiscal year
2000, $0.5 million in fiscal year 1999, and $0.5 million in fiscal year 1998.
The 2000 Employee Stock Purchase Plan, or the "Stock Purchase Plan,"was
adopted by our board of directors and our shareholders prior to the completion
of the initial public offering. The Stock Purchase Plan enables the employees
desiring to do so a convenient means of purchasing shares of common stock
through payroll deductions or lump sum cash payments. The Stock Purchase Plan
provides an incentive to participate by permitting purchases at a discounted
price of 85% of fair market value. We believe that ownership of stock by
employees will foster greater employee interest in the success, growth and
development of our Company. This plan was implemented in the first quarter of
fiscal 2001.
(15) Stock Option Plans
Pre-Recapitalization
We have various stock option plans (the "Plans") under which key employees and
non-employee directors and consultants were granted incentive stock options and
non-qualified options.
Our 1997 Equity Compensation Plan ("the 1997 Plan") was approved, ratified and
adopted by shareholders at the Shareholders' Meeting on October 23, 1997.
Stock option transactions pre-recapitalization during fiscal years 1999 and 1998
are summarized as follows (in thousands, except price per share):
<TABLE>
<CAPTION>
Options Available
Plans For Grant Under Weighted Average
The Plans Options Outstanding Exercise Price
------------------------------------------------------------
<S> <C> <C> <C>
Balance June 28, 1997 66 3,356 $ 6.84
Shares reserved 3,388 -- --
Granted (715) 715 13.92
Exercised -- (1,086) 6.33
Terminated 683 (681) 8.39
------------------------------------------------------------
Balance June 27, 1998 3,422 2,304 $ 8.74
Additional shares reserved -- -- --
Granted (1,166) 1,166 7.91
Exercised -- (2,912) 7.56
Cancelled (2,814) -- 9.96
Terminated 558 (558) 13.17
------------------------------------------------------------
Balance July 3, 1999 -- -- $ --
============================================================
</TABLE>
During fiscal years 1998 and 1997, 1.02 million stock options were granted to
employees outside the plans described above at weighted exercise price of
$10.13, the fair market value at grant date, for terms of five years. Such
options are non-qualified and are not included in the above.
Post-Recapitalization
The above plans were replaced on May 11, 1999. The 1999 Stock Option Plan ("the
1999 Plan") was approved, ratified and adopted at this time. These options vest
over four years and expire in May 11, 2009.
Our 2000 Long-Term Equity Incentive Plan was approved, ratified and adopted in
May 2000. These options vest over four years. As of July 1, 2000, no options
have been granted under this plan.
40
<PAGE>
Effective the pricing for the initial public offering, all common L shares
converted to common shares at a conversion ratio of 1.78-to-1.
Stock option transactions post-recapitalization during fiscal years 1999 and
2000 are summarized as follows (in thousands, except price per share):
<TABLE>
<CAPTION>
Options Available
For Grant Under Weighted Average
1999 Plans The Plans Options Outstanding Exercise Price
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common A Share:
---------------
Balance June 27, 1998 -- -- $ --
Shares reserved 11,070 -- --
Granted (10,328) 10,328 0.54
Exercised -- -- --
Terminated 47 (47) 0.67
------------------------------------------------------------------------------------
Balance July 3, 1999 789 10,281 $ 0.54
Granted (864) 864 1.14
Conversion from L shares -- 408 1.17
Exercised -- (2116) 0.026
Terminated 618 (618) 1.06
Conversion to common shares (543) (8,819) 0.74
------------------------------------------------------------------------------------
Balance July 1, 2000 -- -- $ --
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Available
For Grant Under Weighted Average
1999 Plans The Plans Options Outstanding Exercise Price
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common L Share:
---------------
Balance June 27, 1998 -- -- $ --
Shares reserved 232 -- --
Granted (232) 232 2.12
Exercised -- -- --
Terminated -- -- --
------------------------------------------------------------------------------------
Balance July 3, 1999 -- 232 $ 2.12
Shares reserved -- -- --
Granted -- -- --
Exercised -- (3) --
Terminated -- -- --
Conversion to A share -- (229) 2.12
------------------------------------------------------------------------------------
Balance July 1, 2000 -- -- $ --
====================================================================================
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Options Available
For Grant Under Weighted Average
1999 & 2000 Plans The Plans Options Outstanding Exercise Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Share:
-------------
Balance July 3, 1999 -- -- --
Shares reserved 6,400 -- --
Granted -- -- --
Exercised -- -- --
Terminated -- -- --
Conversion of A shares 543 8,819 0.74
----------------------------------------------------------------------------------------
Balance July 1, 2000 6,943 8,819 $ 0.74
========================================================================================
</TABLE>
As of July 1, 2000, options for 2.3 million shares were exercisable at weighted
average exercise prices ranging from $0.1299 to $1.7530 at an aggregate exercise
price of $1.7 million. Income tax benefits attributable to non-qualified stock
options exercised and disqualifying dispositions of incentive stock options are
credited to equity when realized.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------- ---------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Price 7/1/2000 Contractual Life Exercise Price 7/1/2000 Exercise Price
----------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - $0.21 5,139 8.9 $0.13 1,263 $0.13
$0.21 - $1.70 876 9.8 $1.06 408 $1.17
$1.70 - $1.91 2,804 8.9 $1.75 632 $1.75
---------------------------------------------------------------- ---------------------------------
8,819 9.0 $0.74 2,303 $0.76
================================================================ =================================
</TABLE>
We apply APB 25 and related interpretations in accounting for stock option
plans. Had compensation cost been recognized consistent with SFAS No. 123,our
consolidated net earnings and earnings per share would have been as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $14,732 $23,043 $21,375
Pro forma 13,448 19,449 16,868
Income per diluted share As reported 0.30 0.86 0.96
Pro forma 0.27 0.72 0.76
</TABLE>
The per share weighed-average fair value of stock options issued is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Option Price = FMV 0.61 1.82 8.72
----------------------------------------------------------------------------------------------------------------------
Option Price * FMV 0.57 0.24 --
----------------------------------------------------------------------------------------------------------------------
Option Price ** FMV 12.59 0.12 --
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* means greater than
** means less than
During fiscal 2000, approximately 0.3 million shares were issued below fair
market value. We are currently amortizing the deferred compensation charge over
the four-year vesting period of these options. Amortization for fiscal 2000 was
$0.2 million. In connection with the recapitalization in fiscal 1999, we
recorded a compensation charge of $15.1 million relating to the change in the
acceleration of the vesting, cash-out and conversion of employee stock options
under our previous option plans.
The following assumptions were used to determine the fair value of stock options
granted using the Black-Scholes option-pricing model:
42
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
-------------------------------------------------------------------------------------------------------------------------
Expected volatility 122% Minimal value 60-81%
-------------------------------------------------------------------------------------------------------------------------
Average expected option life 5 years 5 years 4 years
-------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 7.6 % 6.0 % 5.34% to 6.4%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma net income reflects only options granted in fiscal years 2000, 1999
and 1998. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No.123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over an option's vesting
period, and compensation cost for options granted prior to July 1, 1995 is not
considered.
(16) Earnings Per Share
The calculations of earnings per share (EPS) follows (in thousands except per
share amounts):
<TABLE>
<CAPTION>
Fiscal Years Ended
July 1, July 3, June 27,
2000 1999 1998
--------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income before extraordinary items $ 31,370 $23,043 $21,375
Less: Income attributable to Class L Stock -- (530) --
Loss from extraordinary items (16,638) -- --
--------------------------------------------------
Net income $ 14,732 $22,513 $21,375
==================================================
Denominator:
Common Shares 39,843 20,690 20,912
Class A Stock -- 3,758 --
Class B Stock -- 1,364 --
--------------------------------------------------
Weighted average shares used for basic income
per share 39,843 25,812 20,912
Common stock options 10,028 465 1,352
--------------------------------------------------
Weighted average shares outstanding used for diluted
income per share 49,871 26,277 22,264
==================================================
</TABLE>
(17) Stockholders' Equity
Prior to the initial public offering, we had three classes of common stock,
designated as Class A common stock, Class B common stock and Class L common
stock. The Class A common stock entitled the holder to one vote per share on all
matters to be voted upon by shareholders. The Class B common stock and Class L
common stock were non-voting. The Class L common stock was identical to the
Class A common stock and Class B common stock except that the Class L common
stock was entitled preference over the Class A common stock and the Class B
common stock with respect to any distribution to holders of our capital common
stock, equal to the original cost of such share ($18.00) plus any amount which
accrued at a rate of 9% per annum compounded quarterly.
As a result of our initial public offering in May 2000, our articles of
incorporation were amended to provide that:
. Each share of the Series A preferred stock was converted into shares
of Class A common stock and Class L common stock.
. Each share of outstanding Class A common stock and Class B common
stock was reclassified into a single class of common stock on a share-
for-share basis, and
. Each share of outstanding Class L common stock was reclassified into
one share of common stock plus an additional number of shares of
common stock determined by dividing the Preference Amount by the value
of a share of common stock based on the initial public offering price.
43
<PAGE>
Each outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of shareholders. There is no cumulative voting. Except as
otherwise required by law or the restated certificate, the holders of common
stock vote together as a single class on all matters submitted to a vote of
shareholders.
(18) Business Segment and Geographic Information
We have adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", which became effective for fiscal year 1999. We adopted
the requirements of this statement in fiscal year 1999.
Revenue and long-lived assets by our geographic locations are as follows:
<TABLE>
<CAPTION>
Revenue by Geographic Location
------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C>
North America $ 52,990 $ 46,702 $ 71,473
Asia-Pacific 47,250 35,228 37,619
Europe 6,250 5,636 9,311
Taiwan 59,031 51,497 42,231
------------------------------------------------------------------
$ 165,521 $ 139,063 $ 160,634
==================================================================
Long-Lived Assets
------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
------------------------------------------------------------------
United States $ 10,410 $ 9,099 $ 15,742
Singapore 3,508 3,944 2,846
Elimination of Intercompany (860) (916) (704)
------------------------------------------------------------------
$ 13,058 $ 12,127 $ 17,884
==================================================================
</TABLE>
We have two reportable segments, Core products ("Clocks") and Non-core products
("Non-Clocks"). The Core segment represents parts that synchronize the timing
signals in electronic devices. The Non-core products include data communication
transceivers and custom components.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1). We evaluate the
performance of these two segments based on their contribution to operating
income, excluding non-recurring gains or losses.
Our reportable segments are strategic product lines that differ in nature and
have different end uses; as such these product lines are managed and reported to
the chief operating decision maker separately.
The Core segment is standard application specific products that are sold into a
variety of applications. The Average Selling Price tends to be stable, gross
margins are higher than commodity products, and the volumes higher than the Non-
Core segment. Two types of products characterize the Non-Core segment. Data
communications are transceivers used in network applications. The custom parts
are for different applications using varied technologies. Each component in the
custom product line is developed specifically for one customer for their
specific application.
44
<PAGE>
Revenue, operating profit, depreciation and amortization and capital
expenditures by business segment were as follows:
<TABLE>
<CAPTION>
Business Segment Net Revenue
-------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Core $ 148,842 $ 107,710 $ 90,622
Non - Core 16,679 31,353 70,012
-------------------------------------------------------------------
Total Net Revenues $ 165,521 $ 139,063 $ 160,634
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Business Segment Profit (Loss)
-----------------------------------------------------------------------
Operating Profit: 2000 1999 1998
-----------------------------------------------------------------------
<S> <C> <C> <C>
Core $ 45,489 $ 22,783 $ 11,733
Non - Core 6,363 10,674 20,567
Management fee (906) -- --
Special Charge -- (15,051) --
-----------------------------------------------------------------------
Total Operating Profit $ 50,946 $ 18,406 $ 32,300
Reconciliation to statements of
operations:
Gain on sale of Datacom -- 10,734 --
Interest & Other Income 1,200 2,178 1,984
Interest Expense (16,532) (2,955) (64)
-----------------------------------------------------------------------
Net income before
Income taxes and extraordinary
items $ 35,614 $ 28,363 $ 34,220
=======================================================================
</TABLE>
We do not allocate items below operating income to specific segments. The Core
and Non-Core profit is calculated as revenues less cost of sales, research and
development and selling, general and administrative expenses for that segment.
In addition, we do not allocate many of our assets to specific segments, with
the exception of certain property and equipment, and accordingly have not
presented a breakdown of assets by segments.
<TABLE>
<CAPTION>
Business Segment Depreciation/Amortization
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C>
Core $ 2,006 $ 1,595 $ 1,494
Non - Core 110 326 529
Corporate and other 2,576 3,044 2,556
-------------------------------------------------------------
Total consolidated depreciation and
amortization $ 4,692 $ 4,965 $ 4,579
==============================================================
</TABLE>
45
<PAGE>
Business Segment Capital Expenditures
-----------------------------------------
2000 1999 1998
-----------------------------------------
Core $ 2,421 $ 1,029 $ 1,509
Non - Core 30 279 760
Corporate and other 1,907 6,386 5,870
-----------------------------------------
Total Consolidated capital
expenditures $ 4,358 $ 7,694 $ 8,139
=========================================
(19) Related Party Transactions
In the recapitalization, affiliates of Bain Capital, affiliates of Bear Stearns
and certain members of management made an aggregate equity investment in our
company of approximately $50 million as part of an agreement to redeem and
purchase all of our outstanding shares of common stock and vested options for
consideration (including fees and expenses) totaling $294.4 million.
In connection with the recapitalization, we, each of Bain Capital and Bear
Stearns and all of our other equity holders have entered into agreements that,
among other things, provide for tag-along rights, drag-along rights,
registration rights, restrictions on the transfer of shares and certain
preemptive rights. The shareholders agreement provides that in certain
circumstances various specified actions, including among others, major corporate
transactions such as acquisitions, divestitures, financings, recapitalizations
and mergers, as well as other actions such as hiring and firing senior managers,
setting management compensation and establishing capital and operating budgets
and business plans, require the approval of a majority of the shares of common
stock held by Bain Capital. Pursuant to a voting agreement, our board of
directors is comprised of three representatives designated by Bain Capital, one
representative designated by Bear Stearns, our chief executive officer so long
as he is employed by us as chief executive officer and Mr. Boreen so long as he
owned at least 50% of the common stock he owns at the closing of the
recapitalization.
The audit committee is made up of Board of Director members Henry Boreen, John
Howard, and a third person to be voted on at a later date.
In connection with the recapitalization, we entered into an advisory agreement
with each of Bain Capital and Bear Stearns pursuant to which they agreed to
provide financial advisory and consulting services. In exchange for such
services, Bain Capital and Bear Stearns were entitled to an aggregate annual
shareholder advisory fee of $1.0 million and their out-of-pocket expenses.
During fiscal year 1999, we paid Bain Capital and Bear Stearns and its
affiliates fees of $3.4 million and $4.9 million, respectively. Each advisory
agreement was terminated by mutual consent of the parties in connection with the
initial public offering, and we used some of the proceeds of the offering to pay
Bain Capital and Bear Stearns a fee of $2.0 million and $0.7 million,
respectively. Each advisory agreement includes customary indemnification
provisions in favor of each of Bain Capital and Bear Stearns. During fiscal
2000, not including the fees paid in connection with the initial public
offering, we paid Bain Capital and Bear Stearns $0.7 million and $0.2 million,
respectively.
On May 11, 1999, certain members of the management team entered into stock
purchase agreements. In exchange for the purchase of Class A common shares and
Class L common shares, the executives
46
<PAGE>
delivered to us a promissory note. The notes accrue interest at 8% per annum and
mature on May 11, 2006. The executives may prepay the notes at any time, in full
or increments of $1,000. If the executives receive a bonus from us, the
executives have the obligation to prepay their notes in an amount equal to 50%
of the amount of such bonus, net of the amount of any customary withholding
taxes and such amount paid to us. The total amount outstanding as of April 1,
2000 was $0.3 million, of which $0.2 million was owed by our President and Chief
Executive Officer, Mr. Hock Tan.
On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a
board member, for consulting services. The agreement provides for us to pay Mr.
Boreen $350,000 per year in monthly installments. The consulting agreement was
terminated by mutual consent of the parties in connection with the initial
public offering, and proceeds of the initial public offering were used to pay
Mr. Boreen a fee of $350,000.
Sankaty High Yield Asset Partners, L.P., and Brant Point CBO 1999-1 Ltd.,
affiliates of Bain Capital, received a portion of the net proceeds of the
initial public offering from the redemption and repurchase of the senior
subordinated notes. Great Point CLO 1999-1 Ltd., also an affiliate of Bain
Capital, received a portion of the net proceeds of the initial public offering
from the repayment of some of our indebtedness under our senior credit facility.
Investment funds associated with Bain Capital are also shareholders of ChipPAC,
Inc., one of our production vendors. Our orders to ChipPAC totaled approximately
$3.5 million in fiscal 2000 and were on market terms.
As of July 1, 2000, Randolph Street Partners owns 276,893 shares of common stock
acquired in the recapitalization. In connection therewith, Randolph Street
Partners entered into the stockholders agreement and is considered part of the
Bain Group under the stock agreements and the registration agreement. Some
partners of Kirkland & Ellis are partners in Randolph Street Partners. Some
partners of Skadden, Arps, Slate, Meagher and Flom LLP, counsel to the
underwriters, are members in a limited liability company that is an investor in
one of the Bain Capital funds. Kirkland & Ellis has provided legal services to
our company and to Bain Capital from time to time and expects to continue to do
so in the foreseeable future.
ICST Acquisition Corp., an affiliate of Bear, Stearns & Co. Inc., one of the
underwriters of our initial public offering, owns 9,095,265 shares of common
stock acquired in the recapitalization as of July 1, 2000. Integrated Circuit
Systems Equity Investors, L.L.C., an affiliate of Credit Suisse First Boston
Corporation, one of the underwriters of the initial public offering, owns
461,488 shares of common stock acquired in the recapitalization as of July 1,
2000. Credit Suisse First Boston, an affiliate of Credit Suisse First Boston
Corporation, as a lender under our senior credit facility, has received a
portion of the proceeds of this offering used to repay our outstanding
indebtedness under our senior credit facility.
On May 11, 1999, certain members of our senior management team entered into
deferred compensation agreements with our company. The agreement expires on May
11, 2009 upon which time we will pay the executives the entire deferred
compensation amount regardless of their employment status at our Company. If a
sale of our Company is consummated prior to expiration of the agreements, the
executives will receive the full benefit amount at that date. Upon consummation
of the May 22, 2000 initial public offering, the executives received 50% of the
benefit on that date and the remaining 50% is payable next May 2001. The amount
of the remaining deferred compensation as of July 1, 2000 was $0.3 million.
47
<PAGE>
On May 11, 1999, we entered into an employment agreement with Hock E. Tan, as
CEO and President with a base salary of $250,000 per year. In addition to his
salary, Mr. Tan is eligible to earn an annual bonus of up to 120% of his base
salary based upon our Company attaining certain performance targets established
annually by the board of directors.
We previously entered into an employment agreement with Henry Boreen on May 6,
1998 to serve as our interim CEO until September 11, 1998. Mr. Boreen's base
compensation was $10,000 per month, plus a grant of 84,710 stock options at an
exercise price at fair market price at date of grant, which immediately vested.
On September 14, 1998, we made an amendment to this agreement to extend the term
to December 31, 1998. The amendment also increased Mr. Boreen's base
compensation to $12,000 per month plus a grant of 50,826 stock options at an
exercise price of fair value at the date of grant. Those options vested
immediately. Also, in the first quarter of fiscal year 1997, the company and
Henry I. Boreen, Chairman of the Board, entered into an employment agreement as
Interim Chief Executive Officer. For his services in this capacity, Mr. Boreen
received a grant of 127,065 stock options at an exercise price of $6.13 per
share which was equal to the closing price on the date of grant, and which
option has a term of ten years and became exercisable in monthly installments
over the six month period following the date of grant.
On January 11, 1999, we entered into an employment agreement with Rudolf Gassner
as our Chairman of the Board. The employment period was for one year commencing
on January 1, 1999. Mr. Gassner's responsibilities included finding a suitable
candidate to serve as our Chief Executive Officer, and management of day-to-day
operations until a suitable Chief Executive Officer is secured. The agreement
provided for us to pay Mr. Gassner a salary at a monthly rate of $12,000 during
the employment term. Mr. Gassner was also entitled to participate in our
incentive compensation plan. This agreement terminated May 11, 1999.
On November 3, 1998, we granted Mr. Gassner an option to purchase 189,750 shares
of our common stock at $8.19 per share, equal to fair market value on the grant
date. The options vest and become exercisable on a cumulative basis at a rate
of 13,554 shares per month commencing on November 30, 1998, with vesting on
December 31, 1999. On November 3, 1998, we granted Mr. Gassner an option to
purchase an additional 169,420 shares of our common stock at $8.19, the fair
market value on the grant date. These options vest and become exercisable on a
cumulative basis at the rate of 33,884 shares per year commencing on the first
anniversary of the grant date, with full vesting an November 3, 2003, and
earlier vesting in full in the event the price of our common stock exceeds
$11.80 for 10 consecutive trading days. This agreement terminated May 11, 1999.
In the third quarter of fiscal 1998, we entered into a severance agreement with
Stavro Prodromou, the former President and Chief Executive Officer. Dr.
Prodromou received $135,000 in cash severance and health benefits at the time of
his departure, and was granted up to one-year to exercise 211,775 of his stock
options. His remaining options were canceled.
On May 11, 1998, we entered into a consulting agreement with each non-employee
director for management consulting services. The term of each consulting
agreement ended on December 31, 1998, and to the extent service (not to exceed
ten days per month) of any such director were to be retained, he would receive
cash compensation of $2,000 per day. There were no expenses incurred under
these agreements in fiscal year 1999 or fiscal year 2000.
48
<PAGE>
(20) Litigation
On January 27, 1999, Harbor Finance Partners and John P. McCarthy Money Purchase
Plan filed a complaint on behalf of a purported class of the Company's
shareholders in the Court of Common Pleas of Montgomery County, Pennsylvania
against the Company and Mr. Henry I. Boreen in his capacity as its interim Chief
Executive Officer alleging that the consideration to be paid in the merger is
inadequate and seeking to enjoin the merger as well as unspecified compensatory
damages. In March 1999, the plaintiffs amended their complaint to add Mr. Hock
E. Tan as a defendant in his capacity as its Senior Vice President, Chief
Financial Officer, Chief Operating Officer and Secretary. In September 1999, the
plaintiffs dismissed their complaint without requiring any payment or other
consideration from us or any of the other defendants. In September 1999, the
plaintiffs dismissed their complaints without requiring any payments or other
consideration from the Company or any of the other defendants.
On July 31, 1998, Lemelon Medical, Education & Research Foundation, L.P.
("Lemelson") filed a patent infringement action in the U.S. District Court for
the District of Arizona against over 20 companies, including the Company. This
litigation involves 16 patents, all derived from an original 1954 filing.
Lemelson claims that the patents cover a number of aspects of semiconductor chip
manufacturing, in particular optical imaging using alignment marks on the
semiconductor chips, on assembly of the chips into packages, as well as bar-
coding for inventory control. The liability of the Company is alleged under the
U.S. Process Patent Act, which makes a seller of goods liable for a process
abroad that would infringe a U.S. patent if made here. A few of ICS' foundries
are already licensed under the patents, thus reducing the potential liability of
the Company. We along with several other defendants have settled with Lemelson.
On December 28, 1999, the Company paid $190,000 to settle this lawsuit.
On July 2, 1999, Motorola, Inc. filed an action against us and former Motorola
employees, currently employed by us, in the Superior Court of Arizona, Maricopa
County, for unfair competition, breach of contract, misappropriation of trade
secrets and intentional interference with contractual relations. It's former
employees left Motorola and began employment with us in May 1999. Motorola
sought an injunction to prevent us from employing the former Motorola employees
for a reasonable period of time and to enjoin us from using Motorola's trade
secrets. Motorola sued to recover its attorney's fees, unspecified damages and
other relief in this matter. In Fiscal 2000, this case was settled for $2.8
million.
In addition to the foregoing, from time to time, various inquiries, potential
claims and charges and litigation (collectively "claims") are made, asserted or
commenced by or against us, principally arising from or related to contractual
relations and possible patent infringement. We believe that any such claims
currently pending, and the other litigation matters discussed above,
individually and in the aggregate, have been adequately reserved and will not
have any material adverse effect on our consolidated financial position or
results of operations, although no assurance can be made in this regard.
(21) Major Customers
During fiscal 2000 and fiscal 1999, Maxtek, a distributor in Taiwan, represented
12% of our revenues, but no single OEM end customer accounted for 10% or more of
our revenue during fiscal years 2000 and 1999. During fiscal 1998, no customer
represented 10% or more of our revenues.
49
<PAGE>
(22) Quarterly Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended July 1, 2000 and July 3, 1999
(in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------
October 2, January 1, April 1, July 1, September 26, December 26, March 27, July 3,
1999 2000 2000 2000 1998 1998 1999 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 37,840 $ 41,058 $ 41,613 $ 45,010 $ 32,200 $ 35,815 $34,980 $ 36,068
Cost of sales 15,775 17,095 16,068 17,185 17,259 18,334 14,582 14,321
Research and development 5,940 5,781 6,341 6,786 4,760 5,434 6,241 4,881
Operating income (loss) 11,376 11,187 13,039 15,344 5,582 6,157 9,493 (2,826)
Net income (loss) $ 5,454 $ 6,933 $ 8,109 $ (5,764)* $ 4,149 $ 4,512 $16,510 $ (2,128)**
</TABLE>
* Represents an extraordinary charge of $16.7 million (net of tax) relating to
(a) prepayment penalty, totaling $9.5 million (net of tax), associated with the
repurchase of the aggregate outstanding principal amount of our senior
subordinated notes and (b) the elimination of deferred financing costs, totaling
$7.2 million (net of tax) associated with the repayment of our senior
subordinated notes and senior credit facility.
** In connection with the recapitalization, we recorded a compensation charge of
$15.1 million related to the accelerated vesting, cash-out and conversion of
employee stock options.
50
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following biographical information is furnished as to each person
nominated for election as a director.
Name Age Position
=============== === ===========================
Hock E. Tan 48 Chief Executive Officer, President and Director
Justine F. Lien 38 Chief Financial Officer
Lewis C. Eggebrecht 56 Vice President and Chief Scientist
Henry I. Boreen 73 Director
David Dominik 44 Director
Michael A. Krupka 35 Director
Prescott Ashe 33 Director
John Howard 48 Director
Hock E. Tan began serving as Chief Executive Officer and President after the
recapitalization in May 11, 1999. Mr. Tan joined us in August 1994 and was
appointed as Senior Vice President and Chief Financial Officer in February 1995.
In April 1996, Mr. Tan was appointed to the additional post of Chief Operating
Officer. Before joining our company, Mr. Tan was Vice President of Finance of
Commodore International, Ltd. from 1992 to 1994. Mr. Tan has served as Managing
Director of Pacven Investment, Ltd. from 1988 to 1992 and was Managing Director
of Hume Industries (M) Ltd. from 1983 to 1988. His career also includes senior
financial positions with PepsiCo, Inc. and General Motors Corporation. Mr. Tan
holds an M.B.A. from Harvard Business School and an M.S. in Mechanical
Engineering from Massachusetts Institute of Technology.
Justine F. Lien was appointed Chief Financial Officer after the recapitalization
on May 11, 1999 and has been with us since 1993. She has held titles including
Director of Finance and Administration and Assistant Treasurer. Prior to joining
us, Ms. Lien was employed by Smith Industries in various finance capacities. Ms.
Lien holds a B.A. degree in Accounting and Economics from Immaculata College and
is a Certified Management Accountant.
Lewis C. Eggebrecht was appointed Vice President and Chief Scientist in 1998 and
possesses over 30 years of experience in the integrated circuit and personal
computer industries. Prior to his employment with us, Mr. Eggebrecht was Chief
Architect for the Multimedia Products Group at Philips
51
<PAGE>
Semiconductor from 1996 to 1998. Mr. Eggebrecht was a senior engineer at S3 in
1996 and was a Vice President and Chief Scientist at our company from 1994 to
1996. Mr. Eggebrecht also held senior engineering positions at Commodore
International, Franklin Computer and IBM. Mr. Eggebrecht holds numerous patents
and industry awards and has authored over 25 articles for a variety of technical
publications. Mr. Eggebrecht holds a B.S.E.E. degree from the Michigan
Technological University and has accomplished advanced degree work at the
University of Minnesota.
Henry I. Boreen has been a director since December 1984 and chairman of the
board of directors since April 1995. He served as Interim Chief Executive
officer from March 1998 through October 1998. Since 1984, Mr. Boreen has been a
principal of HIB International. From 1989 to January 1998, Mr. Boreen has also
served as chairman of AM Communications, Inc., a manufacturer of
telecommunications equipment. Mr. Boreen has over 35 years of experience in the
integrated circuits industry and was the founder and chairman of Solid State
Scientific, a semiconductor manufacturer.
David Dominik is a co-founder and managing director of Convergence Capital Group
and a special limited partner of Bain Capital, Inc. He was a managing director
of Bain Capital, Inc. from 1990 until March 2000. Previously, Mr. Dominik was a
general partner of Zero Stage Capital, a venture capital firm focused on early-
stage companies, and assistant to the chairman of Genzyme Corporation, a
biotechnology firm. From 1982 to 1984, he worked as a management consultant at
Bain & Company. Mr. Dominik also serves as a director of ChipPAC, Inc., DDi
Corp. and OneSource.
Michael A. Krupka joined Bain Capital in 1991 and has been a Managing Director
since 1997. Prior to joining Bain Capital, Mr. Krupka spent several years as a
management consultant at Bain & Company where he focused on technology and
technology-related companies. In addition, he has served in several senior
operating roles at Bain Capital portfolio companies. Mr. Krupka currently serves
on the board of directors of Sealy Corporation.
Prescott Ashe is a co-founder and managing director of Convergence Capital
Group. He was a principal at Bain Capital, Inc. from June 1998 until March 2000.
He was an associate at Bain Capital, Inc. from 1992 until 1998. Prior to that,
he was an analyst at Bain Capital, Inc. and a consultant at Bain & Company. Mr.
Ashe also serves as a director of ChipPAC, Inc., DDi Corp. and SMTC Corporation.
John D. Howard joined Bear Stearns in March of 1997 to develop and build its
Merchant Banking business. He is a Senior Managing Director of Bear Stearns and
Head of Merchant Banking. Prior to joining Bear Stearns, Mr. Howard founded
Gryphon Capital Partners, a private investment firm. From 1990 to 1996, he was
co-Chief Executive Officer of Vestar Capital Partners, Inc., and a private
investment firm specializing in management buyouts. In addition, Mr. Howard was
a Senior Vice President and partner of Wesray Capital Corporation, one of the
foremost private equity sponsors and a pioneer of leveraged buyouts, from 1985
to 1990. Formerly, Mr. Howard was a Vice President in the mergers and
acquisitions group of Bear Stearns.
52
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended July 1, 2000, July 3,
1999 and June 27, 1998, the compensation paid by the Company to those persons
who were at any time during the last completed fiscal year, the Company's chief
executive officer, and its next most highly compensated executive officers whose
total annual salary and bonus was in excess of $100,000 for the last completed
fiscal year.
<TABLE>
<CAPTION>
===================================================================================================================================
SUMMARY COMPENSATION TABLE
===================================================================================================================================
Long Term Compensation
---------------------------
Annual Compensation Awards
--------------------------------------------------------------------------------------------
Restricted Securities All
Name Stock Underlying Other
and Award(s) Options/ Compensation
Principal Fiscal Salary Bonus ($) SARs ($)/(2)/
Position Year ($) ($)/(1)/ (#)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hock E. Tan (3) 2000 262,556 252,000 - 84,710 57,897
CEO, President and ----
Director (since May 1999) 1999 232,565 70,560 - 1,195,206 5,254
----
1998 209,997 168,000 - - 5,254
----
Justine F. Lien (4) 2000 149,172 112,278 - - 26,855
Chief Financial Officer ----
(since May 1999) 1999 103,931 39,403 - 525,202 5,497
----
1998 89,803 38,610 - 6,777 5,158
----
Lewis C. Eggebrecht 2000 195,618 105,483 - - 37,343
Vice President and ----
Chief Scientist 1999 180,560 80,490 - 677,680 4,275
----
1998 78,923 84,857 - 169,420 454
----
Dinh Bui 2000 182,117 161,539 - 93,181 5,991
Vice President ----
1999 13,508 112,500 - 203,304 51
----
1998 - - - - -
----
Kalyansundaram 2000 180,062 83,415 - - 56,226
Venkateswaran ----
Vice President 1999 170,618 56,054 - 622,523 5,178
----
1998 169,423 69,483 - 3,000 5,178
----
===================================================================================================================================
</TABLE>
(1) Includes cash bonuses for services rendered in the applicable fiscal year.
(2) Includes amounts contributed by the Company (i) under the Company's 401(k)
Plan as follows: Mr. Tan - $6,350 for 2000, $4,750 for 1999, and $4,750 for
1998; Ms. Lien - $6,522 for 2000, $5,245 for 1999 and $4,931 for 1998; Mr.
Eggebrecht - $6,897 for 2000, $3,821 for 1999 and $0 for 1998; Mr. Bui -
$5,550 for 2000; Dr. Venkateswaren - $6,350 for 2000, $4,750 for 1999, and
$4,750 for 1998; (ii) for premiums for a life insurance policy as follows:
Mr. Tan - $504 for 2000, $504 for 1999 and $504 for 1998; Ms. Lien - $353
for 2000, $252 for 1999 and $227 for 1998; Mr. Eggebrecht $476 for 2000,
$454 for 1999 and $454 for 1998; Mr. Bui - $441 for 2000 and $51 for 1999;
Dr. Venkateswaren - $437 for 2000, $428 for 1999; and $428 for 1998; (iii)
for deferred compensation agreements as follows: Mr. Tan - $51,043 for
2000, Ms. Lien - $19,980 for 2000; Mr. Eggebrecht - $29,970 for 2000; and
Mr. Venkateswaren - $49,439 for 2000.
(3) Mr. Tan was appointed Chief Executive Officer and President at the close of
the recapitalization on May 11, 1999.
(4) Ms. Lien was appointed Chief Executive Officer and President at the close
of the recapitalization on May 11, 1999.
53
<PAGE>
The following table sets forth the option grants during the fiscal year ended
July 1, 2000 for the individuals named in the Summary Compensation Table.
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term /(1)/
------------------------------------------------------------------------------------------------------------------------------------
% of Total Exercise Grant
Options Granted Or Base Date Expiration 5% ($) 10% ($)
Options to Employees In Price Market Date
Name Granted Fiscal Year ($/SH) Price
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hock E. Tan 56,473 4.4% 0.96 0.96 01/25/10 34,170 86,592
28,237 2.2% 1.75 0.96 01/25/10 -- 20,964
Justine F. Lien -- -- -- -- -- -- --
Lewis C. Eggebrecht -- -- -- -- -- -- --
Dinh Bui 62,121 4.9% 0.96 0.96 01/25/10 37,587 95,253
31,060 2.4% 1.75 0.96 01/25/10 -- 23,060
Kalyansundaram
Venkateswaran -- -- -- -- -- -- --
====================================================================================================================================
</TABLE>
54
<PAGE>
The following table sets forth-aggregate option exercises during the fiscal year
ended July 1, 2000 and option values for the individuals named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
-----------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Acquired Value At Fiscal Year at FY-End ($)
Name on Exercise (#) Realized ($) End(#)
Exercisable/
Exercisable/ Unexercisable
Unexercisable
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hock E. Tan 389,534 $364,643 269,253/656,503 4,391,108/10,309,491
Justine F. Lien 152,478 $ 15,842 115,498/254,131 1,885,068/4,181,487
Lewis C. Eggebrecht 228,717 $ 23,764 152,069/317,664 2,479,138/5,226,865
Dinh Bui -- -- 50,826/245,659 836,294/3,990,393
Kalyansundaram 377,298 $ 39,201 127,009/152,478 2,051,847/2,508,886
Venkateswaran
=================================================================================================================
</TABLE>
Compensation of Directors
We will reimburse members of the board of directors for any out-of-pocket
expenses incurred by them in connection with services provided in such capacity.
In addition, we may compensate independent members of the board of directors for
services provided in such capacity.
Executive Employment and Severance Arrangements
As a part of the recapitalization, we entered into an employment agreement with
Hock E. Tan, as CEO and President with a base salary of $250,000 per year. In
addition to his salary, Mr. Tan is eligible to earn an annual bonus of up to
120% of his base salary based upon our attaining certain performance targets
established annually by the board of directors. During his term of employment,
Bain Capital has agreed to nominate and vote for Mr. Tan to serve as a member of
the board of directors.
Qualified 401(k) and Profit Sharing Plan
We maintain a qualified 401(k) and profit sharing plan. Commencing in fiscal
2000, employees are permitted to contribute up to 18% of their annual
compensation. In prior years, the amount was 12% of their annual compensation.
Under the plan, we make matching contributions equal to 150% of the first 1%
contributed, 125% of the second 1% contributed, 100% of the third 1%
contributed, 75% of the fourth 1% contributed and 50% of the next 2% contributed
up to a maximum of 6% of annual compensation, subject to the IRS limits. The
amounts we contributed and charged to expense were $0.6 million in fiscal 2000
and $0.5 million in both fiscal years 1999 and 1998.
55
<PAGE>
Deferred Compensation Arrangements
As part of the recapitalization, we entered into deferred compensation
arrangements with certain members of our senior management team. The
arrangements expire on May 11, 2009, at which time we will pay the executives
the entire deferred compensation amount regardless of their employment status at
our Company. If a sale of our Company occurs prior to the expiration of the
arrangements, the executives will receive the full benefit amount at that date.
As a result of the initial public offering, the executives received 50% of the
benefit under these arrangements in June 2000, and the remaining 50% will be
paid on the first anniversary of the offering. The amount of deferred
compensation as of July 1, 2000 was $0.3 million.
Management Equity Participation
The Recapitalization. Some of the shares of our existing common stock held by
some members of management before the recapitalization were converted into
shares of our new common stock after the recapitalization. In addition, some of
the existing stock options held by some of the members of our management before
the recapitalization were converted into options to purchase shares of our new
common stock after the recapitalization and deferred compensation agreements.
Fifteen members of management participated in the rollover of common stock and
stock options, including Messrs. Henry I. Boreen, Hock E. Tan, Justine Lien and
Lewis C. Eggebrecht. These members of management invested an aggregate of $9.8
million in the recapitalization, consisting primarily of the fair value of
certain common stock and vested stock options.
1999 Stock Option Plans. In order to provide additional financial incentives to
certain of our executives and other key employees, in May 1999 we adopted the
1999 Stock Option Plan, or the "1999 Plan" under which we will periodically
grant options to purchase our new common stock. These options will vest upon the
fulfillment of certain conditions, the passage of a specified period of time and
our achievement of certain performance goals, as determined by our board of
directors. All of the unvested options of any terminated employee will expire
upon termination, and the exercise period of all vested options will be reduced
to sixty days following the date of termination. We and certain investors have
the right to repurchase shares of our common stock issued upon the exercise of
options granted under the 1999 Plan if any employee ceases to be employed by us.
The senior management team and many other employees own common stock and
options, together representing approximately 21% of our common stock on a fully-
diluted basis. No future grants will be made under the 1999 Plan upon the
effectiveness of the 2000 Plan.
2000 Long-Term Equity Incentive Plan. We adopted the 2000 Long-Term Equity
Incentive Plan. The equity incentive plan provides for grants of stock options,
stock appreciation rights, restricted stock and performance awards. Directors,
officers and other employees of our Company and its subsidiaries and persons who
engage in services for us are eligible for grants under the plan. The purpose of
the equity incentive plan is to provide these individuals with incentives to
maximize shareholder value and otherwise contribute to our success and to enable
us to attract, retain and reward the best available persons for positions of
responsibility.
Approximately 6,400,000 shares of common stock are available for issuance under
the equity incentive plan, subject to adjustment in the event of a
reorganization, stock split, merger or similar change in our corporate structure
or the outstanding shares of common stock. In the event of any of these
occurrences, we may make any adjustments we consider appropriate to, among other
things, the number and kind of shares, options or other property available for
issuance under the equity incentive plan or covered by grants previously made
under the plan. The shares available for issuance under the equity incentive
plan may be, in whole or in part, authorized and unissued or held as treasury
shares. The compensation committee of our board of directors will administer
the equity incentive plan. Our
56
<PAGE>
board also has the authority to administer the plan and to take all actions that
the compensation committee is otherwise authorized to take under the plan.
Employee Stock Purchase Plan. The 2000 Employee Stock Purchase Plan, or the
"Stock Purchase Plan," was adopted by our board of directors and our
shareholders prior to the completion of the initial public offering. The Stock
Purchase Plan enables the employees desiring to do so a convenient means of
purchasing shares of common stock through payroll deductions or lump sum cash
payments. The Stock Purchase Plan provides an incentive to participate by
permitting purchases at a discounted price. We believe that ownership of stock
by employees will foster greater employee interest in the success, growth and
development of our Company. This plan was implemented in the first quarter of
fiscal 2001.
Compensation Committee Interlocks and Insider Participation
Currently, our board of directors does not have a compensation committee.
Consequently, the entire board of directors participates in deliberations
concerning executive officer compensation. Mr. Tan is a member of the board of
directors and is our President and Chief Executive Officer. Mr. Boreen is a
member of the board of directors and is a former officer of the Company. Mr.
Gassner was a member of the board of directors and an officer of the Company
prior to the recapitalization.
On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a
board member, for consulting services. The agreement provides for us to pay Mr.
Boreen $350,000 per year in monthly installments. The consulting agreement was
terminated by mutual consent of the parties in connection with the initial
public offering, and proceeds of the initial public offering were used to pay
Mr. Boreen a fee of $350,000.
Committees of the Board of Directors
The board of directors will have an audit committee and a compensation
committee. The audit committee will report to the board regarding the
appointment of our independent public accountants, the scope and results of our
annual audits, compliance with our accounting and financial policies and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The audit committee will consist of a majority of directors
not otherwise affiliated with us. The compensation committee of the board of
directors will review and make recommendations to the board regarding our
compensation policies and all forms of compensation to be provided to our
executive officers. In addition, the compensation committee will review bonus
and stock compensation arrangements for all of our other employees. The
compensation committee will consist of at least two non-employee directors (as
defined in Rule 16b-3 under the Exchange Act), and we expect to appoint at least
two additional independent directors. The Audit committee consists of Henry
Boreen, John Howard, and an independent member of the board of directors to be
voted on at a later date.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
approximate beneficial ownership of: (i) each class of its equity securities by
each person who is known by the Company to own more than 5% of the Company's
outstanding voting securities and (ii) each class of its equity securities by
each of its directors and executive officers and all of the directors and
executive officers as a group, in each case as of July 1, 2000. Unless
otherwise noted, to its knowledge, each of the following shareholders has sole
voting and investment power as to the shares shown:
<TABLE>
<CAPTION>
Shares Beneficially owned
-------------------------
Name and Address Number of Shares Percentage of Class
---------------- ----------------------------------------------
<S> <C> <C>
Principal Shareholders:
Bain Capital Funds (1) 27,285,793 42.5%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Bear, Stearns & Co. Inc. 9,095,265 14.2%
245 Park Avenue
New York, New York 10167
Intel Corporation 6,170,073 9.6%
2200 Mission College Boulevard
Santa Clara, CA 95052
Integrated Circuit Systems Equity 461,489 *
Investors, LLC (2)
11 Madison Avenue
New York, NY 10010
Randolph Street Partners 276,893 *
200 East Randolph Drive
Chicago, IL 60601
Directors and Executive Officers:
Henry I. Boreen 4,233,723 6.5%
Hock E. Tan (3) 935,686 1.4%
Justine F. Lien (4) 267,979 *
Lewis C. Eggebrecht (5) 380,790 *
David Dominik (6) 7,220,995 11.2%
Michael A. Krupka (6) 7,220,995 11.2%
Prescott Ashe (7) 7,220,995 11.2%
John Howard (8) 9,095,265 14.2%
Directors and Executive Officers 22,134,438 34.2%
as a group (8 persons)
</TABLE>
* Represents less than 1%.
1) Includes shares of common stock owned by Bain Capital Fund VI, L.P. ("Fund
VI"), BCIP Associates II ("BCIP II"), BCIP Trust Associates II ("BCIP Trust
II"), BCIP Associates II-B ("BCIP II-B"), BCIP Trust Associates II-B ("BCIP
Trust II-B"), BCIP Associates II-C ("BCIP II-C" and, collectively with BCIP
II, BCIP Trust II, BCIP Trust II-B and BCIP II-B, the "BCIPs"), and PEP
Investment PTY Ltd. ("PEP"). The BCIPs, PEP and Fund VI are collectively
referred to as the "Bain Capital Funds."
2) An affiliate of Credit Suisse First Boston Corporation.
3) Includes 269,253 shares of common stock issuable upon exercise of options.
4) Includes 115,498 shares of common stock issuable upon exercise of options.
5) Includes 152,069 shares of common stock issuable upon exercise of options.
6) Mr. Krupka is a Managing Director of Bain Capital, Inc., which is the
managing general partner of each of the BCIPs and has voting and investment
power with respect to the shares owned by PEP. In addition, (i) Messrs.
Krupka and Dominik (or affiliated entities) are general partners of BCIP
Trust II, BCIP Trust II-B, BCIP II and/or BCIP II-B, and (ii) Bain
Investors VI is a general partner of BCIP II-C. Accordingly, each of Mr.
Krupka and Mr. Dominik may be deemed to beneficially own some or all of the
shares owned by the Bain Capital Funds. Each of Mr. Krupka and Mr. Dominik
disclaims beneficial ownership of any such shares.
7) Mr. Ashe (or an affiliated entity) is a principal of Bain Capital, Inc. and
is a general partner of BCIP Trust II, BCIP Trust II-B, BCIP II and/or BCIP
II-B. Accordingly, Mr. Ashe may be deemed to beneficially own some or all
of the shares owned by BCIP II, BCIP II-B, BCIP Trust and BCIP Trust II-B.
Mr. Ashe disclaims beneficial ownership of any shares.
8) Mr. Howard is a Senior Managing Director of Bear, Stearns & Co. Inc.
Accordingly, Mr. Howard may be deemed to beneficially own some or all of
the shares owned by The Bear Stearns Companies Inc. Mr. Howard disclaims
beneficial ownership of any such shares.
58
<PAGE>
Item 13. CERTAIN RELATIONSHIPS RELATED TRANSACTIONS
The Recapitalization
In the recapitalization, affiliates of Bain Capital, an affiliate of Bear
Stearns and certain members of management made an aggregate equity investment in
our company of approximately $50 million as part of an agreement to redeem and
purchase all of our outstanding shares of common stock and vested options for
consideration (including fees and expenses) totaling $294.4 million.
Shareholders Agreement, Voting Agreement and Other Agreements
In connection with the recapitalization, we, each of Bain Capital and Bear
Stearns and all of our other equity holders have entered into agreements that,
among other things, provide for tag-along rights, drag-along rights,
registration rights, restrictions on the transfer of shares and certain
preemptive rights. The shareholders agreement provides that in certain
circumstances various specified actions, including among others, major corporate
transactions such as acquisitions, divestitures, financings, recapitalizations
and mergers, as well as other actions such as hiring and firing senior managers,
setting management compensation and establishing capital and operating budgets
and business plans, require the approval of a majority of the shares of common
stock held by Bain Capital. Pursuant to a voting agreement, our board of
directors is comprised of three representatives designated by Bain Capital, one
representative designated by Bear Stearns, our chief executive officer so long
as he is employed by us as chief executive officer and Mr. Boreen so long as he
owns at least 50% of the common stock he owns at the closing of the
recapitalization.
Advisory Agreements
In connection with the recapitalization, we entered into an advisory agreement
with each of Bain Capital and Bear Stearns pursuant to which they agreed to
provide financial advisory and consulting services. In exchange for such
services, Bain Capital and Bear Stearns were entitled to an aggregate annual
shareholder advisory fee of $1.0 million and their out-of-pocket expenses.
During fiscal year 1999, we paid Bain Capital and Bear Stearns and its
affiliates fees of $3.4 million and $4.9 million, respectively. Each advisory
agreement was terminated by mutual consent of the parties in connection with the
initial public offering, and we used some of the proceeds of the offering to pay
Bain Capital and Bear Stearns a fee of $2.0 million and $0.7 million,
respectively. Each advisory agreement includes customary indemnification
provisions in favor of each of Bain Capital and Bear Stearns. During to fiscal
2000, not including the fees paid in connection with the initial public
offering, we paid Bain Capital and Bear Stearns $0.7 million and $0.2 million,
respectively.
Loans to Executive Officers
On May 11, 1999, certain members of the management team entered into stock
purchase agreements. In exchange for the purchase of Class A common shares and
Class L common shares, the executives delivered to us a promissory note. The
notes accrue interest at 8% per annum and mature on May 11, 2006. The executives
may prepay the notes at any time, in full or increments of $1,000. If the
executives receive a bonus from us, the executives have the obligation to prepay
their notes in an amount equal to 50% of the amount of such bonus, net of the
amount of any customary withholding taxes and such amount paid to us. The total
amount outstanding as of July 1, 2000 was $0.3 million, of which $0.2 million
was owed by Mr. Tan.
Consulting Agreement
On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a
board member, for consulting services. The agreement provides for us to pay Mr.
Boreen $350,000 per year in monthly installments. The consulting agreement was
terminated by mutual consent of the parties in connection
59
<PAGE>
with the initial public offering, and proceeds of the initial public offering
were used to pay Mr. Boreen a fee of $350,000.
Senior Subordinated Notes and Senior Credit Facility
Sankaty High Yield Asset Partners, L.P., and Brant Point CBO 1999-1 Ltd.,
affiliates of Bain Capital, received a portion of the net proceeds of this
offering from the redemption and repurchase of the senior subordinated notes.
Great Point CLO 1999-1 Ltd., also an affiliate of Bain Capital, will receive a
portion of the net proceeds of the offering from the repayment of some of our
indebtedness under our senior credit facility.
Orders Placed with Affiliate of Major Shareholders
Investment funds associated with Bain Capital are also shareholders of ChipPAC,
Inc., one of our production vendors. Our orders to ChipPAC totaled approximately
$3.5 million in fiscal 2000 and were on market terms.
60
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
(1) Consolidated Financial Statements
The consolidated financial statements listed in the accompanying index
to financial statements and financial schedule are filed or
incorporated by reference as a part of this report.
(2) Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this report
(b) Reports on Form 8-K
There were no reports on the Form 8-K during the fourth quarter of fiscal 2000.
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<PAGE>
Consent of Independent Auditors
The Board of Directors
Integrated Circuit Systems, Inc.
The audits referred to in our report dated August 4, 1999, included the related
financial statement schedule as of July 3, 1999, and for the years ended July 3,
1999 and June 27, 1998. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein. We also consent to the
incorporation by reference in the registration statements (No. 333-40428 and No.
333-42392) on Form S-8 of Integrated Circuit Systems, Inc. dated June 29, 2000
and July 28, 2000 of our report dated August 4, 1999, which report appears in
the July 1, 2000 annual report on Form 10-K of Integrated Circuit Systems, Inc.
KPMG LLP
Philadelphia, Pennsylvania
September 7, 2000
62
<PAGE>
SCHEDULE II
INTEGRATED CIRCUIT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 1, 2000, July 3, 1999 and June 27, 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Charged
Beginning of to Costs and Balance at
Description Period Expenses Deductions* End of Period
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended July 1, 2000:
Valuation reserves:
Doubtful Accounts $ 1,000 $ -- $ 312 $ 688
Returns and Allowances 1,150 -- 146 1,004
Inventory 5,140 -- 1,618 3,522
Deferred tax valuation 2,717 2,354 -- 5,071
Year ended July 3, 1999:
Valuation reserves:
Doubtful Accounts $ 627 $ 489 $ 116 $ 1,000
Returns and Allowances 1,166 -- 16 1,150
Inventory 3,360 2,380 600 5,140
Deferred tax valuation 3,145 -- 428 2,717
Year ended June 27, 1998:
Valuation reserves:
Doubtful Accounts $ 212 $ 543 $ 128 $ 627
Returns and Allowances 231 935 -- 1,166
Inventory 2,373 2,687 1,700 3,360
Deferred tax valuation 3,090 55 -- 3,145
</TABLE>
*Deductions include adjustments to the reserves, as well as write-offs.
63
<PAGE>
Index to Exhibits
The following exhibits are filed as part of, or incorporated by
reference into this report.
*3.1 Amended and Restated Articles of Incorporation of the Company (Exhibit
3.1 to the Registrant's Form S-1, registration number 333-33318 [the
"2000 Form S-1"]).
*3.2 Amended and Restated By-laws of the Company (Exhibit 3.2 to the 2000
Form S-1).
*4.1 Indenture, dated as of May 11, 1999, between the Company and Chase
Manhattan Trust Company, National Association, as Trustee with respect
to the 11 1/2% Senior Subordinated Notes due 2009 (including the form
of 11 1/2% Senior Subordinated Notes (Exhibit 4.1 to the Registrant's
Form S-4, registration number 333-88607 [the "1999 Form S-4"]).
*10.1 Purchase Agreement, dated as of May 5, 1999, among the Company, Bear
Stearns & Co. Inc. and Credit Suisse First Boston Corporation (Exhibit
10.1 to the 1999 Form S-4).
*10.2 Registration Rights Amendment, dated as of May 11, 1999, among the
Company, each of the three Guarantor Subsidiaries, Bear, Stearns &
Co., Inc. and Credit Suisse First Boston Corporation (Exhibit 10.2 to
the 1999 Form S-4).
*10.3 Consulting Agreement, dated as of May 11, 1999, between the Company
and Henry Boreen (Exhibit 10.3 to the 1999 Form S-4).
+*10.4 Integrated Circuit Systems, Inc. 1999 Stock Option Plan (Exhibit 10.4
to the 1999 Form S-4).
*10.5 Credit Agreement dated as of May 11, 1999 among the Company, Credit
Suisse First Boston as Administrative Agent, Sole Lead Arranger and
Collateral Agent, and the various lending institutions party thereto
(Exhibit 10.5 to the 1999 Form S-4).
*10.6 Lease, dated as of January 29, 1999 between BET Investments IV and the
Company (Exhibit 10.6 to the 1999 Form S-4).
*10.7 Agreement and Plan of Merger as of January 20, 1999, between the
Company and ICS Merger Corp (the "Recapitalization Agreement")
(Exhibit 10.7 to the 1999 Form S-4).
*10.8 Amendment No. 1 to the Recapitalization Agreements, dated
February 16,1999 (Exhibit 10.8 to the 1999 Form S-4).
+*10.9 Executive Stock and Option Agreements, dated May 11, 1999, among the
Company, Lewis C. Eggebrecht and Hock E. Tan (Exhibit 10.9 to the 1999
Form S-4).
+*10.10 Deferred Compensation Agreements, dated May 11, 1999, among the
Company, Lewis C. Eggebrecht and Hock E. Tan (Exhibit 10.10 to the
1999 Form S-4).
*10.11 Stockholders Agreement, dated as of May 11, 1999, among the Company,
Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates
II, BCIP Associates II-B Trust Associates II-B, BCIP Associates II-C,
PEP Investments PTY Ltd., Randolph Street
64
<PAGE>
Partners 1998 DIF, L.L.C., ICST Acquisition Corp. and Integrated
Circuit Systems Equity Investors, L.L.C (the "Stockholders Agreement")
(Exhibit 10.11 to the 1999 Form S-4).
*10.12 Amendment No. 1 to Stockholders Agreement, dated December 29, 1999
(Exhibit 10.12 to the 2000 Form S-1).
*10.13 Amendment No. 2 to Stockholders Agreement, dated February, 2000
(Exhibit 10.13 to the 2000 Form S-1).
*10.14 Employment, Confidential Information and Invention Assignment
Agreement between the Company and Hock E. Tan (Exhibit 10.12 to the
1999 Form S-4).
*10.15 Consultant Stock Agreement, dated as of May 11, 1999, among the
Company and Henry I. Boreen (Exhibit 10.13 to the 1999 Form S-4).
*10.16 Registration Agreement, dated as of May 11, 1999, among the Company,
Bain Capital Fund VI, L.P., BCIP Trust Associates II, BCIP Trust
Associates II-B, BCIP Associates II, BCIP Associates II-B, BCIP
Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners
II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp.,
Hock E. Tan, Lewis C. Eggebrecht and Integrated Circuit Systems Equity
Investors, L.L.C (the "Registration Rights Agreement") (Exhibit 10.14
to the 1999 Form S-4).
*10.17 Amendment No. 1 to the Registration Rights Agreement, dated December
29, 1999 (Exhibit 10.17 to the 2000 Form S-1).
*10.18 Executive Stock Purchase Agreement, dated as of May 11, 1999, between
the Company and Hock E. Tan (Exhibit 10.15 to the 1999 Form S-4).
*10.19 Promissory Note, dated as of May 11, 1999, executed by Hock E. Tan
(Exhibit 10.16 to the 1999 Form S-4).
*10.20 Pledge Agreement, dated as of May 11, 1999, between the Company and
Hock E. Tan (Exhibit 10.17 to the 1999 Form S-4).
*10.21 Voting Agreement, dated as of May 11, 1999, among the Company, Bain
Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II,
BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II-
C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph
Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp., Henry I.
Boreen, Christopher J. Bland and Barry E. Olsen (Exhibit 10.18 to the
1999 Form S-4).
+*10.22 Employment Agreement, dated as of May 11, 1999, between the Company
and Hock E. Tan (Exhibit 10.19 to the 1999 Form S-4).
*10.23 Non-Compete Agreement, dated as of May 11, 1999, between the Company
and Hock E. Tan (Exhibit 10.20 to the 1999 Form S-4).
*10.24 Advisory Agreement, dated as of May 11, 1999, between the Company and
Bain Capital Partners VI, L.P. (Exhibit 10.21 to the 1999 Form S-4).
*10.25 Advisory Agreement, dated as of May 11, 1999, between the Company and
ICST
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<PAGE>
Acquisition Corp. (Exhibit 10.22 to the 1999 Form S-4) .
*10.26 Lease Agreement, dated June 13, 1988, between VLSI Design Associates
and The Sobrato Group (Exhibit 10.27 to the Registrant's registration
statement, No. 33-54142, on S-4, filed November 3, 1992).
*10.27 Lease between Turtle Beach Systems, Inc. and Winship Land Associates
III, dated May 28, 1993 (Exhibit 10.27 to the Registrant's 1993 Annual
Report on Form 10-K [the "1993 Form 10-K"]).
*10.28 First Amendment to lease, dated as of May 13, 1993, between the
registrant and The Sobrato Group (Exhibit 10.28 to the 1993 Form 10-
K).
*10.29 Wafer purchase contract, dated as of October 12, 1994, between the
Company and American Microsystems, Inc. (Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September 30, 1994).
*10.30 Agreement, dated as of November 21, 1994, between the Company and
Edward H. Arnold (Exhibit 10.1 to the Registrant's Form 10-Q for the
quarter ended December 30, 1995).
*10.31 Wafer purchase contract, dated as of November 8, 1995, between the
Company and Chartered Semiconductor Manufacturing PTE. Ltd. (Exhibits
10(a) and 10(b) to the Registrant's Form 10-Q for the quarter ended
December 30, 1995).
+*10.32 2000 Long Term Equity Incentive Plan (Exhibit 10.32 to the 2000 Form
S-1).
*10.33 Series A Cumulative Convertible Preferred Stock Purchase Agreement by
the Registrant and Intel Corporation, dated December 23, 1999 (Exhibit
10.33 to 2000 Form S-1).
*10.34 Employee Stock Purchase Plan (Exhibit 10.34 to the 2000 Form S-1).
*12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
(Exhibit 12.1 of the 1999 Form S-4).
*16.1 Letter from KPMG LLP re: Change in Certifying Accountant. (Exhibit
16.1 to the 1999 Form S-4).
*21.1 Subsidiaries of the Registrant (Exhibit 21.1 to the 2000 Form S-1).
27.1 Financial Data Schedule.
* Incorporated by reference
+ Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of this report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTEGRATED CIRCUIT SYSTEMS, INC.
Date: September 11, 2000 By: /s/ HOCK E. TAN
--------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
INTEGRATED CIRCUIT SYSTEMS, INC.
Date: September 11, 2000 By: /s/ HOCK E. TAN
--------------
Chief Executive Officer
INTEGRATED CIRCUIT SYSTEMS, INC.
Date: September 11, 2000 By: /s/ JUSTINE F. LIEN
-------------------
Vice President, Chief Financial & Accounting
Officer
Date: September 11, 2000 By: /s/ HENRY I. BOREEN
-------------------
Henry I. Boreen, Director
Date: September 11, 2000 By: /s/ DAVID DOMINIK
-----------------
David Dominik, Director
Date: September 11, 2000 By: /s/ MICHAEL A. KRUPKA
---------------------
Michael A. Krupka, Director
Date: September 11, 2000 By: /s/ PRESCOTT ASHE
-----------------
Prescott Ashe, Director
Date: September 11, 2000 By: /s/ JOHN HOWARD
---------------
John Howard, Director
67
