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Integrated Circuit Systems Inc – ‘10-K’ for 7/2/05

On:  Friday, 9/2/05, at 5:34pm ET   ·   As of:  9/6/05   ·   For:  7/2/05   ·   Accession #:  1193125-5-180002   ·   File #:  0-19299

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/06/05  Integrated Circuit Systems Inc    10-K        7/02/05    9:1.0M                                   RR Donnelley/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Integrated Circuit Systems--Form 10-K               HTML    854K 
 2: EX-10.24    Indemnification Agreement Dated May 22, 2000        HTML     54K 
 3: EX-10.25    Indemnification Agreement Dated December 27, 2004   HTML     51K 
 4: EX-23.1     Consent of Pricewaterhousecoopers LLP.              HTML      7K 
 5: EX-31.1     302 Certification - Chief Executive Officer         HTML     14K 
 6: EX-31.2     302 Certification - Chief Financial Officer         HTML     14K 
 7: EX-32.1     906 Certification - Hock E. Tan                     HTML      9K 
 8: EX-32.2     906 Certification - Justine F. Lien                 HTML      9K 
 9: EX-99.1     Ics Security Ownership of Certain Beneficial        HTML     28K 
                          Owners and Management                                  


10-K   —   Integrated Circuit Systems--Form 10-K
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Report of Independent Registered Public Accounting Firm
"Consolidated Balance Sheets -- July 2, 2005 and July 3, 2004
"Consolidated Statements of Operations -- Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003
"Consolidated Statements of Shareholders' Equity -- Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003
"Consolidated Statements of Cash Flows -- Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003
"Notes to Consolidated Financial Statements

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  Integrated Circuit Systems--Form 10-K  

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 2, 2005

 

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

Incorporation or organization)

 

(I.R.S. Employer

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:

Common Stock, $.01 par value

(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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2).    Yes  ¨    No  x

 

On January 1, 2005, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $1,467,000,000.00 based upon the closing sale price of $20.92 per share on the NASDAQ National market for that date. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

 

As of September 1, 2005, there were 70,252,312 shares of Common Stock, $0.01 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain statements contained in the Company’s Joint Proxy Statement/Prospectus filed by Integrated Device Technology, Inc. on July 22, 2005 are incorporated by reference into Part III of this Form 10-K.

 

The Index to Exhibits can be found on page 72 of this Form 10-K.

 



PART I

 

Item 1. BUSINESS

 

General

 

Integrated Circuit Systems, Inc. (“ICS” or the “Company”) 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 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 digital consumer electronics such as digital set-top boxes and games consoles. We further extended into communications, which needs high performance clocking solutions supporting networking, telecommunication, workstation and server applications. Additionally, we now offer surface acoustic wave (“SAW”) technology to develop high performance products for telecommunications and wireless infrastructure markets.

 

Our “first” 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, LLC and Bear, Stearns and Company Inc. We refer to this event as the “recapitalization.” We issued $100.0 million in aggregate principal amount of senior subordinated notes and entered into a $95.0 million senior credit facility in connection with the recapitalization. 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 “second” initial public offering 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.

 

On May 31, 2001, a secondary offering took place, in which certain shareholders of the Company sold 11.3 million shares of our common stock to the public. We did not receive any of the proceeds from the sale of the shares in this secondary offering.

 

On January 4, 2002 we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash acquired. MNC is a supplier of a broad range of precision electronic devices and modules for optical networking wireless and broadband infrastructure, high-end network servers and defense electronic markets. We believe that by acquiring MNC we now have access to technology that will enhance the performance of our silicon timing products in order to strengthen our position within existing strategic markets such as servers and storage systems. The purchase price included $5.6 million in purchase accounting liabilities and write-down of certain fixed assets related to our preliminary plan to restructure the activities of MNC. MNC received a $2.5 million income tax refund during fiscal year 2003 and as a result goodwill was adjusted. Goodwill was reduced $1.2 million in fiscal 2004 as a result of the reversal of a portion of the restructuring reserve. The results of MNC have been included in the consolidated financial statements since the acquisition date.

 

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On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of shares of ICS common stock and IDT common stock outstanding as of July 1, 2005 (assuming the exercise of all outstanding IDT stock options and ICS stock options), immediately after the Merger, the shareholders of IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

 

The consummation of the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and to ICS, including regulatory review and approval by both our shareholders and the stockholders of IDT. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

 

The merger agreement also includes other terms related to the Merger, including representations, warranties and covenants of both ICS and IDT. IDT has filed a registration statement on Form S-4 containing a joint proxy statement/prospectus relating to the Merger and we have filed that joint proxy statement/prospectus under cover of Schedule 14A. Investors and security holders are urged to read these documents because they contain important information about the Merger, the merger agreement and the other transactions described therein. The foregoing description of the Merger and the merger agreement does not purport to be complete and is qualified in its entirety by reference to the merger agreement, a copy of which is incorporated herein by reference.

 

Products and Product Applications

 

We supply a broad line of timing 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.

 

We also design, develop and market silicon timing devices for other applications such as games consoles, digital set-top boxes, digital cameras, laser printers, flat panel displays and digital TVs. Crystal oscillators have traditionally served the timing requirements of these products. Crystal oscillators are predominately quartz-based crystals 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 billion crystal-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 telecom and networking equipment and mass storage systems.

 

A significant growth area for clocks is communications. As the Internet usage expands, there is a need for increased bandwidth and infrastructure. These increased requirements are driving demands for silicon timing devices.

 

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We also sell 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. We are currently developing a line of high performance mixed signal products for the high definition and digital video/imaging market.

 

Our main frequency source product line includes fixed-frequency and voltage-controlled oscillators, phase-locked loops, synthesizers and clock distribution modules. Our SAW-based product offerings are narrow and wideband bandpass and band reject filters, switched filter banks and unity gain modules. SAW technology is also used for several oscillator-based products.

 

In fiscal year 2005, our SAW and high performance mixed signal products were less than 5% of our total revenue.

 

Sales and Marketing

 

We market our products through a direct sales force that manages a worldwide network of independent sales representatives, international stocking representatives and distributors. Our 10 largest OEM end customers accounted for approximately 45% of our total revenue in fiscal year 2005. We direct our sales efforts through offices in Norristown, PA; San Jose, CA; Worcester, MA; Taipei, Taiwan; Tokyo, Japan; Seoul, Korea; and throughout Europe. We currently have approximately 1,090 OEM end customers. Maxtek Technology Co. Ltd., Lacewood Corporation (formerly known as Maxtech Corporation Limited), MEC Technology Co., Ltd, Magic Island International, and MEC Tech Singapore Pte Ltd. overseas stocking representatives in China and Taiwan, China and Hong Kong, Taiwan, Korea and Singapore respectively, accounted for 25%, 10%, 7%, 6% and 4% of our fiscal year 2005 revenue, respectively. Maxtek, Lacewood, and Magic Island are under common control. MEC Technology and MEC Tech Singapore are under common control. These international stocking representatives sell to approximately 220 OEM end customers.

 

For the fiscal years 2005, 2004, and 2003, we generated approximately 74.1%, 76.1% and 75.6% 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. 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. Foreign sales are directly conducted by sales representatives and international stocking representatives located in the Pacific Rim and Europe, and managed by direct sales staff in the Europe, Taiwan, Korea 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. Generally, these orders may not be canceled without 45 days advance notice. Customer relationships are generally not subject to long-term contracts. Product delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog at any particular date is not representative of actual sales for any succeeding period, and we believe that our backlog is not a meaningful indicator of future events.

 

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. If the warranty terms are met, defective products returned to us are replaced after a confirming evaluation by our quality control staff. We have not experienced significant warranty claims to date.

 

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Manufacturing

 

We qualify and utilize third party suppliers for the manufacture of silicon wafers. Most of our wafers currently are manufactured by outside suppliers, two of which supply the substantial majority of our wafers. The manufactured wafers are packaged primarily at three assemblers. We typically agree upon production schedules with our suppliers based on order backlog and demand forecasts for the approaching three-month period.

 

In addition we have production facilities in Worcester, MA and Auburn, NY. Worcester is our SAW wafer fabrication facility with sub-micron capabilities, and produces the majority of our military and defense products. Our Auburn facility houses the personnel for testing and assembly for the rest of our military and defense products. Commercial SAW product is primarily produced offshore, with some low volume assembly performed at Worcester.

 

We have our own test and drop-ship facility in Singapore’s Kolam Ayer Industrial Park to achieve faster delivery of our products to customers throughout the world. The Singapore facility handles wafer probe and final testing for various integrated circuits used in personal computers, data storage devices and other peripheral applications.

 

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

 

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.

 

During fiscal year 2005, we developed and introduced to market 1,070 new products. For over twenty years, we have developed libraries of proprietary mixed-signal integrated 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. Our company’s SAW capabilities include a library of proprietary device design algorithms utilized by our engineers. Investments in research and development were approximately $46.0 million, $40.4 million and $35.0 million in fiscal years 2005, 2004 and 2003, 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. In the first quarter of fiscal year 2005 we completed the purchase of technology for the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. Our research and development expense in fiscal year 2005 included $7.1 million of amortization of assets with a short useful life related to this purchase. As of July 2, 2005, our research and development staff comprised 142 people. We will continue to invest in research and new product development and invest in new technologies to support our current and future customers.

 

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Patents, Licenses and Trademarks

 

We hold several patents, as well as copyrights, proprietary mask sets, and trademarks with respect to our various products and expect to continue to file applications in the future as a means of protecting our technology and market position. Most of our earlier patents carry a 20-year life and begin expiring in fiscal year 2010. 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 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 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.

 

In connection with the purchase of MNC, we acquired $36.3 million of intangible assets based on an independent appraisal. Of this amount, $2.9 million was assigned to research and development assets that were written off at the date of acquisition. The remaining $33.4 million of intangible assets include a customer base valued at $12.0 million (6 year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life).

 

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. There can be no assurance 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.

 

Competition

 

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. There are several substantial entities in the industry who are much larger than us and 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.

 

Employees

 

As of July 2, 2005, we had 540 full-time employees, 142 of whom were engaged in research and development, 44 in sales, 41 in marketing and technical support, 46 in finance and administration and 267 in manufacturing support and operations. We have incentive programs to reward and retain our personnel, especially our key research and development staff.

 

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Available Information

 

Our website address is www.icst.com. Within the “Investors” section of our website, you can access, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed with or furnished to the Securities and Exchange Commission (“SEC”), in accordance with Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. In addition, the SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers filing electronically, including our company.

 

Forward-Looking Statements

 

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 1995. 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 report and other risks and uncertainties indicated from time to time in our other filings with the 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 report will in fact occur.

 

We do not undertake to update our forward-looking statements or factors that may affect future results to reflect future events or circumstances.

 

Factors That May Affect Future Results

 

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 form 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 form 10-K.

 

We are subject to a pending merger agreement with Integrated Device Technology, Inc.

 

As described above, we have entered into the Merger Agreement which provides for the Company to merge with and into a subsidiary of IDT. Certain members of our senior management team have spent a large amount of time on the pending merger. The merger contains customary termination provisions and is subject to customary conditions, including the approval of the Company’s shareholders. Although we currently expect the merger to be completed in September 2005, there can be no assurance that the merger will be completed, or as to the timing of the completion of the merger. The termination or failure to complete the merger with IDT could have a negative impact on our share price, our financial condition and results of operations. We have also incurred certain fixed costs which will have to be settled regardless of the consummation of the merger.

 

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In addition, achieving the anticipated benefits of the merger will depend in part upon whether the two companies integrate their businesses in an efficient and effective manner. In particular, the necessity of coordinating geographically separated organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. Because of the complex nature of the integration process, we cannot provide any assurances regarding the ultimate success of these integration activities. In addition, the combined company will likely incur considerable expenditures with respect to, among other things, transaction expenses, employee change-in-control payments and the integration of their various information systems.

 

Our future operating results are likely to fluctuate and therefore may fail to meet expectations, which would cause our stock price to decline.

 

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 might fail to meet our expectations for a number of reasons. Any failure to meet expectations could cause our stock price to significantly fluctuate or decline.

 

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;

 

    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.

 

Downturns in the business cycle could reduce our revenues and the profitability of our business.

 

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. This industry has experienced significant downturns, which have been characterized by diminished product demand, production overcapacity, high inventory levels, accelerated erosion of average prices and industry-wide fluctuations in the demand for semiconductors, which have resulted in under-utilization of design capacity. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our ICs. Such shortages could have a material adverse effect on our business and operating results.

 

The markets for our products depend on continued demand for PCs, communications equipment and consumer electronics. There can be no assurance that these end-user markets will not experience changes in demand that will adversely affect our business.

 

Our inability to introduce new products based on the latest technology could adversely affect our business.

 

Our future success is highly dependent upon our ability to continually develop new products using the latest and most cost-effective technologies, introduce our products in commercial quantities to the marketplace ahead of the competition and have our products selected for inclusion in products of leading systems manufacturers’ products. 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.

 

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Our failure to design and develop such new products, to have our products available in commercial quantities ahead of competitive products or to have our products selected for inclusion in products of systems manufacturers would have a material adverse effect on our results of operations and financial condition.

 

We cannot 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.

 

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, established product lines. Competitors also include emerging companies attempting to obtain a share of the existing market for our current and proposed products. We also compete with alternative timing solutions, such as crystal oscillators. To the extent that PCs, communications equipment and consumer electronics OEMs choose to install crystal oscillators as timing devices in their products, demand for our products may decline. 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 and our business could be adversely affected by a 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.

 

Our inability to obtain wafers and assemblers could seriously affect our operations.

 

We currently depend upon third-party suppliers for the manufacture of the silicon wafers from which our finished ICs are manufactured and for the packaging of finished ICs 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. Two outside foundries manufacture virtually all of our wafers. 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 upon third parties for the assembly of our finished integrated circuits from processed silicon wafers. We currently rely on three 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.

 

If we lose any customers, our sales could decline.

 

Our 10 largest OEM end customers accounted for approximately 45% of our total revenue in fiscal year 2005. Maxtek Technology Co. Ltd., Lacewood Corporation, (formerly known as Maxtech Corporation Limited), MEC Technology Co. Ltd., Magic Island International, and MEC Tech Singapore Pte Ltd. overseas stocking representatives in China and Taiwan, China and Hong Kong, Taiwan, Korea and

 

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Singapore respectively, accounted for 25%, 10%, 7%, 6% and 4% of our fiscal year 2005 revenue, respectively. Maxtek, Lacewood and Magic Island are under common control. MEC Technology and MEC Tech Singapore are under common control. These international stocking representatives sell to approximately 220 OEM end customers. Because we are dependent upon continued revenue from OEM end customers, any material delay, cancellation or reduction of orders from these or other major customers could cause our sales to decline significantly. There is no guarantee that we will be able to retain any of our customers. In addition, our customers may materially reduce the amount of product ordered from us at any time. This could cause a significant decline in our net sales and we may not be able to reduce the accompanying expenses at the same time.

 

If we fail to accurately forecast demand for our products, we may have large amounts of unsold products or we may not be able to fill all orders.

 

We provision semiconductors based primarily on our internal forecasts, and secondarily on existing orders, which may be cancelled under many circumstances. Consequently, we depend on our forecasts to determine inventory levels for our products. Because our markets are volatile and subject to rapid technological and price changes, our forecasts may be wrong, and we may make too many or too few of certain products. Also, our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult. The above factors also make it difficult to forecast quarterly operating results. If we are unable to predict accurately the appropriate amount of product required to meet customer demand, our business, financial condition and results of operations could be seriously harmed.

 

Our business could be adversely affected by changes in political and economic conditions abroad.

 

For the fiscal years 2005, 2004, and 2003, we generated approximately 74.1%, 76.1% and 75.6% 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. 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 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, even though business is denominated in U.S. dollars. 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.

 

10


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 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. If we issue equity securities, your percentage of ownership of our company would be reduced. If we issue debt securities, our financial condition may be strained by the requirement to pay interest and other debt-related costs. In addition, our operations may be restricted by the covenants associated with these debt securities. 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.

 

Our inability to secure and protect our intellectual property, and/or the effort of third parties to enforce their own intellectual property rights against us, has in the past resulted and may in the future result in costly and time-consuming litigation.

 

We hold several patents as well as copyrights, mask works and trademarks with respect to various products and expect to continue to file applications 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 might 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 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 may 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.

 

Loss of certain key members of our management or inability to attract and retain skilled personnel could negatively impact our business prospects.

 

We are dependent upon our ability to attract and retain highly skilled technical and managerial personnel. We do not maintain “key man” life insurance on our Chief Executive Officer, Mr. Hock E. Tan, or any of our other technical or 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

 

11


require to successfully develop new and enhanced products and to continue to grow and operate profitably. Furthermore, retention of technical and engineering personnel in our industry typically requires us to present competitive compensation packages, including stock option grants.

 

Some of our products may be subject to product liability claims.

 

Certain of our custom ICs products are sold into medical markets for applications, such as hearing aids. 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.

 

The stock prices of technology companies such as ours are highly volatile and could drop unexpectedly.

 

The public markets have experienced volatility that has particularly affected the market prices of securities of many technology companies for reasons that have often been unrelated to operating results. During the course of the preceding twelve months ended July 2, 2005 the market price of our common stock traded within a range of $17.41 to $25.54 per share. This volatility may adversely affect the market price of our common stock and our visibility and credibility in the markets.

 

Item 2. PROPERTIES

 

Our corporate headquarters, covering approximately 61,000 square feet, is located in Norristown, Pennsylvania. The lease will expire in February 2007 with current monthly rent of approximately $60,700 and progressively increasing each year to approximately $63,000 in the final year of the lease term. We also have a renewal option of three years after the initial term.

 

We opened an approximate 10,000 square foot design facility in Tempe, Arizona in January 2000. The current lease for this facility commenced in January 2005 and runs for three years with monthly rent beginning at $8,764 for the first year and progressively increasing each year to $9,298 in the third year.

 

12


We utilize a facility located in Singapore for testing, warehousing, sales and administration, which consists of approximately 24,000 square feet of space leased pursuant to an agreement, which have various expiration dates through September 2006. The rent for this facility is approximately $23,900 per month.

 

Our San Jose operations consist of approximately 70,000 square feet of office space pursuant to a lease agreement, which will expire in December 2008. Monthly rent began at $100,100 per month, increasing annually to approximately $130,608 per month in 2008.

 

Our Worcester, Massachusetts’ facility consists of approximately 86,200 square feet of space leased pursuant to an agreement, which expires in December 2010 with monthly rent of approximately $40,400 progressively increasing each year to approximately $48,000 in the tenth year, with an option to renew for two more terms of five years.

 

Our Bloomfield, Connecticut facility consisted of approximately 16,400 square feet of space leased pursuant to an agreement, which was terminated in July 2003. The rent was approximately $6,700 per month.

 

Our Auburn, New York facility, which is primarily our defense production location, consists of approximately 21,533 square feet. This property was purchased in March of 1998.

 

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, will not have any material adverse effect on our consolidated financial position, results of operations or cash flows, although no assurance can be made in this regard.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price of and Dividends on the 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 sale prices of our common stock for the fiscal years ended July 2, 2005 and July 3, 2004 based on the daily closing price.

 

     Fiscal Year 2005

   Fiscal Year 2004(1)

     High

   Low

   High

   Low

First quarter

   24.68    19.92    35.63    28.09

Second quarter

   25.54    20.88    34.59    26.10

Third quarter

   20.64    18.22    29.53    23.85

Fourth quarter

   21.94    17.41    27.46    23.41

(1) In our Form 10-K for the year ended July 3, 2004 the closing price reported was the intraday high/low. The prices shown above have been adjusted to reflect the daily closing high/low price.

 

13


We have not in the past, and do not expect for the foreseeable future to pay dividends on our common stock. Instead, we anticipate that all of our earnings in the foreseeable future will be used for working capital and other general corporate purposes. Our existing revolving credit loan agreement restricts our ability to pay dividends to the holders of our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

 

As of July 2, 2005, we had 70.2 million shares of common stock outstanding which are held by 197 holders of record and approximately 6,717 beneficial holders.

 

Issuer Purchases of Equity Securities

 

Shares are repurchased in open-market transactions pursuant to a stock repurchase program announced in September 2001. Up to 5.0 million shares of our common stock have been authorized for repurchase under the repurchase program of which 1.8 million shares remain to be repurchased. The repurchase program does not have an expiration date. We did not repurchase any shares in the open market in the quarter ended July 2, 2005.

 

 

14


Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

 

Five-Year Summary

(In thousands, except for per share data)

 

     Year Ended

     July 2,
2005


   July 3,
2004


   June 28,
2003


   June 29,
2002


   June 30,
2001


Consolidated Statement of Operations Data:

                                  

Revenue

   $ 243,110    $ 272,140    $ 241,762    $ 182,654    $ 188,298

Gross margin

     143,407      163,376      144,097      106,350      116,301

Research and development

     38,977      40,352      35,006      29,239      28,301

Amortization of Video research and development costs (2)

     7,051      —        —        —        —  

Merger/acquisition costs (1)(3)

     3,203      —        —        2,900      —  

Operating income

     51,365      84,775      70,053      41,058      66,194

Net income

   $ 47,403    $ 78,515    $ 61,076    $ 37,778    $ 56,458

Basic income per share

   $ 0.68    $ 1.12    $ 0.90    $ 0.57    $ 0.87

Diluted income per share

   $ 0.67    $ 1.08    $ 0.87    $ 0.54    $ 0.81

Weighted average shares outstanding (basic)

     70,197      70,358      67,898      66,500      64,837

Weighted average shares outstanding (diluted)

     71,109      72,578      70,564      70,192      69,573
     July 2,
2005


   July 3,
2004


   June 28,
2003


   June 29,
2002


   June 30,
2001


Consolidated Balance Sheet Data:

                                  

Working capital

   $ 174,669    $ 260,283    $ 168,687    $ 129,063    $ 128,036

Total assets

     407,722      377,596      315,148      276,392      154,117

Long-term debt, less current portion

     —        —        —        28,514      280

Shareholders’ equity

     381,593      336,225      270,823      183,971      139,053

# of fiscal weeks

     52      53      52      52      52

1) On January 4, 2002, we acquired Micro Networks Corporation. The acquisition resulted in a charge of $2.9 million related to the write-off of in-process research and development costs.
2) On August 4, 2004, we acquired assets, which provides us with the technology and capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. Some of the assets acquired had very short useful lives, which were fully amortized in FY2005. This expense of $7.1 million is included in research and development expense for FY2005.
3) In FY2005, we incurred $3.2 million of costs related to the proposed merger of ICS with Integrated Device Technology. These costs are expensed as incurred.

 

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

15


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We design, develop and market silicon timing devices that emit timing signals used to sequence and synchronize electronic operations to ensure that information is interpreted at the right time and speed. Our silicon timing devices are used in computing systems, such as PCs, workstations, disk drives and printers, as well as in a wide range of digital consumer products, such as digital set-top boxes, HDTVs, games consoles, digital audio and imaging products and video game consoles. Increasingly, our silicon timing devices are also being used in products within the communications infrastructure industry, including Internet backbone, access and networking equipment, such as optical switches, routers, cable and DSL modems, servers and storage area networks. 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. Additionally, we now offer surface acoustic wave (“SAW”) technology to develop high performance products for optical networking and wireless infrastructure markets.

 

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 transfer of title, and substantially all of our sales are made on the basis of purchase orders rather than long-term agreements.

 

Significant Transactions

 

Acquisition of Micro Networks Corporation

 

On January 4, 2002 we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash. We believe that by acquiring MNC we now have access to technology that will enhance the performance of our silicon timing products in order to strengthen our position within existing strategic markets such as servers and storage systems. The purchase price included $5.6 million in purchase accounting liabilities and write-down of certain fixed assets related to our preliminary plan to restructure the activities of the acquired entity. MNC received a $2.5 million income tax refund during fiscal year 2003 and as a result goodwill was adjusted. Goodwill was reduced $1.2 million in fiscal 2004 as a result of the reversal of a portion of the restructuring reserve. The results of MNC have been included in the consolidated financial statements since the acquisition date.

 

Acquisition of high performance mixed signal technology

 

On August 4, 2004 we announced that we had signed an agreement to purchase technology and the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. In the first quarter of fiscal year 2005 we completed the purchase and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. Some of these assets had a short useful life and were fully amortized in the first quarter of fiscal year 2005, resulting in an additional $7.1 million, which was included in research and development expense. The remaining assets consist of a database valued at $16.2 million with a useful life of eight years and an assembled workforce valued at $1.2 million with a useful life of nine years.

 

Merger of Integrated Circuit Systems, Inc and Integrated Device Technology, Inc.

 

On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of ICS common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of shares of ICS common stock and IDT common stock outstanding as of July 1, 2005 (assuming the exercise of all outstanding IDT stock options and ICS stock options), immediately after the Merger, the

 

16


shareholders of IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

 

The consummation of the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and ICS, including regulatory review and approval by the stockholders of both IDT and ICS. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

 

Subsequent Event

 

On August 31, 2005 we entered into a patent cross license agreement with Freescale Semiconductor, Inc. Upon the execution and delivery of the cross-license agreement, ICS agreed to pay to Freescale a non-refundable payment of $10.0 million. In addition, in connection with the execution and delivery of the cross-license agreement, ICS and Freescale entered into an option agreement, pursuant to which ICS has the option to purchase from Freescale certain of its assets for approximately $35.0 million. ICS has not yet exercised its option as of the date of the filing of this report but has a right to do so under the option agreement at any time until September 23, 2005.

 

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)

 

     Year Ended

 
     July 2,
2005


    July 3,
2004


    June 28,
2003


 

Revenue

   100.0 %   100.0 %   100.0 %

Gross margin

   59.0     60.0     59.6  

Research and development expense

   16.0     14.8     14.5  

Amortization of video research and development costs

   2.9     —       —    

Selling, general and administrative expense

   15.9     13.2     15.2  

Charges arising from acquisition

   1.3     —       —    

Amortization of Intangibles

   1.8     0.8     0.9  

Operating income

   21.1     31.2     29.0  

Interest and other income

   1.7     0.9     1.2  

Interest expense

   (0.0 )   (0.1 )   (0.6 )
    

 

 

Income before income taxes from continuing operations

   22.8     32.0     29.6  

Income tax expense

   (3.3 )   (3.1 )   (4.3 )
    

 

 

Net income

   19.5 %   28.9 %   25.3 %
    

 

 

 

Fiscal Year 2005, as Compared to Fiscal Year 2004

 

Revenue. Revenue declined 11%, as the average selling price declined 5%, while volume decreased 6%. Units for PC were flat year over year as the market for our products put on motherboards decreased from fiscal 2004. The communications market to which we ship slowed in the first half of the fiscal year to decrease communication equipment in the channel. Digital consumer units improved because of increased penetration into games consoles and digital TV. While military represents less than 10% of our revenue, the decline in military of 43% year on year reflects a weaker procurement environment for our products.

 

The following is a summary of revenue percentages by end market:

 

     FY2005

    FY2004

    Year over Year
Revenue Growth


 

PC

   46 %   43 %   -5 %

Digital Consumer

   17 %   14 %   3 %

Communications

   32 %   34 %   -16 %

Other

   5 %   9 %   -43 %

 

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Foreign revenue, which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies, was 74.1% of total revenue for fiscal year 2005 as compared to 76.1% of total revenue in the prior year. 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.

 

Gross Margin. Gross margin represents net revenue less cost of sales. Cost of sales includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales decreased $9.1 million to $99.7 million for fiscal year 2005, as compared to the prior year period due to decreased sales. Gross margin as a percentage of total revenue was 59.0% for fiscal year 2005 as compared to 60.0% in the prior year. The overall decrease in gross margin as a percentage of revenue is due to the decline in volume and a $0.04 per unit decline in average selling price. We anticipate that gross margin will continue to fluctuate as a percentage of revenue because of anticipated fluctuations in product mix, manufacturing costs and competitive pricing.

 

Research and Development Expense. Research and development (“R&D”) expense decreased $1.4 million to $39.0 million for fiscal year 2005 as compared to the prior year. As a percentage of revenue, research and development increased to 16.0% as compared to 14.8% in fiscal year 2004 because of lower sales. During fiscal year 2005, we spent $1.8 million to hire additional people in R&D, offset by a decrease of $2.3 million in variable compensation and $0.9 million less on R&D overhead expenses. In the first quarter of fiscal year 2005 we completed the purchase of technology for the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. $7.1 million of the assets purchased were amortized in the first quarter of fiscal 2005 as a result of short useful lives.

 

R&D costs consist primarily of the salaries and related expenses of engineering employees engaged in research, design and development activities, costs related to design tools, supplies and services and facilities expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on our success in recruiting the technical personnel needed for our new product introductions and process development. We continuously attempt to control expense levels in all areas including research and development. However, we continue to make investments in research and development to enhance our product offerings, which in turn are critical to our future growth.

 

Selling, General and Administrative. Selling, general and administrative expenses (“SG&A”), increased $2.6 million to $38.5 million for fiscal year 2005 as compared to the prior year period. As a percentage of total revenue, selling, general, administrative and other expenses increased to 15.9% of revenue as compared to 13.2% in the prior year period. SG&A expenses consist mainly of salaries and related expenses, sales commissions, and professional and legal fees.

 

Selling expense increased $1.8 million in fiscal 2005 as compared to the prior year. This is a result of $1.5 million in higher commissions due to a change in commission rate structure. As a percentage of total revenue, sales expense increased slightly to 10.7% in fiscal 2005 from 8.9% in fiscal 2004.

 

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General and administrative expense increased $1.3 million in fiscal 2005 as compared to fiscal 2004. As a percentage of total revenue, general & administrative expense increased to 5.1% of revenue as compared to 4.0% in the prior year period. The increase is primarily attributable to a $1.8 million increase in audit and consulting fees related to our Sarbanes-Oxley compliance work, and legal and consulting fees of $0.5 million related to the acquisition of assets for the Video business unit, offset by decreases of $0.6 million in bonuses and $0.4 million in insurance costs compared to fiscal 2004.

 

Included in SG&A is the amortization of deferred compensation for restricted stock awards. The amortization of deferred compensation relating to stock awards was $0.2 million in fiscal 2005 as compared to $0.7 million of amortization in fiscal 2004 relating to stock options issued in fiscal 2002 below fair market value.

 

Amortization of Intangibles. Amortization of intangible assets acquired in connection with the acquisition of MNC was $2.3 million for fiscal year 2005 and for fiscal year 2004. An additional $2.0 million in amortization resulted from the acquisition of intangibles related to the Video business assets.

 

Acquisition Charges. In connection with the proposed acquisition of our company by Integrated Device Technology, Inc., we incurred $3.2 million of expense. Included in these expenses were $0.8 million in legal fees, $2.3 million in investment opinion fees, and $0.1 million in FTC filing fees. These costs are expensed as incurred, and included in charges arising from merger.

 

Operating Income. Operating income decreased $33.4 million to $51.4 million in fiscal year 2005 compared to $84.8 million in the prior year period. Expressed as a percentage of revenue, operating income was 21.1% and 31.2% in fiscal year 2005 and fiscal year 2004, respectively.

 

Interest and Other Income. Interest and other income was $4.2 million for fiscal year ended July 2, 2005 and $2.5 million in the prior year period. Included in other income for fiscal 2004 is the gain of $0.3 million as a result of the sale of 25% of our initial investment in Maxtek Technology. The increase in interest income is attributable to the move to longer maturities in our investments.

 

Interest Expense. Interest expense was $0.06 million in fiscal year 2005 and $0.3 million in fiscal year 2004. The decrease is due to the elimination of our debt in the second quarter of fiscal 2004.

 

Income Tax Expense. Our effective tax rate was 14.6% and 9.8% for fiscal years 2005 and 2004, respectively. The increase in our effective tax rate is the result of changes in state tax effects in fiscal 2005, an increase in our contingency reserve of $0.9 million and the non-deductible acquisition costs incurred in the fourth quarter of fiscal year 2005. The increase in the tax contingency reserve was primarily attributable to the increase in exposure due to the current ongoing federal audit for our fiscal years 2001, 2002 and 2003 and potential tax exposure in foreign jurisdictions for fiscal years 2001 through 2005.

 

The effective tax rate for fiscal years 2005 and 2004 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 as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. We do not currently record 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 an $88.7 million liability as of July 2, 2005.

 

Fiscal Year 2004, as Compared to Fiscal Year 2003

 

Revenue. Total revenue for fiscal year ended July 3, 2004 increased by $30.4 million to $272.1 million as compared to the previous year. The increases in sales occurred over all of our end markets.

 

19


Communications was the fastest growing revenues driven by ramp-ups in the ADSL, server, server memory and networking markets. Of the $30.4 million increase in revenues, communications was $23.8 million. Combined, all other revenue only grew 4% as the average selling price declined 7.8% while volume increased 22.1%.

 

The following is a summary of revenue percentages by end market:

 

     FY2004

    FY2003

    Year over Year
Revenue Growth


 

PC

   43 %   46 %   5 %

Digital Consumer

   14 %   16 %   0 %

Communications

   34 %   29 %   34 %

Other

   9 %   9 %   7 %

 

Foreign revenue, which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies, was 76.1% of total revenue for fiscal year 2004 as compared to 75.6% of total revenue in the prior year. 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.

 

Gross Margin. Gross margin represents net revenue less cost of sales. Cost of sales includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales increased $11.1 million to $108.8 million for fiscal year 2004, as compared to the prior year period due to increased sales. Gross margin as a percentage of total revenue was 60.0% for fiscal year 2004 as compared to 59.6% in the prior year. The overall increase in gross margin as a percentage of revenue is due to increased sales of higher margin products, such as ADSL, server and server memory. We anticipate that gross margin will continue to fluctuate as a percentage of revenue because of anticipated fluctuations in product mix, manufacturing costs and competitive pricing.

 

Research and Development Expense. R&D expense increased $5.3 million to $40.4 million for fiscal year 2004 as compared to the prior year. As a percentage of revenue, research and development increased to 14.8% as compared to 14.5% in fiscal year 2003. During fiscal year 2004, we spent $3.6 million more on R&D projects and $1.7 million on hiring additional personnel and overhead expenses.

 

R&D costs consist primarily of the salaries and related expenses of engineering employees engaged in research, design and development activities, costs related to design tools, supplies and services and facilities expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on our success in recruiting the technical personnel needed for our new product introductions and process development. We continuously attempt to control expense levels in all areas including research and development. However, we continue to make substantial investments in research and development to enhance our product offerings, which in turn are critical to our future growth.

 

Selling, General and Administrative. SG&A decreased $0.8 million to $35.9 million for fiscal year 2004 as compared to the prior year period. As a percentage of total revenue, selling, general, administrative and other expenses decreased to 13.2% of revenue as compared to 15.2% in the prior year period. SG&A expenses consist mainly of salaries and related expenses, sales commissions, and professional and legal fees.

 

Selling expense increased $2.3 million in fiscal 2004 as compared to the prior year. This is a result of increased sales commission to outside sales representatives as a result of higher revenue. As a percentage of total revenue, sales expense decreased slightly to 8.9% in fiscal 2004 from 9.1% in fiscal 2003.

 

 

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General and administrative expense declined $2.0 million in fiscal 2004 as compared to fiscal 2003. The decrease is attributable to a reduction of legal fees in fiscal 2004.

 

Included in SG&A is the amortization of deferred compensation for options issued in fiscal 2002 below fair market value. The amortization of deferred compensation relating to stock options was $0.7 million in fiscal 2004 as compared to $0.5 million in fiscal 2003. Fiscal year 2003 includes a $1.3 million accelerated payout for the buyout of executive stock options. Refer to Note14 in Notes to Consolidated Financial Statements for additional details.

 

Amortization of Intangibles. Amortization of intangible assets acquired in connection with the acquisition of MNC was $2.3 million for fiscal year 2004 and for fiscal year 2003.

 

Operating Income. Operating income increased $14.7 million to $84.8 million in fiscal year 2004 compared to $70.1 million in the prior year period. Expressed as a percentage of revenue, operating income was 31.2% and 29.0% in fiscal year 2004 and fiscal year 2003, respectively.

 

Interest and Other Income. Interest and other income was $2.5 million for fiscal year ended July 3, 2004 and $3.0 million in the prior year period. Included in other income in fiscal 2004 is the gain of $0.3 million as a result of the sale of 25% of our initial investment in Maxtek Technology. Included in other income for fiscal 2003 is the gain of $0.6 million as a result of the sale of 50% of our initial investment in Maxtek Technology. The decrease in interest income is attributable to declining interest rates.

 

Interest Expense. Interest expense was $0.3 million in fiscal year 2004 and $1.5 million in fiscal year 2003. The decrease in expense is due to the elimination of our debt in the second quarter of fiscal 2004.

 

Income Tax Expense. Our effective tax rate was 9.8% and 14.6% for fiscal years 2004 and 2003, respectively. The decrease in our effective tax rate is the result of R&D tax credits of $4.3 million recorded in fiscal 2004. The effective tax rate for fiscal years 2004 and 2003 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 as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. We do not currently record 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 $70.8 million liability as of July 3, 2004.

 

Liquidity and Capital Resources

 

At July 2, 2005, our principal sources of liquidity included cash and short-term investments of $127.0 million as compared to the July 3, 2004 balance of $195.6 million. The cash and investments include amounts which have been permanently reinvested into the Singapore operations. In addition, $100.9 million of our long-term investments are invested in marketable debt securities. If we were to repatriate these amounts, they would be subject to U.S. Federal Income Tax. Net cash provided by operating activities was $68.8 million in fiscal year 2005, as compared to $89.7 million in the prior year period. The decrease is primarily attributable to the decrease in operating income, after taxes, and the after-tax effect of the change in amortization (including amortization of video research and development costs). Our days sales outstanding were 62 days in the fourth quarter of fiscal year 2005 and 58 days in the fourth quarter of fiscal year 2004, as a result of the effect of sales mix towards offshore sales, with longer sales terms. Inventory turns decreased from 5.2 times in the fourth quarter of fiscal year 2004 to 4.8 times in the fourth quarter of fiscal year 2005, primarily because of the effect of inventory held for a customer pursuant to a dispute.

 

Purchases for property and equipment were $7.2 million in fiscal year 2005 as compared to $8.6 million

 

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in the prior year period. These expenditures were primarily to support our testing facilities in Singapore and San Jose, the fabrication capabilities in our facility in Worcester, MA acquired with MNC, and to support assembly operations in Singapore. We do not expect significant changes in these levels of capital expenditures.

 

In September 2001, we announced a stock repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. In October 2002, we announced that our board of directors approved to increase the number of shares to be repurchased under this repurchase program to 3.0 million. In October, 2004, we announced that our board of directors approved an increase in the number of shares under this repurchase program to 5.0 million. From inception of this program through July 2, 2005, we have purchased 3.2 million shares for $67.8 million.

 

On March 1, 2004 we entered into a revolving credit loan agreement, which will terminate March 1, 2007. The revolving credit loan agreement allows us to draw down to a maximum balance of $20.0 million in increments of not less than $500,000. At our option, the unpaid balance shall bear interest at the available London Interbank Offer Rate (“LIBOR”) Based Rate (as defined) or the Prime Based Rate (as defined). A commitment fee on the average daily unused portion of the revolving credit loan balance will be due and payable on a quarterly basis. The commitment fee will be between .20% (.0020) and .25% (.0025) based on the funded debt to EBITDA ratio calculated the previous quarter. There was no outstanding balance on our revolving credit loan agreement as of July 2, 2005.

 

In connection with the acquisition of MNC in fiscal year 2002, we entered into a revolving credit and term loan facility dated December 31, 2001. During the first three months of fiscal year 2004, we paid down $4.2 million of the term loan. During the second quarter of fiscal 2004, we made the final payment of $5.8 million on the term loan. This loan agreement was terminated in the third quarter of fiscal 2004. The facility enabled us to draw down $45.0 million under the term loan and $10.0 million under the revolving credit facility. At our option, the interest rate under the term loan was either (1) an annual base rate, which is the higher of (i) a rate of interest announced from time to time by the lenders’ administrative agent as the base rate (“Base Rate”) or (ii) the sum of the federal funds rate plus 0.5% per annum or (2) LIBOR plus 1.75%. At our option, the interest rate under the revolving credit facility, was either (1) the Base Rate or (2) the LIBOR Rate plus a pre-formulated margin.

 

Our revolving credit loan agreement requires the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio, a liquidity ratio, a minimum tangible net worth, and imposes financial limitations. In addition, the loan agreement restricts our ability to pay dividends to the holders of our common stock. At July 2, 2005 we were in compliance with all of these covenants.

 

On January 4, 2002, we acquired MNC, net of cash, for $74.9 million. We believe that by acquiring MNC we now have access to technology that will broaden our offering of silicon timing products to strengthen our position within strategic markets such as servers, storage systems and communications. In connection with the acquisition of MNC, we put in place a restructuring plan for the purpose of making MNC more efficient by combining facilities and moving some manufacturing operations offshore. The purchase price included $5.6 million in purchase accounting liabilities and write-down of fixed assets.

 

From the date of the acquisition until the end of fiscal 2005, one plant in Bloomfield, CT was shut down and the fixed assets associated were disposed of. Sixty-four manufacturing personnel, both line and management, were laid off. The production from Bloomfield was relocated to facilities in Worcester, MA and Auburn, NY, with the remainder going offshore. During fiscal year 2004, goodwill was adjusted due to the reversal of a portion of the restructuring reserve.

 

The following table summarizes the activity of the restructuring reserve since inception:

 

(in thousands)


   Original
Plan
Date
1/2002


  

Utilization

2002


  

Balance

6/2002


  

Utilization

2003


  

Balance

6/2003


  

Utilization

2004


  

Adjustments

2004


   

Balance

6/2004


   Utilization
2005


   Balance
6/2005


Plant Closing Costs

   $ 1,214    $ 27    $ 1,187    $ 472    $ 715    $ 420    $ 223     $ 72    $ 72    $ —  

Personnel Costs

     2,017      437      1,580      1,151      429      496      (67 )     —        —        —  

Write-down of Fixed Assets

     2,407      —        —        —        —        —        —         —        —        —  
    

  

  

  

  

  

  


 

  

  

Total

   $ 5,638    $ 464    $ 2,767    $ 1,623    $ 1,144    $ 916    $ 156     $ 72    $ 72    $ —  
    

  

  

  

  

  

  


 

  

  

 

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This reserve was included in “Accrued expense and other current liabilities” in the Balance Sheet. During fiscal year 2004, goodwill was adjusted due to the reversal of a portion of the restructuring reserve. A total of $0.4 million, $1.6 million, and $0.9 million in plant closing and personnel costs were utilized in 2002, 2003, and 2004, respectively. The restructuring reserve was fully utilized in fiscal 2005 when a total of $72,000 related to plant closing costs was utilized. The results of MNC have been included in the consolidated financial statements since the acquisition date.

 

On August 4, 2004 we announced that we had signed an agreement to purchase technology and the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. In the first quarter of fiscal year 2005 we completed the purchase and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. Some of these assets had a short useful life and were fully amortized in the first quarter of fiscal year 2005, resulting in an additional $7.1 million, which was included in research and development expense. The remaining assets consist of a database valued at $16.2 million with a useful life of eight years and an assembled workforce valued at $1.2 million with a useful life of nine years.

 

In fiscal year 2001, we entered into an Investment and Stock Trade Agreement (the “Agreement”) with Maxtek Technology Co. Ltd (“Maxtek”), an international stocking representative in Taiwan and China. We invested $4.0 million and owned approximately 10% of Maxtek. The Agreement states that if Maxtek fails to successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest (commercial rate set by the Central Bank of China) during the said period. In fiscal 2004 we sold 25% of our initial investment in Maxtek resulting in a gain of $0.3 million. In fiscal 2003 we sold 50% of our initial investment in Maxtek resulting in a gain of $0.6 million. As of July 2, 2005, we owned 1.3 million shares, or approximately, 2.3% of Maxtek. Maxtek represented approximately 25% of our sales for fiscal year 2005, 23% in fiscal year 2004 and 20% in fiscal year 2003. Additionally, sales to Lacewood Corporation, representing business into Hong Kong and China, and Magic Island International representing business in Korea, entities that are commonly controlled by the owners’ of Maxtek, were 10% and 6% of our sales in fiscal year 2005, respectively. Sales to Lacewood were 13% in fiscal year 2004 and 21% in fiscal year 2003. These international stocking representatives sell to approximately 103 OEM end customers.

 

On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of ICS common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of

 

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shares of ICS common stock and IDT common stock outstanding as of July 1, 2005 (assuming the exercise of all outstanding IDT stock options and ICS stock options), immediately after the Merger, the shareholders of IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

 

The consummation of the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and ICS, including regulatory review and approval by the stockholders of both IDT and ICS. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

 

The Merger Agreement contains certain termination rights for both IDT and ICS, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other a termination fee of up to $40 million.

 

In connection with the Merger, holders of outstanding ICS options, whether vested or not vested or exercisable or not exercisable, will be cancelled. Holders of outstanding ICS options, whether or not vested or exercisable, with an exercise price that is less than $7.25 plus the product of 1.3 times the average closing price of IDT common stock for the five trading days ending on the second trading day prior to the effective time of the merger will receive an amount of cash per share, without interest, equal to the excess of such aggregate value over the per share exercise price of such options. Holders of options to purchase ICS common stock with an exercise price equal to or in excess of such aggregate value will not receive any cash for such options. We anticipate the cash outlay to fund the cancellation of options will be approximately $27 million.

 

We believe that the funds on hand together with funds expected to be generated from our operations as well as borrowings under our bank 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.

 

Off-Balance Sheet Arrangements

 

Our purchase obligations consist of purchase commitments with our manufacturers and are based on a six-month rolling forecast. The purchase commitments are utilized to ensure capacity at our various manufacturers.

 

Operating leases primarily consist of leased facilities that we utilize in various locations.

 

Contractual Obligations and Commitments

 

The following summarizes our significant contractual obligations and commitments as of July 2, 2005 (in thousands):

 

Contractual Obligations

 

(in thousands)


   Total

  

Less than

1 year


   1 –3 years

   4 –5 years

   After 5
years


Long-Term Debt

   $ 8    $ 8    $ —      $ —      $ —  

Operating Leases

     10,142      3,235      6,097      810      —  

Purchase Obligations

     19,009      19,009      —        —        —  
    

  

  

  

  

Total

   $ 29,159    $ 22,252    $ 6,097    $ 810    $ —  
    

  

  

  

  

 

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Critical Accounting Policies

 

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have identified below some of the accounting principles critical to our business and results of operations. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We state these accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements contained herein. In addition, we believe our most critical accounting policies include, but are not limited to, the following:

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Our reserve for doubtful accounts is based on (i) our specific assessment of the collectibility of all significant accounts greater than 90 days past due, (ii) our historical estimate of the rate of default for all accounts less than 90 days past due and (iii) any specific knowledge we have acquired that might indicate that an account is uncollectible, regardless of age. The facts and circumstances of each account may require us to use substantial judgment in assessing its collectibility.

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. We record a reserve for obsolete and unmarketable inventory based on assumptions of future demand and market conditions. Because many of our products have multiple applications and serve volatile markets, the recent sales history of any one product is not necessarily indicative of the future demand for such product. The reserve for obsolete and unmarketable inventory is therefore based on our collective judgment regarding the realistic and potential future demand for each product and is inherently subjective. The fact that our products have a long product life cycle and low holding costs increase the subjectivity because these factors extend the time frame in which we could potentially recover the costs of each product. Silicon timing devices are analog building block products and may be used across platforms of different technologies and generations of the same technology. There is limited technology risk on inventories because markets continue to exist for older products. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required.

 

Investments

 

We account for investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments at July 2, 2005 and July 3, 2004 consist primarily of debt securities. We classify debt securities as “held-to-maturity” for those securities that we have the intent and the ability to hold until they mature. Securities classified as “held-to-maturity” are recorded at amortized cost. Securities classified as “available-for-sale” are recorded at fair market value and the gain or loss is included in other comprehensive income.

 

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Goodwill and Other Intangible Assets

 

Goodwill represents the excess of cost over fair value of net assets acquired from business acquisitions. SFAS No. 142, “Goodwill and Other Intangible Assets” addresses how goodwill and other intangible assets should be accounted for after they have been initially recorded in the financial statements. Under SFAS 142, goodwill and other indefinite life intangible assets are no longer amortized. SFAS 142 requires goodwill to be tested for impairment at least on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchases of intangible assets, other than goodwill, to be amortized over their useful lives, unless these lives are determined to be indefinite. The impairment test for intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. The fair value of the indefinite live intangible was determined using the relief from royalty method.

 

We perform goodwill impairment tests in the fourth quarter of each fiscal year for each reporting unit. We have allocated nearly all the goodwill to one reporting unit as it resulted from the MNC acquisition. The process of evaluating the potential impairment of goodwill can be subjective and may require experienced judgment during the analysis. We use the two-step method to measure impairment loss. The first step compares the fair value of the reporting units with its carrying amount, including goodwill. The second step is only necessary if the fair value of the reporting unit is less than its carrying value. Used in the valuations were assumptions of growth rates and profitability for the reporting unit based on market data, cost cutting plans and internal forecasts based on product development plans. We used a combination of three valuation methods, discounted cash flow, quoted market price and market capitalization to determine fair value of the reporting unit.

 

In connection with the purchase of MNC, we acquired $36.3 million of intangible assets based on an independent appraisal. Of this amount, $2.9 million was assigned to research and development assets that were written off at the date of acquisition. The remaining $33.4 million of intangible assets include a customer base valued at $12.0 million (six year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life). The initial and continuing valuation of these assets and the assessment of their useful lives were based on subjective conclusions drawn from the characteristics of each intangible asset. We have assigned indefinite life to the developed technology because in our judgment there are no legal, regulatory, contractual, competitive, economic, or other factors to limit the useful life of this intangible asset. If we had determined that there were factors that would limit the life of this asset, we would have amortized it over the estimated useful life. The effect of this amortization might have resulted in a significant change to our financial statements based on the value of this intangible asset and dependent upon the useful life we would have assigned to this asset.

 

Revenues

 

Revenues from product sales are recognized as revenue upon shipment to the customer. By contract and written agreement, there are only seven customers that have capped right of return and, for three of these customers, price protection. These customers accounted for approximately 63% of revenues for fiscal 2005. Upon shipment to these customers, we provide an allowance for the full 5% or, in some cases 7%, for rights of return, as historically, customers granted a limited right of return have utilized that right to the agreed limit. We also utilize historical data and consider market conditions to estimate an allowance for price protection. These products are semi-custom, prices are predetermined with the end customer, and accordingly are substantially fixed at the time of sale. We recognize sales to these customers in accordance with criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists”, at the time of sale based on the following: The selling price is substantially fixed or determinable at the date of sale; the buyer is obligated to pay for the products; title of the products has transferred; the buyer has economic substance apart from us; we do not have further obligations to assist buyer in the resale of the product; and the returns can be reasonably estimated at the time of sale.

 

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Income Taxes

 

Income tax expense includes U.S. federal, state and international income taxes and is computed in accordance with SFAS No. 109, “Accounting for Income Taxes”. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Valuation allowances are provided against deferred income tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable in the local jurisdictions. The effective tax rate for fiscal years 2005, 2004 and 2003 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 as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. We do not currently record 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 an $88.7 million liability as of July 2, 2005.

 

Accounting for Stock Based Compensation

 

Stock options granted to employees typically have an exercise price equal to the fair market value of our common stock and vest ratably over four years. Up until July 2, 2005, we applied APB 25 in accounting for stock option plans and as a result, generally recorded zero compensation expense. However, since the value of an option bears a direct relationship to our stock price, it is an effective incentive for management to create value for shareholders. We therefore view stock options as a critical component of our long-term performance-based compensation philosophy.

 

Effective July 3, 2005, we adopted SFAS No. 123, as amended by SFAS No. 148. We use the Black-Scholes option-pricing model. The assumptions used are expected volatility based upon the movement of the stock price since the grant date of the option, average expected option life based upon actual history of option grants being exercised, and risk free interest rate based upon current market price for loans of LIBOR plus a pre-formulated margin.

 

Inflation

 

Inflation has not had a significant impact on our results of operations.

 

New Accounting Pronouncements

 

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

 

On June 29, 2005, the FASB reached a consensus on EITF 05-6, “Determining the Amortization Period for Leasehold Improvements.” This consensus is effective for periods beginning after that date. We do not expect this statement to have a material impact on our financial position or results of operations.

 

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” This statement replaced Accounting Principles Board (“APB”) Opinion No. 20 and FASB SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement will be effective for accounting changes made in fiscal years beginning after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

 

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In December 2004, the FASB issued SFAS No. 123 (revised 2004) – “Share-Based Payment.” This standard supersedes APB No. 25, and requires recognition of expense in the financial statements of the cost of share based payment transactions, including stock options, based on the fair value of the award at the grant date. The provisions of this standard are effective for public companies for annual periods beginning after June 15, 2005. We adopted this statement on July 3, 2005 using the modified prospective method. Under this method, stock-based employee compensation cost will be recognized for all new awards granted after July 2, 2005 using the Black-Scholes method. Additionally, compensation costs for unvested stock options and awards that are outstanding at July 2, 2005 will be recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under FAS 123 using the Black-Scholes method. We do not expect any significant changes in the assumptions used to calculate the fair value of stock options as disclosed in Note 1 in the Notes to Consolidated Financial Statements.

 

Under the terms of the proposed Merger Agreement, each outstanding option to purchase ICS common stock, whether vested or not vested or exercisable or not exercisable, will be cancelled. Holders of outstanding ICS options, whether or not vested or exercisable, with an exercise price that is less than $7.25 plus the product of 1.3 times the average closing price of IDT common stock for the five trading days ending on the second trading day prior to the effective time of the merger will receive an amount of cash per share, without interest, equal to the excess of such aggregate value over the per share exercise price of such options. Holders of options to purchase ICS common stock with an exercise price equal to or in excess of such aggregate value will not receive any cash for such options. As of the effective time of the merger, each outstanding share of ICS restricted common stock will become fully vested and the holders of such shares of ICS restricted common stock will receive $7.25 in cash and 1.3 shares of IDT common stock for each share of ICS restricted common stock held.

 

The pro forma information provided in Note 1, in the Notes to Consolidated Financial Statements, “Accounting for Stock-Based Compensation” provides a reasonable estimate of the impact on our financial statements when the statement is fully implemented. We are continuing to assess the impact of the proposed merger with IDT upon the results of operations under the guidance provided by SFAS 123R, which may vary significantly from our historical experience.

 

In December 2004, the FASB also issued SFAS No. 153 – “Exchanges of Nonmonetary Assets.” This standard amends APB Opinion No. 29, Accounting for Nonmonetary Transactions by eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. The provisions of this standard are effective for public companies for annual periods beginning after June 15, 2005. We have adopted this statement beginning with our first quarter of fiscal year 2006. We do not expect this statement to have a material impact on our financial position.

 

In November 2004, the FASB issued SFAS No. 151 – “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” This standard clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Currently this statement does not have an impact on our financial position. However, if in the future we were to experience such abnormal costs such as idle facility expense, handling costs and wasted material it could have a material impact on our operations.

 

28


In September 2004, the FASB approved issuance of Staff Position (“FSP”) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. This deferral will extend until a Staff Position is issued to provide clarification of the guidance presented in paragraphs 10 through 20. Effective July 4, 2004, we adopted all other provisions of EITF Issue 03-1, including measurement guidance for evaluating whether an impairment has occurred for marketable securities and cost method investments. Adoption of these requirements did not have a material effect on the results of operations. Effective December 31, 2004, additional disclosures were also required for cost method investments. The effect of implementing the final provisions of paragraphs 10 through 20 cannot currently be estimated due to the pending implementation issues, but is not expected to be material to the results of future operations.

 

On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted by President Bush. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal year 2006. We have started an evaluation of the effects of the repatriation provision. We expect to complete our evaluation of the effects of the repatriation provision before the end of the first quarter for fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $150 million. The related potential range of income tax expense is between zero and $7.3 million. This is a one-time event and all future earnings will be permanently reinvested into our Singapore operations.

 

On October 4, 2004, President George W. Bush signed the “Working Families Tax Relief Act of 2004,” which retroactively reinstated the research tax credit to the June 30, 2004 expiration date. This change in the law will not have a material impact on the results of future operations.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Exposures

 

Our sales are denominated in U.S. dollars, and 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

 

Our interest rate risk relates primarily to our investment portfolio, which consisted of $55.6 million in cash and cash equivalents, $71.4 million in short term investments and $105.9 million in long term investments as of July 2, 2005, all denominated in U.S. dollars. While our portfolio of debt securities has an average duration of 1.9 years, $ 88.0 million are classified as “held to maturity.” We have the intention to hold these securities to maturity, so a hypothetical 10% move in interest rates on those securities would have no effect on our financial position, results of operations, and cash flows. The remaining $83.2 million of debt securities are classified as “available for sale,” with a duration of 2.1 years. Because of the short duration of the portfolio, a hypothetical 10% move in interest rates would have an insignificant effect on our financial position, results of operations, and cash flows. By policy, we mitigate the credit risk through diversification and adherence to high credit-quality rating standards. We further minimize our risks by restricting the sector concentration and asset allocation of certain type of securities in our investment portfolio. We do not use derivatives for trading or speculative purposes, nor are we party to leveraged derivatives.

 

In connection with our bank agreement, we entered into an 18-month interest rate swap agreement with the same financial institution. The interest rate swap agreement essentially enabled us to manage the exposure to fluctuations in interest rates on a portion of our term loan.

 

29


Our term loan required us to pay interest based on a variable rate. Under the interest rate swap agreement; we were exchanging the variable rate interest on a portion of our term loan, equal to 50% of the outstanding loan amount, with a fixed rate of 5.0%. The interest rate swap agreement was in effect until June 2003, with the notional amount decreasing to $14.8 million over the effective period.

 

As a result of our early payoff of debt, the swap agreement was terminated in January 2003.

 

We had interest expense of $0.06 million for the fiscal year 2005. The potential increase in interest expense for fiscal year 2005 from a hypothetical 10% adverse change in variable interest rates would have an insignificant effect on our financial position, results of operations, and cash flows.

 

 

30


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm    32
Consolidated Balance Sheets – July 2, 2005 and July 3, 2004    34
Consolidated Statements of Operations — Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003    35
Consolidated Statements of Shareholders’ Equity — Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003    36
Consolidated Statements of Cash Flows — Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003    37
Notes to Consolidated Financial Statements    38

 

31


Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

of Integrated Circuit Systems, Inc.:

 

We have completed an integrated audit of Integrated Circuit Systems, Inc.’s 2005 consolidated financial statements and of its internal control over financial reporting as of July 2, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Consolidated financial statements and financial statement schedule

 

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 2, 2005 and July 3, 2004, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (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 audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of July 2, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

32


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

September 2, 2005

 

 

33


Integrated Circuit Systems, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

 

     July 2,
2005


    July 3,
2004


 

Assets

                

Current Assets:

                

Cash and cash equivalents

   $ 55,605     $ 68,973  

Investments

     71,375       126,606  

Accounts receivable, net

     40,110       45,717  

Inventory, net

     17,430       18,772  

Deferred income taxes

     5,678       22,759  

Prepaid assets

     4,045       6,309  

Other current assets

     2,804       880  
    


 


Total current assets

     197,047       290,016  

Property and equipment, net

     19,416       19,254  

Intangibles

     40,943       27,842  

Goodwill

     35,422       35,422  

Long-term investments

     105,865       5,000  

Deferred income taxes

     4,527       —    

Other assets

     4,502       62  
    


 


Total assets

   $ 407,722     $ 377,596  
    


 


Liabilities and Shareholders’ Equity

                

Current Liabilities:

                

Current portion of long-term debt

   $ 8     $ 82  

Accounts payable

     14,103       17,557  

Accrued salaries and bonuses

     459       2,811  

Accrued commissions

     1,329       1,688  

Accrued expenses and other current liabilities

     4,282       4,019  

Income taxes payable

     2,197       3,576  
    


 


Total current liabilities

     22,378       29,733  

Deferred income taxes

     3,466       11,248  

Other liabilities

     285       390  
    


 


Total liabilities

     26,129       41,371  
    


 


Commitments and contingencies

                

Shareholders’ Equity:

                

Preferred stock, $0.01 par, authorized 5,000; none issued

     —         —    

Common stock, $0.01 par, authorized 300,000: issued

73,396 and 72,701 shares as of July 2, 2005 and
July 3, 2004 respectively

     734       727  

Additional paid in capital

     294,697       282,569  

Retained earnings

     154,543       107,140  

Deferred compensation

     (543 )     —    

Treasury stock, at cost, 3,153 and 2,475 shares as of July 2, 2005 and July 3, 2004 respectively

     (67,824 )     (54,211 )

Accumulated other comprehensive income (loss)

     (14 )     —    
    


 


Total shareholders’ equity

     381,593       336,225  
    


 


Total liabilities and shareholders’ equity

   $ 407,722     $ 377,596  
    


 


 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

34


Integrated Circuit Systems, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

 

     Year Ended

 
    

July 2,

2005


   

July 3,

2004


   

June 28,

2003


 

# of fiscal weeks

     52       53       52  

Revenue

   $ 243,110     $ 272,140     $ 241,762  

Cost and expenses:

                        

Cost of sales

     99,703       108,764       97,665  

Research and development

     38,977       40,352       35,006  

Amortization of Video research and development costs

     7,051       —         —    

Selling, general and administrative

     38,533       35,949       36,738  

Charges arising from merger

     3,203       —         —    

Amortization of intangibles

     4,278       2,300       2,300  
    


 


 


Operating income

     51,365       84,775       70,053  

Interest and other income

     4,233       2,507       2,954  

Interest expense

     (60 )     (266 )     (1,466 )
    


 


 


Income before income taxes

     55,538       87,016       71,541  

Income tax expense

     8,135       8,501       10,465  
    


 


 


Net income

   $ 47,403     $ 78,515     $ 61,076  
    


 


 


Basic net income per share:

                        

Net Income

   $ 0.68     $ 1.12     $ 0.90  
    


 


 


Diluted net income per share:

                        

Net Income

   $ 0.67     $ 1.08     $ 0.87  
    


 


 


Weighted average shares outstanding – basic

     70,197       70,358       67,898  

Weighted average shares outstanding – diluted

     71,109       72,578       70,564  

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

 

35


Integrated Circuit Systems, Inc.

Consolidated Statements of Shareholders’ Equity

(in thousands)

 

     Common
Stock
Shares


   Common
Stock
Amount


   Additional
Paid in
Capital


   

Retained
Earnings

(Deficit)


    Deferred
Compensation


    Treasury
Shares


    Treasury
Stock


    Accumulated
Other
Comprehensive
Income (Loss)


    Total
Shareholders’
Equity


 

Balance at June 29, 2002

   67,841      678      227,531       (32,451 )     (3,988 )   (655 )     (7,799 )     —         183,971  

Shares issued upon exercise of stock options

   3,389      34      13,313       —         —       —         —         —         13,347  

Tax benefits related to stock options

   —        —        19,516       —         —       —         —         —         19,516  

Shares issued by the Stock Purchase Plan

   54      1      804       —         —       —         —         —         805  

Purchase of treasury shares

   —        —        —         —         —       (465 )     (8,413 )     —         (8,413 )

Net Income

                         61,076       —       —         —         —         61,076  

Deferred compensation

   —        —        (2,738 )     —         3,257     —         —         —         519  

Other

   —        —        2       —         —       —         —         —         2  
    
  

  


 


 


 

 


 


 


Balance at June 28, 2003

   71,284      713      258,428       28,625       (731 )   (1,120 )     (16,212 )     —         270,823  

Shares issued upon exercise of stock options

   1,378      14      10,443       —         —       —         —         —         10,457  

Tax benefits related to stock options

   —        —        12,793       —         —       —         —         —         12,793  

Shares issued by the Stock Purchase Plan

   39      —        898       —         —       —         —         —         898  

Purchase of treasury shares

   —        —        —         —         —       (1,355 )     (37,999 )     —         (37,999 )

Net income

   —        —        —         78,515       —       —         —         —         78,515  

Deferred compensation

   —        —        —         —         731     —         —         —         731  

Other

   —        —        7       —         —       —         —         —         7  
    
  

  


 


 


 

 


 


 


Balances at July 3, 2004

   72,701    $ 727    $ 282,569     $ 107,140     $ —       (2,475 )   $ (54,211 )   $ —       $ 336,225  

Shares issued upon exercise of stock options

   601      6      7,388                                             7,394  

Tax benefits related to stock options

   —               3,005                                             3,005  

Shares issued by the Stock Purchase Plan

   61             1,042                                             1,042  

Shares issued – Restricted Stock Grant

   33      1      705                                             706  

Purchase of treasury shares

   —                                     (678 )     (13,613 )             (13,613 )

Net income

   —        —        —         47,403       —       —         —         —         47,403  

Deferred compensation

   —        —        —         —         (543 )   —         —                 (543 )

Unrealized loss on securities available for sale

                                                       (24 )     (24 )

Other

   —        —        (12 )     —         —       —         —         10       (2 )
    
  

  


 


 


 

 


 


 


Balances at July 2, 2005

   73,396    $ 734    $ 294,697     $ 154,543     $ (543 )   (3,153 )   $ (67,824 )   $ (14 )   $ 381,593  
    
  

  


 


 


 

 


 


 


 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

36


Integrated Circuit Systems, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

     Year Ended

 
    

July 2,

2005


   

July 3,

2004


   

June 28,

2003


 

Cash flows from operating activities:

                        

Net income

   $ 47,403     $ 78,515     $ 61,076  

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:

                        

Depreciation and amortization

     11,064       8,436       8,583  

Amortization of Video research and development costs.

     7,051                  

Amortization of deferred finance charge

     19       138       149  

Amortization of bond premiums/discounts

     (368 )     (265 )     —    

Amortization of deferred compensation

     162       731       519  

(Gain) loss on sale of operating assets and investments

     168       (930 )     (804 )

Tax benefit of stock options

     3,005       12,793       20,202  

Deferred income taxes

     4,772       (7,140 )     (562 )

Changes in assets and liabilities:

                        

Accounts receivable

     5,607       (14,216 )     (2,760 )

Inventory

     1,342       (2,950 )     2,734  

Other assets

     (4,176 )     3,969       (4,825 )

Accounts payable, accrued expenses and other liabilities

     (5,902 )     4,551       (5,074 )

Income taxes payable

     (1,379 )     6,050       (9,756 )
    


 


 


Net cash provided by operating activities

     68,768       89,682       69,482  
    


 


 


Cash flows from investing activities:

                        

Capital expenditures

     (7,221 )     (8,587 )     (5,722 )

Proceeds from sale of fixed assets

     263       62       99  

Proceeds from sales of available-for-sale investments

     61,409                  

Proceeds from maturities of held-to-maturity investments

     197,771       145,056       36,635  

Proceeds from sale of investment in Maxtek

             1,324       2,578  

Purchases of available-for-sale investments

     (145,062 )     (239,925 )     (35,174 )

Purchases of held-to-maturity investments

     (159,531 )     —         —    

Acquisition of MRT assets

     (24,450 )     —         —    

Acquisition of Micro Networks Corporation, net of cash acquired

     —         —         2,345  
    


 


 


Net cash provided by (used in) investing activities

     (76,821 )     (102,070 )     761  
    


 


 


Cash flows from financing activities:

                        

Repayments of long-term debt and capital leases

     (138 )     (9,977 )     (32,199 )

Proceeds from exercise of stock options

     7,394       10,457       13,347  

Proceeds from stock purchase plan

     1,042       898       805  

Deferred financing charges

     —         (56 )     —    

Purchase of treasury stock

     (13,613 )     (37,999 )     (8,413 )
    


 


 


Net cash used in financing activities

     (5,315 )     (36,677 )     (26,460 )
    


 


 


Net increase (decrease) in cash

     (13,368 )     (49,065 )     43,783  

Cash and cash equivalents:

                        

Beginning of year

     68,973       118,038       74,255  
    


 


 


End of year

   $ 55,605     $ 68,973     $ 118,038  
    


 


 


Supplemental disclosures of cash information:

                        

Cash payments (receipts) during the period for:

                        

Interest

   $ (3,082 )   $ 161     $ 1,091  
    


 


 


Income taxes (refunded)

   $ 1,417     $ (5,115 )   $ (2,503 )
    


 


 


Supplemental disclosures for non-cash information:                         

Capital lease of equipment

   $ —       $ 171     $ —    
    


 


 


 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

37


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 its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

 

Reporting Periods

 

Our fiscal year is a 52/53 week operating cycle that ends on the Saturday nearest June 30. The period ending July 3, 2004 is a 53 week period. All other periods presented herein represent a 52-week operating cycle.

 

Cash Equivalents

 

We consider all highly liquid investments purchased with an original maturity of three months or less at purchase to be cash equivalents. Cash and cash equivalents at July 2, 2005 consist of cash, money market funds and commercial paper.

 

Investments

 

We account for investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments at July 2, 2005 and July 3, 2004 consist primarily of debt securities. We classify debt securities as “held-to-maturity” for those securities that we have the intent and the ability to hold until they mature. Securities classified as “held-to-maturity” are recorded at amortized cost. Securities classified as “available-for-sale” are recorded at fair market value and the gain or loss is included in other comprehensive income.

 

We also have investments in two privately held companies. We account for these non-marketable equity securities using the cost method because these securities which do not have a readily determined fair value and we do not exercise significant influence on these investees as our holdings are 2.3% and 0.6% of the outstanding shares, respectively. We evaluate our investments for impairment whenever circumstances arise that may indicate an impairment event may have occurred.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Our reserve for doubtful accounts is based on (i) our specific assessment of the collectibility of all significant accounts greater than 90 days past due, (ii) our historical estimate of the rate of default for all accounts less than 90 days past due and (iii) any specific knowledge we have acquired that might indicate that an account is uncollectible, regardless of age. The facts and circumstances of each account may require us to use substantial judgment in assessing its collectibility.

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. We record a reserve for obsolete and unmarketable inventory based on assumptions of future demand and market conditions. Because many of our products have multiple applications and serve volatile markets, the recent sales history of any one product is not necessarily indicative of the future demand for such product. The reserve for obsolete and unmarketable inventory is therefore based on our collective judgment regarding the realistic and potential future demand for each product and is inherently subjective. The fact that our products have a long product life cycle and low holding costs

 

38


increases the subjectivity because these factors extend the time frame in which we could potentially recover the costs of each product. Silicon timing devices are analog building block products and may be used across platforms of different technologies and generations of the same technology. There is limited technology risk on inventories because markets continue to exist for older products. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required.

 

Property, Plant and Equipment

 

Property and equipment are recorded at cost less accumulated depreciation. Depreciation on furniture and machinery and equipment is computed using the straight-line depreciation method over periods ranging from three to ten years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the improvement. The cost of fully depreciated assets remaining in use is included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in net income. Maintenance and repairs are charged to expense when incurred.

 

Deferred Financing Costs

 

In fiscal year 2002 we entered into a term loan facility. Costs incurred in connection with this term loan were being amortized over the life of the loan, three years. This loan agreement was terminated in the third quarter of fiscal 2004, and we entered into a new facility.

 

In March 2004, we entered into a new revolving credit and term facility. Costs incurred in connection with this term loan are being amortized over the life of the loan, three years. Accumulated amortization was $18,700 with approximately $31,000 remaining to be amortized as of July 2, 2005.

 

Goodwill and Other Indefinite Lived Intangible Assets

 

Goodwill represents the excess of cost over fair value of net assets acquired from business acquisitions. SFAS No. 142, “Goodwill and Other Intangible Assets” addresses how goodwill and other intangible assets should be accounted for after they have been initially recorded in the financial statements. Under SFAS 142, goodwill and other indefinite life intangible assets are no longer amortized. SFAS 142 requires goodwill to be tested for impairment at least on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchases of intangible assets, other than goodwill, to be amortized over their useful lives, unless these lives are determined to be indefinite. The impairment test for intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. The fair value of the indefinite live intangible was determined using the relief from royalty method.

 

We perform goodwill impairment tests in the fourth quarter of each fiscal year for each reporting unit. We have allocated nearly all the goodwill to one reporting unit as it resulted from the MNC acquisition. The process of evaluating the potential impairment of goodwill can be subjective and may require experienced judgment during the analysis. We use the two-step method to measure impairment loss. The first step compares the fair value of the reporting units with its carrying amount, including goodwill. The second step is only necessary if the fair value of the reporting unit is less than its carrying value. Used in the valuations were assumptions of growth rates and profitability for the reporting unit based on market data, cost cutting plans and internal forecasts based on product development plans. We used a combination of three valuation methods, discounted cash flow, quoted market price and market capitalization to determine fair value of the reporting unit.

 

As of July 2, 2005 we determined that there was no impairment of goodwill or indefinite life intangibles.

 

 

39


At July 2, 2005, we have $35.4 million of goodwill and $18.4 million of indefinite lived intangible assets. No impairment of goodwill or other indefinite lived intangible assets existed at July 2, 2005. We had no indefinite lived intangible assets prior to the acquisition of MNC. There was no change in goodwill during fiscal year 2005.

 

Carrying Value of Long-Term Assets

 

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

 

Revenues from product sales are recognized as revenue upon shipment to the customer. By contract and written agreement, there are only seven customers that have capped right of return and, for three of these customers, price protection. These seven customers accounted for approximately 63% of revenues for fiscal 2005. Upon shipment to these customers, we provide an allowance for the full 5% or, in some cases 7%, for rights of return, as historically, customers granted a limited right of return have utilized that right to the agreed limit. We also utilize historical data and consider market conditions to estimate an allowance for price protection. These products are semi-custom, prices are predetermined with the end customer, and accordingly, are substantially fixed at the time of sale. We recognize sales to these customers in accordance with criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists”, at the time of sale based on the following: The selling price is substantially fixed or determinable at the date of sale; the buyer is obligated to pay for the products; title of the products has transferred; the buyer has economic substance apart from us; we do not have further obligations to assist 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. For the fiscal year ended July 2, 2005 two customers, accounted for 41% and 11% of revenue, and for 42% and 17%, respectively of our total accounts receivable as of July 2, 2005. These two customers sell to approximately 220 OEMs. For fiscal years 2004 and 2003 one customer comprised 39% and 27% of our revenues, respectively, and accounted for 37% of our accounts receivable at July 3, 2004. We also have a substantial concentration of credit risk in the PC motherboard industry. Refer to Note 16 for geographic information.

 

Cash deposits are maintained with financial institutions in excess of federally insured limits.

 

In order to mitigate investment risk, our policy requires all investments in debt securities bear at least an A- rating from Standard & Poor’s or A3 by Moody’s. Investments in asset backed and mortgage backed bonds are limited to those rated AAA/Aaa.

 

Income Taxes

 

Income tax expense includes U.S. federal, state and international income taxes and is computed in accordance with SFAS No. 109, “Accounting for Income Taxes”. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax

 

40


effects of these differences are reported as deferred income taxes. Valuation allowances are provided against deferred income tax assets, which are not likely to be realized. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable in the local jurisdictions. The effective tax rate for fiscal years 2005, 2004 and 2003 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 as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. We do not currently record 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 an $88.7 million liability as of July 2, 2005.

 

Foreign Currency Translation

 

The functional currency of the Company’s foreign subsidiary is the U.S. dollar, as this is the currency of the primary economic environment in which the subsidiary conducts its business. Transactions and balances originally denominated in other currencies are remeasured into dollars in accordance with the provisions of SFAS No. 52, “Foreign Currency Translation,” with any resulting gain or loss charged against net income or loss.

 

Research and Development

 

Research and development costs consist primarily of the salaries and related expenses of engineering employees engaged in research, design and development activities, costs related to design tools, supplies and services and facilities expenses.

 

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.

 

Reclassification of Accounts

 

Certain prior year balances have been reclassified to conform to the current year classifications.

 

Accounting for Stock-Based Compensation

 

We have adopted the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, and continue to apply Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock options issued to employees and directors. Stock options granted to employees typically have an exercise price equal to the fair market value of our common stock and vest ratably over four years. However, since the value of an option bears a direct relationship to our stock price, it is an effective incentive for management to create value for shareholders. We therefore view stock options as a critical component of our long-term performance-based compensation philosophy.

 

SFAS No. 148, “Accounting for Stock-Based Compensation” amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. We adopted this statement during the third quarter of fiscal year 2003.

 

41


We apply APB 25 and related interpretations in accounting for stock option plans. Our policy is to grant stock options at the fair market value of the underlying stock at the date of grant. Accordingly, compensation expense is generally recognized only when options are granted with a discounted exercise price. Any resulting compensation expense is recognized ratably over the associated service period, which is generally the option vesting term. Had compensation cost been recognized consistent with SFAS No. 123, as amended by SFAS No. 148, our consolidated net earnings and earnings per share for each fiscal year would have been as follows (in thousands except per share data):

 

     2005

   2004

   2003

Net Income:

                    

As Reported

   $ 47,403    $ 78,515    $ 61,076

Add: Stock-based employee compensation expense included in reported net earnings, net of

    related tax effects (1)

     105      475      1,158

Deduct: Total stock - based employee expense determined under the fair value based method
    for all awards, net of related tax effects (2)

     20,353      21,102      18,230

Pro forma

   $ 27,155    $ 57,888    $ 44,004

Basic earnings per common share:

                    

As Reported

   $ 0.68    $ 1.12    $ 0.90

Pro forma

   $ 0.39    $ 0.82    $ 0.65

Diluted earnings per common share:

                    

As Reported

   $ 0.67    $ 1.08    $ 0.87

Pro forma

   $ 0.38    $ 0.81    $ 0.63

Diluted common shares:

                    

As Reported

     71,109      72,578      70,564

Pro forma

     70,927      71,389      69,548

(1) In the Company’s Form 10-K for the year ended June 28, 2003, the stock-based employee compensation expense included in reported net earnings was reported as $1,781 for the year ended June 28, 2003. This amount has been adjusted as shown above to provide for the related tax effects.
(2) In the Company’s Form 10-K for the year ended June 28, 2003, the stock-based employee compensation expense determined under the fair value based method was reported as $28,046 for the year ended June 28, 2003. This amount has been adjusted as shown above to provide for the related tax effects.

 

42


SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.

 

The following assumptions were used to determine the fair value of stock options granted using the Black-Scholes option-pricing model:

 

     2005

    2004

    2003

 

Dividend yield

   0 %   0 %   0 %

Expected volatility

   40 %   76 %   85 %

Average expected option life

   5.43 years     6 years     5 years  

Risk-free interest rate

   3.87 %   3.1 %   4.6 %

 

New Accounting Pronouncements

 

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

 

On June 29, 2005, the FASB reached a consensus on EITF 05-6, “Determining the Amortization Period for Leasehold Improvements.” This consensus is effective for periods beginning after that date. We do not expect this statement to have a material impact on our financial position or results of operations.

 

In May 2005, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” This statement replaced Accounting Principles Board (“APB”) Opinion No. 20 and FASB SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement will be effective for accounting changes made in fiscal years beginning after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) – “Share-Based Payment.” This standard supersedes APB No. 25, and requires recognition of expense in the financial statements of the cost of share based payment transactions, including stock options, based on the fair value of the award at the grant date. The provisions of this standard are effective for public companies for annual periods beginning after June 15, 2005. We adopted this statement on July 3, 2005 using the modified prospective method. Under this method, stock-based employee compensation cost will be recognized for all new awards granted after July 2, 2005 using the Black-Scholes method. Additionally, compensation costs for unvested stock options and awards that are outstanding at July 2, 2005 will be recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under FAS 123 using the Black-

 

43


Scholes method. We do not expect any significant changes in the assumptions used to calculate the fair value of stock options as disclosed in Note 1 in the Notes to Consolidated Financial Statements.

 

In December 2004, the FASB also issued SFAS No. 153 – “Exchanges of Nonmonetary Assets.” This standard amends APB Opinion No. 29, Accounting for Nonmonetary Transactions by eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. The provisions of this standard are effective for public companies for annual periods beginning after June 15, 2005. We will adopt this statement beginning with our first quarter of fiscal year 2006. We do not expect this statement to have a material impact on our financial position.

 

In November 2004, the FASB issued SFAS No. 151 – “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” This standard clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Currently this statement does not have an impact on our financial position. However, if in the future we were to experience such abnormal costs such as idle facility expense, handling costs and wasted material it could have a material impact on our operations.

 

In September 2004, the FASB approved issuance of Staff Position (“FSP”) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. This deferral will extend until a Staff Position is issued to provide clarification of the guidance presented in paragraphs 10 through 20. Effective July 4, 2004, we adopted all other provisions of EITF Issue 03-1, including measurement guidance for evaluating whether an impairment has occurred for marketable securities and cost method investments. Adoption of these requirements did not have a material effect on the results of operations. Effective December 31, 2004, additional disclosures were also required for cost method investments. The effect of implementing the final provisions of paragraphs 10 through 20 cannot currently be estimated due to the pending implementation issues, but is not expected to be material to the results of future operations.

 

On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted by President Bush. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal year 2006. We have started an evaluation of the effects of the repatriation provision. We expect to complete our evaluation of the effects of the repatriation provision before the end of the first quarter for fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $150 million. The related potential range of income tax expense is between zero and $7.3 million. This is a one-time event and all future earnings will be permanently reinvested into our Singapore operations.

 

On October 4, 2004, President George W. Bush signed the “Working Families Tax Relief Act of 2004”, which retroactively reinstated the research tax credit to the June 30, 2004 expiration date. This change in the law will not have a material impact on the results of future operations.

 

(2) Merger and Acquisition

 

On January 4, 2002, we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash acquired. We acquired MNC to gain access to technology that we believe will enhance the

 

44


performance of our silicon timing products, strengthening our position within existing strategic markets such as servers and storage systems. In connection with the acquisition of MNC, we began a restructuring plan that involved moving certain manufacturing operations offshore, reducing its workforce and combining facilities. In connection with the acquisition of MNC, we put in place a restructuring plan for the purpose of making MNC more efficient by combining facilities and moving some manufacturing operations offshore. The purchase price includes $5.6 million in purchase accounting liabilities and write-down of fixed assets.

 

From the date of the acquisition until the end of the first quarter of fiscal 2005, one plant in Bloomfield, CT was shut down and the fixed assets associated were disposed of. Sixty-four manufacturing personnel, both line and management, were laid off. The production from Bloomfield was relocated to facilities in Worcester, MA and Auburn, NY, with the remainder going offshore. During fiscal year 2004, goodwill was adjusted due to the reversal of a portion of the restructuring reserve.

 

The following table summarizes the activity of the restructuring reserve since inception:

 

(in thousands)


   Original
Plan
Date
1/2002


  

Utilization

2002


  

Balance

6/2002


  

Utilization

2003


  

Balance

6/2003


  

Utilization

2004


  

Adjustments

2004


   

Balance

6/2004


   Utilization
2005


   Balance
6/2005


Plant Closing Costs

   $ 1,214    $ 27    $ 1,187    $ 472    $ 715    $ 420    $ 223     $ 72    $ 72    $ —  

Personnel Costs

     2,017      437      1,580      1,151      429      496      (67 )     —        —        —  

Write-down of Fixed Assets

     2,407      —        —        —        —        —        —         —        —        —  
    

  

  

  

  

  

  


 

  

  

Total

   $ 5,638    $ 464    $ 2,767    $ 1,623    $ 1,144    $ 916    $ 156     $ 72    $ 72    $ —  
    

  

  

  

  

  

  


 

  

  

 

Related to the acquisition of MNC we acquired $36.3 million of intangible assets, of which, $2.9 million was assigned to research and development assets that were written off at the date of acquisition. The remaining $33.4 million of intangible assets include a customer base valued at $12.0 million (6 year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life). Amortization of the customer base for fiscal years 2005, 2004, and 2003, was $2.0 million, $2.0 million and $2.0 million, respectively. Amortization of the trade name, which commenced in fiscal year 2003, was $0.3 million, $0.3 million and $0.3 million for fiscal years 2005, 2004 and 2003, respectively.

 

On August 4, 2004 we announced that we had signed an agreement to purchase technology and the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. In the first quarter of fiscal year 2005 we completed the purchase and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. Some of these assets had a short useful life and were fully amortized in the first quarter of fiscal year 2005, resulting in an additional $7.1 million, which was included in research and development expense. The remaining assets consist of a database valued at $16.2 million with a useful life of 8 years and an assembled workforce valued at $1.2 million with a useful life of 9 years, which are included in intangible assets. Amortization expense for fiscal year 2005 included $2.0 million for the database and $0.1 million for the workforce

 

45


Future amortization amounts are as follows as of July 2, 2005 (in thousands):

 

2006

   4,460

2007

   4,460

2008

   3,460

2009

   2,460

2010

   2,460

 

Total amortization expense (in thousands)

 

2005

   4,278

2004

   2,300

2003

   2,300

 

On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of ICS common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of shares of ICS common stock and IDT common stock outstanding as of July 1, 2005 (assuming the exercise of all outstanding IDT stock options and ICS stock options), immediately after the Merger, the shareholders of IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

 

The consummation of the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and ICS, including regulatory review and approval by the stockholders of both IDT and ICS. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

 

The Merger Agreement contains certain termination rights for both IDT and ICS, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other a termination fee of up to $40 million.

 

We incurred $3.2 million in expenses associated with the merger of our company with Integrated Device Technology, Inc. Included in these expenses were $0.8 million in legal fees, $2.3 million in investment opinion fees, and $0.1 million in FTC filing fees. These costs are expensed as incurred, and included in charges arising from merger.

 

(3) 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 $0.4 million in licensing fees during fiscal year 2005, $1.2 million during fiscal year 2004, and $1.4 million during fiscal year 2003. The expense is included in our research and development expense in the Statements of Operations.

 

46


(4) Investments

 

During fiscal years 2005 and 2004, we invested in debt securities. Securities for which we have the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Certain securities have been classified as available-for-sale. Securities classified as available-for-sale are recorded at fair market value and the gain or loss is included in other comprehensive income.

 

Aggregate annual maturities of debt securities as of July 2, 2005 (in thousands):

 

     Held-to-
maturity


   Available-
for-sale


2006

   $ 29,285    $ 12,540

2007

     29,567      22,971

2008

     14,219      47,716

2009

     4,847      —  

2010 and beyond

     10,120      —  
    

  

     $ 88,038    $ 83,227
    

  

 

Aggregate fair value of debt securities classified as available-for-sale as of July 2, 2005 (in thousands):

 

     Fair market
Value


   Unrecognized
Gain(Loss)


 

US Treasury securities

   $ 83,207    $ (24 )

 

The unrecognized loss is included in other comprehensive income for fiscal year 2005.

 

Aggregate fair value of debt securities classified as held-to-maturity as of July 2, 2005 (in thousands):

 

     Fair Market
Value


   Unrecognized
Gain(Loss)


Corporate debt securities

   $ 80,568    $ 26

Mortgage-backed securities

     7,519      23
    

  

Total

   $ 88,087    $ 49
    

  

 

Proceeds from sales of available-for-sale securities (in thousands):

 

     Proceeds

   Recognized
Gain(Loss)


 

US Treasury securities

   $ 61,409    $ (99 )

 

47


The average cost basis was used for the recognized gain or loss on the sales of securities.

 

We also have investments in two privately held companies Maxtek Technology Co. Ltd and Best Elite International Ltd that are carried at cost. The carrying cost of Maxtek was $1.0 million as of July 2, 2005 and $1.0 million as of July 3, 2004. During the first quarter of fiscal 2004 and in the second quarter of 2005, Maxtek declared stock dividends. Our ownership is 1.3 million shares or approximately 2.3% of Maxtek as of July 2, 2005 and was 1.3 million shares or approximately 2.5% as of July 3, 2004. Our investment in Best Elite was made during fiscal 2004 and is carried at a cost of $5.0 million at July 2, 2005 and July 3, 2004. Our percent ownership of this company was 0.6% as of July 2, 2005 and 0.7% as of July 3, 2004.

 

(5) Accounts Receivable

 

The components of accounts receivable are as follows (in thousands):

 

     Year Ended

 
    

July 2,

2005


   

July 3,

2004


 

Accounts receivable

   $ 43,107     $ 47,209  

Less: allowance for returns and doubtful accounts

     (2,997 )     (1,492 )
    


 


     $ 40,110     $ 45,717  
    


 


 

(6) Inventory

 

The components of inventories are as follows (in thousands):

 

     Year Ended

 
     July 2,
2005


   

July 3,

2004


 

Raw Materials

   $ 9,897     $ 8,237  

Work-in-process

     6,735       7,953  

Finished parts

     7,899       9,296  

Less: obsolescence reserve

     (7,101 )     (6,714 )
    


 


Inventory, net

   $ 17,430     $ 18,772  
    


 


 

(7) Property and Equipment

 

Property and equipment consists of the following (in thousands):

 

     Year Ended

 
    

July 2,

2005


   

July 3,

2004


 

Land

   $ 170     $ 170  

Building and improvements

     1,008       1,005  

Machinery and equipment

     46,222       42,577  

Furniture and fixtures

     2,801       2,864  

Leasehold improvements

     5,675       5,563  

Capital leases

     171       171  
    


 


       56,047       52,350  

Less: accumulated depreciation and amortization

     (36,631 )     (33,096 )
    


 


Property and equipment, net

   $ 19,416     $ 19,254  
    


 


 

48


Depreciation and amortization expense related to property and equipment was $6.7 million, $6.0 million, and $6.3 million in fiscal years 2005, 2004 and 2003, respectively.

 

(8) Other Balance Sheet Accounts

 

Other current assets consist of the following (in thousands):

 

     Year Ended

    

July 2,

2005


  

July 3,

2004


Due from employee stock option exercise

   $ 121    $ 181

Interest receivable

     1,972      133

Other

     711      566
    

  

     $ 2,804    $ 880
    

  

 

Included in other noncurrent assets as of July 2, 2005 is $4.5 million related to prepaid maintenance contracts.

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

     Year Ended

    

July 2,

2005


  

July 3,

2004


Legal accruals

   $ 220    $ 20

Accrued restructuring expense

     —        72

Accrued vacation

     1,086      1,024

Accrued rent

     721      820

Other

     2,255      2,083
    

  

     $ 4,282    $ 4,019
    

  

 

(9) Debt

 

On March 1, 2004 we entered into a revolving credit loan agreement, which will terminate March 1, 2007. The revolving credit loan agreement allows us to draw down to a maximum balance of $20.0 million in increments of not less than $500,000. At our option, the unpaid balance shall bear interest at the available LIBOR Based Rate (as defined) or the Prime Based Rate (as defined). A commitment fee on the average daily-unused portion of the revolving credit loan balance will be due and payable on a quarterly basis. The commitment fee will be between .20% (.0020) and .25% (.0025) based on the funded debt to EBITDA ratio, as defined in the revolving credit loan agreement, calculated the previous quarter. There was no outstanding balance on our revolving credit loan agreement as of July 2, 2005.

 

In connection with the acquisition of Micro Networks Corporation (“MNC”) in Fiscal 2002, we entered into a revolving credit and term loan facility dated December 31, 2001. During the first three months of fiscal year 2004, we paid down $4.2 million of the term loan. During the second quarter of fiscal 2004, we made the final payment of $5.8 million on the term loan. This loan agreement was terminated in the third quarter of fiscal 2004. The facility enabled us to draw down $45.0 million under the term loan and $10.0 million under the revolving credit facility. At our option, the interest rate under the term loan was either (1) an annual base rate, which is the higher of (i) a rate of interest announced from time to time by the lenders’ administrative agent as the base rate (“Base Rate”) or (ii) the sum of the federal funds rate plus 0.5% per annum or (2) LIBOR plus 1.75%. At our option, the interest rate under the revolving credit facility, was either: (1) the Base Rate or (2) the LIBOR Rate plus a pre-formulated margin. In connection with our bank agreement, we entered into an 18-month interest rate swap agreement with the same financial institution. The interest rate swap agreement essentially enabled us to manage the exposure to fluctuations in interest rates on a portion of our term loan.

 

49


Our term loan required us to pay interest based on a variable rate. Under the interest rate swap agreement we exchanged the variable rate interest on a portion of our term loan, equal to 50% of the outstanding loan amount, with a fixed rate of 5.0%. The interest rate swap agreement was in effect until June 2003, with the notional amount decreasing to $14.8 million over the effective period. The swap agreement was terminated in January 2003 with a payment of $170,000. The $170,000 was included in interest expense.

 

Senior debt consisted of the following (in thousands):

 

    

July 2,

2005


  

July 3,

2004


Revolving credit facility at LIBOR plus 1.75 bp

   $ —      $ —  

Capital lease obligations and other

     8      82
    

  

     $ 8    $ 82

Less current portion

     8      82
    

  

Long-term debt, less current portion

   $ —      $ —  
    

  

 

Our revolving credit loan agreement requires the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio, a liquidity ratio, a minimum tangible net worth, and imposes financial limitations. The current revolving credit loan agreement also restricts our ability to pay dividends to the holders of our common stock. At July 2, 2005, and July 3, 2004 we were in compliance with all of these covenants. There was no outstanding balance on our revolving credit loan agreement as of July 2, 2005.

 

(10) Lease Obligations

 

We lease certain of our facilities under operating lease agreements, some of which have renewal options.

 

Rental expense under operating lease agreements was $3.6 million, $4.0 million and $3.5 million in 2005, 2004 and 2003, respectively.

 

Future minimum lease commitments under our operating leases are as follows as of July 2, 2005 (in thousands):

 

2006

   $ 3,235

2007

     2,741

2008

     2,147

2009

     1,209

2010 and after

     810
    

     $ 10,142
    

 

50


Sublease income under all operating lease agreements was $0.9 million, $0.9 million, and $0.9 million in fiscal years 2005, 2004 and 2003, respectively. Future amounts due under the subleases are as follows as of July 2, 2005 (in thousands):

 

2006

   $ 536

2007

     531

2008

     132

2009

     —  

2010 and after

     —  
    

     $ 1,199
    

 

Future minimum lease commitments under our capital leases are as follows as of July 2, 2005 (in thousands):

 

2006

   $ 8

2007 and after

     —  
    

     $ 8
    

 

(11) Fair Value of Financial Instruments

 

We have estimated the fair value of our financial instruments using available market information and appropriate methodologies. However, considerable judgment is 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 2, 2005 due to the short-term maturities of these instruments.

 

Investment securities -For securities held as investments (which include corporate and government bonds and notes) and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For nonpublic equity investments, it is not practicable to estimate fair value where the company holds less than a 5% interest.

 

Long-term debt – Interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities would be used to estimate fair value for debt issues for which quoted market prices are not available. Since we have no outstanding long-term debt at July 2, 2005, the carrying value of this item is not materially different from its fair value.

 

Interest rate swap agreementIn connection with our bank agreement, on December 31, 2001 we entered into an 18-month interest rate swap agreement with one of the same financial institutions. The interest rate swap agreement essentially enables us to manage the exposure to fluctuations in interest rates on a portion of our term loan. This agreement was paid off in January 2003.

 

51


(12) Income Taxes

 

The provision for income taxes consists of the following (in thousands):

 

     Year Ended

 
    

July 2,

2005


  

July 3,

2004


   

June 28,

2003


 

Current tax expense (benefit):

                       

Federal

   $ 1,355    $ 2,260     $ 10,086  

State

     215      997       979  

Foreign

     54      (72 )     (38 )
    

  


 


Total current

   $ 1,624    $ 3,185     $ 11,027  
    

  


 


Deferred tax expense (benefit):

                       

Federal

   $ 5,189    $ 7,085     $ (926 )

State

     454      (2,155 )     77  

Foreign

     868      386       287  
    

  


 


Total deferred

     6,511      5,316       (562 )
    

  


 


Total income tax expense

   $ 8,135    $ 8,501     $ 10,465  
    

  


 


 

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):

 

     Fiscal Year Ended

    

July 2,

2005


  

July 3,

2004


Deferred tax assets:

             

Depreciation

   $ 195      —  

Accounts receivable allowances

     250    $ 222

Inventory valuation

     2,182      2,244

Other compensation charges

     388      658

Net state operating loss carry forward

     2,072      3,917

Net federal operating loss carry forward

     2,884      10,450

Federal tax credits

     10,561      6,367

State tax credits

     5,012      3,316

Accrued expense and other

     773      872
    

  

Gross deferred tax assets

     24,317      28,046

Less: valuation allowance

     4,629      3,719
    

  

Deferred tax asset

     19,688      24,327

Deferred tax liabilities:

             

Intangibles

     9,226      10,038

Depreciation

     0      372

Prepaid expenses

     356      389

Singapore deferred taxes

     1,525      674

Federal impact of state tax attributes

     1,841      1,343

Other

     1      —  
    

  

Deferred tax liabilities

     12,949      12,816
    

  

Net deferred tax asset (liability)

   $ 6,739    $ 11,511
    

  

 

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 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.

 

52


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 2, 2005. We periodically reassess and re-evaluate the status of our recorded deferred tax assets. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable in the local jurisdictions. The effective tax rate for fiscal years 2005, 2004 and 2003 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income through December 31, 2007. This is stated in our agreement with the Economic Development Board of Singapore. The pioneer status is contingent upon ICS meeting certain investment criteria in fixed assets, personnel, and technology. We do not currently record 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 an $88.7 million liability as of July 2, 2005.

 

On October 22, 2004, the American Jobs Creation Act (“AJCA”) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal year 2006. We have started an evaluation of the effects of the repatriation provision. We expect to complete our evaluation of the effects of the repatriation provision before the end of the first quarter for fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $150 million. The related potential range of income tax expense is between zero and $7.3 million. This is a one-time event and all future earnings will be permanently reinvested into our Singapore operations.

 

Pretax income from foreign operations was $41.3 million in fiscal 2005, $57.5 million in fiscal 2004, and $42.0 million in fiscal 2003. Pretax income from domestic operations was $14.2 million in fiscal 2005, $29.5 million in fiscal 2004, and $29.5 million in fiscal 2003.

 

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):

 

     Year Ended

 

(in thousands)


   July 2,
2005


    July 3,
2004


    June 28,
2003


 

Earnings Before Income Taxes

   $ 55,538     $ 87,016     $ 71,541  

Computed Expected Tax Expense

     19,438       30,456       25,039  

State Taxes (net of Federal Income tax benefit)

     435       (1,158 )     666  

Effects of lower foreign tax rates

     (12,074 )     (18,988 )     (13,792 )

Federal research and development credits

     (2,152 )     (2,718 )     —    

Increase in the Federal valuation allowance

     598       680       160  

Increase in the contingency reserve

     863       —         —    

Non-deductible acquisition costs

     1,051       —         —    

Other

     (24 )     229       (1,608 )
    


 


 


     $ 8,135     $ 8,501     $ 10,465  
    


 


 


Basic per share effect of tax holiday

   $ 0.17     $ 0.27     $ 0.20  

Diluted per share effect of tax holiday

   $ 0.17     $ 0.26     $ 0.20  

Weighted average shares outstanding – basic

     70,197       70,358       67,898  

Weighted average shares outstanding – diluted

     71,109       72,578       70,564  

 

53


The effect of lower foreign tax rates is due to our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income for five years.

 

We establish reserves for tax contingencies when, despite the belief that our tax return positions are fully supported, it is probable that certain positions may be challenged and may not be fully sustained. The tax contingency reserves are analyzed on a quarterly basis and adjusted based upon changes in facts and circumstances, such as the progress of federal and state audits, case law and emerging legislation. Our effective tax rate includes the impact of tax contingency reserves and changes to the reserves, including related interest, as considered appropriate by management. The tax contingency reserve was increased for the fiscal year ended July 2, 2005 by $0.9 million primarily attributable to the increase in exposure due to the current ongoing federal audit for our fiscal years 2001, 2002 and 2003 and potential tax exposure in foreign jurisdictions for fiscal years 2001 through 2005.

 

As of July 2, 2005 we have federal operating loss carry forwards of $8.2 million, which begin expiring in 2021. As of July 2, 2005, we have state operating loss carry forwards of approximately $58.8 million, which began expiring in 2005. We have provided a full valuation allowance against a portion of the state operating loss carry forwards where it is more likely than not that those carry forwards will not be utilized. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable or are expected to be remitted.

 

(13) Employee Benefit Plans

 

We have a bonus plan, which covers permanent full-time exempt employees with at least six months of service. Bonuses under this plan are based on achieving specified revenue, operating and profit objectives. Amounts charged to operating expense for the plan were $0.2 million, $5.1 million, and $4.8 million in fiscal years 2005, 2004 and 2003, respectively.

 

We have a 401(k) employee savings plan, which provides for contributions to be held in trust by corporate fiduciaries. Employees are permitted to contribute up to 18% 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% of annual compensation, subject to IRS limits. The matching amounts contributed and charged to expense were $1.3 million in fiscal year 2005, $1.3 million in fiscal year 2004, and $1.3 million in fiscal year 2003.

 

(14) Shareholders’ Equity

 

Treasury Stock

 

In September 2001, we announced a stock repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. In October 2002, we announced that our board of directors approved to increase the number of shares to be repurchased under this repurchase program to 3.0 million. In October 2004, we announced that our board of directors had approved an increase in the number of shares to be repurchased under the program to 5.0 million. As of July 2, 2005, we had purchased 3.2 million shares for $67.8 million. The stock repurchase program was instituted to improve shareholder value.

 

Employee Stock Purchase Plan

 

We authorized 500,000 shares of common stock under our employee stock purchase plan (“ESPP”). The ESPP permits employees to purchase common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the common stock at the beginning or end of each three-month offering period. Shares purchased by and distributed to participating employees were 61,178 in fiscal 2005, 39,529 in fiscal 2004, and 53,206 in fiscal 2003 at weighted average prices of $17.05, $22.72 and $15.15, respectively.

 

54


2002 Equity Incentive Plan

 

In October 2002, our board of directors approved the 2002 Employees’ Equity Incentive Plan (“2002 Plan”). The 2002 Plan provides for grants of non-qualified stock options, stock appreciation rights, restricted stock and performance awards to employees of the Company and its subsidiaries, persons to whom an offer of employment has been extended and others performing services for the Company or a subsidiary, but does not permit any grants to our officers and directors. The compensation committee of our board of directors will administer the 2002 Plan, including determining the exercise price and other terms and conditions of options granted under the 2002 Plan. The maximum term for exercise of options granted under the 2002 Plan is ten years from the date of grant. Three million shares of our common stock are available for issuance under the 2002 Plan, subject to adjustment in the event of a reorganization, merger or similar change in our corporate structure or change in the shares of common stock. As of July 2, 2005 there were 2.6 million options issued and outstanding under the 2002 Plan.

 

2000 Long-Term Equity Incentive Plan

 

In May 2000, the 2000 Long-Term Equity Incentive Plan was approved, ratified and adopted (the “2000 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. The Compensation Committee has discretion to set the terms of awards granted under the 2000 Plan, including vesting terms. Typically, options which have been granted under the 2000 Plan vest over 4 years. Under the 2000 Plan 8.4 million shares of our common stock are available for issuance, subject to adjustment in the event of a reorganization, merger or similar change in our corporate structure or change in the outstanding shares of common stock. As of July 2, 2005 there were 5.0 million options issued and outstanding under the 2000 Plan.

 

1999 Plan

 

In May 1999, the 1999 Stock Option Plan was adopted (the “1999 Plan”). The equity plan provided for periodic grants of options to purchase our 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. No future grants will be made under the 1999 Plan. As of July 2, 2005 there were 0.7 million options issued and outstanding under the 1999 Plan.

 

55


Stock option transactions during fiscal years 2003, 2004 and 2005 are summarized as follows (in thousands, except price per share):

 

1999, 2000 and 2002 Plans


  

Options Available

For Grant Under

The Plans


    Options Outstanding

   

Weighted Average

Exercise Price


Common Share:

                  

Balance June 29, 2002

   2,613     9,608     $ 9.85

Shares reserved

   3,673     —         —  

Granted

   (2,490 )   2,490       21.62

Exercised

   —       (3,390 )     3.94

Terminated

   667     (667 )     16.08

Cancelled shares

   (31 )   —         —  
    

 

 

Balance June 28, 2003

   4,432     8,041     $ 15.72

Shares reserved

   703     —         —  

Granted

   (1,321 )   1,321       28.62

Exercised

   —       (1,378 )     8.09

Terminated

   635     (635 )     21.55

Cancelled shares

   —       —         —  
    

 

 

Balance July 3, 2004

   4,449     7,349     $ 18.78

Shares reserved

         —         —  

Granted

   (2,301 )   2,301       20.00

Exercised

   —       (600 )     12.31

Terminated

   689     (689 )     22.91

Cancelled shares

   —       —         —  
    

 

 

Balance July 2, 2005

   2,837     8,361     $ 19.21
    

 

 

 

As of July 2, 2005, options for 4.3 million shares were exercisable at exercise prices ranging from $0.1299 to $32.95 at an aggregate exercise price of $71.4 million. Income tax benefits attributable to non-qualified stock options exercised and disqualifying dispositions of incentive stock options are credited to equity when such options are exercised.

 

Options Outstanding


   Options Exercisable

Range of

Exercise Price


 

Outstanding
as of

7/2/2005


  

Weighted Average
Remaining

Contractual Life


  

Weighted Average

Exercise Price


  

Exercisable

as of

7/2/2005


  

Weighted Average

Exercise Price


$ 0.00 - $3.53

  794,668    4.3    $ 0.82    761,668    $ 0.86

$10.58 - $14.10

  175,904    5.3      11.10    175,654      11.09

$14.10 - $17.63

  273,525    5.6      16.83    238,525      16.94

$17.63 - $21.15

  3,119,847    7.5      18.92    1,864,697      18.86

$21.15 - $24.68

  3,082,625    8.3      21.97    978,344      22.10

$24.68 - $28.20

  422,550    8.4      27.44    106,575      27.43

$28.20 - $31.73

  333,000    8.3      29.64    95,000      29.53

$31.73 - $35.25

  159,000    8.3      32.73    68,750      32.78
   
  
  

  
  

    8,361,119    7.5    $ 19.21    4,289,213    $ 16.65
   
  
  

  
  

 

The per share weighed-average fair value of stock options issued is as follows:

 

     2005

   2004

   2003

Option Price = FMV

   $ 20.39    $ 18.59    $ 15.09

Option Price > FMV

     —        —        —  

Option Price < FMV

     —        —        —  

 

During fiscal year 2002, approximately 0.2 million shares were issued below fair market value. These shares were subsequently cancelled during fiscal year 2003. Prior to our Initial Public Offering (IPO),

 

56


we issued options at what we believed was fair market value. As these options were granted within six months of our IPO, we recorded deferred compensation as the difference between the exercise price and our IPO price. We amortized the deferred compensation charge over the four-year vesting period of these options, ending in fiscal year 2004. Amortization for fiscal year 2004 was $0.7 million and for fiscal year 2003 was $0.5 million. Fiscal year 2003 includes a $1.3 million accelerated payout for the buyout of executive stock options.

 

During fiscal year 2005, we issued 33,000 shares of restricted stock, valued at $0.7 million. These shares will vest over 4 years, so we are amortizing the deferred compensation charge over that period. During fiscal 2005, we amortized $0.2 million for deferred compensation for these shares.

 

(15) Earnings Per Share

 

The calculations of earnings per share (EPS) follow (in thousands except per share amounts):

 

     Fiscal Years Ended

     July 2,
2005


   July 3,
2004


   June 28,
2003


Numerator:

                    

Net income

   $ 47,403    $ 78,515    $ 61,076

Denominator:

                    

Weighted average shares used for basic income per share

     70,197      70,358      67,898

Common stock options

     912      2,220      2,666
    

  

  

Weighted average shares outstanding used for diluted income per share

     71,109      72,578      70,564
    

  

  

 

Options to purchase 4.1 million, 0.6 million and 2.4 million shares of common stock, with average exercise prices of $20.73, $28.20 and $20.96 were outstanding during fiscal years 2005, 2004 and 2003, respectively, but were excluded from the diluted earnings per common share calculation because the options’ exercise prices were greater than the average market price of our common stock.

 

(16) Comprehensive Income (Loss)

 

Total comprehensive income (loss) is defined as the change in equity during a period from non-owner sources. The components of comprehensive income were as follows (net of income tax effect):

 

 

     Fiscal Years Ended

     July 2,
2005


    July 3,
2004


   June 28,
2003


Net income

   $ 47,403     $ 78,515    $ 61,076

Unrealized gain (loss) on investments

     (16 )     —        —  

Foreign currency translation adjustments:

     (1 )     5      1
    


 

  

Total comprehensive income

   $ 47,386     $ 78,520    $ 61,077
    


 

  

 

Included in the reclassification adjustment, net, above are realized gains and losses on equity investments.

 

The components of accumulated other comprehensive income/(loss) were as follows (net of income tax effect):

 

     July 2,
2005


 

Unrealized gain (loss) on available-for-sale investments

   $ (16 )

Cumulative translation adjustments:

     7  
    


Total accumulated other comprehensive income (loss)

   $ (9 )
    


 

57


(17) Business Segment and Geographic Information

 

Factors used in determining the reportable business segments include the nature of operating activities, existence of separate senior management teams, and the type of information presented to the company’s chief operating decision maker to evaluate all results of operations.

 

We operate and track our results in one operating segment. We design, develop and sell silicon timing devices for various electronics applications. The nature of our products and operating activities, as well as selling methods, is consistent among all of our products. We have one senior management team and the information is presented to the company’s chief operating decision maker to evaluate all results as one operating segment. All of our products are similar as they are sold for the purpose of sequencing and synchronizing electronic operations. Over 95% of the products are integrated circuits. Less than 5% of the products are based on surface acoustic wave technology.

 

Revenue and tangible long-lived assets by our geographic locations are as follows:

 

     Revenue by Geographic Location

 
     2005

    2004

    2003

 

North America – US

   $ 63,071     $ 64,961     $ 58,940  

North America – Non US

     10,411       9,678       5,334  

Asia-Pacific

     81,215       99,473       92,803  

Europe

     13,100       13,993       17,670  

Taiwan

     75,313       84,035       67,015  
    


 


 


     $ 243,110     $ 272,140     $ 241,762  
    


 


 


     Tangible Long-Lived Assets

 
     2005

    2004

    2003

 

United States

   $ 9,951     $ 11,004     $ 11,508  

Singapore

     10,095       8,925       4,959  

Europe

     —         2       7  

Elimination of Intercompany

     (630 )     (677 )     (725 )
    


 


 


     $ 19,416     $ 19,254     $ 15,749  
    


 


 


 

(18) Related Party Transactions

 

Michael A. Krupka and David Dominik, both of whom are directors of the Company, are members or general partners of certain investment funds associated with Bain Capital, LLC. Certain of these Bain Capital, LLC investment funds are also shareholders of STATSChipPac Ltd., one of our production vendors. Our orders to STATSChipPac totaled approximately $0.1 million for fiscal year 2005, $0.4 million for fiscal year 2004, and $0.5 million for fiscal year 2003.

 

58


In fiscal year 2001, we entered into an Investment and Stock Trade Agreement (the “Agreement”) with Maxtek Technology Co. Ltd (“Maxtek”), an international stocking representative in Taiwan and China. We invested $4.0 million and owned approximately 10% of Maxtek. The Agreement states that if Maxtek fails to successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest (commercial rate set by the Central Bank of China) during the said period. In fiscal 2004 we sold 25% of our initial investment in Maxtek resulting in a gain of $0.3 million. In fiscal 2003 we sold 50% of our initial investment in Maxtek resulting in a gain of $0.6 million. As of July 2, 2005, we owned 1.3 million shares, or approximately, 2.3% of Maxtek. Maxtek represented approximately 25% of our sales for fiscal year 2005, 23% in fiscal year 2004 and 20% in fiscal year 2003. Additionally, sales to Lacewood Corporation, representing business into Hong Kong and China, and Magic Island International representing business in Korea, entities that are commonly controlled by the owners’ of Maxtek, were 10% and 6% of our sales in fiscal year 2005, respectively. Sales to Lacewood were 13% in fiscal year 2004 and 21% in fiscal year 2003. These international stocking representatives sell to approximately 103 OEM end customers.

 

(19) Litigation and Contingencies

 

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, individually and in aggregate, have been adequately reserved and will not have any material adverse effect in terms of liquidity and in terms of the financial statements as a whole, although no assurance can be made in this regard.

 

We indemnify certain customers for fees and damages and costs awarded against them in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. To date, we have not paid or been required to defend any indemnification claims, and accordingly, we have not accrued any amounts for our indemnification obligations. However, there can be no assurances that we will not have any future financial exposure under those indemnification obligations.

 

(20) Subsequent Event

 

On August 31, 2005 we entered into a patent cross license agreement with Freescale Semiconductor, Inc. Upon the execution and delivery of the cross-license agreement, ICS agreed to pay to Freescale a non-refundable payment of $10.0 million. In addition, in connection with the execution and delivery of the cross-license agreement, ICS and Freescale entered into an option agreement, pursuant to which ICS has the option to purchase from Freescale certain of its assets for approximately $35.0 million. ICS has not yet exercised its option as of the date of the filing of this report but has a right to do so under the option agreement at any time until September 23, 2005.

 

59


(21) Quarterly Data (Unaudited)

 

The following is a summary of the unaudited quarterly results of operations for the years ended July 2, 2005 and July 3, 2004 (In thousands, except for EPS):

 

     Quarter Ended

    

October 2,

2004


  

January 1,

2005


  

April 2,

2005


  

July 2,

2005


   September 27,
2003


   December 27,
2003


  

March 27,

2004


  

July 3,

2004


Revenue

   $ 66,096    $ 60,628    $ 58,124    $ 58,262    $ 65,285    $ 69,565    $ 67,794    $ 69,496

Cost of sales

     26,772      25,269      23,817      23,845      26,436      28,107      26,745      27,476

Gross Profit

     39,324      35,359      34,307      34,417      38,849      41,458      41,049      42,020

Research and development

     10,187      9,426      9,943      9,421      9,308      10,014      10,426      10,604

Operating income

     11,081      15,319      13,694      11,271      19,751      21,806      21,515      21,703

Net income

     10,149      13,980      13,007      10,267      17,281      18,652      18,546      24,036

Basic EPS

   $ 0.14    $ 0.20    $ 0.19    $ 0.15    $ 0.25    $ 0.26    $ 0.26    $ 0.34

Diluted EPS

   $ 0.14    $ 0.20    $ 0.18    $ 0.15    $ 0.24    $ 0.26    $ 0.26    $ 0.33

 

 

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

Item 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended July 2, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the company’s internal control over financial reporting as of July 2, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework.

 

Based on our assessment using those criteria, we concluded that our internal control over financial reporting was effective as of July 2, 2005.

 

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Our management’s assessment of the effectiveness of our internal control over financial reporting as of July 2, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 8 of this Annual Report on Form 10-K.

 

Item 9B. OTHER INFORMATION

 

None.

 

 

62


PART III

 

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following sets forth brief biographical information for each director and executive officer of Integrated Circuit Systems, Inc. All directors of the Company hold office for their respective terms and until their successors have been elected and qualified.

 

Name


   Age

  

Position


Hock E. Tan

   53    Chief Executive Officer, President and Director

Justine F. Lien

   43    Vice President and Chief Financial Officer

Dinh N. Bui

   52    Vice President, Frequency Timing Group

Randall R. Frederick

   50    Vice President, Video Business

Lewis C. Eggebrecht

   61    Director

Henry I. Boreen

   78    Director

David Dominik

   49    Director

Michael A. Krupka

   40    Director

John D. Howard

   53    Director

Nam P. Suh, Ph.D.

   69    Director

Russell G. Weinstock

   62    Director

 

Hock E. Tan began serving as Chief Executive Officer and President and as a Director after the recapitalization of the Company in May 1999. Mr. Tan joined the Company 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./B.S. in Mechanical Engineering from Massachusetts Institute of Technology. Mr. Tan currently serves as a member of Class III of the Board of Directors, and his current term will expire at the annual meeting in 2006.

 

Justine F. Lien was appointed Chief Financial Officer after the recapitalization of the Company in May 1999 and has been with the Company since 1993. She has held titles including Director of Finance and Administration and Assistant Treasurer. Prior to joining the Company, Ms. Lien was employed by Smith Industries in various finance capacities. Ms. Lien holds a B.A. degree in Accounting from Immaculata College and is a Certified Management Accountant.

 

Dinh N. Bui joined ICS in May 1999 as Vice President of the Frequency Timing Group Business Unit. He was elected as an executive officer in July 2003. Prior to joining ICS, he was President and CEO of Phaselink Labs, the company he founded in 1991. From 1981 to 1991 he was at International Microcircuits, Inc., (IMI), where he provided special analog expertise for custom low power, communication and timing devices and managed development of timing devices for personal computers. Mr. Bui received an M.S.E.E. degree in Electrical Engineering from Catholic University of Leuven in Belgium in 1977.

 

Randall R. Frederick joined ICS in March 2000 as Director of Marketing. In October 2000, he was appointed Vice President, MicroClock Business Unit and was elected as an executive officer in July 2003. He was appointed to be the Vice President of the Video Business Unit in July 2004. Before

 

63


joining ICS, Mr. Frederick was Vice President of Engineering and Marketing at International Microcircuits, Inc., (IMI), from 1998-2000. Prior to IMI, he held both Director and Vice President positions for the Logic division at Integrated Device Technology, Inc. (IDT). He was with IDT from 1989-1998. Mr. Frederick has also been in product development and marketing at Fairchild Semiconductor, Inova Microsystems and Philips Semiconductor. Mr. Frederick has a B.S. in Electrical Engineering from the University of California at Davis and an MBA from California State University at San Jose. Mr. Frederick currently has over 25 years experience in the integrated circuits industry.

 

Lewis C. Eggebrecht has been a director since May 31, 2003. He served as Vice President and Chief Scientist of ICS from 1998 through May 30, 2003 and possesses over 30 years of experience in the integrated circuit and personal computer industries. Prior to his employment with the Company, Mr. Eggebrecht was Chief Architect for the Multimedia Products Group at Philips Semiconductor from 1996 to 1998 and was a senior engineer at S3 in 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. Mr. Eggebrecht currently serves as a member of Class I of the Board of Directors, and is a candidate for re-election at the Annual meeting. If elected, Mr. Eggebrecht’s term will expire at the annual meeting in 2007.

 

Henry I. Boreen has been a director since December 1984 and Chairman of the Board of Directors from April 1995 to May 1999. He served as Interim Chief Executive Officer from March 1998 through October 1998. Since 1984, Mr. Boreen has been a principal of HIB International. Since 1987, Mr. Boreen has been Chairman of US Tech. Mr. Boreen served as Chairman of AM Communications, Inc., a manufacturer of telecommunications equipment from 1989 to 1999. Since 2000, Mr. Boreen has been Chairman of Combex, Inc., a software company, and since 2002, he has been the trustee of the Cardiovascular Foundation, which is a charitable trust. Mr. Boreen has over 35 years experience in the integrated circuits industry and was the founder and Chairman of Solid State Scientific, a semiconductor manufacturer. Mr. Boreen currently serves as a member of Class I of the Board of Directors, and is a candidate for re-election at the Annual meeting. If elected, Mr. Boreen’s term will expire at the annual meeting in 2007.

 

David Dominik has been a director since the recapitalization of the Company in May 1999. He has been a managing director of Golden Gate Capital, a private equity investment firm he co-founded, since 2000. He has also been a special limited partner of Bain Capital, LLC, a private equity investment firm since 2000. He was a managing director of Bain Capital, LLC from 1990 until March 2000. From 1986 to 1990, Mr. Dominik was a general partner of Zero Stage Capital, a venture capital firm focused on early-stage companies, and was Assistant to the Chairman of Genzyme Corporation, a biotechnology firm, from 1984 to 1986. From 1982 to 1984, he worked as a management consultant at Bain & Company, a consulting firm. Mr. Dominik also serves on the Board of Directors at Leiner, Inc. Mr. Dominik currently serves as a member of Class I of the Board of Directors, and is a candidate for re-election at the Annual meeting. If elected, Mr. Dominik’s term will expire at the annual meeting in 2007.

 

Michael A. Krupka has been a director since the recapitalization of the Company in May 1999. He joined Bain Capital in 1991 and has been a Managing Director since 1997. Prior to joining Bain Capital Inc., 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 LLC portfolio companies. Mr. Krupka currently serves on the Board of Directors of US LEC Corporation. Mr. Krupka currently serves as a member of Class II of the Board of Directors, and his current term will expire at the annual meeting in 2005.

 

64


John D. Howard has been a director since the recapitalization of the Company in May 1999. He joined Bear Stearns in March of 1997 and is a Senior Managing Director and Chief Executive Officer of Merchant Banking. From 1990 to 1997, he was co-Chief Executive Officer of Vestar Capital Partners Inc., 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. Mr. Howard currently serves on the Board of Directors of Aeropostale, Inc., Nice-Pak Holdings Inc., and New York & Co. Mr. Howard currently serves as a member of Class II of the Board of Directors, and his current term will expire at the annual meeting in 2005.

 

Nam P. Suh, Ph.D. has been a director since November 2000. He is currently The Ralph E. and Eloise F. Cross Professor and Director at the Park Center for Complex Systems (formerly The Manufacturing Institute) at the Massachusetts Institute of Technology (“MIT”). He has been with the MIT faculty since 1970 and during this time, he served as the Head of the Department of Mechanical Engineering from 1991 to 2001. He was also the Founding Director of the MIT Laboratory for Manufacturing and Productivity, founder and Director of the MIT-Industry Polymer Processing Program, head of the Mechanics and Material Division of the Mechanical Engineering department, and a member of the Engineering Council of MIT. Between 1984 and 1988, he was appointed by President Ronald Reagan as Assistant Director for Engineering of the National Science Foundation, for which he received the Foundation’s Distinguished Service Award. He has authored over 300 papers, six books, and holds approximately 50 patents. Dr. Suh holds a B.S. and M.S. from MIT, and has received a Ph.D. from Carnegie Mellon University. In addition to many honors and awards from many countries, Dr. Suh also received three honorary doctorate degrees. Dr. Suh currently serves on the Board of Directors of Trexel, Inc., Tribotek, Inc., ParkerVision, Inc., Axiomatic Design Software, Inc., and Therma Wave, Inc. Dr. Suh currently serves as a member of Class III of the Board of Directors, and his current term will expire at the annual meeting in 2006.

 

Russell G. Weinstock has been a director since December 2004. Mr. Weinstock is a retired financial executive with more than 35 years experience in technology driven companies. He retired from Silicon Valley Group, Inc. in 2001 with 16 years of service, during the last 10 years of which he held the position of Vice President of Finance and Chief Financial Officer, prior to which he served as the Silicon Valley Group’s Corporate Controller. Over the preceding 20 years, Mr. Weinstock held various positions in financial management for CCT Corporation, Sperry Univac, RCA Corporation and Paper Manufacturer’s Company. Mr. Weinstock served on Juvenile Diabetes Research Foundation’s Silicon Valley Board of Directors from approximately mid 2001 until mid 2003. Mr. Weinstock received a B.S. in Accounting from Rider University in 1965.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s executive officers, directors and greater than 10% shareholders (“Reporting Persons”) to file reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4 and 5) of Company securities with the Securities and Exchange Commission. Reporting Persons are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations of Reporting Persons that no other reports were required to be filed during the fiscal year ended July 2, 2005, all Section 16(a) filing requirements applicable to the Reporting Persons were complied within a timely manner during the last fiscal year.

 

65


Audit Committee

 

We have a standing Audit Committee (the “Audit Committee”), which, during fiscal 2005, was composed of Henry I. Boreen, John D. Howard, Nam P. Suh, Ph.D. and Russell G. Weinstock, each of whom is “independent” within the meaning of the applicable SEC and Nasdaq rules. Upon appointment of Russell G. Weinstock to the Audit Committee in December 2004 Henry I Boreen ceased to be a member of the committee.

 

Audit Committee Financial Expert

 

Our Board of Directors has determined that one member of our Audit Committee, Russell G. Weinstock, has the qualifications to be an “audit committee financial expert” as defined in the Securities and Exchange Commission’s rules and regulations and also meets the standards of independence adopted by the Securities and Exchange Commission for membership on an audit committee.

 

Code of Business Conduct and Ethics

 

The Board of Directors has adopted a Code of Business Conduct and Ethics applicable to our directors, officers and employees, including our Chief Executive Officer & President, our Chief Financial Officer, and our Vice Presidents. The Code of Business Conduct and Ethics is filed as an exhibit to our Form 10-K for the year ended July 3, 2004 and is posted in the “Investors” section of our web site at www.icst.com. We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of or waivers to, the Code of Business Conduct and Ethics on our web site.

 

Item 11. EXECUTIVE COMPENSATION

 

The following table sets forth, for the fiscal years ended July 2, 2005, July 3, 2004 and June 28, 2003, 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.

 

66


SUMMARY COMPENSATION TABLE

 

         

Annual

Compensation


  

Long Term

Compensation Awards


Name and Principal Position


  

Fiscal

Year


  

Salary

($)


  

Bonus

($)(1)


   Securities
Underlying
Options(#)


   All Other
Compensation
($)(2)


Hock E. Tan
CEO, President and Director

   2005
2004
2003
   340,569
334,517
310,408
   144,544
247,031
196,312
   3,750
125,000
—  
   9,441
12,460
11,529

Justine F. Lien
Vice President and Chief Financial Officer

   2005
2004
2003
   206,220
199,135
193,995
   46,746
91,350
80,496
   4,000
—  
100,000
   10,464
11,499
11,575

Dinh N. Bui (3)
Vice President, Frequency Timing Group

   2005
2004
   221,631
209,231
   55,427
94,828
   4,000
—  
   6,625
6,496

Randall R. Frederick (3)
Vice President, Video Business Unit

   2005
2004
   215,815
209,231
   31,991
94,049
   34,000
—  
   10,926
11,678

(1) Includes cash bonuses for services rendered in the applicable fiscal year.
(2) Includes amounts contributed by the Company for fiscal year 2005: (i) under the Company’s 401(k) Plan as follows: Mr. Tan $8,938; Ms. Lien $9,960; Mr. Bui $6,121; and Mr. Frederick $10,422; and (ii) for premiums for a life insurance policy as follows: Mr. Tan $504; Ms. Lien $504; Mr. Bui $504; and Mr. Frederick $504.
(3) Mr. Bui and Mr. Frederick were elected as executive officers in the 2004 fiscal year of the Company.

 

The following table sets forth the option grants during the fiscal year ended July 2, 2005 for the individuals named in the Summary Compensation Table.

 

OPTION GRANTS IN FISCAL YEAR ENDED JULY 2, 2005

 

     Individual Grants

   

Exercise
or Base
Price

($/Sh)


  

Expiration
Date


  

Potential Realizable Value
at Assumed Annual Rates

of Stock Price Appreciation

for Option Term ($)


Name


  

Number of
Securities
Underlying

Options
Granted


   Percent of
Total Options
Granted to
Employees in
Fiscal Year


          5%

   10%

Hock E. Tan

   3,750    0.17 %   18.50    1/24/2015    43,630    110,566

Justine F. Lien

   4,000    0.18 %   18.50    1/24/2015    46,538    117,937

Dinh N. Bui

   4,000    0.18 %   18.50    1/24/2015    46,538    117,937

Randall R. Frederick

   4,000    0.18 %   18.50    1/24/2015    46,538    117,937

Randall R. Frederick

   30,000    1.33 %   21.36    8/5/2014    402,996    1,021,270

 

67


The following table sets forth aggregate option exercises during the fiscal year ended July 2, 2005 and option values for the individuals named in the Summary Compensation Table.

 

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND

FISCAL YEAR END OPTION VALUES

 

Name


   Shares
Acquired
on
Exercise
(#)


  

Value

Realized
($)


  

Number of

Securities
Underlying
Unexercised Options
At Fiscal Year End
(#)


   Value of Unexercised
In-the-Money Options
at Fiscal Year End ($)


        

Exercisable/

Unexercisable


  

Exercisable/

Unexercisable


Hock E. Tan

   50,000    1,037,290    268,958/125,000    1,932,771/38,438

Justine F. Lien

   0    0    111,500/82,500    92,570/53,100

Dinh N. Bui

   0    0    197,296/85,000    854,214/60,550

Randall R. Frederick

   0    0    226,356/100,000    1,476,800/54,400

 

Compensation of Directors

 

The Company reimburses 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, the Company compensates independent members of the Board of Directors with an annual stipend of $15,000 for services provided in such capacity, as well as $3,000 for each board meeting attended, and $2,000 for each committee meeting attended other than in conjunction with a full board meeting.

 

Executive Employment Agreements

 

In August 2003, the Compensation Committee approved an increase in the base salary of Hock E. Tan, as CEO and President, to $325,000 per year pursuant to an employment agreement that was entered into as of May 1999. In addition to his salary, Mr. Tan is eligible to earn an annual bonus of up to 150% of his base salary based upon our attaining certain performance targets established annually by the Board of Directors. Mr. Tan’s employment agreement may be terminated either by Mr. Tan’s resignation or by the Company, with or without cause. In the event the employment agreement is terminated without cause, or Mr. Tan resigns for good reason, the company is required to make severance payments to Mr. Tan in the amount of 125% of his then current base salary, plus any bonus earned, but unpaid (such bonus being prorated if Mr. Tan is terminated prior to the last day of the fiscal year) and health benefits. The foregoing severance payments are required to be made until twelve months following the termination.

 

In June 2005, Hock E. Tan entered into an agreement with IDT to act as Chairman of the IDT board of directors, which agreement is effective following the merger. Mr. Tan will serve as Chairman of the IDT board of directors for the two-year term of this agreement. Mr. Tan will also serve as an executive officer of IDT. During the first year of Mr. Tan’s employment, his primary responsibility will be to manage the transition and integration of ICS’s business and operations with the business and operations of IDT. Mr. Tan’s base salary pursuant to such agreement is $325,000 per year. Mr. Tan is eligible to earn an annual bonus of up to 75% of his base salary based upon his achievement of certain

 

68


individual, unit and corporation-wide performance targets pursuant to IDT’s Incentive Compensation Plan and Mr. Tan is eligible to receive an option to purchase 200,000 shares of IDT common stock, in addition to the first and second replacement grants of options to purchase IDT common stock which will be granted for each of his ICS options which will be cancelled pursuant to the terms of the merger agreement, similar to all ICS optionees. This third stock option grant will vest, pursuant to Mr. Tan’s continued service with IDT, in two (2) equal annual installments upon Mr. Tan’s first and second anniversaries of his commencement of employment with IDT. Mr. Tan’s employment may be terminated without Cause by IDT, provided such termination is approved by no less than 75% of the members of the Board or by Mr. Tan for Good Reason (as such capitalized terms are defined by his employment agreement). In the event of such a termination without Cause, or resignation for Good Reason, IDT is required, upon Mr. Tan’s signing and not revoking a release of all claims against IDT, to make severance payments to Mr. Tan in the amount of 100% of his base salary, continue to pay health benefit premiums for Mr. Tan and his family for a maximum of twelve months and provide twelve months of accelerated vesting of his outstanding stock options.

 

In June 2005, Dinh Bui entered into an agreement with IDT to act as IDT’s Vice President Frequency Timing Group, which agreement is effective following the merger. Mr. Bui will serve as Vice President of IDT for the two (2) year term of this agreement. Mr. Bui’s base salary pursuant to such agreement is $251,538 per year. Mr. Bui is eligible to earn an annual bonus with a target rate of 30% of his base salary based upon his achievement of certain individual, unit and corporation-wide performance targets pursuant to IDT’s Incentive Compensation Plan and Mr. Bui is eligible to receive an option to purchase 100,000 shares of IDT common stock, in addition to the first and second replacement grants of options to purchase IDT common stock which will be granted for each of his ICS options which will be cancelled pursuant to the terms of the merger agreement, similar to all ICS optionees. This third stock option grant will vest, pursuant to Mr. Bui’s continued service with IDT, in three (3) substantially equal annual installments upon Mr. Bui’s second, third, and fourth anniversaries of his commencement of employment with IDT. Mr. Bui’s employment may terminate without Cause by IDT, or by Mr. Bui for Good Reason (as such capitalized terms are defined in his employment agreement). In the event of such a termination without Cause, or resignation for Good Reason, IDT is required, upon Mr. Bui’s signing and not revoking a release of all claims against IDT, to make severance payments to Mr. Bui in the amount of 100% of his base salary, continue to pay health benefit premiums for Mr. Bui and his family for a maximum of twelve months and provide twelve months of accelerated vesting of his outstanding stock options.

 

In June 2005, Randall Frederick entered into an agreement with IDT to act as IDT’s Vice President of Video, which agreement is effective following the merger. Mr. Frederick will serve as Vice President of Video of IDT for the two (2) year term of this agreement. Mr. Frederick’s base salary pursuant to such agreement is $244,419 per year. Mr. Frederick is eligible to earn an annual bonus with a target rate of 30% of his base salary based upon his achievement of certain individual, unit and corporation-wide performance targets pursuant to IDT’s Incentive Compensation Plan and Mr. Frederick is eligible to receive an option to purchase 100,000 shares of IDT common stock, in addition to the first and second replacement grants of options to purchase IDT common stock which will be granted for each of his ICS options which will be cancelled pursuant to the terms of the merger agreement, similar to all ICS optionees. This third stock option grant will vest, pursuant to Mr. Frederick’s continued service with IDT, in three (3) substantially equal annual installments upon Mr. Frederick’s second, third, and fourth anniversaries of his commencement of employment with IDT. Mr. Frederick’s employment may terminate without Cause by IDT, or by Mr. Frederick for Good Reason (as such capitalized terms are defined in his employment agreement). In the event of such a termination without Cause, or resignation for Good Reason, IDT is required, upon Mr. Frederick’s signing and not revoking a release of all claims against IDT, to make severance payments to Mr. Frederick in the amount of 100% of his base salary, continue health benefits for Mr. Frederick and his family for a maximum of twelve months and provide twelve months of accelerated vesting of his outstanding stock options.

 

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ICS intends to pay Justine Lien, ICS’s Vice President of Finance and Chief Financial Officer, twelve months of severance and medical benefits following the termination of her employment following the merger and to pay her a bonus equal to $50,000 upon consummation of the merger.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the Compensation Committee of the Board of Directors are John D. Howard and Michael A. Krupka. Neither Mr. Howard nor Mr. Krupka is an officer or employee, or a former officer or employee, of the Company.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Except for the summary of the Company’s equity compensation plans below, the information required under this item is hereby incorporated by reference from the Company’s Joint Proxy Statement/ Prospectus included as a part of the Form S-4 filed by Integrated Device Technology, Inc. with the Securities Exchange Commission on July 22, 2005 under the caption “ICS Security Ownership of Certain Beneficial Owners and Management.” A copy of the pertinent pages from such Form S-4 are filed as Exhibit 99.1 to this Form 10-K

 

The following table sets forth information as of the end of the Company’s 2005 fiscal year with respect to compensation plans under which the Company is authorized to issue shares.

 

EQUITY COMPENSATION PLAN INFORMATION

 

Plan Category


   Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights


   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights


   Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(excluding securities
reflected in 1st column)


Equity compensation plans approved by security holders (1)

   5,788,194    $ 17.3864    2,446,054

Equity compensation plans not approved by security holders (2)

   2,572,925    $ 23.3157    390,700
    
  

  

Total

   8,362,119    $ 19.2114    2,835,754
    
  

  

(1) These plans consist of: 1999 Stock Option Plan, Executive Stock and Option Agreements, Executive Stock Purchase Agreement, 2000 Long-Term Equity Incentive Plan and 2000 Employee Stock Purchase Plan.
(2) This consists of 2002 Employees’ Equity Incentive Plan.

 

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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Orders Placed with Affiliate of Directors

 

Michael A. Krupka and David Dominik, both of whom are directors of the Company, are members or general partners of certain investment funds associated with Bain Capital, LLC. Certain of these Bain Capital, LLC investment funds are also shareholders of STATSChipPac Ltd., one of our production vendors. Our orders to STATSChipPac totaled approximately $0.1 million for fiscal year 2005, $0.4 million for fiscal year 2004 and $0.5 million for fiscal year 2003 and were on market terms.

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

During fiscal year 2005, the Company retained as independent registered public accounting firm, PricewaterhouseCoopers LLP, to provide services as set forth below.

 

Auditor Fees and Services

 

The aggregate fees incurred by the Company with PricewaterhouseCoopers LLP for the annual audit and other services for the fiscal years ended July 2, 2005 and July 3, 2004 were as follows:

 

Fee Category    


   Fiscal 2005 Fees ($)

   Fiscal 2004 Fees ($)

Audit Fees (1)

   1,209,700    310,000

Audit-Related Fees (2)

   239,800    49,800

Tax Fees (3)

   3,700    8,000

All Other Fees (4)

        —  

Total Fees

   1,453,200    367,800

(1). Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s financial statements and for reviews of the interim financial statements included in the Company’s quarterly reports on Form 10-Q.
(2). Audit-Related Fees consist of fees billed for professional services rendered for audit-related services including consultations on other financial accounting and reporting related matters. 2005 fees include services rendered in connection with mergers and acquisitions.
(3). Tax Fees consists of fees billed for professional services relating to tax compliance and other tax advice.
(4). All Other Fees consist of fees billed for all other services.

 

Pre-Approval Policy

 

All audit related services, tax services and other services were pre-approved by the Audit Committee, which concluded that the provision of such services by PricewaterhouseCoopers LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s pre-approval policies and procedures provide for pre-approval of audit, audit-related, tax services and other services. Unless a type of service to be provided by the independent public accountants has received general pre-approval, it will require specific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved fee levels require specific pre-approval by the audit committee. The pre-approval fee levels for all services to be provided by the independent public accountants are established annually by the Audit Committee.

 

 

71


PART IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(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.

 

72


SCHEDULE II

 

INTEGRATED CIRCUIT SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS

 

Years ended July 2, 2005, July 3, 2004, and June 28, 2003

(in thousands)

 

Description


  

Balance at

Beginning of

Period


  

Additions Charged

to Costs and

Expenses*


    Deductions**

  

Balance at

End of Period


Year ended July 2, 2005:

                            

Valuation reserves:

                            

Doubtful accounts

   $ 423    $ (51 )   $ 18    $ 354

Returns and allowances

     1,069      1,574       —        2,643

Inventory reserve

     6,714      2,635       2,248      7,101

Deferred tax valuation

     3,719      1,346       436      4,629

Year ended July 3, 2004:

                            

Valuation reserves:

                            

Doubtful accounts

   $ 795    $ (44 )   $ 328    $ 423

Returns and allowances

     1,219      (150 )     —        1,069

Inventory reserve

     8,490      (26 )     1,750      6,714

Deferred tax valuation

     7,102      —         3,383      3,719

Year ended June 28, 2003:

                            

Valuation reserves:

                            

Doubtful accounts

   $ 1,279    $ 93     $ 577    $ 795

Returns and allowances

     748      471       —        1,219

Inventory reserve

     8,084      891       485      8,490

Deferred tax valuation

     6,942      160       —        7,102

* Additions include the inclusion of Micro Networks Corporation reserves after the acquisition on January 4, 2002.
** Deductions include adjustments to the reserves, as well as write-offs.

 

 

73


Index to Exhibits

 

The following exhibits are filed as part of, or incorporated by reference into this report.

 

*2.1   Agreement and Plan of Merger, dated June 15, 2005, by and among Integrated Device Technologies, Inc., Colonial Merger Sub I, Inc. and Integrated Circuit Systems, Inc. (Exhibit 2.1 to the Form 8-K filed June 16, 2005).
*3.1   Amended and Restated Articles of Incorporation of the Company (Exhibit 3.1 to the Form 10-Q for the quarter ended December 30, 2000).
*3.2   Amended and Restated By-laws of the Company (Exhibit 3.2 to the Form 8-K filed December 29, 2004).
*10.1   Integrated Circuit Systems, Inc. 1999 Stock Option Plan (Exhibit 10.4 to the Registrant’s Form S-4, registration number 333-88607 [the “1999 Form S-4”]).
*10.2   Lease, dated as of January 29, 1999 between BET Investments IV and the Company (Exhibit 10.6 to the 1999 Form S-4).
+*10.3   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).
+*10.4   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).
+*10.5   Employment, Confidential Information and Invention Assignment Agreement between the Company and Hock E. Tan (Exhibit 10.12 to the 1999 Form S-4).
*10.7   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).
*10.8   Amendment No. 1 to the Registration Rights Agreement, dated December 29, 1999 (Exhibit 10.17 to the 2000 Form S-1).
+*10.9   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).
+*10.12   Employment Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan (Exhibit 10.19 to the 1999 Form S-4).
+*10.13   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).
*10.14   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).

 

74


*10.15   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”]).
*10.16   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).
*10.17   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).
*10.18   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).
*10.19   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).
+*10.20   2000 Long Term Equity Incentive Plan (Exhibit 10.1 and 10.2. to the Registrant’s Form 10-Q for the quarter ended October 2, 2004).
*10.21   Employee Stock Purchase Plan (Exhibit 10.34 to the 2000 Form S-1).
*10.23   Revolving Credit Loan Agreement, dated as of June 23, 2000, among the Company, ICST, Inc., ICS Technologies, Inc., Integrated Circuit Systems PTE, Ltd. and First Union National Bank (Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended December 30, 2000).
10.24   Indemnification Agreement dated May 22, 2000 between Integrated Circuit Systems, Inc. and Lewis C. Eggebrecht (pursuant to instruction 2 to Item 601 of Regulation S-K, the Indemnification Agreement, which is substantially identical in all material respects except as to the parties thereto and the date thereof, between the Company and the following individual, is not being filed: Henry I. Boreen).
10.25   Indemnification Agreement dated December 27, 2004 between Integrated Circuit Systems, Inc. and Russell G. Weinstock (pursuant to instruction 2 to Item 601 of Regulation S-K, the Indemnification Agreement, which is substantially identical in all material respects except as to the parties thereto and the date thereof, between the Company and the following individual, is not being filed: Hock E. Tan, Justine F. Lien, David Dominik, Michael A. Krupka, John D. Howard, Nam P. Suh, Ph.D.)
*10.26   2002 Employees’ Equity Incentive Plan (Exhibit 4.3 to the Registrant’s Form 8-K filed February 10, 2003).

 

75


*10.27   Form of Voting Agreement, dated June 15, 2005, by and among a stockholder of Integrated Circuit Systems, Inc. and Integrated Device Technologies, Inc. (Exhibit 10.1 to the Form 8-K filed June 17, 2005).
*10.28   Form of Voting Agreement, dated June 15, 2005, by and among a stockholder of Integrated Device Technologies, Inc. and Integrated Circuit Systems, Inc. (Exhibit 10.2 to the Form 8-K filed June 17, 2005).
*14.1   Registrant’s Code of Business Conduct and Ethics (Exhibit 14.1 to the Registrant’s Form 10-K for the fiscal year ended July 3, 2004).
*21.1   Subsidiaries of the Registrant (Exhibit 21.1 to the Registrant’s Form 10-K for the fiscal year ended July 3, 2004).
23.1   Consent of PricewaterhouseCoopers LLP.
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Hock E. Tan.
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Justine F. Lien.
99.1   ICS Security Ownership of Certain Beneficial Owners and Management

* Incorporated by reference
+ Management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(c) of this report.

 

76


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 2, 2005   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 2, 2005   By:  

/s/ Hock E. Tan


        Hock E. Tan, Chief Executive Officer, Director
Date: September 2, 2005   By:  

/s/ Justine F. Lien


        Justine F. Lien, Vice President, Chief Financial
        & Accounting Officer
Date: September 2, 2005   By:  

/s/ Henry Boreen


        Henry I. Boreen, Director
Date: September 2, 2005   By:  

/s/ David Dominik


        David Dominik, Director
Date: September 2, 2005   By:  

/s/ Michael A. Krupka


        Michael A. Krupka, Director
Date: September 2, 2005   By:  

/s/ John Howard


        John Howard, Director
Date: September 2, 2005   By:  

/s/ Nam P. Suh


        Nam P. Suh, Director
Date: September 2, 2005   By:  

/s/ Lewis Eggebrecht


        Lewis Eggebrecht, Director
Date: September 2, 2005   By:  

/s/ Russell Weinstock


        Russell Weinstock, Director

 

77


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-K’ Filing    Date    Other Filings
12/31/07
3/1/07
12/15/05
12/5/05
9/23/05
9/15/05425
Filed as of:9/6/05
Filed on:9/2/05425
9/1/05425,  8-K
8/31/058-K
7/22/05
7/3/05
For Period End:7/2/05
7/1/05
6/29/05
6/17/05425
6/16/05425,  8-K
6/15/058-K
4/2/0510-Q
1/1/0510-Q
12/31/04
12/29/048-K
12/27/043,  8-K
10/22/04
10/4/04
10/2/0410-Q
8/4/048-K
7/4/04
7/3/0410-K
6/30/04
3/27/0410-Q
3/1/04
12/27/0310-Q
9/27/0310-Q
6/28/0310-K
5/31/03
5/30/03
2/10/03S-8
12/15/02
6/29/0210-K
1/4/028-K,  8-K/A
12/31/01
6/30/0110-K405
5/31/01
12/30/0010-Q
6/23/00
5/22/00S-1/A
12/29/99
5/11/9915-12G
1/29/998-K
12/30/95
11/8/95
11/21/94
10/12/94
9/30/94
5/28/93
5/13/93
11/3/92
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