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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the Quarter ended March 29, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-19299
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Integrated Circuit Systems, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2000174
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 Boulevard of the Generals
Norristown, Pennsylvania 19403
(Address of principal executive offices)
(610) 630-5300
(Registrant's telephone number including area code)
--------------------------------
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
-----
As of May 9, 1997, there were outstanding 11,898,158 shares of the Registrant's
Common Stock, no par value.
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1
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INTEGRATED CIRCUIT SYSTEMS, INC.
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INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
March 29, 1997 and June 29, 1996 3
Consolidated Statements of Operations:
Three and Nine Months Ended March 29, 1997
and March 30, 1996 4
Consolidated Statements of Cash Flows:
Nine Months Ended March 29, 1997 and
March 30, 1996 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
</TABLE>
OTHER INFORMATION
Exhibits and Reports on Form 8-K
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
($ and shares in thousands)
<TABLE>
<CAPTION>
March 29, June 29,
1997 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 17,725 $ 27,376
Marketable securities - current 24 24
Accounts receivable, net 17,081 13,705
Inventory, net 13,267 16,237
Other current assets 4,709 5,451
----------- -----------
Total current assets 52,806 62,793
----------- -----------
Property and equipment, net 13,573 14,135
Deposits on purchase contracts 10,042 5,575
Goodwill 5,745 1,495
Equity investment and advances 3,305 -
Net assets of discontinued operations 118 3,294
Other assets 125 278
----------- -----------
Total assets $ 85,714 $ 87,570
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable to bank $ 2,650 $ 2,315
Current portion of long term debt 195 117
Accounts payable 9,258 9,649
Income tax payable 2,037 -
Accrued expenses and other current liabilities 2,879 2,689
----------- -----------
Total current liabilities 17,019 14,770
----------- -----------
Long-term debt, less current portion 1,541 1,631
Deferred income taxes 1,296 788
----------- -----------
Total liabilities 19,856 17,189
----------- -----------
Minority interest - 1,217
Shareholders' Equity:
Preferred stock, authorized 5,000 shares, none issued Common stock,
no par value, authorized 50,000 shares;
issued and outstanding 11,835 and 11,389 shares as of
March 29, 1997 and June 29, 1996, respectively 40,572 32,674
Retained earnings 28,564 36,950
Less: treasury stock, at cost (286 and 35 shares as of
March 29, 1997 and June 29, 1996, respectively) (3,278) (460)
----------- -----------
Total shareholders' equity 65,858 69,164
----------- -----------
Total liabilities and shareholders' equity $ 85,714 $ 87,570
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Operations
($ and shares in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues: $ 25,120 $ 15,382 $ 73,946 $ 70,320
Cost and expenses:
Cost of sales 13,503 11,891 43,458 40,443
Research and development 3,500 2,495 9,566 7,824
Selling, general and administrative 3,145 4,744 11,280 14,021
Other charges:
Facility closing - - - 1,757
Write off of in-process research and
development costs 11,196 - 11,196 1,500
-------------- ---------- ---------- ----------
Operating income (loss) (6,224) (3,748) (1,554) 4,775
-------------- ---------- ---------- ----------
Interest and other (income) (405) (346) (1,090) (888)
Interest expense 8 42 44 371
Minority interest - (98) (154) (851)
Loss from equity investment 317 - 463 -
-------------- ---------- ---------- ----------
Income (loss) before income taxes and
discontinued operations (6,144) (3,346) (817) 6,143
Income taxes 1,835 (1,620) 3,428 1,937
-------------- ---------- ---------- ----------
Income (loss) from continuing operations (7,979) (1,726) (4,245) 4,206
Discontinued operations:
Loss from operations (1,335) (360) (2,194) (237)
Loss on disposal (1,511) - (1,511) -
-------------- ---------- ---------- ----------
Loss from discontinued operations (2,846) (360) (3,705) (237)
-------------- ---------- ---------- ----------
Net income (loss) $ (10,825) $ (2,086) $ (7,950) $ 3,969
============== ========== ========== ==========
Earnings (loss) per common shares:
Income (loss) from continuing operations $ (0.68) $ (0.15) $ (0.37) $ 0.36
Loss from discontinued operations (0.24) (0.03) (0.33) (0.02)
-------------- ---------- ---------- ----------
Net income (loss) per common share $ (0.92) $ (0.18) $ (0.70) $ 0.34
============== ========== ========== ==========
Common and common equivalent shares 11,771 11,317 11,324 11,586
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended,
Mar. 29, Mar. 30,
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,950) $ 3,969
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Other charge 11,196 2,715
Depreciation and amortization 2,606 2,159
Minority interest (154) (851)
Loss from discontinued operations 3,705 94
(Gain) loss on disposition of assets (352) 32
Deferred income taxes 683 (369)
Loss from equity investments 463 -
Non-cash compensation 84 -
Accounts receivable (5,367) 3,608
Advance to equity investment 167 -
Inventory 277 (4,951)
Other assets, net (433) 81
Accounts payable, accrued expenses and other current liabilities (360) (848)
Income taxes 262 242
------------ -----------
Net cash provided by operating activities 4,827 5,881
------------ -----------
Cash flows from investing activities:
Capital expenditures (1,913) (2,450)
Sales, maturities (purchases) of marketable securities - 7,846
Increase in net deposits on purchase contracts (4,466) (1,302)
Acquisitions, net of cash acquired (5,879) (986)
Other (82) 112
------------ -----------
Net cash provided by (used in) investing activities (12,340) 3,220
------------ -----------
Cash flows from financing activities:
Net borrowings under line of credit agreement 335 4,648
Repayments of long-term debt (93) (1,957)
Repurchase of common stock (10,466) -
Exercise of stock options 6,995 2,043
Tax benefit of stock option exercises 1,091 426
------------ -----------
Net cash provided by (used in) financing activities (2,138) 5,160
------------ -----------
Net increase (decrease) in cash and cash equivalents (9,651) 14,261
Cash and cash equivalents:
Beginning of period 27,376 6,646
------------ -----------
End of period $ 17,725 $ 20,907
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 43 $ 234
============= ============
Income taxes $ 1,310 $ 1,387
============= ============
Supplemental disclosures of non-cash investing activities:
Issuance of common stock - acquisition of MicroClock $ 8,000 $ -
============= ============
Issuance of Turtle Beach common stock - acquisition
of Value Media $ - $ 2,673
============= ============
See footnote 3 and 9 for non-cash financing activities
</TABLE>
See accompanying notes to consolidated financial statements.
6
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
(1) INTERIM ACCOUNTING POLICY
The accompanying financial statements have not been audited. In the opinion of
the Company's management, the accompanying consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's financial position at March 29, 1997 and results
of operations and cash flows for the interim periods presented. Certain items
have been restated to conform to current period presentation.
Certain footnote information has been condensed or omitted from these financial
statements. Therefore, these financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended June 29, 1996. Results
of operations for period ended March 29, 1997 are not necessarily indicative of
results to be expected for the full year.
(2) CONSOLIDATION POLICY
The accompanying consolidated financial statements include the accounts of the
Company and all of its subsidiaries (wholly and majority-owned), after
elimination of all significant intercompany accounts and transactions.
(3) ACQUISITION/MERGER
On February 28, 1997, the Company acquired all the capital stock of MicroClock,
Inc. ("MicroClock"), a leading producer of clock synthesizer integrated circuits
for multimedia applications, for approximately $16.4 million to be paid in the
form of approximately $6.4 million in cash and 608,504 shares of ICS common
stock. The Company's shares exchanged in the transaction are restricted for one
year and therefore, have been valued at $8.0 million for purposes of purchase
accounting. The acquisition was accounted for under the purchase method of
accounting and resulted in a charge of $11.2 million related to the write-off of
in process research & development costs and the recording of goodwill of $1.7
million, which will be amortized over the next 7 years. Revenues of MicroClock
were not significant to the Company's consolidated statement of operations for
the three and nine month periods ended March 29, 1997.
On November 29, 1996, the Company signed an Agreement and Plan of Merger, (the
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach
Systems, Inc. ("Turtle Beach") to Voyetra Technologies Inc. ("Voyetra"), in
exchange for an approximately 35% equity interest in Voyetra. Voyetra is a
supplier of music and audio software. No gain or loss was recorded on this
transaction. The Company's proportionate share of underlying equity in Voyetra
is approximately $3.5 million. The excess of the Company's carrying value over
their proportionate share of underlying equity of approximately $4.3 million
will be amortized as goodwill over 7 years. The Company accounts for its
investment in Voyetra under the equity method of accounting. In connection with
the merger, the Company also entered into a Revolving Credit Agreement and Note
(the "Credit Agreement") with Voyetra, pursuant to which the Company has agreed
to make loans to Voyetra up to an aggregate of $3.5 million. See Related Party
footnote (9).
(4) DISCONTINUED OPERATIONS
During the quarter ended March 29, 1997, the Company made a strategic decision,
with approval by the Board of Directors, to dispose of its majority interest in
their subsidiary, Ark Logic, either by sale or abandonment within a 12 month
period. As such, the Company has presented Ark Logic as discontinued operations
and all prior periods have been restated to reflect this presentation. The
carrying value of the investment of approximately $1.0 million and direct costs
of $0.5 million for severance and shut down costs are recorded under
discontinued operations as "Loss on disposal" in the statement of operations.
The Company has reserved $1.3 million for its share of losses through the
disposal date in discontinued operations as "Loss from operations". Revenues
from Ark Logic for the three and nine month periods ending March 29, 1997 were
$0.3 million and $1.6 million, respectively.
7
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
(5) INVENTORY
Inventory is valued at the lower of standard cost which approximates actual cost
(FIFO basis), or market.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
March 29, June 29,
1997 1996
------------------ -------------------
<S> <C> <C>
Work-in-process $ 1,825 $ 4,430
Finished parts 13,495 13,808
Less: Obsolescence reserve (2,053) (2,001)
------------------ -------------------
$ 13,267 $ 16,237
================== ===================
</TABLE>
(6) LINE OF CREDIT
During the third quarter of fiscal 1997, the Company drew down $2.7 million from
its revolving/term loan credit facility with a commercial bank. The Company was
in compliance with all covenants as of March 29, 1997.
(7) PURCHASE COMMITMENTS
Pursuant to the Company's purchase commitment agreement with Chartered
Semiconductor Manufacturing PTE, Ltd. ("CSM"), in November 1996 and March 1997,
the Company deposited a total of $6.0. The remaining $2.0 million due under the
agreement will be paid by the end of the first quarter of fiscal 1998.
(8) COMMON STOCK
In November, the Board of Directors authorized the repurchase of up to 1.0
million shares of the Company's common stock over the next twelve months. The
timing and amount of shares repurchased will be determined at the discretion of
the Company's management. The Company has repurchased 542,000 shares valued at
$7.6 million, using the cost method since December 1, 1996.
(9) RELATED PARTY
In the second quarter fiscal 1997, the Company entered into a Revolving Credit
Agreement and Note (the "Credit Agreement") with Voyetra under which the Company
extends a line of credit up to $3.5 million, subject to Voyetra satisfying
certain financial covenants. As of March 29, 1997, $.5 million was outstanding
under this agreement. Advances under the Credit Agreement bear interest at 9.0%
annually. The Credit Agreement will expire as of December 31, 1997, subject to
extension under certain circumstances.
8
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
(9) RELATED PARTY (CONT'D)
On September 25, 1996, the Company sold its battery charge controller business
to Edward H. Arnold, a former director and former CEO of the Company. Although
the Company had been involved in the battery charge business since 1991, it was
not considered a core business and the associated products did not materially
contribute to the Company's revenue. In making this sale the Company determined
that further investment in such business was not consistent with the strategic
direction of the Company. Under the terms of such tax-free sale, Mr. Arnold
acquired all outstanding shares of the Company's wholly-owned subsidiary which
owned the intellectual property rights and working capital assets of this
business in exchange for 68,387 shares of the Company's common stock as valued
at $11.537 per share ( the average closing price for 10 days prior to the sale).
The sale price of $.8 million was based upon a valuation made by a reputable
independent appraiser and involved a premium over such valuation. In addition,
the Company will receive a royalty of 2% of the gross revenue received for all
sales during the three year period after September 25, 1996, of the products
comprising the business, as consideration for a license to the subsidiary of a
trademark associated with such products. The Company has recorded the gain in
the statement of operations as follows: the battery charge controller inventory
sold is recorded as revenue ($.6 million) with its corresponding costs in cost
of sales ($.3 million), the gain on the remaining assets is recorded as other
income ($.2 million).
(10) SUBSEQUENT EVENTS
On May 1, 1997, the Company announced that it will jointly develop with
International Business Machines Corporation ("IBM"), a new generation of
integrated circuits designed for Fast Ethernet networking systems. The pact
provides for the Company to license its Ethernet 100Base-TX PHY technology to
IBM, which will in turn license its 10/100 MAC and 32-bit PCI technology to the
Company. The Company and IBM will jointly develop a single chip Fast Ethernet
integrated 10/100 MAC/PHY; however, the companies can build and sell chips
separately. In addition, the Company will share in certain development costs as
the parties may agree to be appropriate.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
On November 29, 1996, the Company signed an Agreement and Plan of Merger, (the
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach
Systems, Inc. ("Turtle Beach") to Voyetra Technologies Inc. ("Voyetra"), in
exchange for an approximately 35% equity interest in Voyetra. Commencing with
the date of the Merger Agreement, the Company accounts for its investment in
Voyetra under the equity method of accounting.
On February 28, 1997, the Company acquired all the capital stock of MicroClock,
Inc. ("MicroClock"), a leading producer of clock synthesizer integrated circuits
for multimedia applications. The acquisition was accounted for under the
purchase method of accounting and resulted in a one-time charge of $11.2 million
related to the write-off of in process research and development costs and the
recording of goodwill of $1.7 million, which will be amortized over the next 7
years. The results of MicroClock have been included with the Company's since the
date of acquisition.
The following table sets forth, for the periods indicated, the percentage
relationship to revenue of certain cost, expense and income items. The table and
the subsequent discussion should be read in conjunction with the financial
statements and the notes thereto:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Mar. 29, Mar. 30, Mar. 29, Mar. 30,
------------ ------------ ------------ -------------
1997 1996 1997 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 53.8 77.3 58.8 57.5
Research and development 13.9 16.2 12.9 11.1
Selling, general and administrative 12.5 30.8 15.3 19.8
Other charges:
Facility closing 2.5
Write-off of in-process research and
development costs 44.6 - 15.1 2.1
------------ ------------ ------------ -------------
Operating income (loss) (24.8) (24.3) (2.1) 6.8
Interest and other (income) (1.6) (2.2) (1.5) (1.2)
Interest expense - 0.3 - 0.5
Minority interest - (0.6) (0.1) (1.2)
Loss from equity investment 1.3 - 0.6 -
------------ ------------ ------------ -------------
Income (loss) before income taxes and
discontinued operations (24.5) (21.8) (1.1) 8.7
Income taxes 7.3 (10.5) 4.6 2.8
------------ ------------ ------------ -------------
Income (loss) from continuing operations (31.8) (11.3) (5.7) 5.9
Discontinued operations:
Loss from operations (5.3) (2.3) (3.0) (0.3)
Loss on disposal (6.0) - (2.0) -
------------ ------------ ------------ -------------
Loss from discontinued operations (11.3) (2.3) (5.0) (0.3)
------------ ------------ ------------ -------------
Net income (loss) (43.1)% (13.6)% (10.7)% 5.6%
============ ============ ============ =============
</TABLE>
10
<PAGE>
Third Quarter 1997 as Compared to Third Quarter 1996
Despite the de-consolidation of Turtle Beach in the period, consolidated revenue
increased $9.7 million or 63.3% for the third quarter ended March 29, 1997 as
compared to the prior year quarter. The increase in revenue was primarily
attributable to the FTG and DataComm product lines, slightly offset by Turtle
Beach.
The Company's FTG component revenue increased $7.8 million to $13.6 million for
the third quarter of fiscal 1997 as compared to the prior year quarter
reflecting significant market share gains. Total FTG component revenue
contributed 54.3% of consolidated revenue for the third quarter in fiscal 1997
as compared to 37.8% for the prior year quarter.
Data Communication component revenue was $4.9 million for the third quarter of
fiscal 1997. Data Communications component revenue comprised 19.5% of
consolidated revenue for the third quarter of fiscal 1997 compared to little
corresponding revenue in the prior year quarter as a result of strong shipments
of the ICS1890 10/100 MB phyceiver chip.
Advanced Technologies component revenue increased $1.3 million for the third
quarter of fiscal 1997, as compared to the prior year quarter. The increase
represents an increase in the high performance products. Advanced Technologies
component revenue comprised 26.2% of consolidated revenue for the third quarter
of fiscal 1997 versus 34.4% for the prior year quarter primarily the result of
the deconsolidation of Turtle Beach and Ark Logic.
The revenues of Turtle Beach were de-consolidated during the third quarter of
fiscal 1997, as a result of the merger of Turtle Beach and Voyetra, as compared
to $4.2 million in the prior year quarter.
Foreign revenue (which includes shipments of ICs to offshore subsidiaries of US
multinational companies) was 61.4% of total revenue for the third quarter of
fiscal 1997 compared to 54.4% of total revenue in the prior year quarter. The
percentage increase reflects growth in the Far East.
Cost of sales as a percentage of total revenue was 53.8% for the third quarter
of fiscal 1997 as compared to 77.3% in the prior year quarter. The decrease in
the cost of sales percentage was primarily the result of an inventory adjustment
in the third quarter of fiscal 1996 and the impact of the Turtle Beach
transaction.
Research and development expense increased $1.0 million to $3.5 million for the
third quarter of fiscal 1997, as compared to the prior year quarter. The
increase is primarily attributable to increased product development programs in
FTGs and Data Communications.
Selling, general and administrative expense decreased $1.6 million to $3.1 in
the third quarter of fiscal 1997 as compared to the prior year quarter as a
resulting from continued efforts in cost reductions and the Turtle Beach
transaction.
During the third quarter of fiscal 1997, the Company recorded a charge to
earnings of approximately $11.2 million related to write-off of in process
product research & development costs as a result of the Company's acquisition of
MicroClock (See footnote 3 of the financial statements).
Nine Months Ended March 29, 1997 as compared to Nine Months Ended March 30, 1996
Consolidated revenue increased $3.6 million or 5.2% for the nine months ended
March 29, 1997 as compared to the prior year period. The increase in revenues
were primarily attributable to the FTG product line and the Data Communication
product line, slightly offset by decreases in the Advance Technologies product
line and the deconsolidation of Turtle Beach.
The Company's FTG component revenue increased $6.8 million to $39.6 million for
the nine months of fiscal 1997 as compared to the prior year period. The
increase is primarily related to the introduction of motherboard chips to the
Taiwanese market and the acquisition of MicroClock. Total FTG component revenue
contributed 53.6% of consolidated revenue in fiscal 1997 as compared to 46.8%
for the prior year period.
Data Communication component revenue was $9.2 million for the nine months of
fiscal 1997. Data Communications component revenue comprised 12.5% of
consolidated revenue in fiscal 1997 with very little corresponding revenue in
the prior year period as a result of the introduction of its 1890 family of
phyceiver chips in late third quarter of fiscal 1996.
Advanced Technologies component revenue decreased $3.7 million for the nine
months of fiscal 1997, as compared to the prior year period. The decrease
represents a decline in custom ASIC components. Advanced Technologies component
revenue comprised 24.7% of consolidated revenue in fiscal 1997 versus 31.3% for
the prior year period.
11
<PAGE>
As the result of the merger of Turtle Beach and Voyetra, revenue from Turtle
Beach decreased $8.6 million to $6.8 million in fiscal 1997.
Foreign revenue (which includes shipments of ICs to offshore subsidiaries of US
multinational companies) was 59.3% of total revenue for the nine months of
fiscal 1997 and compared to 45.9% of total revenue in the prior year period. The
percentage increase reflects growth in the Far East.
Cost of sales as a percentage of total revenue was 58.8% for the nine months of
fiscal 1997 which was comparable to 57.5% in the prior year period. This
increase represents a change in product mix, including the impact of the Turtle
Beach transaction.
Research and development expense increased $1.7 million to $9.6 million for the
nine months of fiscal 1997, as compared to the prior year period. Research and
development spending continues to increase because of acceleration placed on
FTGs programs and application support to the 1890 chip.
Selling, general and administrative expense decreased $2.7 million to $11.3 for
the nine months of fiscal 1997 as compared to the prior year period as a result
of continued emphasis on tighter fiscal control and the current year only
including five months of Turtle Beach operations in this line item.
During the third quarter of fiscal 1997, the Company took a charge in connection
with the acquisition of MicroClock of $11.2 million related to the write-off of
in process product research and development costs.
During the second quarter of fiscal 1996, the Company took a charge in
connection with the acquisition of the multimedia and communications peripheral
products lines of Value Media, Inc. by Turtle Beach and the consolidation of
Turtle Beach's operations. The charge, net of minority interest and tax was $2.0
million, or $.17 per share. The major components of these charges were:
* 1.8 million for severance, fixed asset write-off, buy out of building
lease and write-down of inventory in connection with the closing of the
York, Pennsylvania facility of Turtle Beach.
* 1.5 million related to the write-off of in-process research and
development projects at Value Media arising from the acquisition.
Income Taxes
The income tax expense was $3.4 million for the nine months ended March 29, 1997
compared to $1.9 million in the prior year period. The write-off of in process
research & development in fiscal 1997 was not tax deductible, therefore, the tax
rate, excluding this charge was 33.0% as compared to 31.5% in the prior year
period.
Backlog
The Company's backlog as of March 29, 1997 was $34.4 as compared to $23.2
million in the prior year period. The Company includes in its backlog customer
released orders which may be canceled generally with 60 days advance notice
without significant penalty to the customers. Accordingly, the Company believes
that its backlog, at any time, should not be used as a measure of future
revenues.
Industry and Other Risk Factors
The Company continues to experience pricing pressures and increased competition
in its more mature products. The Company's strategy has been to develop new
products and introduce them ahead of the competition in order to have them
selected for design into products of leading OEMs. The Company's newer
components, which include advanced motherboard FTG components and timing and
communication components are examples of this strategy. However, there can be no
assurance that the Company will continue to be successful in these efforts or
that further competitive pressures would not have a material impact on revenue
growth or profitability.
12
<PAGE>
In addition, the semiconductor and personal computer industry, in which the
Company participates, is generally characterized by rapid technological change,
intense competitive pressure, and, as a result, product price erosion. The
Company's operating results can be impacted significantly by the introduction of
new products, new manufacturing technologies, rapid changes in the demand for
products, decreases in the average selling price over the life of a product and
the Company's dependence on third-party wafer suppliers. The Company's operating
results are subject to quarterly fluctuations as a result of a number of
factors, including competitive pressures on selling prices, availability of
wafer supply, fluctuation in yields, changes in the mix of products sold, the
timing and success of new product introductions and the scheduling of orders by
customers. The Company believes that its future quarterly operating results may
also fluctuate as a result of Company-specific factors, including pricing
pressures on its more mature FTG components as well as the competitive pressure
and lower gross margins for its multimedia products, continuing demand for its
custom ASIC products and acceptance of the Company's newly introduced ICs and
board level products and market acceptance of its customers' products. Due to
the effect of these factors on future operations, past performance may be a
limited indicator in assessing potential future performance.
Liquidity and Capital Resources
At March 29, 1997, the Company's principal sources of liquidity included cash
and cash equivalents of $17.7 million as compared to $27.4 million at June
29,1996. Net cash provided operating activities was $4.8 million for the nine
months of fiscal 1997, as compared to $5.9 million in prior year period. This
decline represents increases in accounts receivable as result of revenue gains,
partially offset by quicker inventory turns.
Net cash used by investing activities was $12.3 million for the nine months of
fiscal 1997, as compared to net cash provided by investing activities of $3.2
million in the prior year period. Expenditures for property and equipment were
comparable in both periods. In connection with a purchase commitment agreement
with a wafer supplier (see footnote 5 of the notes to consolidated financial
statements), the Company increased its deposit by $6.0 million, this was
slightly offset by refunds of a previous deposit with another wafer supplier.
The Company's approach to asset and liability management requires flexibility
and therefore, majority of investments are now in short term instruments and
therefore, there were no purchases or sales of long term investments as compared
to prior year period. The Company acquired MicroClock in the third quarter of
fiscal 1997.
On February 28, 1997, the Company acquired the entire capital stock of
MicroClock, Inc. ("MicroClock"), a leading producer of clock synthesizer
integrated circuits for multimedia applications, for approximately $16.4 million
to be paid in the form of approximately $6.4 million in cash and 608,504 shares
of ICS common stock. The Company's shares exchanged in the transaction are
restricted for one year and therefore, have been valued at $8.0 million for
purposes of purchase accounting. The acquisition was accounted for under the
purchase method of accounting and resulted in a charge of $11.2 million related
to the write-off of in process research & development costs and the recording of
goodwill of $1.7 million, which will be amortized over the next 7 years.
Revenues of MicroClock were not significant to the Company's consolidated
statement of operations for the three and nine month periods ended March 29,
1997.
On November 29, 1996, the Company signed an Agreement and Plan of Merger, (the
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach
Systems, Inc. ("Turtle Beach") to Voyetra Technologies Inc. ("Voyetra"), in
exchange for an approximately 35% equity interest in Voyetra. Voyetra is a
supplier of music and audio software. There was no gain or loss was recorded on
this transaction. The Company's proportionate share of underlying equity in
Voyetra is approximately $3.5 million. The excess of the Company's carrying
value over their proportionate share of underlying equity of approximately $4.3
million will be amortized as goodwill. The Company accounts for its investment
in Voyetra under the equity method of accounting. For the one month ended March
29, 1997, the Company's share of losses from Voyetra was $463,000. In connection
with the merger, the Company also entered into a Revolving Credit Agreement and
Note (the "Credit Agreement") with Voyetra, pursuant to which the Company has
agreed to make loans to Voyetra aggregating $3.5 million. As of March 29, 1997,
$.5 million was outstanding under this agreement. The Credit Agreement is
subject to certain covenants, including maintenance of certain financial items.
Advances under the Credit Agreement bear interest at 9.0% annually. The
expiration of the Credit Agreement is December 31, 1997, subject to extension
under certain circumstances.
13
<PAGE>
The Company borrowed a net $0.3 on its $20.0 million revolving line of credit
during the first nine months of fiscal 1997. Stock repurchased, net of stock
options exercised, was $2.4 million in 1997 versus $2.5 million generated from
stock option exercised in the prior year.
The Company believes that existing sources of liquidity and funds expected to be
generated from operations will provide adequate cash to fund the Company's
anticipated working capital needs over the short term. Further expansion of the
Company's business or the completion of any material strategic acquisitions may
require additional funds which, to the extent not provided by internally
generated sources, could require the Company to seek access to debt or equity
markets.
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121). The adoption has not had a material financial
impact.
The Company has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). The Company believes that
the adoption of this statement will not have a material financial impact.
Update On Impact of Other Charges Taken in FY1996 and FY1995
In connection with the fiscal 1995 charge, the Company has paid approximately
$150,000 in consulting payments through the six months ended March 29, 1997,
with the balance of approximately $50,000 remaining.
As a result of the Turtle Beach and Voyetra merger, the accrued liability for
the York facility lease was assumed by Voyetra.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11 Computation of Net Income Per Share for the three and nine months
ended March 29, 1997 and March 30, 1996.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
A report Form 8-K, dated February 28, 1997, was filed to
report the acquisition of MicroClock, Inc. under Item 2 of Form 8-K.
Pursuant to Item 7 (c) of Form 8-K, the Company filed as an exhibit,
the Agreement and Plan of Merger dated February 28, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1997 INTEGRATED CIRCUIT SYSTEMS, INC.
By: /s/ Dr. Stavro Prodromou
------------------------
Dr. Stavro Prodromou
President and Chief Executive Officer
Date: May 13, 1997
By: /s/ Hock E. Tan
---------------
Hock E. Tan
Senior Vice President and CFO
(principal financial & accounting
officer)
16
<PAGE>
EXHIBIT 11
INTEGRATED CIRCUIT SYSTEMS, INC.
Computation of Per Share Income
($ and shares in thousands, except for per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Mar. 29, Mar. 30, Mar. 29, Mar. 30,
1997 1996 1997 1996
---------- ----------- ----------- -----------
Primary
- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (10,825) $ (2,086) $ (7,950) $ 3,968
========== =========== =========== ===========
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 11,771 11,317 11,324 11,261
Assumed exercise of stock options - - - 325
---------- ----------- ----------- -----------
11,771 11,317 11,324 11,586
========== =========== =========== ===========
Earnings (loss) per common share and common
equivalent shares $ (0.92) $ (0.18) $ (0.70) $ 0.34
========== =========== =========== ===========
Fully Diluted
- -------------
Net income (loss) $ (10,825) $ (2,086) $ (7,950) $ 3,968
========== =========== =========== ===========
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 11,771 11,317 11,324 11,261
Assumed exercise of stock options - - - 334
---------- ----------- ----------- -----------
11,771 11,317 11,324 11,595
========== =========== =========== ===========
Earnings (loss) per common share and common equivalent
shares $ (0.92) $ (0.18) $ (0.70) $ .34
========== =========== =========== ===========
</TABLE>
Note: If the exercise of stock options were assumed, the earning per share would
be ($0.88) and ($0.69) for the three and nine month period ended March 29, 1997,
respectively.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> MAR-29-1997
<CASH> 17,725
<SECURITIES> 24
<RECEIVABLES> 17,689
<ALLOWANCES> 608
<INVENTORY> 13,267
<CURRENT-ASSETS> 52,806
<PP&E> 24,052
<DEPRECIATION> 10,479
<TOTAL-ASSETS> 85,714
<CURRENT-LIABILITIES> 17,019
<BONDS> 1,541
0
0
<COMMON> 40,572
<OTHER-SE> 25,286
<TOTAL-LIABILITY-AND-EQUITY> 85,714
<SALES> 73,946
<TOTAL-REVENUES> 73,946
<CGS> 43,458
<TOTAL-COSTS> 43,458
<OTHER-EXPENSES> 32,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (817)
<INCOME-TAX> 3,428
<INCOME-CONTINUING> (4,245)
<DISCONTINUED> (3,705)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,950)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.70)
</TABLE>
