<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
Form 10-Q
__________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------
EXCHANGE ACT OF 1934
For the Quarter ended March 28, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-19299
________________________________
INTEGRATED CIRCUIT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-2000174
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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
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As of May 5, 1998, there were 12,324,721 outstanding shares of the Registrant's
Common Stock, no par value.
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
--------------------------------
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page
Number
<S> <C> ------
Consolidated Balance Sheets:
March 28, 1998 and June 28, 1997 3
Consolidated Statements of Operations:
Three and Nine Months Ended March 28, 1998
and March 29, 1997 4
Consolidated Statements of Cash Flows:
Nine Months Ended March 28, 1998 and
March 29, 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
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 28, June 28,
1998 1997
---------------- ------------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 21,123 $18,425
Marketable securities 15,643 7,981
Accounts receivable, net 23,171 20,690
Inventory, net 16,547 13,542
Other current assets 4,449 5,574
---------------- ------------------
Total current assets 80,933 66,212
---------------- ------------------
Property and equipment, net 18,292 14,104
Deposits on purchase contracts 7,864 8,000
Goodwill, net 1,390 1,600
Other assets 727 706
---------------- ------------------
Total assets $109,206 $90,622
---------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt 196 206
Accounts payable 15,030 12,565
Income tax payable 2,441 2,346
Accrued expenses and other current liabilities 2,954 2,835
---------------- ------------------
Total current liabilities 20,621 17,952
---------------- ------------------
Long-term debt, less current portion 1,411 1,503
Other long term liabilities 1,171 1,020
---------------- ------------------
Total liabilities 23,203 20,475
---------------- ------------------
Shareholders' Equity:
Preferred stock, authorized 5,000 shares, none issued
Common stock, no par value, authorized 50,000 shares;
issued and outstanding 13,073 and 12,445 shares as of
March 28, 1998 and June 28, 1997, respectively 56,244 45,366
Retained earnings 45,802 28,531
Translation adjustment (122) (1)
Less: treasury stock, at cost (724 and 286 shares as of
March 28, 1998 and June 28, 1997, respectively (15,921) (3,749)
---------------- ------------------
Total shareholders' equity 86,003 70,147
---------------- ------------------
Total liabilities and shareholders' equity $109,206 $90,622
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Operations
($ and shares in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
--------------------------------------------------
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenues: $43,545 $ 25,120 $125,174 73,946
Cost and expenses:
Cost of sales 23,977 13,503 68,486 43,458
Research and development 5,540 3,500 15,097 9,566
Selling, general and administrative 4,900 3,145 15,068 11,280
In process research and development - 11,196 - 11,196
Goodwill amortization 59 194 175 324
--------------------------------------------------
Operating income (loss) 9,069 (6,418) 26,348 (1,878)
--------------------------------------------------
Interest and other (income) (656) (600) (1,694) (1,415)
Interest expense 11 9 49 45
Minority interest - - - (154)
Losses from equity investments - 317 - 463
--------------------------------------------------
Income (loss) before income taxes and
Discontinued operations 9,714 (6,144) 27,993 (817)
Income taxes 3,506 1,835 10,723 3,428
--------------------------------------------------
Income (loss) from continuing operations 6,208 (7,979) 17,270 (4,245)
Loss from discontinued operations - (2,846) - (3,705)
--------------------------------------------------
Net income (loss) $ 6,208 $(10,825) $ 17,270 $(7,950)
==================================================
Earnings (loss) per common shares:
Basic:
Income (loss) from continuing operations $ 0.50 $ (0.68) $ 1.40 $ (0.37)
Loss from discontinued operations - (0.24) - (0.33)
--------------------------------------------------
Net income (loss) per common share $ 0.50 $ (0.92) $ 1.40 $ (0.70)
--------------------------------------------------
Diluted:
Income (loss) from continuing operations $ 0.48 $ (0.68) $ 1.30 $ (0.37)
Loss from discontinued operations - (0.24) - (0.33)
--------------------------------------------------
Net income (loss) per common share $ 0.48 $ (0.92) $ 1.30 $ (0.70)
==================================================
Basic common and common equivalent shares 12,326 11,771 12,347 11,324
Diluted common and common equivalent shares 13,066 11,771 13,270 11,324
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
- ----------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
<S> <C> <C>
Nine months ended,
--------------------------------
March 28, March 29,
1998 1997
Cash flows from operating activities:
Net income(loss) $ 17,270 $ (7,950)
Adjustments to reconcile net income(loss) to net
cash provided by operating activities:
In process research and development expense - 11,196
Depreciation and amortization 3,404 2,606
Minority interest - (154)
Losses and advances to discontinued operations - 3,705
Losses and advances from equity investments - 630
Stock compensation - 84
(Gain) loss on disposition of assets 218 (352)
Deferred income taxes (1,259) 683
Accounts receivable, net (2,481) (5,367)
Inventory, net (3,005) 277
Other assets, net (49) (433)
Accounts payable, accrued expenses and other current liabilities 2,633 (360)
Income taxes 95 262
--------------------------------
Net cash provided by operating activities 16,826 4,827
--------------------------------
Cash flows from investing activities:
Capital expenditures (7,383) (1,913)
Sales, maturities and purchases of investments (7,884) -
Deposits on purchase contracts 2,712 (4,466)
Acquisitions, net of cash acquired - (5,879)
Other - (82)
--------------------------------
Net cash used in investing activities (12,555) (12,340)
--------------------------------
Cash flows from financing activities:
Net borrowings under line of credit agreement - 335
Repayments of long-term debt (103) (93)
Proceeds from exercise of stock options 6,726 6,995
Tax benefit of stock options exercised 4,151 1,091
Repurchase of common stock (12,172) (10,466)
--------------------------------
Net cash used in financing activities (1,398) (2,138)
--------------------------------
Effect of exchange rate changes on cash and cash equivalents (175) -
Net increase (decrease) in cash and cash equivalents 2,698 (9,651)
Cash and cash equivalents:
Beginning of period 18,425 27,376
--------------------------------
End of period $ 21,123 $ 17,725
================================
Supplemental disclosure:
Marketable Securities:
Beginning of period $ 7,981 $ 24
End of period $ 15,643 $ 24
</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 $ 49 $ 43
==========================
Income taxes $6,704 $1,310
==========================
Supplemental disclosures of non-cash investing activities:
Issuance of common stock acquisition of MicroClock $ - $8,000
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
(1) INTERIM ACCOUNTING POLICY
The accompanying consolidated 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
28, 1998 and results of operations and cash flows for the interim periods
presented. Certain items have been reclassified 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 28, 1997. Results
of operations for period ended March 28, 1998 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 subsidiaries, after elimination of all significant
intercompany accounts and transactions.
(3) INVENTORY
Inventory is valued at the lower of standard cost, which approximates actual
costs (FIFO basis), or market.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
March 28, June 28,
1998 1997
------------------ -------------------
<S> <C> <C>
Work-in-process $10,169 $ 9,362
Finished parts 9,748 6,553
Less: Obsolescence reserve (3,370) (2,373)
------------------ -------------------
$16,547 $13,542
================== ===================
</TABLE>
(4) LONG TERM DEBT
The Company did not draw on its $20.0 million revolving line of credit during
the first nine months of fiscal 1998. In March 1998, the Company renegotiated
its revolving/term loan credit facility with a commercial bank to extend the
expiration to December 31, 1999.
7
<PAGE>
(5) COMMON STOCK
In January 1998, the Board of Directors authorized a new stock repurchase
program, which provides for the purchase from time to time of 1.5 million shares
of the Company's common stock. The timing and amount of shares repurchased will
be determined at the discretion of the Company's management. As of March 28,
1998, the Company holds approximately 0.7 million shares in treasury stock
valued at $15.9 million, using the cost method.
(6) IBM AGREEMENT
During the second quarter of fiscal 1998, the technology exchange program
between the Company and International Business Machines Corporation ("IBM") on
Fast Ethernet chip technologies was completed and accordingly, the agreement
governing this program between the two companies was terminated.
(7) YEAR 2000 DISCLOSURE
The Company has developed preliminary plans to address possible impact on its
computer systems of the year 2000. Key operational systems, design programs and
software applications have been assessed and detailed plans have been developed
to address the modifications required. The financial impact of making such
changes is not expected to be material to the Company's results of operations or
financial condition. The Company is also in the process of reviewing Year 2000
compliance of the third parties with which it deals electronically. The Company
is not in a position at this time to assess the financial impacts or costs of
such compliance on such third parties at this time.
(8) RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS ACTIVITIES
For the nine months ended March 28, 1998 and March 29, 1997, the Company
generated approximately 62.9% and 59.3% of its net sales, respectively, from
international markets. These sales were generated primarily from the Company's
customers in the Pacific Rim region and included sales to foreign corporations,
as well as to foreign subsidiaries of U.S. corporations. All revenues and
production purchases are denominated in US dollars. Two of the Company's wafer
suppliers and all of the Company's assemblers are located in the Pacific Rim and
in addition, the Company has opened a new facility in Singapore in the current
fiscal year. Several countries in this region have experienced currency
devaluation and/or difficulties in financing short-term obligations.
8
<PAGE>
(8) RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS ACTIVITIES (CONT'D)
The Company's 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 the Company's customers being in Taiwan. Certain aspects
of the Company's operations are subject to governmental regulations in the
countries in which the Company does business, including those relating to
currency conversion and repatriation, taxation of its earnings and earnings of
its personnel, and its use of local employees and suppliers. The Company's
operations are also subject to the risk of changes in laws and policies in the
various jurisdictions in which the Company does business, which may impose
restrictions on the Company. The Company cannot determine to what extent future
operations and earnings of the Company may be effected by the economic crisis,
new laws, new regulations, changes in or new interpretations of existing laws or
regulations or other consequences of doing business outside the U.S.
(9) LITIGATION
As had been previously disclosed in the first quarter fiscal 1998 Form 10-Q,
Voyetra Technologies ("VTI") filed suit against the Company for various claims
related to the merger of Turtle Beach Systems ("TBS") with VTI. On December 31,
1997, the Company and Voyetra reached a settlement in which VTI would release
the Company from all claims and relieve the Company of all obligations with
respect to the VTI/TBS merger agreement in exchange for assumption of certain
liabilities of TBS, a $200,000 cash payout and return of VTI stock held by the
Company. As of the end of the third fiscal quarter 1998, the Company has
settled these obligations and returned the VTI stock held by the Company to
VTI.
(10) NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," in the third quarter of fiscal 1998. As a result, all
prior year's earnings per share calculations have been restated.
The Company has not adopted Statement of Financial Accounting Standards No. 130,
" Reporting Comprehensive Income," which will become effective for fiscal year
1999. The Company believes that the adoption of this statement will not have a
material financial impact.
The Company has not adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
will become effective for fiscal year 1999. The Company believes that the
adoption of this statement will not have a material financial impact.
(11) SUBSEQUENT EVENTS
On April 23, 1998, the Company filed a Current Report on Form 8-K, which was
included as an exhibit to the third quarter earnings release. The earnings
release disclosed that the Company has experienced increased competition in the
market for single channel 10/100mb LAN transceivers, which has led to
cancellation of orders and severe price erosion for this product line. While
recent market acceptance of several new frequency timing products for multimedia
and communication applications has been positive, the Company does not expect
new frequency timing products to deliver sufficient revenue and earnings in the
fourth quarter to offset expected declines from networking transceivers.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
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. 28, Mar. 29, Mar. 28, Mar. 29,
----------------------------------- -------------------------------
1998 1997 1998 1997
----------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 55.1 53.8 54.7 58.8
Research and development 12.7 13.9 12.1 12.9
Selling, general and administrative 11.3 12.5 12.1 15.3
In process research and development - 44.5 - 15.1
Goodwill amortization 0.1 0.8 0.1 0.4
----------------------------------- -------------------------------
Operating income (loss) 20.8 (25.5) 21.0 (2.5)
Interest and other (income) (1.5) (2.3) (1.4) (1.9)
Interest expense - - - 0.1
Minority interest and equity investment - 1.3 - 0.4
----------------------------------- -------------------------------
Income (loss) before income taxes and
discontinued operations 22.3 (24.5) 22.4 (1.1)
Income tax expense 8.0 7.3 8.6 4.6
----------------------------------- -------------------------------
Income (loss) from continuing operations 14.3 (31.8) 13.8 (5.7)
Loss from discontinued operations - (11.3) - (5.0)
----------------------------------- -------------------------------
Net income (loss) 14.3% (43.1%) 13.8% (10.7%)
----------------------------------- -------------------------------
</TABLE>
Third Quarter 1998 as Compared to Third Quarter 1997
Consolidated revenues increased $18.4 million or 73.3% for the third quarter
ended March 28, 1998 as compared to the prior year quarter. The increase in
revenues was attributable to demand increases across all product lines.
The Company's FTG component revenues increased $7.6 million to $21.2 million for
the third quarter of fiscal 1998 as compared to the prior year quarter. The
increase reflects the acquisition of MicroClock, Inc. ("MicroClock") in the
third quarter of fiscal 1997 and strong demand from PC motherboard OEM
customers. Total FTG component revenues contributed 48.8% of consolidated
revenues for the third quarter in fiscal 1998 which represented a slight
decrease from the 54.3% for the prior year quarter as a result of the
significant growth in the data communication products.
10
<PAGE>
Data Communication component revenues was $13.9 million for the third quarter of
fiscal 1998, an increase of $9.0 million as compared to the prior year quarter.
Data Communications component revenues comprised 31.8% of consolidated
revenues for the third quarter of fiscal 1998 as compared to 19.5% in the prior
year quarter due to increased market share from network system suppliers of the
single chip 10/100 Mb transceivers.
Systems Technologies (a.k.a. Advanced Technology or custom mixed signals)
revenues increased to $8.5 million for the third quarter of fiscal 1998, up $1.9
million as compared to the prior year quarter. The increase reflects strong
demand for GENDAC products in 3-D graphic solution and timing generators for LCD
drives. Systems Technologies component revenues comprised 19.4% of
consolidated revenues for the third quarter of fiscal 1998 versus 26.2% for the
prior year quarter as a result of the significant growth in the data
communications product line.
Foreign revenues (which includes shipments of ICs to offshore subsidiaries of US
multinational companies) was 59.5% of total revenues for the third quarter of
fiscal 1998 and compared to 61.4% of total revenues in the prior year quarter.
Cost of sales as a percentage of total revenues was 55.1% for the third quarter
of fiscal 1998 as compared to 53.8% in the prior year quarter. The increase
in the cost of sales percentage was primarily the result of product mix.
Research and development expense increased $2.0 million to $5.5 million for the
third quarter of fiscal 1998, as compared to the prior year quarter. The
increase is primarily attributable to increased investment in new FTGs and data
communications products. As a percentage of revenue, research and development
expenses were 12.7% in the current quarter as compared to 13.9% in the prior
year quarter as a result of significant growth in revenues.
Selling, general and administrative, as a percentage of revenue decreased from
12.5% in the prior year quarter to 11.3% in the third quarter of fiscal 1998.
This decrease is attributable to the Company's leverage on increased volume.
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 and development costs as a result of the acquisition of
MicroClock.
Consolidated income from continuing operations was $6.2 million or $0.48
per shares as compared to a loss of $8.0 million or ($0.68) per share.
Excluding special charges, consolidated income from continuing operations was
$3.5 million, or $0.30 per share in the prior year quarter.
NINE MONTHS ENDED MARCH 28, 1998 AS COMPARED TO NINE MONTHS ENDED MARCH 29,
1997
Consolidated revenues increased $51.2 million or 69.3% for the nine months
ended March 28, 1998 as compared to the prior year period. All product lines
experienced an increase and were partially offset by the exclusion of Turtle
Beach as a result of the merger of Turtle Beach and Voyetra.
The Company's FTG component revenues increased $26.4 million to $66.0 million
for the nine months of fiscal 1998 as compared to the prior year period. The
acquisition of MicroClock in the third quarter of fiscal 1997 contributed $13.0
million of the increase. Total FTG component revenues contributed 52.8% of
consolidated revenue in fiscal 1998, which represented an increase with respect
to 55.4 % for the prior year period. The slight decrease, as a percentage of
revenue, is the result of the significant gains in the data communications
product line, offset by the acquisition of MicroClock.
11
<PAGE>
Data Communication component revenues was $35.4 million for the nine months of
fiscal 1998 as compared to $9.2 million in the prior year period. Data
Communications component revenues comprised 28.3% of consolidated revenues in
fiscal 1998 as compared to 12.5% in the prior year period due to increased
market share.
Systems Technologies component revenues increased to $23.8 million for the nine
months of fiscal 1998, as compared to $18.3 million in the prior year period.
The increase reflects strong demand for GENDAC products in 3-D graphic solution
and timing generators for LCD drives. Systems Technologies component revenues
comprised 19.0% of consolidated revenues in fiscal 1998 versus 24.7% for the
prior year period as the result of the significant gains in the data
communications product line.
The prior year revenues included $6.8 million of revenues from Turtle Beach
Systems, Inc. as compared to no revenues in fiscal 1998, as a result of the
merger of Turtle Beach with Voyetra Technologies, Inc. in November 1996.
Foreign revenues (which includes shipments of ICs to offshore subsidiaries of US
multinational companies) was 62.9% of total revenues for the nine months of
fiscal 1998 and compared to 59.3% of total revenues in the prior year period.
The percentage increase reflects growth in the Far East.
Cost of sales as a percentage of total revenues was 54.7% for the nine months of
fiscal 1998 as compared to 58.8% in the prior year period. The decrease in the
cost of sales percentage was primarily the result of material cost reduction and
higher volume.
As a percentage of revenue, research and development expenses were 12.1% in the
current year period as compared to 12.9% in the prior year period. Despite
research and development expense decreases, as a percentage of revenue, research
and development spending increased because of accelerated product development
programs in FTG and Data Communications.
Selling, general and administrative expense increased $3.8 million to $15.1
million for the nine months of fiscal 1998 as compared to the prior year period.
As a percentage of revenue, selling, general and administrative expenses
decreased from 15.3% to 12.1% as a result of continued emphasis on tighter
fiscal control, the deconsolidation of Turtle Beach and significant growth in
revenue.
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.
Consolidated income from continuing operations was $17.3 million, or $1.30 per
share, as compared to a loss of $4.2 million, or ($0.37) per share. Excluding
special charges and losses from equity investments, prior year's consolidated
income from continuing operations was $7.3 million, or $0.63 per share.
Income Taxes
The Company's income tax expense was $10.7 million for the nine months ended
March 28, 1998 compared to $3.4 million in the prior year period, reflecting
unconsolidated tax losses at Turtle Beach, and the taxable gain from the sale of
assets to Singapore in fiscal 1998, which was eliminated, for book purposes, in
the consolidated financial statements and the tax free gain from the sale of
the Company's battery charge controller business in the prior year period.
12
<PAGE>
Industry 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.
Subsequent to the end of the third fiscal quarter, the Company experienced
increased competition in the market for single channel 10/100mb LAN
transceivers, which has led to cancellation of orders and severe price erosion
for this product line. The Company doesn't expect increased revenues from other
product line to be sufficient in the fourth fiscal quarter to offset declines in
revenues from single channel 10/100mb LAN transceivers. The Company's backlog
as of March 28, 1998 was $28.6 million as compared to $34.4 million at March 29,
1997. The Company includes in its backlog customer released orders, which may be
canceled generally with 30 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.
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, products 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.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $21.1 million as compared to $18.4 million at June 28,
1997. Net cash provided by operating activities was $16.8 million for the nine
months of fiscal 1998, as compared to $4.8 million in prior year period. This
increase primarily represents improved earnings and inventory turns partially
offset by increased accounts receivable as a result of revenue increases.
Notwithstanding, the Company's days sales outstanding was reduced from 51 days
at June 28, 1997 to 45 days in the nine months of fiscal 1998, while inventory
turns increased from 4.2 times in fiscal 1997 to 6.3 times in the nine months of
fiscal 1998.
Expenditures for property and equipment were $7.4 for the nine months of fiscal
1998 as compared to $1.9 in the prior year period. The increases in
expenditures are primarily attributable to the start up of the Singapore
facility and the investment in design and testing tools and software. Net
purchases of marketable securities were $7.8 million for the current period as
compared to no net activities with marketable securities in the prior year
period.
The Company repurchased, using the cost method, 437,000 of its outstanding
shares valued at $12.2 million versus 792,000 shares valued at $10.5 million in
the comparable prior period. Through exercise of stock options by various
employees, share capital increased $6.7 million in fiscal 1998, as compared to
$7.0 million in the prior year period.
The Company did not draw on its $20.0 million revolving line of credit during
the first nine months of fiscal 1998. In March 1998, the Company renegotiated
its revolving/term loan credit facility with a commercial bank to extend the
expiration to December 31, 1999. 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.
In January 1998, the Board of Directors authorized a new stock repurchase
program, which provides for the purchase from time to time of 1.5 million shares
of the Company's common stock. The timing and amount of shares repurchased will
be determined at the discretion of the Company's management. As of March 28,
1998, the Company holds approximately 0.7 million shares in treasury stock
valued at $15.9 million, using the cost method.
During the second quarter of fiscal 1998, the technology exchange program
between the Company and International Business Machines Corporation ("IBM") on
Fast Ethernet chip technologies was completed and accordingly, the agreement
governing this program between the two companies was terminated.
The Company has developed preliminary plans to address possible impact on its
computer systems of the year 2000. Key operational systems, design programs and
software applications have been assessed and detailed plans have been developed
to address the modifications required. The financial impact of making such
changes is not expected to be material to the Company's results of operations or
financial condition. The Company is also in the process of reviewing Year 2000
compliance of the third parties with which it deals electronically. The Company
is not in a position at this time to assess the financial impacts or costs of
such compliance on such third parties at this time.
14
<PAGE>
For the nine months ended March 28, 1998 and March 29, 1997, the Company
generated approximately 62.9% and 59.3% of its net sales, respectively, from
international markets. These sales were generated primarily from the Company's
customers in the Pacific Rim region and included sales to foreign corporations,
as well as to foreign subsidiaries of U.S. corporations. All revenues and
production purchases are performed in US dollars. Two of the Company's wafer
suppliers and all of the Company's assemblers are located in the Pacific Rim and
in addition, the Company has opened a new facility in Singapore in the current
fiscal year. Several countries in this region have experienced currency
devaluation and/or difficulties in financing short-term obligations.
The Company's 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 the Company's customers being in Taiwan. Certain aspects
of the Company's operations are subject to governmental regulations in the
countries in which the Company does business, including those relating to
currency conversion and repatriation, taxation of its earnings and earnings of
its personnel, and its use of local employees and suppliers. The Company's
operations are also subject to the risk of changes in laws and policies in the
various jurisdictions in which the Company does business, which may impose
restrictions on the Company. The Company cannot determine to what extent future
operations and earnings of the Company may be effected by the economic crisis,
new laws, new regulations, changes in or new interpretations of existing laws or
regulations or other consequences of doing business outside the U.S.
As had been previously disclosed in the first quarter 1998 Form 10-Q, Voyetra
Technologies ("VTI") filed suit against the Company for various claims related
to the merger of Turtle Beach Systems ("TBS") with VTI. On December 31, 1997,
the Company and Voyetra reached a settlement in which VTI would release the
Company from all claims and relieve the Company of all obligations with respect
to the VTI/TBS merger agreement in exchange for assumption of certain
liabilities of TBS, a $200,000 cash payout and return of VTI stock held by the
Company. As of the end of the third fiscal quarter 1998, the Company has
settled these liabilities and returned the VTI stock held by the Company to VTI.
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," in the third quarter of 1998. As a result, all prior
year's earnings per share calculations have been restated.
The Company has not adopted Statement of Financial Accounting Standards No. 130,
" Reporting Comprehensive Income," which will become effective for fiscal year
1999. The Company believes that the adoption of this statement will not have a
material financial impact.
The Company has not adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
will become effective for fiscal year 1999. The Company believes that the
adoption of this statement will not have a material financial impact.
On April 23, 1998, the Company filed a Current Report on Form 8-K which included
as an exhibit in to the third quarter earnings release. The earnings release
disclosed that the Company has experienced increased competition in the market
for single channel 10/100mb LAN transceivers, which has led to cancellation of
orders and severe price erosion for this product line. While recent market
acceptance of several new frequency timing products for multimedia and
communication applications has been positive, the Company does not expect these
new frequency timing products to deliver sufficient revenue and earnings in the
fourth quarter to offset expected declines from networking transceivers.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
11 Computation of Net Income Per Share for the three
and nine months ended March 28, 1998
and March 29, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None reported.
16
<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 7, 1998 INTEGRATED CIRCUIT SYSTEMS, INC.
By: /s/ Henry Boreen
-------------------
Henry Boreen
President and Chief Executive Officer
Date: May 7, 1998
By: /s/ Hock E. Tan
-------------------
Hock E. Tan
Senior Vice President and CFO
(Principal financial & accounting officer)
17
<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. 28, Mar. 29, Mar. 28, Mar. 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic
- -----
Income(loss) from continuing operations $ 6,208 $ (7,979) $17,270 $(4,245)
Loss from discontinuing operations - (2,846) - (3,705)
----------- ----------- ----------- -----------
Net income(loss) $ 6,208 $(10,825) $17,270 $(7,950)
=========== =========== =========== ===========
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 12,326 11,771 12,347 11,324
=========== =========== =========== ===========
Income(loss) from continuing operations $ 0.50 $ (0.68) $ 1.40 $ (0.37)
Loss from discontinued operations - (0.24) - (0.33)
----------- ----------- ----------- -----------
Basic earnings(loss) per common share and
common equivalent shares $ 0.50 $ (0.92) $ 1.40 $ (0.70)
=========== =========== =========== ===========
Diluted
- -------
Income(loss) from continuing operations $ 6,208 $ (7,979) $17,270 $(4,245)
Loss from discontinuing operations - (2,846) - (3,705)
----------- ----------- ----------- -----------
Net income(loss) $ 6,208 $(10,825) $17,270 $(7,950)
=========== =========== =========== ===========
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 12,326 11,771 12,347 11,324
Assumed exercise of stock options 740 - 923 -
----------- ----------- ----------- -----------
13,066 11,771 13,270 11,324
=========== =========== =========== ===========
Income(loss) from continuing operations $ 0.48 $ (0.68) $ 1.30 $ (0.37)
Loss from discontinued operations - (0.24) - (0.33)
----------- ----------- ----------- -----------
Diluted earnings(loss) per common share and
common equivalent shares $ 0.48 $ (0.92) $ 1.30 $ (0.70)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> MAR-28-1998
<CASH> 21,123
<SECURITIES> 15,643
<RECEIVABLES> 26,003
<ALLOWANCES> 2,832
<INVENTORY> 16,547
<CURRENT-ASSETS> 80,933
<PP&E> 32,692
<DEPRECIATION> 14,400
<TOTAL-ASSETS> 109,206
<CURRENT-LIABILITIES> 20,621
<BONDS> 1,411
0
0
<COMMON> 56,244
<OTHER-SE> 29,759
<TOTAL-LIABILITY-AND-EQUITY> 109,206
<SALES> 125,174
<TOTAL-REVENUES> 125,174
<CGS> 65,592
<TOTAL-COSTS> 68,486
<OTHER-EXPENSES> 30,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 27,993
<INCOME-TAX> 10,723
<INCOME-CONTINUING> 17,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,270
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.30
</TABLE>
