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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 October 2, 1999
___ 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
________________________________
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___ No X
---
As of November 15, 1999, there were 15,612,588 shares of Class A Common Stock,
5,653,079 shares of Class B Common Stock and 2,362,852 shares of Class L Common
Stock; $0.01 par value, outstanding.
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INTEGRATED CIRCUIT SYSTEMS, INC.
--------------------------------
INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
October 2, 1999 (Unaudited) and July 3, 1999 3
Consolidated Statements of Operations (Unaudited):
Three Months Ended October 2, 1999 and
September 26, 1998 4
Consolidated Statements of Cash Flows (Unaudited):
Three Months Ended October 2, 1999 and
September 26, 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
2
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Item 1. Consolidated Financial Statements
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
October 2, July 3,
1999 1999
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,412 $ 9,285
Marketable securities 286 288
Accounts receivable, net 19,364 18,120
Inventory, net 7,011 8,736
Deferred income taxes 8,284 8,644
Prepaid assets 1,294 797
Other current assets 517 523
Current portion of deposit on purchase contracts 3,973 3,973
------------ ----------
Total current assets 50,141 50,366
------------ ----------
Property and equipment, net 12,434 12,127
Deferred financing costs, net 12,377 12,767
Deposits on purchase contracts 10,903 11,348
Other assets 1,326 1,187
------------ ----------
Total assets $ 87,181 $ 87,795
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 1,170 $ 1,030
Accounts payable 10,898 10,258
Income tax payable 4,426 4,473
Accrued payroll and bonus 1,203 2,056
Accrued interest 4,845 2,108
Accrued expenses and other current liabilities 2,956 3,531
------------ ----------
Total current liabilities 25,498 23,456
------------ ----------
Long-term debt, less current portion 160,750 169,000
Other liabilities 1,435 1,462
Deferred income taxes 890 789
------------ ----------
Total liabilities 188,573 194,707
------------ ----------
Shareholders' deficit:
Class A common stock, $0.01 par, authorized 27,000;
Issued and outstanding 15,613 shares 156 156
Class B common stock, $0.01 par, authorized 70,000;
Issued and outstanding 5,653 56 56
Class L common stock, $0.01 par, authorized 3,000;
Issued and outstanding 2,363 24 24
Additional paid in capital 34,719 34,719
Accumulated deficit (135,958) (141,412)
Notes receivable (389) (455)
------------ ----------
Total shareholders' deficit (101,392) (106,912)
------------ ----------
Total liabilities and shareholders' deficit $ 87,181 $ 87,795
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Oct 2, Sept 26,
1999 1998
-------- -------
<S> <C> <C>
Revenues: $37,840 $32,200
Cost and expenses:
Cost of sales 15,775 17,259
Research and development 5,940 4,760
Selling, general and administrative 4,440 4,540
Management fee 250 --
Goodwill amortization 59 59
-------- -------
Operating income 11,376 5,582
-------- -------
Interest and other income (177) (775)
Interest expense 4,763 51
-------- -------
Income before income taxes 6,790 6,306
Income taxes 1,336 2,157
-------- -------
Net income $ 5,454 $ 4,149
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
Oct 2, Sept 26,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,454 $ 4,149
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,103 1,339
Deferred financing charge 390 --
(Gain) loss on sale of investments 82 (76)
(Gain) loss on sale of building (26) --
Purchase of trading securities -- (4,467)
Sale of trading securities -- 4,973
Deferred income taxes 460 (378)
Accounts receivable (1,244) 1,526
Inventory 1,725 1,942
Other assets, net (622) (101)
Accounts payable, accrued expenses and other current liabilities (788) (3,412)
Accrued interest expense 2,737 --
Income taxes (47) 1,396
------- -------
Net cash provided by operating activities 9,224 6,891
------- -------
Cash flows from investing activities:
Purchase of investments -- (6,953)
Proceeds from sale/maturities of marketable securities -- 13,123
Capital expenditures (1,478) (1,036)
Change in deposits on purchase contracts 444 --
Proceeds from sale of fixed assets 47 2
------- -------
Net cash provided by (used in) investing activities (987) 5,136
------- -------
Cash flows from financing activities:
Exercise of stock options -- 1
Repayments of long-term debt (8,110) (35)
------- -------
Net cash used in financing activities (8,110) (34)
------- -------
Net increase in cash and cash equivalents 127 11,993
Cash and cash equivalents:
Beginning of period 9,285 25,340
------- -------
End of period $ 9,412 $37,333
======= =======
</TABLE>
5
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
Oct 2, Sept 26,
1999 1998
------- -------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $1,516 $ 51
====== ======
Income taxes $ 922 $1,093
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
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 October 2, 1999 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 on pages F-1 to F-
34 included in the Company's Prospectus dated October 19, 1999 filed with the
Securities Exchange Commission ("Exchange Offer Prospectus"). Results of
operations for the three months ended October 2, 1999 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) INVENTORY
Inventory is valued at the lower of market or standard cost, which approximates
actual costs using the first-in, first-out (FIFO) method.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
October 2, July 3,
1999 1999
--------- --------
<S> <C> <C>
Work-in-process $ 5,267 $ 8,211
Finished parts 6,279 5,665
Less: Obsolescence reserve (4,535) (5,140)
--------- --------
$ 7,011 $ 8,736
========= ========
</TABLE>
(4) RECAPITALIZATION
On May 11, 1999, the Company merged with ICS Merger Corp., a transitory merger
company formed and wholly owned by the affiliates of Bain Capital Inc. and Bear,
Stearns and Company Inc. (the "Equity Investors"). The following events, which
collectively are referred to as the recapitalization, provided the consideration
for the redemption and purchase of the Company's outstanding shares of common
stock and vested options, together with the payment of fees and expenses,
totaling $294.4 million that took place on May 11, 1999:
. An equity investment of $30.6 million made by the Equity Investors and
certain other investors in ICS Merger Corp.;
. Direct purchases by Bain Capital of its common stock from certain existing
shareholders for $9.6 million;
. A rollover equity investment by certain members of its senior management team
of $9.8 million, consisting primarily of:
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. Certain existing common stock ($6.6 million that was converted into its
new common stock after the merger; and
. Certain existing stock that was converted into new stock options after the
merger ($2.2 million) and deferred compensation agreements ($0.5
million);
. Purchases of new common stock ($0.5 million) in exchange for promissory
notes;
. Borrowing of $70.0 million in term loans and $3.9 million under a $25.0
million revolving line of credit;
. The offering of $100.0 million in senior subordinated notes (the "Notes");
and
. The use of cash on-hand of approximately $70.5 million.
(5) DEBT
The Company paid down principal amount of $8.1 million in September 1999. The
Company purchased $2.0 million of its 11 1/2 % senior subordinated notes at 98%
of par and paid $6.1 million of the principal on its term A and B loans as well
as $1.5 million in interest.
Certain of the Company's loan agreements require the maintenance of specified
financial ratios and impose financial limitations. At October 2, 1999, the
Company was in compliance with the senior credit facility covenants.
(6) BUSINESS SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which became effective for fiscal year
1999. The Company adopted the requirements of this statement in fiscal year
1999.
The Company has two reportable segments, Clock products and Non-Clock products.
The Clock segment represents parts that synchronize the timing signals in
electronic devices. The Non-Clock products include data communication
transceivers and custom components.
The Company's reportable segments are strategic product lines that differ in
nature and have different end uses. As such these product lines are managed and
reported to the chief operating decision-maker separately.
Clocks are standard application specific products that are sold into a variety
of applications. The ASP's tend to be stable, gross margins are higher than
commodity products, and the volumes higher than the Non-Clock segment. The Non-
Clock segment is made up of custom parts using varied technologies for different
applications such as transceivers. Each component in the custom product line is
developed specifically for one customer for their specific application.
Revenue, operating profit, depreciation and amortization and capital
expenditures by business segment were as follows:
Business Segment Net Revenue
-----------------------------------
October 2, September 26,
1999 1998
-----------------------------------
Clock $ 32,392 $ 24,107
Non - Clock 5,448 8,093
-----------------------------------
Total Net Revenues $ 37,840 $ 32,200
===================================
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<TABLE>
<CAPTION>
Business Segment Profit (Loss)
---------------------------------------
Operating Profit: October 2, September 26,
1999 1998
--------------------------------------
<S> <C> <C>
Clock $10,144 $4,736
Non - Clock 1,482 846
Management fee (250) --
--------------------------------------
Total Operating Profit $11,376 $5,582
Reconciliation to statements of operations:
Interest & Other Income 177 775
Interest Expense (4,763) (51)
--------------------------------------
Net income (loss) before
Income taxes $ 6,790 $6,306
======================================
</TABLE>
The Company does not allocate items below operating income to specific segments.
The Clock and Non-Clock profit is calculated as revenues less cost of sales,
research and development and selling, general and administrative expenses for
that segment.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities," which
defers the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company will adopt the requirements of this statement in fiscal
year 2001.
SUBSEQUENT EVENTS
On July 2, 1999, Motorola, Inc. filed an action against the Company and four
former employees of Motorola in the Superior Court of Arizona, Maricopa County,
for unfair competition, breach of contract, misappropriation of trade secrets
and intentional interference with contractual relations. Motorola is suing to
recover its attorneys' fees, unspecified damages and other relief in this
matter. Independent of the lawsuit, a restraining order for the Company's
Arizona design center was put in place. A $500,000 payment was made October
1999 in conjunction with the placement of the restraining order, allowing the
Arizona design center to move forward with research and development. The
Company is currently in settlement discussions with Motorola.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, such as when we describe
what we believe, expect or anticipate will occur, and other similar statements,
you must remember that our expectations may not be correct. While we believe
these expectations and projections are reasonable, such forward-looking
statements are inherently subject to risks, uncertainties and assumptions about
us, including, among other things:
. Our dependence on continuous introduction of new products based on the latest
technology
. The intensely competitive semiconductor and personal computer component
industries
. The importance of frequency timing generator products to total revenue
. Our dependence on the personal computer industry and third-party silicon
wafer fabricators and assemblers of semiconductors
. Risks associated with international business activities and acquisitions and
integration of acquired companies or product lines
. Our dependence on proprietary information and technology and on key personnel
. Our product liability exposure and the potential unavailability of insurance
. General economic conditions, including economic conditions related to the
semiconductor and personal computer industries
We do not guarantee that the transactions and events described in this Form 10-Q
will happen as described or that they will happen at all. You should read this
Form 10-Q completely and with the understanding that actual future results may
be materially different from what we expect. We disclaim any intention or
obligation to update these forward-looking statements, even though our situation
will change in the future.
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
------------------
Oct 2, Sept 26,
1999 1998
---------- ----------
<S> <C> <C>
Revenues: 100.0% 100.0%
Cost and expenses:
Cost of sales 41.7 53.6
Research and development 15.7 14.8
Selling, general and administrative 11.7 14.1
Management fee 0.7 --
Goodwill amortization 0.2 0.2
---------- -----------
Operating income 30.0 17.3
---------- -----------
Interest and other income (0.5) (2.4)
Interest expense 12.6 0.1
---------- -----------
Income before income taxes 17.9 19.6
Income taxes 3.5 6.7
---------- -----------
Net income 14.4% 12.9%
========== ===========
</TABLE>
10
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FIRST QUARTER FISCAL 2000 AS COMPARED TO FIRST QUARTER FISCAL 1999
Consolidated revenue increased by $5.6 million to $37.8 million for the first
quarter ended October 2, 1999 as compared to the prior year quarter. The
increase is primarily due to the increase in revenue generated by the Company's
Clock applications.
Clock segment revenue increased by $8.2 million to $32.4 million for the first
quarter ended October 2, 1999 as compared to the prior year quarter. The
increase is attributable to strong demand from PC motherboard OEM customers.
Clock components contributed approximately 85.6% of consolidated revenue for the
first quarter of fiscal 2000, which represented an increase from 74.9% for the
prior year quarter. The average selling price for Clocks declined 16.5%, while
the volume increased 61.1%.
The Company is currently involved in the design of FTGs for the next generation
of PC motherboards. In particular, FTGs are being used for the Pentium III
(high-end motherboard), Whitney (sub-$1,000 PC motherboard) and Mobile BX (new
notebook motherboard) platforms, all of which are expected to be released by the
relevant manufacturers in calendar 1999. The Company is planning to expand into
high performance clocking solutions supporting networking, telecommunication,
workstation and server applications.
Non-Clocks' segment revenue decreased by $2.6 million to $5.4 million for the
quarter ended October 2, 1999, as compared to the prior year quarter. Non-
Clocks' segment revenue represented approximately 14.4% of total revenue in the
first quarter of fiscal year 2000, as compared to 25.1% in the prior year
period. This is primarily due to the Company shifting its focus away from the
transceiver market to our other product groups. The Company sold certain
intellectual property and equipment of its Data Communications product group to
3Com Corporation on February 18, 1999, but we will continue to sell and support
existing and the next generation fast ethernet transceiver products. The
average selling price for Non-Clocks increased 4.3%, and the volume decreased
34.9%.
Foreign revenue (which includes shipments of integrated circuits ("ICs") to
foreign companies as well as offshore subsidiaries of US multinational
companies) was 70.9% of total revenue for the first quarter of fiscal 2000 as
compared to 67.1% of total revenue in the prior year quarter. While the
percentage increase reflected growing sales to the Pacific Rim markets, certain
of our international sales were to customers in the Pacific Rim which in turn
sold some of their products to North America, Europe and other non-Asian
markets. The Company's sales are denominated in U.S. dollars and minimize
foreign currency risk. See "Business - Product Overview - Non-Clocks" in the
Exchange Offer Prospectus.
Cost of sales decreased $1.5 million to $15.8 million for the quarter ended
October 2, 1999, as compared to the prior year quarter. Cost of sales as a
percentage of total revenue was 41.7% for the first quarter of fiscal 2000 as
compared to 53.6% in the prior year quarter. The Company continues to realize
material cost savings in the manufacturing processes and cost savings from its
in-house testing.
Research and development ("R&D") expense increased $1.1 million to $5.9 million
for the first quarter of fiscal 2000 from $4.8 million in the prior year
quarter. As a percentage of revenue, research and development increased to
15.7% as compared to 14.8% in the first quarter of fiscal 1999. The Company's
continued emphasis in R&D has contributed to the increase with greater spending
in research and development for the Clock segments, which is slightly offset by
the decreased expenses for the Non-Clock segments, further reflecting the
Company shifting its focus away from the transceiver market.
Selling, general and administrative expense decreased $0.1 million to $4.4
million for the first quarter of fiscal 2000 as compared to the prior year
period. As a percentage of total revenue, selling, general and administrative
expenses decreased 2.4%.
11
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In connection with the recapitalization, the Company entered into a consulting
agreement with both Bain Capital Inc. and Bear, Stearns & Co., Inc. The
management fee incurred for the period ended October 2, 1999 was $0.3 million,
or 0.7% of revenue. There was no management fee in the prior year period.
In dollar terms, operating income was $11.4 million in the first quarter of
fiscal 2000 compared to $5.6 million in the first quarter of fiscal 1999.
Expressed as a percentage of revenue, operating income was 30.0% and 17.3% in
the first quarter of fiscal 2000 and the prior year period, respectively.
Interest and other income was $0.2 million for the quarter ended October 2, 1999
and $0.8 million in the prior year period. Interest income decreased as a result
of lower cash balances available for investing.
Interest expense was $4.8 million in the first quarter of fiscal 2000 and
$51,000 in the first quarter of fiscal 1999. The increase in interest expense is
attributable to the financing obtained in connection with our May 1999
recapitalization.
The Company's effective income tax rate was 19.7% for the first quarter of 2000
as compared to 34.2% in the prior year period. The decrease in the tax rate is
primarily attributable to the tax benefits of our Singapore operations.
INDUSTRY FACTORS
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, data communication components and PC multimedia
audio and graphics 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.
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,
continuing demand for its custom ASIC products and acceptance of the Company's
newly introduced ICs, board level and software 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.
Further information on these and other factors which could affect the Company's
financial results can be found in the Exchange Offer Prospectus under the
caption "Risk Factors".
LIQUIDITY AND CAPITAL RESOURCES
At October 2, 1999, the Company's principal sources of liquidity included cash
and investments of $9.7 million as compared to the July 3, 1999 balance of $9.6
million. Net cash provided by operating activities was $9.2 million in the
first quarter of fiscal 2000, as compared to $6.9 million in the prior year
quarter. The cash provided by operating activities in the first quarter of
fiscal 2000 consisted mainly of earnings before interest, taxes, depreciation
and amortization expenses ("EBITDA") of $12.5 million offset by changes in
operating assets of $0.9 million, interest
12
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payments of $1.5 million and income tax payments of $0.9 million. EBITDA
increased $5.6 million over the same period in 1999 primarily due to the
increases in gross-margin, as discussed above. The Company's days sales
outstanding decreased slightly from 49 days at July 3, 1999 to 47 days in the
first quarter of fiscal 1999, while inventory turns increased from 7.28 times in
fiscal 1999 to 7.96 times in the first quarter of fiscal 2000.
Expenditures for property and equipment were $1.5 million in the first quarter
of fiscal 2000 as compared to $1.0 million in the prior year quarter. The
increase is primarily due to the Company's start-up of its design center in
Phoenix, Arizona.
On May 11, 1999, the Company merged with ICS Merger Corp., a transitory merger
company formed and wholly owned by the affiliates of Bain Capital Inc. and Bear,
Stearns and Company Inc. (the "Equity Investors"). The following events, which
collectively are referred to as the recapitalization, provided the consideration
for the redemption and purchase of the Company's outstanding shares of common
stock and vested options, together with the payment of fees and expenses,
totaling $294.4 million that took place on May 11, 1999:
. An equity investment of $30.6 million made by the Equity Investors and certain
other investors in ICS Merger Corp.;
. Direct purchases by Bain Capital of its common stock from certain existing
shareholders for $9.6 million;
. A rollover equity investment by certain members of its senior management team
of $9.8 million, consisting primarily of:
. Certain existing common stock ($6.6 million that was converted into its new
common stock after the merger; and
. Certain existing stock that was converted into new stock options after the
merger ($2.2 million) and deferred compensation agreements ($0.5 million);
. Purchases of new common stock ($0.5 million) in exchange for promissory
notes;
. Borrowing of $70.0 million in term loans and $3.9 million under a $25.0
million revolving line of credit;
. The offering of $100.0 million in senior subordinated notes (the "Notes"); and
. The use of cash on-hand of approximately $70.5 million.
The Company did not draw on its $20.0 million revolving line of credit during
the first quarter of fiscal 2000.
The Company paid down principal amount of $8.1 million in September 1999. The
Company purchased $2.0 million of its 11 1/2 % senior subordinated notes at 98%
of par and paid $6.1 million of the principal on its term A and B loans as well
as $1.5 million in interest.
Certain of the Company's loan agreements require the maintenance of specified
financial ratios and impose financial limitations. At October 2, 1999, the
Company was in compliance with the senior credit facility covenants.
Management believes that the 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
market.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, a temporary inability to
process transactions, send invoices, or engage in normal business activities.
The Company's formal Year 2000 readiness program includes analysis of
potentially affected business and process systems and replacement or correction
of all non-compliant critical business and process systems that the Company will
13
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need in the new millennium. As of October 2, 1999, the Company's internal
application systems, infrastructure and procedures, and manufacturing and
control processes were Year 2000 compliant. In connection with its Year 2000
readiness program the Company was required to modify or replace certain portions
of its internal systems. The Company used internal resources to reprogram or
replace then test the software for Year 2000 changes.
The Company relies on subcontractors for wafer manufacture, assembly and testing
of products. The Company has sent questionnaires to these critical suppliers to
determine the extent to which the Company's operations are exposed to failure of
Year 2000 issues. The Company has received positive responses from all of its
vendors, promising to be Year 2000 compliant by the fall of 1999. There can be
no assurance that they will be successful in resolving any Year 2000 issues,
enabling the Company to continue receiving products from these suppliers. The
failure of resolving the Company's vendors to resolve these issues could result
in a shutdown of some or all the Company's operations, which would have a
material adverse effect on the Company.
The Company utilizes third-party network equipment and software products, which
may or may not be Year 2000 compliant. The Company has begun formal
communications, through questionnaires, with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are Year 2000 capable. The Company has received positive
responses from all of these suppliers, promising to be Year 2000 compliant by
the fall of 1999. The Company does not currently have any information
concerning the Year 2000-compliance status of its customers. If any of the
Company's significant customers and suppliers do not successfully and in a
timely manner achieve Year 2000 compliance, the Company's business or operations
could be adversely affected. There can be no assurance that another company's
failure to ensure Year 2000 capability would not have an adverse effect on the
Company. The products that the Company sells are not date-sensitive, and
therefore product related exposures are low.
The total expense of the Year 2000 project to date is approximately $100,000,
which is not material to the Company's business operations or financial
condition. Although the Company believes that resolution of the Year 2000 issue
will not require material additional costs and will not have a material adverse
effect on its results of operations, there can be no assurance that additional
material compliance costs will not be incurred or that the Company will be able
to resolve in a timely manner any Year 2000 issues that arise. The expenses of
the Year 2000 project are being funded through operating cash flows.
The Company's contingency plan, in case of failure due to Year 2000, consists of
stocking volume parts by December 31, 1999, so that stock is still available in
the event of a production shut down. The Company has not only qualified
secondary sources for wafer fabrication, assembly and testing, but also
identified third and fourth backup sources as well. The Company placed backup
generators for power at all of its critical sites. There can be no assurance
that the Company's contingency plan will adequately address issues that may
arise in the year 2000. The failure of the Company to successfully resolve such
issues could result in shutdown of some or all of the Company's operations,
which would have a material adverse effect on the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities," which defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company will adopt the requirements of this statement in fiscal year 2001.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's variable interest expense is sensitive to changes in the general
level of United States and European interest rates. A portion of the Company's
debt is currently borrowed at Eurodollar rates plus a blended rate of
approximately 3.3% and is sensitive to changes in interest rates. At October 2,
1999, the weighted average interest rate on our $63.9 million of variable
interest debt was approximately 8.6% and the fair value of the debt approximates
its carrying value.
The Company had interest expense of $4.8 million for the first quarter of fiscal
2000. The potential increase in interest expense for the first quarter of
fiscal 1999 from hypothetical 2% adverse change in the variable interest rates,
would be approximately $0.3 million.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 27, 1999, Harbor Finance Partners and John P. McCarthy Money Purchase
Plan filed a complaint on behalf of a purported class of the Company's
shareholders in the Court of Common Pleas of Montgomery County, Pennsylvania
against the Company and Mr. Henry I. Boreen in his capacity as its interim Chief
Executive Officer alleging that the consideration to be paid in the merger is
inadequate and seeking to enjoin the merger as well as unspecified compensatory
damages. In March 1999, the plaintiffs amended their complaint to add Mr. Hock
E. Tan as a defendant in his capacity as its Senior Vice President, Chief
Financial Officer, Chief Operating Officer and Secretary. In September 1999, the
plaintiffs dismissed their complaint without requiring any payment or other
consideration from the Company or any of the other defendants.
On July 2, 1999, Motorola, Inc. filed an action against the Company and four
former employees of Motorola in the Superior Court of Arizona, Maricopa County,
for unfair competition, breach of contract, misappropriation of trade secrets
and intentional interference with contractual relations. Motorola is suing to
recover its attorneys' fees, unspecified damages and other relief in this
matter. Independent of the lawsuit, a restraining order for the Company's
Arizona design center was put in place, allowing the Arizona design center to
move forward with research and development. A $500,000 payment was made October
1999 in conjunction with the placement of the restraining order. The Company is
currently in settlement discussions with Motorola.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
17
<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: November 15, 1999 INTEGRATED CIRCUIT SYSTEMS, INC.
By: /S/ Hock E. Tan
----------------------------------
Hock E. Tan
President and Chief Executive Officer
Date: November 15, 1999 By: /S/ Justine F. Lien
----------------------------------
Justine F. Lien
Vice President, Finance and Chief Financial
Officer
(Principal financial & accounting officer)
18
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