<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 January 1, 2000
______ 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 February 10, 2000, there were 16,593,160 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, and 3,366,670 shares of Preferred Stock; $4.0 par value
outstanding.
===============================================================================
1
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INTEGRATED CIRCUIT SYSTEMS, INC.
--------------------------------
INDEX
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<TABLE>
<CAPTION>
Page
Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
January 1, 2000 (Unaudited) and July 3, 1999 3
Consolidated Statements of Operations (Unaudited):
Three and Six Months Ended January 1, 2000 and
December 26, 1998 4
Consolidated Statements of Cash Flows (Unaudited):
Six Months Ended January 1, 2000 and
December 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 16
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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Item 1. Consolidated Financial Statements
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 24,483 $ 9,285
Marketable securities 284 288
Accounts receivable, net 18,397 18,120
Inventory, net 8,396 8,736
Deferred income taxes 8,695 8,644
Prepaid assets 2,139 797
Other current assets 941 523
Current portion of deposit on purchase contracts 3,973 3,973
--------- ---------
Total current assets 67,308 50,366
--------- ---------
Property and equipment, net 12,534 12,127
Deferred financing costs, net 12,173 12,767
Deposits on purchase contracts 10,578 11,348
Other assets 1,249 1,187
--------- ---------
Total assets $ 103,842 $ 87,795
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 2,030 $ 1,030
Accounts payable 12,707 10,258
Income tax payable 4,528 4,473
Accrued payroll and bonus 1,851 2,056
Accrued interest 1,842 2,108
Accrued expenses and other current liabilities 4,635 3,531
--------- ---------
Total current liabilities 27,593 23,456
--------- ---------
Long-term debt, less current portion 154,623 169,000
Other liabilities 1,409 1,462
Deferred income taxes 1,116 789
--------- ---------
Total liabilities 184,741 194,707
--------- ---------
Shareholders' deficit:
Preferred Stock, $4.0 par, authorized 3,367; 13,467 --
Issued and outstanding 3,367 shares
Class A common stock, $0.01 par, authorized 27,000; 165 156
Issued and outstanding 16,509 shares
Class B common stock, $0.01 par, authorized 70,000; 56 56
Issued and outstanding 5,653
Class L common stock, $0.01 par, authorized 3,000; 24 24
Issued and outstanding 2,363
Additional paid in capital 34,811 34,719
Accumulated deficit (129,026) (141,412)
Notes receivable (396) (455)
--------- ---------
Total shareholders' deficit (80,899) (106,912)
--------- ---------
Total liabilities and shareholders' deficit $ 103,842 $ 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 Six months ended
------------------ ----------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues: $41,058 $35,815 $78,898 $68,015
Cost and expenses:
Cost of sales 17,095 18,334 32,870 35,593
Research and development expense 5,781 5,434 11,721 10,194
Selling, general and administrative expense 6,687 5,832 11,127 10,372
Management fee 250 -- 500 --
Goodwill amortization 58 58 117 117
---------- ---------- --------- ----------
Operating income 11,187 6,157 22,563 11,739
---------- ---------- --------- ----------
Interest and other (income) (232) (644) (369) (1,418)
Interest expense 4,549 14 9,312 64
---------- ---------- --------- ----------
Income before income taxes 6,870 6,787 13,620 13,093
Income taxes 71 2,275 1,403 4,432
---------- ---------- --------- ----------
Income before extraordinary items 6,799 4,512 12,217 8,661
Extraordinary gain on early retirement of bonds,
net of taxes 134 -- 170 --
---------- ---------- --------- ----------
Net income $ 6,933 $ 4,512 $12,387 $ 8,661
========== ========== ========= ==========
</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>
Six Months Ended
----------------
Jan 1, Dec 26,
2000 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,387 $ 8,661
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 2,253 2,697
Amortization of deferred financing charge 796 --
Loss (gain) on sale of fixed assets 61 (320)
(Gain) loss on sale of building (52) --
Loss on disposition of assets -- 311
Purchase of trading securities -- (13,535)
Sale of trading securities -- 14,300
Tax benefit from the exercise of stock options 61 (3)
Deferred income taxes 275 (936)
Accounts receivable (277) 780
Inventory 340 5,940
Other assets, net (1,877) 18
Accounts payable, accrued expenses and other current liabilities 3,348 (3,585)
Accrued interest expense (266) --
Income taxes 54 482
-------- --------
Net cash provided by operating activities 17,103 14,810
-------- --------
Cash flows from investing activities:
Purchase of investments -- (19,926)
Proceeds from sale/maturities of marketable securities -- 18,323
Capital expenditures (2,608) (4,245)
Change in deposits on purchase contracts 769 (12,000)
Proceeds from sale of fixed assets 60 15
-------- --------
Net cash used in investing activities (1,779) (17,833)
-------- --------
Cash flows from financing activities:
Exercise of stock options 39 53
Investment into the Company 13,467 --
Repayments of long-term debt (13,430) (76)
Repurchase of common stock -- (3,016)
Deferred financing charges (202) --
-------- --------
Net cash used in financing activities (126) (3,039)
-------- --------
Net increase in cash and cash equivalents 15,198 (6,062)
Cash and cash equivalents:
Beginning of period 9,285 25,340
-------- --------
End of period $ 24,483 $ 19,278
======== ========
</TABLE>
5
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
Jan 1, Dec 26,
2000 1998
------------ ------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $8,565 $ 64
====== ======
Income taxes $ 922 $4,743
====== ======
Non-cash disclosures:
Capital lease of equipment $ 53 $ --
====== ======
</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 January 1,
2000 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 and six months ended January 1, 2000 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):
January 1, July 3,
2000 1999
----------- ---------
Work-in-process $ 7,328 $ 8,211
Finished parts 5,638 5,665
Less: Obsolescence reserve (4,570) (5,140)
------- -------
$ 8,396 $ 8,736
======= =======
(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:
. Certain existing common stock ($6.6 million that was converted into its
new common stock after the merger);
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. Certain existing stock that was converted into new stock options after
the merger ($2.2 million) and deferred compensation agreements ($0.5
million); and
. 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 the principal amount of $8.1 million in September 1999,
and $5.3 million in November 1999. The Company purchased $2.0 million of its 11
1/2 % senior subordinated notes below par in September, resulting in a gain of
$36,000 net of income taxes, and $5.0 million below par in November, resulting
in a gain of $134,000 net of income taxes. The gain on the early retirement of
bonds is reported as an extraordinary item, net of income tax. In September, the
Company paid $6.1 million of principal on its term A and B loans and $0.3
million in November, as well as $8.6 million in interest during the first six
month of fiscal year 2000.
Certain of the Company's loan agreements require the maintenance of specified
financial ratios and impose financial limitations. At January 1, 2000, the
Company was in compliance with the senior credit facility covenants.
(6) EQUITY
During December 1999, the Company received $13.5 million in exchange for 3.3
million shares of $4.0 par value preferred stock from a strategic corporate
investor.
(7) 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 average selling prices (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.
8
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Revenue and operating profit by business segment were as follows:
<TABLE>
<CAPTION>
Business Segment Net Revenue
--------------------------------------------------------------------
Three months ended Six months ended
--------------------------------------------------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Clock $37,441 $26,952 $69,833 $51,059
Non - clock 3,617 8,863 9,065 16,956
--------------------------------------------------------------------
Total net revenues $41,058 $35,815 $78,898 $68,015
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Business Segment Profit (Loss)
---------------------------------------------------------------------------
Three months ended Six months ended
---------------------------------------------------------------------------
Operating Profit: January 1, December 26, January 1, December 26,
2000 1998 2000 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Clock $10,449 $4,760 $19,889 $ 9,004
Non - clock 988 1,397 3,174 2,735
Management fee (250) -- (500) --
---------------------------------------------------------------------------
Total operating profit 11,187 6,157 22,563 11,739
Reconciliation to statements of operations:
Interest & other income 382 644 559 1,418
Interest expense (4,549) (14) (9,312) (64)
Net income (loss) before ---------------------------------------------------------------------------
Income taxes $ 7,020 $6,787 $13,810 13,093
===========================================================================
</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.
(8) 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.
(9) LEGAL
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 $0.5 million payment was made during
the second quarter of fiscal 2000 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, and has accrued $1.5 million toward a possible settlement.
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 Six Months Ended
------------------ ----------------
Jan 1, Dec 26, Jan 1, Dec 26,
2000 1998 2000 1998
------------- ------------- ------------ ------------
Revenues: 100.0% 100.0% 100.0% 100.0%
<S> <C> <C> <C> <C>
Cost and expenses:
Cost of sales 41.6 51.2 41.7 52.3
Research and development 14.1 15.2 14.9 15.0
Selling, general and administrative 16.3 16.3 14.1 15.3
Management fee 0.6 -- 0.6 --
Goodwill amortization 0.1 0.1 0.1 0.2
------ ------ ------ ------
Operating income 27.3 17.2 28.6 17.2
------ ------ ------ ------
Interest and other income (0.6) (1.8) (0.5) (2.1)
Interest expense 11.1 0.0 11.8 0.1
------ ------ ------ ------
Income before income taxes 16.8 19.0 17.3 19.2
Income taxes 0.2 6.4 1.8 6.5
------ ------ ------ ------
Income before extraordinary items 16.6 12.6 15.5 12.7
Extraordinary gain on early retirement of bonds 0.3 -- 0.2 --
------ ------ ------ ------
Net income 16.9% 12.6% 15.7% 12.7%
====== ====== ====== ======
</TABLE>
10
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SECOND QUARTER FISCAL 2000 AS COMPARED TO SECOND QUARTER FISCAL 1999
Consolidated revenue increased by $5.3 million to $41.1 million for the second
quarter ended January 1, 2000 as compared to the prior year quarter. The
increase is due to the growth in revenue generated by the Company's Clock
applications.
Clock segment revenue increased by $10.5 million to $37.4 million for the second
quarter ended January 1, 2000 as compared to the prior year quarter. The
increase is attributable to strong demand from PC motherboard and set top box
products. Clock components contributed approximately 91.2% of consolidated
revenue for the second quarter of fiscal 2000, which represented an increase of
15.9% from 75.3% for the prior year quarter. The average selling price for
Clocks declined 10.0%, while the volume increased 54.4%.
The Company is currently involved in the design of FTGs for the next generation
of PC motherboards, the Company is planning to expand into high performance
clocking solutions supporting networking, telecommunication, workstation and
server applications.
Non-Clock segment revenue decreased by $5.2 million to $3.6 million for the
quarter ended January 1, 2000, as compared to the prior year quarter. Non-Clock
segment revenue represented approximately 8.8% of total revenue in the second
quarter of fiscal year 2000, as compared to 24.7% in the prior year period. This
is primarily due to the Company shifting its focus to the various clock markets
and diminishing investment into the non-clock businesses. The Company sold
certain intellectual property and equipment of its Data Communications product
group to 3Com Corporation on February 18, 1999, but will continue to sell and
support existing and the next generation fast ethernet transceiver products. The
average selling price for Non-Clocks increased 68.7%, and the volume decreased
75.8%.
Foreign revenue (which includes shipments of integrated circuits ("ICs") to
foreign companies as well as offshore subsidiaries of US multinational
companies) was 73.1% of total revenue for the second quarter of fiscal 2000 as
compared to 70.6% 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 $1.2 million to $17.1 million for the quarter ended
January 1, 2000, as compared to the prior year quarter. Cost of sales as a
percentage of total revenue was 41.6% for the second quarter of fiscal 2000 as
compared to 51.2% in the prior year quarter. The Company continues to realize
material cost savings in the manufacturing processes. Greater efficiencies
occurred in the in-house testing processes causing savings per unit tested.
Also, reductions in packaging costs helped offset lower clock A.S.P.'s.
Research and development ("R&D") expense increased $0.4 million to $5.8 million
for the second quarter of fiscal 2000 from $5.4 million in the prior year
quarter. As a percentage of revenue, research and development decreased to 14.1%
as compared to 15.2% in the second quarter of fiscal 1999. The Company's
continued emphasis in R&D has contributed to the increase in expense with
greater spending in research and development for the Clock segments. This
increase is slightly offset by the decreased expenses for the Non-Clock
segments, which further reflects the Company shifting its focus to clock
markets. This increased expense represented a lower percentage of revenue due to
the significant gain in sales during the second quarter of fiscal 2000
Selling, general and administrative expense increased $0.9 million to $6.7
million for the second quarter of fiscal 2000 as compared to the prior year
period. The increase is primarily due to the legal fee expense from the Motorola
lawsuit (see Part II, Item 1; Legal Proceedings). As a percentage of total
revenue, selling, general and administrative expenses remained flat at 16.3%.
11
<PAGE>
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 January 1, 2000 was $0.3 million,
or 0.6% of revenue. There was no management fee in the prior year period.
In dollar terms, operating income was $11.2 million in the second quarter of
fiscal 2000 compared to $6.2 million in the second quarter of fiscal 1999.
Expressed as a percentage of revenue, operating income was 27.3% and 17.2% in
the second quarter of fiscal 2000 and the prior year period, respectively.
Interest and other income was $0.2 million for the quarter ended January 1, 2000
and $0.6 million in the prior year period. Interest income decreased as a result
of lower cash balances available for investing.
Interest expense was $4.5 million in the second quarter of fiscal 2000 and
$14,000 in the second quarter of fiscal 1999. The increase in interest expense
is attributable to the financing obtained in connection with our May 1999
recapitalization.
Gain on the early retirement of bonds, net of taxes, was $0.1 million for the
second quarter of fiscal 2000. There was no gain on retirement of bonds during
the prior year period.
The Company's effective income tax rate was 1.2% for the second quarter of 2000
as compared to 33.5% in the prior year period. The decrease in the tax rate is
primarily attributable to the tax benefits of our Singapore operations, and
benefits from the interest expense in the current year. As our Singapore
facility becomes more profitable, it causes the Company's consolidated tax rate
to decrease due to Singapore's tax holiday, in which operating income is not
taxable for 5 years ending in fiscal 2002.
SIX MONTHS ENDED JANUARY 1, 2000 AS COMPARED TO SIX MONTHS ENDED DECEMBER 26,
1998
Consolidated revenue increased by $10.9 million to $78.9 million for the six
months ended January 1, 2000 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 $18.8 million to $69.8 million for the six
months ended January 1, 2000 as compared to the prior year period. The increase
is attributable to strong demand from PC motherboard and set top box products.
Clock components contributed approximately 88.5% of consolidated revenue for the
first six months of fiscal 2000, which represented an increase from 75.1% for
the prior year quarter. The average selling price for Clocks declined 13.0%,
while the volume increased 57.4%.
The Company is currently involved in the design of FTGs for the next generation
of PC motherboards, and the Company is planning to expand into high performance
clocking solutions supporting networking, telecommunication, workstation and
server applications.
Non-Clock segment revenue decreased by $7.9 million to $9.1 million for the six
months ended January 1, 2000, as compared to the prior year period. Non-Clock
segment revenue represented approximately 11.5% of total revenue in the fist six
months of fiscal year 2000, as compared to 24.9% in the prior year period. This
is primarily due to the Company shifting its focus to the clock markets. The
Company sold certain intellectual property and equipment of its Data
Communications product group to 3Com Corporation on February 18, 1999, but will
continue to sell and support existing and the next generation fast ethernet
transceiver products. The average selling price for Non-Clocks increased 25.8%,
and the volume decreased 57.3%.
Foreign revenue (which includes shipments of integrated circuits ("ICs") to
foreign companies as well as offshore subsidiaries of US multinational
companies) was 72.1% of total revenue for the first six months of fiscal 2000 as
compared to 68.9% of total revenue in the prior year period. While the
percentage increase reflected growing sales to the
12
<PAGE>
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 $2.7 million to $32.9 million for the six months ended
January 1, 2000, as compared to the prior year period. Cost of sales as a
percentage of total revenue was 41.7% for the first six months of fiscal 2000 as
compared to 52.3% in the prior year period. 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 $1.5 million to $11.7 million
for the first six months of fiscal 2000 from $10.2 million in the prior year
period. As a percentage of revenue, research and development decreased to 14.9%
as compared to 15.0% in the first six months of fiscal 1999. The Company's
continued emphasis in R&D has contributed to the increase in expense with
greater spending in research and development for the Clock segment. This
increase is slightly offset by the decreased expenses for the Non-Clock segment.
This increased expense represented a lower percentage of revenue due to the
significant increase in sales during the second quarter of fiscal 2000
Selling, general and administrative expense increased $0.8 million to $11.1
million for the first six months of fiscal 2000 as compared to the prior year
period. The increase is primarily due to the legal fee expense from the Motorola
lawsuit (see Part II, Item 1; Legal Proceedings). As a percentage of total
revenue, selling, general and administrative expenses decreased to 14.1% of
revenue as compared to 15.3% in the prior year period.
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 six months ended January 1, 2000 was $0.5
million, or 0.6% of revenue. There was no management fee in the prior year
period.
In dollar terms, operating income was $22.6 million in the first six months of
fiscal 2000 compared to $11.7 million in the first six months of fiscal 1999.
Expressed as a percentage of revenue, operating income was 28.6% and 17.2% in
the first six months of fiscal 2000 and the prior year period, respectively.
Interest and other income was $0.4 million for the six months ended January 1,
2000 and $1.4 million in the prior year period. Interest income decreased as a
result of lower cash balances available for investing.
Interest expense was $9.3 million in the first six months of fiscal 2000 and
$64,000 in the first six months of fiscal 1999. The increase in interest expense
is attributable to the financing obtained in connection with our May 1999
recapitalization.
Gain on the early retirement of bonds, net of taxes, was $0.2 million for the
first six months of fiscal 2000. There was no gain on retirement of bonds during
the prior year period.
The Company's effective income tax rate was 10.3% for the first six months of
fiscal 2000 as compared to 33.9% in the prior year period. The decrease in the
tax rate is primarily attributable to the tax benefits of our Singapore
operations, and benefits that the Company receives for additional interest
expense. As our Singapore facility becomes more profitable, it causes the
Company's consolidated tax rate to decrease due to Singapore's tax holiday, in
which operating income is not taxable for 5 years ending in fiscal 2002.
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, networking components and PC multimedia audio and graphics
components, are
13
<PAGE>
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 competitive pressure,
acceptance of the Company's newly introduced ICs, board level products 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 January 1, 2000, the Company's principal sources of liquidity included cash
and investments of $24.8 million as compared to the July 3, 1999 balance of $9.6
million. Net cash provided by operating activities was $17.1 million in the
first six months of fiscal 2000, as compared to $14.8 million in the prior year
period. The cash provided by operating activities in the first six months of
fiscal 2000 consisted mainly of earnings before interest, taxes, depreciation
and amortization expenses ("EBITDA") of $12.8 million offset by changes in
operating assets of $1.6 million, interest payments of $8.6 million and income
tax payments of $0.9 million. EBITDA increased $10.9 million over the same
period in 1999 primarily due to the increases in gross-margin, as discussed
above. The Company's days sales outstanding remained flat at 49 days, while
inventory turns increased from 7.28 times in fiscal 1999 to 9.60 times in the
first six months of fiscal 2000.
Expenditures for property and equipment were $2.6 million in the first six
months of fiscal 2000 as compared to $4.2 million in the prior year period. The
decrease is primarily due to the Company's move into the new facility in San
Jose during the second quarter of fiscal 1999. $1.3 million of the expenditures
for property and equipment during fiscal 2000 were invested in the start-up of
the Company's new Arizona facility.
During December 1999, the Company received $13.5 million in exchange for 3.3
million shares of $4.0 par value preferred stock from a strategic corporate
investor.
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;
14
<PAGE>
. 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);
. Certain existing stock that was converted into new stock options after
the merger ($2.2 million) and deferred compensation agreements ($0.5
million); and
. 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 paid back any draw downs on its $25.0 million revolving line of
credit by the end of the second quarter of fiscal 2000.
The Company paid down the principal amount of $8.1 million in September 1999,
and $5.3 million in November 1999. The Company purchased $2.0 million of its 11
1/2 % senior subordinated notes below par in September, resulting in a gain of
$36K net of income taxes, and $5.0 million below par in November, resulting in a
gain of $0.1 million net of income taxes. In September, the Company paid $6.1
million of principal on its term A and B loans and $0.3 million in November, as
well as $8.6 million in interest during the first six month of fiscal year 2000.
Certain of the Company's loan agreements require the maintenance of specified
financial ratios and impose financial limitations. At January 1, 2000, 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 has not had any disruptions due to Year 2000 issue.
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.
15
<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 2.8% and is sensitive to changes in interest rates. At January 1,
2000, the weighted average interest rate on our $63.6 million of variable
interest debt was approximately 8.1% and the fair value of the debt approximates
its carrying value.
The Company had interest expense of $9.3 million for the first six months of
fiscal 2000. The potential increase in interest expense for the first two
quarters of fiscal 1999 from hypothetical 2% adverse change in the variable
interest rates, would be approximately $0.3 million.
16
<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 December 28,
1999, the Company paid $190,000 to settle this lawsuit.
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 $500K payment was made during the
second quarter of fiscal 2000 in conjunction with the placement of the
restraining order. The Company is currently in settlement discussions with
Motorola, and accrued $1.5 million toward a possible settlement.
17
<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.
18
<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: February 15, 2000 INTEGRATED CIRCUIT SYSTEMS, INC.
By: /s/ Hock E. Tan
---------------------------------
Hock E. Tan
President and Chief Executive Officer
Date: February 15, 2000 By: /s/ Justine F. Lien
---------------------------------
Justine F. Lien
Vice President, Finance and Chief Financial Officer
(Principal financial & accounting officer)
19
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