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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 April 1, 2000
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE 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 X No
--- ---
As of May 11, 2000, there were 16,778,082 shares of Class A Common Stock,
5,653,079 shares of Class B Common Stock and 2,359,703 shares of Class L Common
Stock; $0.01 par value, and 3,366,670 shares of Series A Cumulative Convertible
Preferred Stock; $4.0 stated value outstanding.
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1
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INTEGRATED CIRCUIT SYSTEMS, INC.
--------------------------------
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
April 1, 2000 (Unaudited) and July 3, 1999 3
Consolidated Statements of Operations (Unaudited):
Three and Nine Months Ended April 1, 2000 and
March 27, 1999 4
Consolidated Statements of Cash Flows (Unaudited):
Nine Months Ended April 1, 2000 and
March 27, 1999 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
<PAGE>
Item 1. Consolidated Financial Statements
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
April 1, July 3,
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 31,320 $ 9,285
Marketable securities 278 288
Accounts receivable, net 18,389 18,120
Inventory, net 8,829 8,736
Deferred income taxes 8,209 8,644
Prepaid assets 1,645 797
Other current assets 707 523
Current portion of deposit on purchase contracts 10,177 3,973
--------- ---------
Total current assets 79,554 50,366
--------- ---------
Property and equipment, net 12,335 12,127
Deferred financing costs, net 11,947 12,767
Deposits on purchase contracts -- 11,348
Other assets 1,455 1,187
--------- ---------
Total assets $ 105,291 $ 87,795
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 23 $ 1,030
Accounts payable 11,093 10,258
Income tax payable 4,834 4,473
Accrued payroll and bonus 1,309 2,056
Accrued interest 4,556 2,108
Accrued expenses and other current liabilities 3,314 3,531
--------- ---------
Total current liabilities 25,129 23,456
--------- ---------
Long-term debt, less current portion 150,597 169,000
Other liabilities 2,301 2,251
--------- ---------
Total liabilities 178,027 194,707
--------- ---------
Shareholders' deficit:
Series A cumulative convertible preferred stock, $4.00 stated 13,467 --
Class A common stock, $0.01 par, 168 156
Class B common stock, $0.01 par, 56 56
Class L common stock, $0.01 par, 24 24
Additional paid in capital 34,752 34,719
Accumulated deficit (120,923) (141,412)
Notes receivable (280) (455)
--------- ---------
Total shareholders' deficit (72,736) (106,912)
--------- ---------
Total liabilities and shareholders' deficit $ 105,291 $ 87,795
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------- ---------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues: $ 41,613 $ 34,980 $ 120,511 $ 102,995
Cost and expenses:
Cost of sales 16,068 14,582 48,938 50,175
Research and development 6,341 6,241 18,062 16,435
Selling, general and administrative 5,856 4,538 16,983 14,910
Management fee 250 -- 750 --
Goodwill amortization 59 59 176 176
-------- --------- --------- ---------
Operating income 13,039 9,560 35,602 21,299
-------- --------- --------- ---------
Interest and other income 423 431 792 1,850
Gain on sale of Datacom -- 10,647 -- 10,647
Interest expense (4,543) (13) (13,855) (78)
-------- --------- --------- ---------
Income before income taxes 8,919 20,625 22,539 33,718
Income taxes 810 4,115 2,213 8,547
-------- --------- --------- ---------
Income before extraordinary items 8,109 16,510 20,326 25,171
Extraordinary gain on early retirement of bonds,
net of taxes -- -- 170 --
-------- --------- --------- ---------
Net income $ 8,109 $16,510 $ 20,496 $ 25,171
======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
April 1, March 27,
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,496 $ 25,171
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 3,371 3,605
Amortization of deferred financing charge 1,215 --
(Gain) loss on sale of assets (18) 262
(Gain) loss on sale of DataCom -- (10,647)
Sale (purchase) of trading securities -- 454
Stock compensation -- 1,280
Tax benefit from the exercise of stock options 219 154
Deferred income taxes 573 (894)
Accounts receivable (269) (540)
Inventory (93) 5,843
Other assets, net (1,289) (930)
Accounts payable, accrued expenses and other current liabilities (127) (2,634)
Accrued interest expense 2,448 --
Income taxes 360 2,869
-------- --------
Net cash provided by operating activities 26,886 23,993
-------- --------
Cash flows from investing activities:
Purchase of investments -- (31,685)
Proceeds from sale/maturities of marketable securities -- 27,246
Capital expenditures (3,505) (6,618)
Change in deposits on purchase contracts 5,143 (7,739)
Proceeds from sale of fixed assets 93 16,134
-------- --------
Net cash provided by (used in) investing activities 1,731 (2,662)
-------- --------
</TABLE>
5
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
April 1, March 27,
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from financing activities:
Exercise of stock options 60 840
Sale of preferred stock 13,467 --
Repayments of long-term debt (19,463) (112)
Repurchase of common stock -- (3,016)
Deferred financing charges (395) --
Other (251) --
-------- --------
Net cash used in financing activities (6,582) (2,288)
-------- --------
Net increase in cash and cash equivalents 22,035 19,043
Cash and cash equivalents:
Beginning of period 9,285 25,340
-------- --------
End of period $ 31,320 $ 44,383
======== ========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 9,927 $ 64
======== ========
Income taxes $ 1,024 $ 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 April 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-35 included in the Company's Registration Statement dated March 27, 2000 filed
with the Securities Exchange Commission ("Exchange Offer Prospectus"). Results
of operations for the three and nine months ended April 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) THE RECAPITALIZATION
In the recapitalization on May 11, 1999, affiliates of Bain Capital, an
affiliate of Bear Stearns and Co., Inc. and certain members of management made
an aggregate equity investment in the Company of approximately $50 million as
part of agreements to redeem and purchase all of our outstanding shares of
common stock and vested options for consideration (including fees and expenses)
totaling $294.4 million.
(4) 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>
<S> <C> <C>
April 1, July 3,
2000 1999
-------- -------
Work-in-process $ 7,297 $ 8,211
Finished parts 6,072 5,665
Less: Obsolescence reserve (4,540) (5,140)
------- -------
$ 8,829 $ 8,736
======= =======
</TABLE>
(5) PURCHASE COMMITMENTS
In the third quarter of fiscal 2000, Chartered Semiconductor PTE ("CSM") repaid
the $4.3 million, extinguishing the balance outstanding under the first deposit.
The second deposit commitment period ends December 31, 2000 and accordingly, the
remaining balance of $10.2 million is recorded as a current asset.
7
<PAGE>
(6) DEBT
The Company purchased $2.0 million of the senior subordinated notes below par in
September 1999, resulting in a gain of $36,000, net of income taxes, and $5.0
million below par in November 1999, resulting in a gain of $134,000 net of
income taxes. In addition, the Company has paid $12.4 million of principal on
the term A and term B loans, as well as $9.9 million in interest during the
first nine months of fiscal year 2000.
Certain of the Company's loan agreements require the maintenance of specified
financial ratios and impose financial limitations. At April 1, 2000, the
Company was in compliance with the senior credit facility covenants.
(7) EQUITY
During December 1999, the Company received $13.5 million in exchange for 3.4
million shares of series A cumulative convertible preferred stock from a
strategic corporate investor.
(8) 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, core products and non-core products.
The core segment represents products that synchronize the timing signals in
electronic devices. The non-core 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.
Core products are standard application specific products that are sold into a
variety of applications. The average selling prices (ASP's) of core products
tend to be stable, gross margins are higher than commodity products, and the
volumes higher than the non-core segment. The non-core 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 and operating profit by business segment were as follows:
<TABLE>
<CAPTION>
Business Segment Net Revenue
-------------------------------------------------------
Three months ended Nine months ended
-------------------------------------------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Core $36,968 $27,553 $106,801 $ 78,612
Non-core 4,645 7,427 13,710 24,383
-------------------------------------------------------
Revenues $41,613 $34,980 $120,511 $102,995
=======================================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Business Segment Profit (Loss)
-------------------------------------------------------
Three months ended Nine months ended
-------------------------------------------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Profit:
Core $11,224 $ 8,717 $ 31,113 $ 17,721
Non-core 2,065 843 5,239 3,578
Management fee (250) -- (750) --
-------------------------------------------------------
Total operating profit 13,039 9,560 35,602 21,299
Reconciliation to statements of operations:
Interest & other income 423 11,078 792 12,497
Interest expense (4,543) (13) (13,855) (78)
-------------------------------------------------------
Net income (loss) before
Income taxes $ 8,919 $20,625 $ 22,539 $33,718
=======================================================
</TABLE>
The Company does not allocate items below operating income to specific segments.
The core and non-core profit is calculated as revenues less cost of sales,
research and development and selling, general and administrative expenses for
that segment.
(9) INITIAL PUBLIC OFFERING
On March 27, 2000, the Company announced that it had filed with the Securities
and Exchange Commission, a registration statement relating to a proposed initial
public offering of its common stock. The net cash proceeds of the offering to
be received by the Company, will be used to redeem or repurchase outstanding
senior subordinated notes, repay in full all outstanding obligations under the
Company's senior bank credit facility, pay fees and expenses of the offering,
and fund general corporate requirements. The proposed offering will be
underwritten by a group led by Credit Suisse First Boston, Inc. There can be no
assurance that the Company will complete its initial public offering on the
terms proposed or at all.
(10) 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.
(11) 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 sued to
recover its attorneys' fees, unspecified damages and other relief in this
matter. Independent of the lawsuit, a restraining order for the Company's
Phoenix 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 Phoenix design center to move forward with
research and development. Both parties entered into a settlement agreement in
the third quarter of fiscal 2000, wherein, Motorola received a payment of $2.3
million from the Company and the case has been dismissed. The Company also
incurred $1.4 million in legal fees in conjunction with this lawsuit, $0.1
million of which was expensed during the quarter ended April 1, 2000.
9
<PAGE>
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 Nine months ended
-------------------------------------------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues: 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 38.6 41.7 40.6 48.7
Research and development 15.2 17.8 15.0 16.0
Selling, general and administrative 14.1 13.0 14.1 14.4
Management fee 0.6 -- 0.6 --
Goodwill amortization 0.2 0.2 0.2 0.2
------ ------ ------ ------
Operating income 31.3 27.3 29.5 20.7
------ ------ ------ ------
Interest and other income 1.0 1.2 0.7 1.8
Gain on sale of DataCom -- 30.5 -- 10.3
Interest expense (10.9) -- (11.5) (0.1)
------ ------ ------ ------
Income before income taxes 21.4 59.0 18.7 32.7
Income taxes 1.9 11.8 1.8 8.3
------ ------ ------ ------
Income before extraordinary items 19.5 47.2 16.9 24.4
Extraordinary gain on early retirement of bonds -- -- 0.1 --
------ ------ ------ ------
Net income 19.5% 47.2% 17.0% 24.4%
====== ====== ====== ======
</TABLE>
10
<PAGE>
THIRD QUARTER FISCAL 2000 AS COMPARED TO THIRD QUARTER FISCAL 1999
Total revenues for the third quarter of fiscal 2000 increased by $6.6 million to
$41.6 million an 19.0% increase over the corresponding quarter of the previous
year. The increase is due to the growth in revenue generated by the Company's
core silicon timing business.
The core silicon timing revenue increased 34.2% over the corresponding quarter
in 1999, and increased as a proportion of total revenues to 88.8% from 78.8%
over this period. The growth in our core revenues reflected an increase in
market share for the silicon timing products in the PC industry, as well as
sharply increased sales to the communications industry and digital set-top box
applications. The average selling price for the core segment declined 12%,
while the volume increased 52%.
The non-core revenue decreased by $2.8 million to $4.6 million for the quarter
ended April 1, 2000, as compared to the prior year quarter. Non-core revenue
represented approximately 11.2% of total revenue in the third quarter of fiscal
year 2000, as compared to 21.2% in the prior year quarter. This is primarily due
to the Company shifting its focus to our core silicon timing devices. The
Company sold certain intellectual property and equipment of its Data
Communications product group to 3Com Corporation on February 18, 1999 and
continues to sell and support existing and the next generation fast ethernet
transceiver products. The average selling price for Non-core segment declined
1%, and the volume decreased 37%.
Foreign revenue (which includes shipments of integrated circuits ("ICs") to
foreign companies as well as offshore subsidiaries of US multinational
companies) was 66.8% of total revenue for the third quarter of fiscal 2000 as
compared to 69.1% of total revenue in the corresponding prior year quarter. The
percentage decrease reflects the seasonality effect on PC motherboards in the
Taiwan region. The Company's sales are denominated in U.S. dollars and minimize
foreign currency risk.
Cost of sales consists of costs related to the purchase of processed wafers,
assembly and testing services provided by third-party suppliers, as well as
costs arising from in-house product testing, shipping, quality control and
manufacturing support operations. Cost of sales increased $1.5 million to $16.1
million for the quarter ended April 1, 2000, as compared to the prior year
quarter. The trend to higher margin products and material cost reductions
decreased cost of sales as a percentage of sales to 38.6% from 41.7% in the
similar period in the prior year.
Research and development ("R&D") expense increased $0.1 million to $6.3 million
for the third quarter of fiscal 2000 from $6.2 million in the corresponding
prior year quarter. In the prior year, the Company incurred a $1.3 million
compensation charge arising from modifications of stock options owned by certain
employees affected by the sale of assets to 3Com. R&D expenses for the third
quarter of fiscal 1999 were $4.9 million before the compensation expense, which
results in a $1.4 million increase in R&D as compared to the third quarter of
fiscal 2000. As a percentage of revenue, research and development decreased to
15.2% as compared to 17.8% in the third 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 core silicon timing
segment. This increase is slightly offset by the decreased expenses for the
non-core segments, which further reflects the Company shifting its focus to core
silicon timing markets. This increased expense represented a lower percentage
of revenue due to the significant increase in sales during fiscal 2000.
Selling, general and administrative expense increased $1.3 million to $5.9
million for the third quarter of fiscal 2000 as compared to the prior year
quarter. The increase is primarily due to a $2.3 million payment in connection
with a recently settled lawsuit involving the establishment of the Company's
Phoenix design center (see Part II, Item 1; Legal Proceedings). As a percentage
of total revenue, selling, general and administrative expenses were 14.1% in the
current fiscal quarter as compared to 13.0% in the corresponding prior year
quarter.
Goodwill amortization remained flat at $59,000 for both periods presented.
11
<PAGE>
In connection with the May 1999 recapitalization, the Company entered into a
consulting agreement with both Bain Capital Inc. and Bear, Stearns & Co., Inc.
The management fee incurred for the quarter ended April 1, 2000 was $0.3
million, or 0.6% of revenue. There was no management fee in the prior year
quarter.
In dollar terms, operating income was $13.0 million in the third quarter of
fiscal 2000 compared to $9.6 million in the third quarter of fiscal 1999.
Expressed as a percentage of revenue, operating income was 31.3% and 27.3% in
the third quarter of fiscal 2000 and the prior year quarter, respectively.
Interest and other income was $0.4 million for the quarter ended April 1, 2000
and $0.4 million in the prior year quarter. Interest income remained relatively
flat as compared to the prior year quarter.
Interest expense was $4.5 million in the third quarter of fiscal 2000 and
$13,000 in the third 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 9.1% for the third quarter of 2000
as compared to 20.0% in the prior year period. The decrease in the tax rate is
primarily attributable to the tax benefits of our Singapore operations and
additional interest expense. As our Singapore facility becomes more profitable,
it causes our consolidated tax rate to decrease due to Singapore's tax holiday,
in which operating income is not taxable for five years ending in fiscal 2003.
NINE MONTHS ENDED APRIL 1, 2000 AS COMPARED TO NINE MONTHS ENDED MARCH 27, 1999
Total revenue for the nine months ended April 1, 2000, increased by $17.5
million to $120.5 million as compared to the similiar period in the previous
year. The increase is primarily due to the increase in revenue generated by the
Company's core silicon timing business.
The core silicon timing revenue increased by $28.2 million to $106.8 million for
the nine months ended April 1, 2000, as compared to the prior year period. The
increase is principally attributable to strong demand from PC motherboard and
set-top box products. The Company was successful in the sale of products to the
communications equipment industry. Core revenue contributed approximately 88.6%
of consolidated revenue for the nine months of fiscal 2000, which represented an
increase from 76.3% for the prior year period.
Non-core revenue decreased by $10.7 million to $13.7 million for the nine months
ended April 1, 2000, as compared to the prior year period. Non-core revenue
represented approximately 11.4% of total revenue in the nine months of fiscal
year 2000, as compared to 23.7% in the prior year period. This is primarily due
to shifting the focus to the core silicon timing business. The Company sold
intellectual property and equipment of its non-core business to 3Com Corporation
on February 18, 1999, and continues to sell and support existing and next
generation Fast Ethernet transceiver products.
Foreign revenue (which includes shipments of integrated circuits to foreign
companies as well as offshore subsidiaries of US multinational companies) was
70.3% of total revenue for the nine months of fiscal 2000 as compared to 69.0%
of total revenue in the prior year period. 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.
Despite an increase in total revenues, cost of sales decreased $1.3 million to
$48.9 million for the nine months ended April 1, 2000, as compared to the prior
year period, due to material cost savings in the manufacturing processes, cost
savings from our in-house testing and favorable product mix trends. Cost of
sales as a percentage of total revenue was 40.6% for the first nine months of
fiscal 2000 as compared to 48.7% in the prior year period.
12
<PAGE>
Research and development, or R&D, expense increased $1.7 million to $18.1
million for the first nine months of fiscal 2000 from $16.4 million in the prior
year period. As a percentage of revenue, research and development decreased to
15.0% as compared to 16.0% in the nine months of fiscal 1999. Continued emphasis
on R&D has contributed to the increase in expense with greater spending in
research and development for the core silicon timing business. This increase is
slightly offset by the decreased expenses for the non-core business. This
increased expense represented a lower percentage of revenue due to the
significant increase in sales during fiscal 2000.
Selling, general and administrative expense increased $2.0 million to $17.0
million for the nine months of fiscal 2000 as compared to the prior year period.
The increase is primarily due to a $2.3 million payment in connection with a
recently settled lawsuit involving the establishment of the Company's Phoenix
design center. As a percentage of total revenue, selling, general and
administrative expenses decreased to 14.1% of revenue as compared to 14.4% in
the prior year period.
Goodwill amortization remained flat at $0.2 million for both periods presented.
As a party to a consulting agreement with both Bain Capital and Bear Stearns, we
incurred a management fee for the nine months ended April 1, 2000 equal to $0.8
million, or 0.6% of revenue. There was no management fee in the prior year
period.
In dollar terms, operating income was $35.6 million in the nine months of fiscal
2000 compared to $21.2 million in the prior year period. Expressed as a
percentage of revenue, operating income was 29.5% and 20.7% in the nine months
of fiscal 2000 and the prior year period, respectively.
Interest and other income was $0.7 million for the nine months ended April 1,
2000 and $1.9 million in the prior year period. Interest income decreased as a
result of lower cash balances available for investing.
Interest expense was $13.9 million in the nine months of fiscal 2000 and $0.1
million in the nine 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
nine months of fiscal 2000. There was no gain on retirement of bonds during the
prior year period.
Our effective income tax rate was 9.8% for the nine months of fiscal 2000 as
compared to 25.3% in the prior year period. The decrease in the tax rate is
primarily attributable to the tax benefits of our Singapore operations and
additional interest expense. As our Singapore facility becomes more profitable,
it causes our consolidated tax rate to decrease due to Singapore's tax holiday,
in which operating income is not taxable for five years ending in fiscal 2003.
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 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 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
13
<PAGE>
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 Registration Statement under the caption
"Risk Factors".
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2000, Principal sources of liquidity included cash and investments
of $31.6 million as compared to the July 3, 1999 balance of $9.6 million. Net
cash provided by operating activities was $26.9 million in the nine months of
fiscal 2000, as compared to $24.0 million in the prior year period. The cash
provided by operating activities in the nine months of fiscal 2000 consisted
mainly of earnings before interest, taxes, depreciation and amortization
expenses, or EBITDA, of $43.0 million offset by changes in operating assets of
$2.0 million, interest payments of $9.9 million and income tax payments of $1.0
million. EBITDA increased by $17.8 million over the similar period in 1999
primarily due to the increases in gross margin, as discussed above. EBITDA
should not be considered an alternative to cash flow from operating activities
as a measure of liquidity, as an alternative to net income as an indicator of
our operating performance, or as an alternative to any other measures of
performance in accordance with generally accepted accounting principles. The
Company's days sales outstanding decreased from 49 days in fiscal 1999 to 40
days in fiscal 2000, while inventory turns increased from 7.28 times in fiscal
1999 to 7.40 times in the nine months of fiscal 2000.
Expenditures for property and equipment were $3.5 million in the first nine
months of fiscal 2000 as compared to $6.6 million in the prior year period. The
decrease is primarily due to the relocation into a new facility in San Jose
during the second quarter of fiscal 1999. Purchases of property and equipment
during fiscal 2000 in the amount of $1.3 million were made for our new Phoenix
facility.
In the third quarter of 2000, Chartered Semiconductor PTE ("CSM") repaid the
$4.3 million, extinguishing the balance outstanding under the first deposit.
The second deposit commitment period ends December 31, 2000 and accordingly, the
remaining balance of $10.2 million is recorded as a current asset.
During December 1999, the Company received $13.5 million from a strategic
corporate investor in exchange for 3.4 million shares of Series A cumulative
convertible preferred stock.
The Company purchased $2.0 million of our senior subordinated notes below par in
September 1999, resulting in a gain of $36,000 net of income taxes, and $5.0
million below par in November 1999, resulting in a gain of $134,000 net of
income taxes. In the first nine months of fiscal 2000, the Company has paid
$12.4 million in principal on its long term debt (term A and B loans), as well
as $9.9 million in interest during the first nine months of fiscal 2000. Certain
of the loan agreements require the maintenance of specified financial ratios and
impose financial limitations. At April 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.
14
<PAGE>
On March 27, 2000, the Company announced that it had filed with the Securities
and Exchange Commission, a registration statement relating to a proposed initial
public offering of its common stock. Certain shareholders are expected to sell
shares of common stock in, and receive a portion of the proceeds from, its
proposed initial public offering. The net cash proceeds of the offering to be
received by the Company will be used to redeem or repurchase outstanding senior
subordinated notes, repay in full all outstanding obligations under the
Company's senior bank credit facility, pay fees and expenses of the offering,
and fund general corporate requirements. The proposed offering will be
underwritten by a group led by Credit Suisse First Boston, Inc. There can be no
assurance that the Company will complete its initial public offering on the
terms proposed or at all.
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 the 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.
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 2.7% and is sensitive to changes in interest rates. At April 1,
2000, the weighted average interest rate on our $63.6 million was a combination
of variable interest debt of approximately 6.1%, and the blended rate stated
above. The fair value of the debt approximates its carrying value.
The Company had interest expense of $13.9 million for the nine months of fiscal
2000. The potential increase in interest expense for the nine months of fiscal
2000 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
recapitalization is inadequate and seeking to enjoin the recapitalization 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 sued to
recover its attorneys' fees, unspecified damages and other relief in this
matter. Independent of the lawsuit, a restraining order for the Company's
Phoenix 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 Phoenix design center to move forward with
research and development. Both parties have entered into a settlement
agreement, wherein, Motorola received a one time payment of $2.3 million and the
case has been dismissed. The Company also incurred $1.4 million in legal fees
in conjunction with this lawsuit, $0.1 million of which was expensed during the
quarter ended April 1, 2000.
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:
A report on Form 8-K, dated March 27, 2000, was filed to report
that the Company has filed with the Securities and Exchange
Commissions a registration statement relating to a proposed
initial public offering of its common stock. Pursuant to item 5
(c) of the form 8-K, the Company filed as an exhibit the Press
Release dated March 27, 2000.
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: May 11, 2000 INTEGRATED CIRCUIT SYSTEMS, INC.
By: /s/ Hock E. Tan
---------------------------------------------------
Hock E. Tan
President and Chief Executive Officer
Date: May 11, 2000 By: /s/ Justine F. Lien
---------------------------------------------------
Justine F. Lien
Vice President, Finance and Chief Financial Officer
(Principal financial & accounting officer)
18
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