10-Q 1 d10q.txt FORM 10Q ================================================================================ 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 December 29, 2001 ___ 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 X No_____ ----- As of February 7, 2002, there were 66,560,306 shares of Common Stock; $0.01 par value, outstanding. ================================================================================ 1 INTEGRATED CIRCUIT SYSTEMS, INC. -------------------------------- INDEX ----- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets: December 29, 2001 (Unaudited) and June 30, 2001 3 Consolidated Statements of Operations (Unaudited): Three and Six Months Ended December 29, 2001 and December 30, 2000 4 Consolidated Statements of Cash Flows (Unaudited): Six Months Ended December 29, 2001 and December 30, 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About 15 Market Risk PART II. OTHER INFORMATION Item 4. Submission of matters to a vote of security holders Item 6. Exhibits and Reports on Form 8-K 2 Item 1. Consolidated Financial Statements INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
December 29, June 30, 2001 2001 --------------- --------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 87,868 $ 91,400 Marketable securities 27,253 3,000 Accounts receivable, net 22,502 27,359 Inventory, net 11,810 10,097 Deferred taxes 3,446 4,053 Prepaid income taxes 2,189 -- Prepaid assets 5,969 5,411 Current portion of deposit on purchase contracts -- 596 ---------- ---------- Total current assets 161,037 141,916 ---------- ---------- Property and equipment, net 10,246 11,215 Other assets 1,279 986 ---------- ---------- Total assets $ 172,562 $ 154,117 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term obligations $ 423 $ 429 Accounts payable 9,683 8,579 Accrued expenses and other current liabilities 3,450 3,566 Income tax payable -- 1,306 ---------- ---------- Total current liabilities 13,556 13,880 ---------- ---------- Long-term debt, less current portion 71 280 Other liabilities 954 904 ---------- ---------- Total liabilities 14,581 15,064 ---------- ---------- Shareholders' equity: Common stock, $0.01 par, authorized 300,000; Issued and outstanding 67,010 and 66,128 shares as of December 29, 2001 and June 30, 2001, respectively. 670 661 Additional paid in capital 218,290 211,524 Accumulated deficit (51,230) (70,229) Deferred compensation (2,194) (2,722) Notes receivable -- (181) Treasury stock, at cost, 655 shares (7,799) -- Other comprehensive income 244 -- ---------- ---------- Total shareholders' equity 157,981 139,053 ---------- ---------- Total liabilities and shareholders' equity $ 172,562 $ 154,117 ========== ==========
See accompanying notes to consolidated financial statements. 3
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands) (Unaudited) Three Months Ended Six Months Ended ------------------ ---------------- December 29, 2001 December 30, 2000 December 29, 2001 December 30, 2000 ----------------- ----------------- ----------------- ----------------- Revenue: $ 38,560 $ 56,484 $ 74,267 $ 107,835 Cost and expenses: Cost of sales 16,014 21,362 31,160 40,831 Research and development 5,846 7,503 12,494 14,643 Selling, general and administrative 5,526 4,301 9,974 10,418 Goodwill amortization -- 58 -- 117 ------------ -------------- ---------------- --------------- Operating income 11,174 23,260 20,639 41,826 ------------ -------------- ---------------- --------------- Interest and other income 666 865 1,591 1,466 Interest expense (23) (22) (45) (175) ------------ -------------- ---------------- --------------- Income before income taxes 11,817 24,103 22,185 43,117 Income taxes 1,683 5,221 3,186 8,684 ------------ -------------- ---------------- --------------- Net income $ 10,134 $ 18,882 $ 18,999 $ 34,433 ============ ============== ================ =============== Basic income per share: Net income $ 0.15 $ 0.29 $ 0.29 $ 0.53 Diluted income per share: Net income $ 0.15 $ 0.27 $ 0.27 $ 0.50 Weighted average share outstanding - basic 66,180 64,597 66,314 64,486 Weighted average share outstanding - diluted 69,535 69,404 69,796 69,451
See accompanying notes to consolidated financial statements. 4 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six Months Ended ---------------- December 29, December 30, 2001 2000 ---------- ---------- Cash flows from operating activities: Net income $ 18,999 $ 34,433 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,578 2,583 Amortization of bond premiums 6 (4) Deferred financing charge 7 5 Amortization of deferred compensation 489 535 (Gain) loss on sale of assets (105) (1) Tax benefit of stock options 5,402 2,857 Deferred income taxes 710 (726) Changes in assets and liabilities: Accounts receivable 4,857 (6,671) Inventory (1,713) 192 Other assets, net (224) 567 Accounts payable, accrued expenses and other current liabilities 987 1,422 Income taxes (3,496) 8,858 ---------- ---------- Net cash provided by operating activities 28,497 44,050 ---------- ---------- Cash flows from investing activities: Purchase of marketable securities (38,019) -- Sales/maturities of marketable securities 14,062 -- Capital expenditures (1,621) (2,056) Refunds of deposits on purchase contracts -- 9,877 Other 192 49 ---------- ---------- Net cash (used in) provided by investing activities (25,386) 7,870 ---------- ---------- Cash flows from financing activities: Net repayments under line of credit agreement -- (10,000) Exercise of stock options 1,098 210 Shares purchased through stock purchase plan 314 351 Initial public offering expenses -- (194) Purchase of treasury stock (7,799) -- Repayments of long-term debt (256) (329) ---------- ---------- Net cash used in financing activities (6,643) (9,962) ---------- ---------- Net (decrease) increase in cash and cash equivalents (3,532) 41,958 Cash and cash equivalents: Beginning of period 91,400 28,940 ---------- ---------- End of period $ 87,868 $ 70,898 ========== ==========
See accompanying notes to consolidated financial statements. 5 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 our management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly our financial position at December 29, 2001 and results of operations and cash flows for the interim periods presented. Certain items have been reclassified to conform to current period presentation. Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended June 30, 2001. Results of operations for the six months ended December 29, 2001 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 its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. (3) ACCOUNTING FOR GOODWILL Our adoption of Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets" eliminates the amortization of goodwill in our current quarter. Our goodwill amortization expense in the first six months of fiscal year 2001 totaled $117,000 pretax. Had we continued to amortize goodwill, our amortization expense in the first six months of fiscal year 2002 would have been $117,000 pretax. This transition had no impact on diluted EPS in either period. (4) INVENTORY Inventory is valued at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. The components of inventories are as follows (in thousands): December 29, June 30, 2001 2001 ------------ ------------ Work-in-process $ 6,240 $ 6,513 Finished parts 8,735 7,178 Less: Obsolescence reserve (3,165) (3,594) ------------ ------------ $ 11,810 $ 10,097 ============ ============ (5) DEBT In June 2000, we obtained a $30.0 million revolving credit facility with a commercial bank to expire in June 2002, with an option to extend the facility for an additional period subject to certain covenants, including maintenance of certain financial ratios. As of December 29, 2001, we had no outstanding balances under this agreement, and we were in compliance with the revolving credit facility covenants. Subsequent to quarter end, we terminated this credit facility and entered into a new facility as discussed below. In connection with the acquisition of Micro Networks, we entered into a new revolving credit and term loan facility dated December 31, 2001, which expire December 31, 2004. The new facility enables us to draw down $45.0 million under the term loan and $10.0 million under the revolving credit facility. At our option, the interest rates under the term loan will be either (1) a base rate, which is the higher of (i) a rate of interest announced from time to time by the lenders' 6 administrative agent as the base rate ("Base Rate") or (ii) the sum of 0.5% per annum plus the federal funds rate or (2) London Interbank Offer Rate ("LIBOR") plus 1.75%. At our option, the interest rates under the Revolving Credit Loan, will be either (1) the Base Rate or (2) the LIBOR Rate plus a pre-formulated margin. (6) CAPITAL STOCK In September 2001, we announced a stock repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. As of December 29, 2001, we had purchased 655,000 shares for $7.8 million. (7) NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations", which supersedes Accounting Principles Board Opinion No. 16 ("APB No. 16"), "Business Combinations". The most significant changes made by SFAS No. 141 is the requirement of the usage of the purchase method of accounting for all business combinations initiated after June 30, 2001 and established specific criteria for the recognition of intangible assets separately from goodwill. We adopted this statement during the first quarter of fiscal year 2002. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which supercedes APB No. 17, "Intangible Assets". SFAS No. 142 provides guidance on accounting for goodwill and other intangible assets subsequent to acquisition. These provisions are effective for fiscal years beginning after December 15, 2001. We adopted this statement during the first quarter of fiscal year 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". SFAS No. 143 provides guidance on accounting for the retirement of tangible long-lived assets and the associated asset retirement costs. These provisions are effective for fiscal year beginning after June 15, 2002. We do not believe that adoption of this statement will have a material impact on our operating results. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 established a single accounting model for the disposition of long-lived assets by sale. These provisions are effective for fiscal years beginning after December 15, 2001. We do not believe that adoption of this statement will have a material impact on our operating results. (8) NET INCOME PER SHARE Basic net income per share is based on the weighted average number of common shares outstanding excluding contingently issuable or returnable shares that contingently convert into Common Stock upon certain events. Diluted net income per share is based on the weighted average number of common shares outstanding and diluted potential common shares outstanding. 7 The following table set forth the computation of net income (numerator) and shares (denominator) for earnings per share:
Three Months Ended Six Months Ended December 29, December 30, December 29, December 30, 2001 2000 2001 2000 ------------------------------------------------------------------ Numerator (in thousands): Net income $ 10,134 $ 18,882 $ 18,999 $ 34,433 ------------------------------------------------------------------ Denominator (in thousands): Weighted average shares outstanding used for basic income per share 66,180 64,597 66,314 64,486 Common stock options 3,355 4,807 3,482 4,965 ------------------------------------------------------------------ Weighted average shares outstanding used for diluted income per share 69,535 69,404 69,796 69,451 ==================================================================
(9) INCOME TAXES Our effective income tax rate was 14.4% for the first six months of fiscal year 2002 as compared to 20.1% in the prior year period. The effective tax rate for fiscal years 2002 and 2001 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non- passive income for five years. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $30.5 million liability as of December 29, 2001. (10) COMPREHENSIVE INCOME Total comprehensive income represents net income plus the results of certain equity changes not reflected in the condensed consolidated and combined statements of operations. The components of accumulated other comprehensive income are shown below.
Three Months Ended Six Months Ended December 29, December 30, December 29, December 30, 2001 2000 2001 2000 ----------------------------------------------------------------------------- Net income $ 10,134 $ 18,882 $ 18,999 $ 34,433 ----------------------------------------------------------------------------- Other comprehensive income: Unrealized Gain on Investments 28 -- 243 --- ----------------------------------------------------------------------------- Total comprehensive income $ 10,162 $ 18,882 $ 19,242 $ 34,433 =============================================================================
(11) LEGAL PROCEEDINGS From time to time, various inquiries, potential claims and charges and litigation are made, asserted or commenced by or against us, principally arising from or related to contractual relations and possible patent infringement. We believe that any of these claims currently pending, individually and in the aggregate, have been adequately reserved and will not have any material adverse effect on our consolidated financial position or results of operations, although no assurance can be made in this regard. On or about March 28, 2001, Cypress Semiconductor Corporation, ("Cypress"), and International Microcircuits Inc. filed a suit against us in the U.S. District Court in Delaware, alleging that we infringed on three patents and induced others to infringe on them as well. Plaintiffs seek injunctive relief, unspecified damages and enhanced damages for willful 8 infringement. We denied the allegations and filed a counterclaim seeking to invalidate the patents. We filed a patent infringement lawsuit in the U.S. District Court, Northern District of California against Cypress, alleging that Cypress infringes upon one of our patents, and we seek injunctive relief and damages against Cypress. Cypress denied the allegations and filed a counterclaim seeking to invalidate our patent. On or about July 20, 2001, Cypress filed a complaint with the U.S. International Trade Commission, ("ITC"), to commence an investigation of us for patent infringement. A notice of investigation was issued, and we denied the allegations of Cypress in this ITC complaint. Litigation in the Delaware lawsuit about a patent that is subject of Cypress' ITC complaint is stayed, until the ITC's determination under the Cypress complaint becomes final. On or about November 5, 2001, we filed a complaint with the ITC to commence an investigation of Cypress for patent infringement. A notice of investigation was issued, and Cypress denied the allegations in our complaint. We will continue to vigorously pursue our rights and defenses in all litigation with Cypress. Although we believe that all the litigation will not have a material adverse effect on our results of operations and financial condition, no assurance can be made in this regard. (12) CUSTOMERS In fiscal year 2001, we entered into an Investment and Stock Trade Agreement (the "agreement") with Maxtek Technology Co. Ltd ("Maxtek"), a distributor in Taiwan. We advanced $4.0 million dollars as a prepayment for acquiring 4.0 million shares, or approximately 10%, of Maxtek. The agreement states that if Maxtek fails to successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest (commercial rate set by the bank of China) during the said period. Maxtek is one of our distributors and represented approximately 18% of our sales for the first six months of fiscal year 2002, and 12% in the prior year period. Additionally, sales to Maxtech Corporation Limited ("Maxtech"), a company controlled by the primary shareholder of Maxtek, were 20% of our sales in the first six months of fiscal year 2002 and 8% in the prior year period. (13) SUBSEQUENT EVENTS On December 20, 2001, we announced that we signed a definitive agreement to acquire Micro Networks Corporation ("Micro Networks"), a leading supplier of precision timing devices for optical networking, wireless infrastructure and high-end network servers using surface acoustic wave (SAW) technology. Subsequent to quarter end, we announced our completion of the acquisition. This agreement provides for all outstanding equity interests of Micro Networks to be exchanged for $65.0 million in cash, net of certain adjustments including Micro Networks' severance and benefit plan payments, obligations arising upon a change of control and changes in Micro Networks' working capital since September 30, 2001, and an assumption of approximately $12.0 million of debt. The acquisition was funded through cash on hand as well as through term bank financing obtained subsequent to quarter end. On or about January 22, 2002, the presiding judge in the 2 ITC investigations involving Cypress and us ordered the investigations consolidated. 9 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:
Three Months Ended Six Months Ended ------------------ ---------------- December December December December 29, 30, 29, 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues 100.0% 100.0% 100.0% 100.0% Gross margin 58.5 62.2 58.1 62.1 Research and development 15.2 13.3 16.8 13.6 Selling, general and administrative 14.3 7.6 13.5 9.6 Goodwill amortization -- 0.1 -- 0.1 ---------- ---------- ---------- ---------- Operating income 29.0 41.2 27.8 38.8 ---------- ---------- ---------- ---------- Interest and other income 1.7 1.5 2.1 1.4 Interest expense (0.1) (0.0) (0.0) (0.2) ---------- ---------- ---------- ---------- Income before income taxes 30.6 42.7 29.9 40.0 Income taxes 4.3 9.3 4.3 8.1 ---------- ---------- ---------- ---------- Net income 26.3% 33.4% 25.6% 31.9% ========== ========== ========== ==========
10 SECOND QUARTER FISCAL YEAR 2002 AS COMPARED TO SECOND QUARTER FISCAL YEAR 2001 Revenue. Revenue decreased by $17.9 million to $38.6 million for the second quarter ended December 29, 2001 as compared to the prior year quarter. The 31.7% decrease is primarily due to macroeconomic factors, which affected overall revenue and was slightly offset by shipments to new end markets such as game machines and DDR memory modules. Although we have experienced stabilization in our average selling prices this quarter, the average selling price declined 21.1% from the prior year quarter, while the volume decrease 13.5%. Foreign revenue (which includes shipments of integrated circuits ("ICs") to foreign companies as well as offshore subsidiaries of US multinational companies) was 78.9% of total revenue for the second quarter of fiscal year 2002 as compared to 65.1% of total revenue in the prior year quarter. This increase is attributable to strong demand in the Asian PC market. 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. Our sales are denominated in U.S. dollars and minimize foreign currency risk. Gross Margin. Cost of sales decreased $5.4 million to $16.0 million for the second quarter of fiscal year 2002, as compared to the prior year quarter. Cost of sales as a percentage of total revenue was 41.5% for the second quarter of fiscal year 2002 as compared to 37.8% in the prior year quarter. The overall decrease in margin is due to product mix as well as a general decline in average selling prices. Research and Development Expense. Research and development ("R&D") expense decreased $1.7 million to $5.8 million for the second quarter of fiscal year 2002 from $7.5 million in the prior year quarter. As a percentage of revenue, research and development increased to 15.2% in the second quarter of fiscal year 2002 as compared to 13.3% in the prior year period. Our continued emphasis on R&D includes greater spending in research and development for our silicon timing business. The decreased expense represented a greater percentage of revenue due to the significant decrease in sales during the second quarter of fiscal year 2002. Selling, General, Administrative and Other. Selling, general, administrative and other expense increased $1.1 million to $5.5 million for the second quarter of fiscal year 2002 as compared to the prior year quarter. As a percentage of total revenue, selling, general, administrative and other expenses increased to 14.3% in the second quarter of fiscal year 2002 as compared to 7.7% in the prior year period. Selling, general, administrative and other expense for the second quarter of fiscal year 2001 is net of $2.0 million in insurance proceeds received in relation to litigation. Excluding this event, selling, general, administrative and other expense has decreased by $0.9 million. Operating Income. In dollar terms, operating income was $11.2 million in the second quarter of fiscal year 2002 compared to $23.3 million in the second quarter of fiscal year 2001. Expressed as a percentage of revenue, operating income was 29.0% and 41.2% in the second quarter of fiscal year 2002 and the prior year period, respectively. Interest Expense. Interest expense was $23,000 in the second quarter of fiscal year 2002 and $22,000 in the second quarter of fiscal year 2001. Interest and Other Income. Interest and other income was $0.7 million for the quarter ended December 29, 2001 and $0.9 million in the prior year quarter. Although we have a greater cash balance available for investing, the overall decrease in federal rates over the past year has affected our investment income. Income Tax Expense. Our effective income tax rate was 14.2% for the second quarter of fiscal year 2002 as compared to 21.7% in the prior year period. The effective tax rate for fiscal years 2002 and 2001 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income for five years. The decrease in overall tax rate was directly attributable to increased revenue and income in our Singapore operations relative to our domestic operations. We do not currently calculate deferred taxes on our investment in our Singapore 11 operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $30.5 million liability as of December 29, 2001. SIX MONTHS ENDED DECEMBER 29, 2001 AS COMPARED TO SIX MONTHS ENDED DECEMBER 30, 2000 Revenue. Consolidated revenue for the first half of fiscal year 2002 decreased by $33.5 million to $74.3 million, compared to the corresponding prior year period. The 31.1% decrease is primarily due to macroeconomic factors, which affected overall revenue. Strength in the personal computer and gaming machines markets has offset some of this decrease. The average selling price declined 21.1%, while the volume decreased 12.7%. Foreign revenue (which includes shipments of integrated circuits ("ICs") to foreign companies as well as offshore subsidiaries of US multinational companies) was 78.6% of total revenue for the first six months of fiscal year 2002 as compared to 68.5% of total revenue in the prior year quarter. This increase is attributable to strong demand in the Asian PC market. 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. Our sales are denominated in U.S. dollars and minimize foreign currency risk. Gross Margin. Cost of sales for the first half of fiscal year 2002 decreased $9.6 million to $31.2 million, compared to the corresponding prior year period. Cost of sales as a percentage of total revenue was 41.9% for the first six months of fiscal year 2002 as compared to 37.9% in the prior year period. The overall decrease in margin is due to product mix as well as a decline in average selling prices. Research and Development Expense. Research and development expense for the first half of fiscal year 2002 decreased $2.1 million to $12.5 million, compared to the corresponding prior year period. As a percentage of revenue, research and development increased to 16.8% in the first six months of fiscal year 2002 as compared to 13.6% in the prior year period. Our continued emphasis on R&D includes greater spending in research and development of our silicon timing business. The decreased expense represented a greater percentage of revenue due to the significant decrease in sales during the first six months of fiscal year 2002. Selling, General, Administrative and Other. Selling, general, administrative and other expense for the first half of fiscal year 2002 decreased by $0.5 million to $10.0 million, compared to the corresponding prior year period. As a percentage of total revenue, selling, general, administrative and other expenses increased to 13.5% in the first half of fiscal year 2002, compared to 9.7% in the prior year period. The increase is partly attributable to the inclusion in the selling, general, administrative and other expense for the first half of fiscal year 2001 of $2.0 million in insurance proceeds received in relation to litigation. Excluding this litigation related item, selling, general, administrative and other expense has decreased by $2.5 million. Operating Income. Operating income decreased by $21.2 million to $20.6 million, compared to the corresponding prior year period. Expressed as a percentage of revenue, operating income was 27.8% and 38.8% in the first six months of fiscal year 2002 and the prior year period, respectively. Interest Expense. Interest expense decreased by $0.1 million to $45,000, compared to the corresponding prior year period. Interest and Other Income. Interest and other income was $1.6 million in the first six months of fiscal year 2002 and $1.5 million in the prior year period. Although an increase in cash flows from operations has contributed to greater cash balance available for investing, reductions by the Federal Reserve over the past year have impacted rates available for investing. 12 Income Tax Expense. Our effective income tax rate for the first six months of fiscal year 2002 was 14.4% as compared to 20.1% in the corresponding prior year period. The effective tax rate for fiscal years 2002 and 2001 reflects the tax- exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income for five years. The decrease in overall tax rate was directly attributable to increased revenue and income in our Singapore operations relative to our domestic operations. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $30.5 million liability as of December 29, 2001. INDUSTRY FACTORS Our 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. Our newer components, which include advanced motherboard frequency timing generator components, and silicon timing devices for digital consumer and communication applications, are examples of this strategy. However, there can be no assurance that we will continue to be successful in these efforts or that further competitive pressures would not have a material impact on revenue growth or profitability. We include customer released orders in our backlog, which may be canceled generally with 30 days advance notice without significant penalty to the customers. Accordingly, we believe that our backlog, at any time, should not be used as a measure of future revenues. The semiconductor, personal computer and communication industries, in which we participate, are generally characterized by rapid technological change, intense competitive pressure, and, as a result, products price erosion. Our 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 our dependence on third-party wafer suppliers. Our 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. We believe that our future quarterly operating results may also fluctuate as a result of Company-specific factors, including pricing pressures on our more mature FTG components as well as the competitive pressure, and acceptance of our newly introduced ICs, and market acceptance of our customers' products. Due to the effect of these factors on future operations, past performance may be a limited indicator in assessing potential future performance. LIQUIDITY AND CAPITAL RESOURCES At December 29, 2001, our principal sources of liquidity included cash and investments of $115.1 million as compared to of $94.4 million at June 30, 2001. Net cash provided by operating activities was $28.5 million in the first six months of fiscal year 2002, as compared to $44.1 million in the prior year period. This decrease is primarily attributable to the decrease in revenue. Our days sales outstanding decreased from 71 days as of the fourth quarter of fiscal year 2001 to 53 days in the second quarter of fiscal year 2002, while inventory turns increased from 5.2 times in fiscal year 2001 to 5.5 times in the second quarter of fiscal year 2002. Purchases for property and equipment were $1.6 million in the first six months of fiscal year 2002 as compared to $2.1 million in the prior year period. In September, we announced a repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. As of December 29, 2001, we had purchased 655,000 shares for $7.8 million. In June 2000, we obtained a $30.0 million revolving credit facility with a commercial bank to expire in June 2002, with an option to extend the facility for an additional period subject to certain covenants, including maintenance of certain 13 financial ratios. As of December 29, 2001, we had no outstanding balances under this agreement, and we were in compliance with the revolving credit facility covenants. Subsequent to quarter end, we terminated this credit facility and entered into a new facility as discussed below. In connection with the acquisition of Micro Networks, we entered into a new revolving credit and term loan facility dated December 31, 2001, which expire December 31, 2004. The new facility enables us to draw down $45.0 million under the term loan and $10.0 million under the revolving credit facility. At our option, the interest rates under the term loan will be either (1) a base rate, which is the higher of (i) a rate of interest announced from time to time by the lenders' administrative agent as the base rate ("Base Rate") or (ii) the sum of 0.5% per annum plus the federal funds rate or (2) London Interbank Offer Rate ("LIBOR") plus 1.75%. At our option, the interest rates under the Revolving Credit Loan, will be either (1) the Base Rate or (2) the LIBOR Rate plus a pre- formulated margin. On December 20, 2001, we announced that we signed a definitive agreement to acquire Micro Networks Corporation ("Micro Networks"), a leading supplier of precision timing devices for optical networking, wireless infrastructure and high-end network servers using surface acoustic wave (SAW) technology. Subsequent to quarter end, we announced our completion of the acquisition. This agreement provides for all outstanding equity interests of Micro Networks to be exchanged for $65.0 million in cash, net of certain adjustments including Micro Networks' severance and benefit plan payments, obligations arising upon a change of control and changes in Micro Networks' working capital since September 30, 2001, and an assumption of approximately $12.0 million of debt. The acquisition was funded through cash on hand as well as through term bank financing obtained subsequent to quarter end. We believe that the funds on hand together with funds expected to be generated from our operations as well as borrowings under our bank revolving credit facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Thereafter, we may need to raise additional funds in future periods to fund our operations and potential acquisitions if any. We may also consider conducting future equity or debt financings if we perceive an opportunity to access the capital markets on a favorable basis, within the next twelve months or thereafter. Any such additional financing, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and results of operations. If additional funds were raised through the issuance of equity securities or convertible debt securities, the percentage of ownership of our shareholders would be reduced. Furthermore, such equity securities or convertible debt securities might have rights, preferences or privileges senior to our common stock. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations", which supersedes Accounting Principles Board Opinion No. 16 ("APB No. 16"), "Business Combinations". The most significant changes made by SFAS No. 141 is the requirement of the usage of the purchase method of accounting for all business combinations initiated after June 30, 2001 and established specific criteria for the recognition of intangible assets separately from goodwill. We adopted this statement during the first quarter of fiscal year 2002. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which supercedes APB No. 17, "Intangible Assets". SFAS No. 142 provides guidance on accounting for goodwill and other intangible assets subsequent to acquisition. These provisions are effective for fiscal years beginning after December 15, 2001. We adopted this statement during the first quarter of fiscal year 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". SFAS No. 143 provides guidance on accounting for the retirement of tangible long-lived assets and the associated asset retirement costs. These provisions are 14 effective for fiscal year beginning after June 15, 2002. We do not believe that adoption of this statement will have a material impact on our operating results. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 established a single accounting model for the disposition of long-lived assets by sale. These provisions are effective for fiscal years beginning after December 15, 2001. We do not believe that adoption of this statement will have a material impact on our operating results. Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exposures Our sales are denominated in U.S. dollars, accordingly, we do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows. Interest Rate Risk As of December 29, 2001 we did not have obligations under the bank credit and, therefore, we currently do not engage in interest rate hedging activities. 15 Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of stockholders held on October 30, 2001, the stockholders of the Company elected three directors of the Company. Mr. Henry I. Boreen, Mr. David Dominik and Mr. Prescott Ashe were elected to serve as directors at the meeting. The voting results were 55,474,783 shares in favor and 1,287,055 shares withheld for Mr. Boreen, 56,662,736 shares in favor and 99,102 shares withheld for Mr. Dominik and 56,660,536 shares in favor and 101,302 shares withheld for Mr. Ashe. 16 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 3.2 Amended and Restated By-laws of the Company (as amended effective August 3, 2001). (b) Reports on Form 8-K: None. 17 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. INTEGRATED CIRCUIT SYSTEMS, INC. Date: February 12, 2002 By: /s/ Hock E Tan ----------------------------------------- Hock E. Tan President and Chief Executive Officer Date: February 12, 2002 By: /s/ Justine F. Lien ----------------------------------------- Justine F. Lien Vice President, Finance and Chief Financial Officer (Principal financial & accounting officer) 18