-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WO7zyRb7m2jX8DGGvC0bkbhXTAfX37nQCsKMO5j+kTrZ/oQxxTlkGFRImUGahhiU bQSu4ho2LHux53DpJ8LFcQ== 0001036050-01-500548.txt : 20010511 0001036050-01-500548.hdr.sgml : 20010511 ACCESSION NUMBER: 0001036050-01-500548 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED CIRCUIT SYSTEMS INC CENTRAL INDEX KEY: 0000874689 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 232000174 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19299 FILM NUMBER: 1628823 BUSINESS ADDRESS: STREET 1: 2435 BLVD OF THE GENERALS CITY: NORRISTOWN STATE: PA ZIP: 19403 BUSINESS PHONE: 6106305300 MAIL ADDRESS: STREET 1: 2435 BLVD OF THE GENERALS CITY: NORRISTOWN STATE: PA ZIP: 19403 10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ Form 10-Q __________________ (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------ EXCHANGE ACT OF 1934 For the Quarter ended March 31, 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 May 4, 2001, there were 65,541,937 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: March 31, 2001 (Unaudited) and July 1, 2000 3 Consolidated Statements of Operations (Unaudited): Three and Nine Months Ended March 31, 2001 and April 1, 2000 4 Consolidated Statements of Cash Flows (Unaudited): Nine Months Ended March 31, 2001 and April 1, 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 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)
March 31, July 1, 2001 2000 ----------- ----------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 67,100 $ 28,940 Marketable securities 10,249 282 Accounts receivable, net 34,471 23,660 Inventory, net 11,619 10,718 Prepaid income taxes 1,627 9,358 Prepaid assets 5,827 4,191 Current portion of deposit on purchase contracts -- 9,877 -------- -------- Total current assets 130,893 87,026 -------- -------- Property and equipment, net 11,971 13,058 Other assets 1,055 1,135 -------- -------- Total assets $143,919 $101,219 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term obligations $ 441 $ 10,435 Accounts payable 14,159 13,408 Accrued expenses and other current liabilities 4,785 6,079 -------- -------- Total current liabilities 19,385 29,922 -------- -------- Long-term debt, less current portion 384 835 Other liabilities 1,426 1,542 -------- -------- Total liabilities 21,195 32,299 -------- -------- Shareholders' equity: Common stock, $0.01 par, authorized 300,000; Issued and outstanding 64,908 and 64,269 shares as of March 31, 2001 and July 1, 2000, respectively. 649 643 Additional paid in capital 204,522 199,018 Accumulated deficit (79,259) (126,687) Deferred compensation (2,985) (3,768) Notes receivable (203) (286) -------- -------- Total shareholders' equity 122,724 68,920 -------- -------- Total liabilities and shareholders' equity $143,919 $101,219 ======== ========
See accompanying notes to consolidated financial statements. 3 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands) (Unaudited)
Three Months Ended Nine Months Ended ---------------------------------- --------------------------------- March 31, 2001 April 1, 2000 March 31, 2001 April 1, 2000 ------------------------------------------------------------------------ Revenue: $45,320 $41,613 $153,155 $120,511 Cost and expenses: Cost of sales 17,109 16,068 57,940 48,938 Research and development 7,237 6,341 21,880 18,062 Selling, general and administrative 6,434 5,856 16,852 16,983 Management fee -- 250 -- 750 Goodwill amortization 59 59 176 176 ------------------------------------------------------------------------ Operating income 14,481 13,039 56,307 35,602 ------------------------------------------------------------------------ Interest and other income 1,140 423 2,606 792 Interest expense (22) (4,543) (197) (13,855) ------------------------------------------------------------------------ Income before income taxes and extraordinary gain 15,599 8,919 58,716 22,539 Income taxes 2,604 810 11,288 2,213 ------------------------------------------------------------------------ Income before extraordinary gain 12,995 8,109 47,428 20,326 Extraordinary gain on early extinguishment of debt -- -- -- 170 ------------------------------------------------------------------------ Net income $12,995 $ 8,109 $ 47,428 $ 20,496 ======================================================================== Basic income per share: Income before extraordinary gain $ 0.20 $ 0.21 $ 0.73 $ 0.56 Extraordinary gain on early extinguishment of debt -- -- -- -- ------------------------------------------------------------------------ Net income $ 0.20 $ 0.21 $ 0.73 $ 0.56 ------------------------------------------------------------------------ Diluted income per share: Income before extraordinary gain $ 0.19 $ 0.16 $ 0.68 $ 0.42 Extraordinary gain on early extinguishment of debt -- -- -- -- ------------------------------------------------------------------------ Net income $ 0.19 $ 0.16 $ 0.68 $ 0.42 ------------------------------------------------------------------------ Weighted average share outstanding - basic 64,746 37,717 64,573 36,608 Weighted average share outstanding - diluted 69,577 50,184 69,507 48,365
See accompanying notes to consolidated financial statements. 4 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine Months Ended ----------------- March 31, April 1, 2001 2000 ------------------ ------------------- Cash flows from operating activities: Net income $ 47,428 $ 20,496 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,850 3,371 Amortization of deferred compensation 783 -- Tax benefit of stock options 4,791 219 Changes in assets and liabilities: Accounts receivable (10,811) (269) Inventory (901) (93) Other assets, net (370) (1,289) Accounts payable, accrued expenses and other current liabilities (531) (127) Income taxes 7,731 360 Other (1,302) 4,218 ---------- -------- Net cash provided by operating activities 50,668 26,886 ---------- -------- Cash flows from investing activities: (Purchases) sales of investments (10,060) -- Capital expenditures (2,734) (3,505) Refunds of deposits on purchase contracts 9,877 5,143 Proceeds from sale of fixed assets 135 93 ---------- -------- Net cash (used in) provided by investing activities (2,782) 1,731 ---------- -------- Cash flows from financing activities: Net repayments under line of credit agreement (10,000) -- Exercise of stock options 402 60 Investment into the Company -- 13,467 Shares sold through stock purchase plan 511 -- Initial public offering expenses (194) -- Deferred financing charges -- (395) Repayments of long-term debt (445) (19,463) Other -- (251) ---------- -------- Net cash used in financing activities (9,726) (6,582) ---------- -------- Net increase in cash and cash equivalents 38,160 22,035 Cash and cash equivalents: Beginning of period 28,940 9,285 ---------- -------- End of period $ 67,100 $ 31,320 ========== ========
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 March 31, 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 July 1, 2000. Results of operations for the nine months ended March 31, 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 all of our 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):
March 31, July 1, 2001 2000 --------- ------- Work-in-process $ 8,274 $ 4,934 Finished parts 7,112 9,306 Less: Obsolescence reserve (3,767) (3,522) ------- ------- $11,619 $10,718 ======= =======
(4) PURCHASE COMMITMENTS On October 7, 1998, we assumed a third party's wafer purchase contract with Chartered Semiconductor PTE ("CSM"). The agreement required us to advance $12.0 million as part of a mutual commitment for CSM to supply and for us to purchase an agreed upon minimum quarterly quantity of wafers over a twenty-seven month period from October 1, 1998 to December 31, 2000. The agreement required CSM to refund the deposit to us in progressive quarterly installments based upon the volume of purchases made by us, and they are contractually obligated to return our deposit. As a result of the December 31, 2000 expiration date, the remaining balance of $9.9 million was refunded to us during the second quarter of fiscal 2001. 6 (5) DEBT In June 2000, we obtained a $30.0 million revolving credit facility with a commercial bank. The facility expires in June 2002, with an option to extend the facility for an additional period and is subject to certain covenants, including maintenance of certain financial ratios. As of March 31, 2001, we had no outstanding balances under this agreement, and we were in compliance with the revolving credit facility covenants. (6) BUSINESS SEGMENT INFORMATION We have two reportable segments, core products and non-core products. The core segment represents parts which incorporate timing and synchronization signals in electronic devices. The non-core products include data communication transceivers and custom components. Our 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 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 in mixed signal. 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:
Business Segment Net Revenue ------------------------------------------------------------------ Three Months Ending Nine Months Ending ------------------------------------------------------------------ March 31, April 1, March 31, April 1, 2001 2000 2001 2000 ------------------------------------------------------------------ Core $43,974 $36,968 $146,305 $106,801 Non - core 1,346 4,645 6,850 13,710 ------------------------------------------------------------------ Total Net Revenues $45,320 $41,613 $153,155 $120,511 ==================================================================
Business Segment Profit ------------------------------------------------------------------ Three Months Ending Nine Months Ending ------------------------------------------------------------------ March 31, April 1, March 31, April 1, 2001 2000 2001 2000 ------------------------------------------------------------------ Core $14,122 $11,224 $53,251 $ 31,113 Non - core 359 2,065 3,056 5,239 Management fee -- (250) -- (750) -------------------------------------------------------------------- Total Operating Profit $14,481 $13,039 $56,307 $ 35,602 Reconciliation to statements of operations: Interest & Other Income 1,140 423 2,606 792 Interest Expense (22) (4,543) (197) (13,855) -------------------------------------------------------------------- Net income before income taxes and extraordinary gains $15,599 $ 8,919 $58,716 $ 22,539 ====================================================================
7 We do 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. (7) NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued staff accounting bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The subsequent issuance of SAB 101A and SAB 101B has deferred the timing of the adoption of the requirements until the fourth quarter of fiscal year 2001. We believe that the adoption of SAB 101 will not have a material effect on our business, financial position or results of operations. (8) NET INCOME PER SHARE Basic net income per share is computed using the weighted average number of common shares outstanding for the period while diluted net income per share is computed assuming conversion of our dilutive securities, such as options. The following table set forth the computation of net income (numerator) and shares (denominator) for earnings per share:
Three Months Ended Nine Months Ended March 31, April 1, March 31, April 1, 2001 2000 2000 2000 ------------------------------------------------------------------------------ Numerator (in thousands): Net income $12,995 $ 8,109 $47,428 $20,496 ------------------------------------------------------------------------------ Denominator (in thousands): Weighted average shares outstanding used for basic income per share 64,746 37,717 64,573 36,608 Common stock options 4,831 12,467 4,934 11,757 ------------------------------------------------------------------------------ Weighted average shares outstanding used for diluted income per share 69,577 50,184 69,507 48,365 ==============================================================================
(9) INCOME TAXES Our effective income tax rate was 19.2% for the first nine months of 2001 as compared to 9.8% in the prior year period. The decrease in interest expense caused profitability in the US to increase, resulting in a rise in the consolidated tax rate. (10) LEGAL PROCEEDINGS On March 28, 2001, Cypress Semiconductor Corp. filed suit against us in the U.S. District Court in Delaware, alleging that we have infringed on three of its patents and have induced other to infringe on them as well. Cypress seeks injunctive relief and unspecified damages. We have denied the allegations and have filed a counterclaim seeking to invalidate the Cypress patents at issue in the lawsuit. We have also filed a motion to transfer venue of the lawsuit to the U.S. District Court in Northern District of California and we have filed a separate patent infringement suit against Cypress in the U.S. District Court in the Northern District of California, alleging that several of Cypress' patents infringe upon certain of out products. Our separate suit also seeks injunctive relief and damages against Cypress. We intend to continue to vigorously pursue our rights and defenses in this litigation. Although we believe that any liability that we may incur in this litigation would not have a material adverse effect on our results of operations and financial condition, no assurance can be provided in this regard. From time to time, various inquiries, potential claims, charges and litigation are made, asserted or commenced by or against us, principally arising from or related to contractual relations and possible patent infringement. There are no material pending legal proceedings against the Company. The Company is, however, involved in routine litigation arising in the ordinary course of its business, and, while the results of the proceedings cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. 8 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 Nine Months Ended ----------------------------------- ------------------------------------- March 31, April 1, March 31, April 1, 2001 2000 2001 2000 ------------------ ---------------- ---------------- ------------------- Revenues: 100.0% 100.0% 100.0% 100.0% Cost and expenses: Cost of sales 37.8 38.6 37.8 40.6 Research and development 16.0 15.2 14.3 15.0 Selling, general and administrative 14.2 14.9 11.1 14.9 ------------- ----------------- ------------------- ---------------- Operating income 32.0 31.3 36.8 29.5 ------------- ----------------- ------------------- ---------------- Interest and other income 2.5 1.0 1.7 0.7 Interest expense (0.0) (10.9) (0.1) (11.5) ------------- ----------------- ------------------- ---------------- Income before income taxes and extraordinary gain 34.5 21.4 38.4 18.7 Income taxes 5.8 1.9 7.4 1.8 ------------- ----------------- ------------------- ---------------- Income before extraordinary gain 28.7 19.5 31.0 16.9 Gain on early retirement of bonds -- -- -- 0.1 ------------- ----------------- ------------------- ---------------- Net income 28.7% 19.5% 31.0% 17.0% ============= ================= =================== ================
9 THIRD QUARTER FISCAL 2001 AS COMPARED TO THIRD QUARTER FISCAL 2000 Revenue. Consolidated revenue increased by $3.7 million to $45.3 million for the third quarter ended March 31, 2001 as compared to the prior year third quarter. Revenue generated by our core silicon timing products is the reason for the growth. Our core silicon timing revenue increased by $7.0 million to $44.0 million for the third quarter ended March 31, 2001 as compared to the prior year quarter. Over 50% of our core revenue during this period was derived from non-PC related sources, compared with 42% for the corresponding prior year period. Shipments to the communications market were 35% of our core revenue. This was driven by an increase in the volume of shipments to our networking and other telecom applications such as DSL and optical networking. Our core silicon timing revenue contributed approximately 97.0% of consolidated revenue for the third quarter of fiscal 2001, which represented an increase from 88.8% for the prior year quarter. The average selling price for core silicon timing devices declined 4.3%, while the volume increased 24.3%. Non-core revenue decreased by $3.3 million to $1.3 million for the third quarter of fiscal 2001, as compared to the prior year quarter. Non-core revenue represented approximately 3.0% of total revenue in the third quarter of fiscal year 2001, as compared to 11.2% in the prior year period. This is primarily due to our focus on the core silicon timing products. The average selling price for non-core revenue decreased 15.6%, and the volume decreased 65.7%. Foreign revenue (which includes shipments of integrated circuits ("ICs") to foreign companies as well as offshore subsidiaries of US multinational companies) was 76.8% of total revenue for the third quarter of fiscal 2001 as compared to 66.8% of total revenue in the corresponding prior year quarter. The increase in the percentage reflects a higher rate of growth in the Taiwanese markets. Gross Margin. Cost of sales increased $1.0 million to $17.1 million for the third quarter of fiscal 2001, as compared to the prior year quarter. Gross margin for the third quarter of fiscal 2001 as a percentage of total revenue was 62.2%, as compared to 61.4% in the prior year quarter. The increase in margin is partially attributable to a favorable shift in product mix. We also continue to realize cost savings from lower fabrication and assembly rates charged by our third party vendors and from taking substantially all of our testing procedures in-house at our Singapore testing facility. Research and Development Expense. Research and development ("R&D") expense increased $0.9 million to $7.2 million, compared to the corresponding prior year quarter. Our continued emphasis on research and development includes greater spending in research and development for products serving the communications, digital consumer and computing industries. As a percentage of revenue, research and development increased to 16.0% in the third quarter of fiscal 2001 as compared to 15.2% in the corresponding prior year period. Selling, General, Administrative and Other. Selling, general, administrative and other expense decreased $0.3 million to $6.5 million, compared to the corresponding prior year quarter. As a percentage of total revenue, selling, general, administrative and other expenses decreased to 14.2% in the third quarter of fiscal 2001 as compared to 14.9% in the prior year period. The decrease is partly attributable to the expense of $0.9 million incurred in connection with the settlement of a lawsuit by Motorola in the third quarter of fiscal 2000. Operating Income. Operating income increased by $1.4 million to $14.5 million, compared to the corresponding prior year quarter. Expressed as a percentage of revenue, operating income was 32.0% and 31.3% in the third quarter of fiscal 2001 and the prior year period, respectively. 10 Interest Expense. Interest expense decreased by $4.5 million to less than $0.1 million, compared to the corresponding prior year quarter. As a result of the repayment of debt with the net proceeds of our initial public offering, our cost of borrowings has decreased. Interest and Other Income. Interest and other income increased by $0.7 million to $1.1 million, compared to the corresponding prior year quarter. An increase in cash flow generated from operations has contributed to greater cash balances. Income Tax Expense. Our effective income tax rate was 16.7% for the third quarter of 2001 as compared to 9.1% in the prior year period. The decrease in interest expense caused profitability in the US to increase, resulting in a rise in the consolidated tax rate. NINE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO NINE MONTHS ENDED APRIL 1, 2000 Revenue. Consolidated revenue for the first nine months of fiscal year 2001 increased by $32.7 million to $153.2 million, compared to the corresponding prior year period. The growth in revenue is primarily due to increased sales of our core silicon timing products. Our core silicon timing revenue for the first nine months of fiscal year 2001 increased by $39.5 million to $146.3 million, compared to the corresponding prior year period. Over 50% of our core revenue during this period was derived from digital consumer and communication related sources, compared with 36.7% for the corresponding prior year period. Despite a slow down in the communications industry, shipments to the communications market accounted for 28.9% of our core revenue for the first nine months of fiscal year 2001, compared to 12.2% for the first nine months of fiscal year 2000. This increase in the first nine months of fiscal year 2001 was driven by an increase in the volume of shipments of our networking and other telecom applications. Our core silicon timing revenue contributed approximately 95.5% of consolidated revenue for the first nine months of fiscal year 2001, which represented an increase from 88.6% for the prior year period. The average selling price for core silicon timing devices declined 3.4%, while the volume increased 41.9%. Non-core revenue for the first nine months of fiscal year 2001 decreased by $6.8 million to $6.9 million, compared to the corresponding prior year period. Non- core revenue represented approximately 4.5% of total revenue in the first nine months of fiscal year 2001, as compared to 11.4% in the corresponding prior year period. This decrease is primarily due to our continued focus on the core silicon timing products. The average selling price for non-core revenue decreased 16.0%, and the volume decreased 40.5%. Foreign revenue (which includes shipments of integrated circuits ("ICs") to foreign companies as well as offshore subsidiaries of US multinational companies) was relatively flat at 70.9% of total revenue for the first nine months of fiscal year 2001 as compared to 70.3% of total revenue in the corresponding prior year period. Gross Margin. Cost of sales for the first nine months of fiscal year 2001 increased $9.0 million to $57.9 million, compared to the corresponding prior year period. Gross margin for the first nine months of fiscal 2001 as a percentage of total revenue was 62.2%, as compared to 59.4% in the corresponding prior year period. The increase in margin is partially attributable to a favorable shift in product mix. We also continue to realize cost savings from lower fabrication and assembly rates charged by our third party vendors and from taking substantially all of our testing procedures in-house at our Singapore testing facility. Research and Development Expense. Research and development expense for the first nine months of fiscal year 2001 increased $3.8 million to $21.9 million, compared to the corresponding prior year period. Our continued emphasis on research and development includes greater spending in research and development for products serving the communications, digital consumer and computing industries. While research and development expenses grew in dollar terms, as a percentage of revenue, research and development decreased to 14.3% in the first nine months of fiscal year 2001 as compared to 15.0% in the corresponding prior year period. 11 Selling, General, Administrative and Other. Selling, general, administrative and other expense for the first nine months of fiscal year 2001 decreased by $0.9 million to $17.0 million, compared to the corresponding prior year period. As a percentage of total revenue, selling, general, administrative and other expenses decreased to 11.1% in the first nine months of fiscal year 2001, compared to 14.9% in the corresponding prior year period. The decrease is partly attributable to the inclusion in selling, general, administrative and other expense for the first nine months of fiscal year 2000 of $4.0 million incurred in connection with the settlement of a lawsuit. In addition, selling, general, administrative and other expense for the first nine months of fiscal year 2001 is net of $2.0 million in insurance proceeds received in relation to this litigation. Excluding these two litigation-related items, selling, general, administrative and other expense had increased as a percentage of total revenue to 12.4% in the first nine months of fiscal year 2001, compared to 11.5% in the corresponding prior year period. This increase is primarily due to the amortization, in the first nine months of fiscal year 2001, of deferred compensation relating to options granted in the third quarter of fiscal year 2000 and variable expense relating to increased revenue. Operating Income. Operating income increased by $20.7 million to $56.3 million, compared to the corresponding prior year period. Expressed as a percentage of revenue, operating income was 36.8% and 29.5% in the first nine months of fiscal year 2001 and the corresponding prior year period, respectively. Interest Expense. Interest expense decreased by $13.7 million to $0.2 million, compared to the corresponding prior year period. As a result of the repayment of debt with the net proceeds of our initial public offering, our cost of borrowings has decreased. Interest and Other Income. Interest and other income increased by $1.8 million to $2.6 million, compared to the corresponding prior year period. An increase in cash flow generated from operations has contributed to greater cash balances. Income Tax Expense. Our effective income tax rate for the first nine months of fiscal 2001 was 19.2% as compared to 9.8% in the corresponding prior year period. The decrease in interest expense caused profitability in the US to increase, resulting in a rise in the consolidated tax rate. 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 12 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 March 31, 2001, our principal sources of liquidity included cash and investments of $77.3 million as compared to $29.2 million at July 1, 2000. Net cash provided by operating activities was $50.7 million in the first nine months of fiscal year 2001, compared to $26.9 million in the prior year period. This increase is primarily attributable to the growth in our profitability, our federal tax refund of $3.6 million received in the first quarter of fiscal year 2001, the refund of the remaining $9.9 million of the purchase contract with Chartered Semiconductor in the second quarter of fiscal year 2001 and our receipt of the insurance proceeds of $2.0 million in the second quarter of fiscal year 2001. Our days sales outstanding increased from 48 days as of the fourth quarter of fiscal 2000 to 69 days in the third quarter of fiscal year 2001, while inventory turns decreased from 7.0 times in fiscal 2000 to 6.1 times in the third quarter of fiscal 2001. As a result of our continued expansion of our Phoenix design center and our San Jose facility, expenditures for property and equipment were $2.7 million in the first nine months of fiscal year 2001 as compared to $3.5 million in the corresponding prior year period. On October 7, 1998, we assumed a third party's wafer purchase contract with Chartered Semiconductor PTE. The agreement required us to advance $12.0 million as part of a mutual commitment for Chartered to supply and for us to purchase an agreed upon minimum quarterly quantity of wafers over a 27-month period from October 1, 1998 to December 31, 2000. The agreement required Chartered to refund the deposit to us in progressive quarterly installments based upon the volume of purchases made by us. As a result of the December 31, 2000 expiration date, the remaining balance of $9.9 million was refunded to us during the first nine months of fiscal year 2001. In June 2000, we secured a $30.0 million revolving credit facility with a commercial bank. The facility expires in June 2002, with an option, at the bank's sole discretion, to extend the facility for an additional period and is subject to certain covenants, including maintenance of certain financial ratios. In the third quarter of fiscal year 2001, we had no outstanding balances under this agreement. As of March 31, 2001, we were in compliance with the revolving credit facility covenants. We believe that cash flows from operating activities and borrowings available under our revolving credit facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months. Thereafter, we may need to raise additional funds in the future periods to fund our operations and potential acquisitions, if any. 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. 13 NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued staff accounting bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The subsequent issuance of SAB 101A and SAB 101B has deferred the timing of the adoption of the requirements until the fourth quarter of fiscal year 2001. We believe that the adoption of SAB 101 will not have a material effect on our business, financial position or results of operations. 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 March 31, 2001 we did not have obligations under the bank credit and, therefore, we currently do not engage in interest rate hedging activities. 14 Item 1. Legal Proceedings On March 28, 2001, Cypress Semiconductor Corp. filed suit against us in the U.S. District Court in Delaware, alleging that we have infringed on three of its patents and have induced other to infringe on them as well. Cypress seeks injunctive relief and unspecified damages. We have denied the allegations and have filed a counterclaim seeking to invalidate the Cypress patents at issue in the lawsuit. We have also filed a motion to transfer venue of the lawsuit to the U.S. District Court in Northern District of California and we have filed a separate patent infringement suit against Cypress in the U.S. District Court in the Northern District of California, alleging that several of Cypress' patents infringe upon certain of out products. Our separate suit also seeks injunctive relief and damages against Cypress. We intend to continue to vigorously pursue our rights and defenses in this litigation. Although we believe that any liability that we may incur in this litigation would not have a material adverse effect on our results of operations and financial condition, no assurance can be provided in this regard. From time to time, various inquiries, potential claims, charges and litigation are made, asserted or commenced by or against us, principally arising from or related to contractual relations and possible patent infringement. There are no material pending legal proceedings against the Company. The Company is, however, involved in routine litigation arising in the ordinary course of its business, and, while the results of the proceedings cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K: None. 15 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: May 10, 2001 By: /s/ Hock E. Tan --------------------------------- Hock E. Tan President and Chief Executive Officer Date: May 10, 2001 By: /s/ Justine F. Lien --------------------------------- Justine F. Lien Vice President, Finance and Chief Financial Officer (Principal financial & accounting officer) 16 -----END PRIVACY-ENHANCED MESSAGE-----