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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29,1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19299
Integrated Circuit Systems, Inc.
(Exact name of registrant as specified in its character)
Pennsylvania 23-2000174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2435 Boulevard of the Generals, Norristown, Pennsylvania 19403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 630-5300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
Aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of September 6, 1996, based on the closing sales
price, was $113,096,775. Such calculation excludes the shares of Common Stock
beneficially held by directors and certain officers of the registrant but does
not reflect a determination that persons are affiliates for any other purpose.
The number of shares outstanding of the registrant's Common Stock as of
September 6, 1996: 11,392,050 shares
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on November 25, 1996 are incorporated by reference
into Part III.
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PART I
Item 1. BUSINESS
General
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Integrated Circuit Systems, Inc. (the "Company") was incorporated in
Pennsylvania in 1976, and began by designing and marketing custom application
specific integrated circuits ("ASICs") for various industrial customers. In
particular the Company was noted for its unique expertise in designing ASICs
which combined both analog and digital or "mixed-signal" technology. By 1988,
the Company had adopted a strategy of developing proprietary integrated circuits
("ICs") to capitalize on its complex mixed-signal design technology and
pioneered the market for frequency timing generators ("FTGs") which provide the
timing signals or "clocks" necessary to synchronize high performance electronic
systems. FTGs replaced the multiple crystal oscillators and other peripheral
circuitry previously used to generate and synchronize timing signals, thus
providing savings in board space, power consumption and cost. The Company's
initial FTG products were used in video graphics applications in personal
computers ("PCs"), but its FTG product line soon expanded to include ICs for the
main circuit boards of the PC (commonly referred to as the "motherboards") and
PC peripheral devices such as disk drives, audio cards and laser printers. More
recently the Company has further extended the use of its mixed-signal expertise
to develop and market products for multimedia and data communication
applications.
In the second quarter of fiscal 1993, the Company acquired Avasem Corporation
("Avasem"), a privately held company providing FTGs primarily for PC
motherboards, as well as other custom mixed signal IC components. In the first
quarter of fiscal 1994, the Company acquired Turtle Beach Systems, Inc., a
privately held company engaged in the design, development and marketing of sound
board and software products primarily for the PC multimedia market. These
acquisitions were structured as tax-free reorganizations and were accounted for
as pooling of interests. Accordingly, all financial information has been
restated to reflect the combined operations of these companies. In the third
quarter of fiscal 1995, the Company acquired a 51% interest in ARK Logic, Inc.,
a privately held company developing graphic accelerator engines. In the second
quarter of fiscal 1996, the Company's Turtle Beach subsidiary acquired the PC
multimedia and communications peripheral product lines of Value Media, Inc., a
privately held company that developed and marketed multimedia peripheral kits
for PCs. Through its Turtle Beach subsidiary the Company integrates its
multimedia ICs with additional hardware and software, and markets multimedia
peripheral kits for PCs. The latter two acquisitions were accounted for using
the purchase method, and accordingly such operations are now included in the
Company's consolidated financial statements from the respective dates of
acquisition. The company considers its various design, manufacture and marketing
activities to be a single industry segment.
The Company's initial public offering of Common Stock occurred in June 1991, at
which time the Company's Common Stock commenced trading on the Nasdaq National
Market under the symbol ICST.
Products and Product Applications
---------------------------------
Frequency Timing Generators
The Company's FTG customers are predominately PC original equipment
manufacturers ("OEMs"). As of fiscal 1996, these major OEM customers include:
Intel, Compaq, IBM, Hewlett-Packard and DEC.
Motherboard and Peripheral Applications. The Company supplies a broad line of
FTG products for use in motherboard and peripheral applications, which provide
the numerous frequency outputs required for both general and specific timing
functions required by the motherboards and the peripherals of computer systems.
These FTGs control multiple functions by providing and synchronizing the timing
of the computer system, including signals from the video screen, graphics
controller, memory, keyboard, microprocessor, disk drives
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and communication ports. The Company has expanded its presence in this market
and the products designed for these applications currently contribute most of
the Company's FTG revenues.
During fiscal 1995 the Company experienced increased demand for its FTG
motherboard and peripheral products driven by industry growth in higher
performance desktop and portable computing, and a new generation of FTGs for the
Pentium, PowerPC, and NexGen microprocessor-based motherboards. Such demand
however slowed during fiscal 1996, reflecting an aging product line and a
general softness in the PC component industry.
New Applications. The Company intends to increase its presence in high
frequency/performance FTGs for timing and graphics applications, which
applications comprised less than 10% of its total FTG revenue in fiscal 1996.
Such applications will likely include new products for wireless communications
and other non-PC markets.
Multimedia Products
PC multimedia applications enable the user to input, create, manipulate and
combine different forms of data including audio and video (i.e., images, text,
graphics and animation). The Company's customers in the multimedia market are
predominately add-in board makers. including Jaton, Hercules, Aztech and
Diamond Multimedia.
Turtle Beach Systems. With the acquisition of Turtle Beach in July 1993, the
Company expanded its product offerings to include a family of high performance
PC sound board and software products used to record, edit and play back
digitally recorded sound on IBM compatible computers. Turtle Beach marketed
these products for professional audio and music applications through the PC
distribution channel and consumer mass merchandisers. The Company originally
intended to incorporate proprietary audio chipsets and software under
development in the Company into new Turtle Beach sound card products. However,
with the recent redirection of the Company's multimedia product strategy to
integrate audio into the video/graphic environment, the original intent is no
longer appropriate.
The Company is exploring alternatives which will enable Turtle Beach to be
separately measured in both financial and business terms, while maximizing the
return on the Company's investment in Turtle Beach for the Company's
shareholders. During the third quarter of fiscal 1995 the Company took a one-
time charge of $3.5 million as part of downsizing Turtle Beach, replaced certain
management personnel and discontinued Turtle Beach's non-SoundBlaster
compatible business. During the second quarter of fiscal 1996 the Company took
a one-time charge of $2.3 million in connection with the relocation of the
Turtle Beach business from York, PA to Fremont, CA, and a write-off of in-
process R&D in connection with its purchase of the peripheral product lines of
Value Media, Inc. While Turtle Beach continued to significantly increase its
revenue during fiscal 1996, the PC audio business remains a challenge for the
Company and there can be no assurance that break-even performance for Turtle
Beach can be reliably achieved or sustained.
ARK Logic. The Company acquired a majority interest in ARK Logic in the third
of quarter of fiscal 1995. ARK Logic offers a family of graphic user interface
controller chips with built-in high performance graphic accelerator engines. A
suite of software drivers supporting PC operating systems has also been
developed by ARK Logic. These devices utilize external RAMDAC and video clock
generators which are compatible with the Company's GENDAC (FTG integrated with a
RAMDAC/TM/) family of integrated generators.
During the later part of fiscal 1996 ARK Logic introduced a fully integrated
single chip controller incorporating the Company's GENDAC technology, full
motion video functionality and ARK Logic's graphics core logic. ARK Logic
expects to introduce its next generation video graphics controller in early
fiscal 1997. In addition, ARK Logic is continuing development of a full PC
multimedia solution in a single chip which includes 3-D rendering capabilities
as well as 2-D video graphics and audio, which is expected to be introduced in
late fiscal 1997.
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Timing & Communications
The Company has developed and since late fiscal 1995 marketed transceiver
chipsets for data communications applications, including ATM and SONET. New
product introductions continued in fiscal 1996 to address these and other
rapidly growing communication opportunities in Fast Ethernet. During the fourth
quarter 1996 the Company introduced and sampled prototypes for a single chip,
CMOS, 10/100 megabyte PHYceiver product for Fast Ethernet applications. This
unique product has generated significant interest among OEMs supplying 100
megabyte solutions to the networking industry. The Company believes that
transition to Fast Ethernet in the LAN marketplace continues to offer
opportunities for the Company's communication products. In addition, the
Company continues to have a significant presence in high frequency performance
timing for workstation applications. New products were introduced last year for
laser engine and line locking applications, which have subsequently won
acceptance at major office product, telecommunications and imaging OEMs.
Custom ICs
The Company has developed and sold custom mixed-signal ICs to a broad range of
customers and market applications. Custom ICs are typically sold pursuant to
development and production contracts which generally provide for partial
reimbursement of development costs and a minimum production commitment to be
purchased by the customer after approval of a prototype. Unit prices for custom
IC products are negotiated based on factors which include complexity of the
design, minimum purchase requirements and the Company's production and testing
costs. Such products do not, however, contribute a significant portion of the
total Company revenue.
A few of the Company's custom IC products are sold into the medical market for
applications which include a blood glucose measurement instrument, hearing aids
and cardiac pacemakers. In certain cases, the Company has provided or received
indemnities with respect to possible third party claims arising from these
products. Although the Company believes that exposure to third party claims has
been minimized, there can be no assurance that the Company will not be subject
to third party claims in these or any other applications, or that any
indemnification or insurance available to the Company will be adequate to
protect it from liability.
Sales and Marketing
-------------------
The Company markets its IC component products worldwide through independent
sales representatives and a network of distributors managed by a direct sales
force. During fiscal 1996 the Company conducted its direct sales efforts
through its offices in Norristown, Pennsylvania, San Jose, California, Austin,
Texas, and Boston, Massachusetts. The Company has over 400 OEM customers,
including, ATI Technologies, Compaq, DEC, Diamond Computer, Epson, Hewlett
Packard, IBM, Intel, Silicon Graphics, Sun Microsystems, Tandy and Texas
Instruments. During fiscal 1996 shipments to Intel (including all Intel and
Intel subcontractor locations) accounted for ten or more percent of the
Company's consolidated revenue.
The Company's Turtle Beach products are sold to distributors and mass-
merchandisers. Sales efforts are conducted through its sales office located in
Fremont, CA and through third party sales representatives.
Foreign sales are conducted by sales representatives and distributors located in
the Pacific Rim and Europe. Foreign sales are generally denominated in U.S.
dollars and are subject to risks common to export activities, including
governmental regulation and trade barriers.
At June 29, 1996, the Company's backlog was approximately $23.0 million, as
compared to $35.4 million at June 30, 1995. The Company includes in its backlog
customer released orders with firm schedules for shipment within the next twelve
months. These orders may be canceled generally with 60 days advance notice
without significant penalty to the customers. The Company has experienced a
reduction in customer
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order lead times for its IC products and its "turns" business (i.e., orders
placed by customers for immediate or relatively short term delivery) has grown
to a significant share of its quarterly revenue. Almost all of Turtle Beach's
orders are turns business and accordingly Turtle Beach operates with a
relatively small backlog. Furthermore, in accordance with industry practices
Turtle Beach periodically accepts from its customers returns of products which
such customers have not resold within a reasonable time period, in exchange for
orders for new products. For these reasons, the Company believes that its
backlog, at any time, should not be used as a measure of future revenues.
The Company's revenues are subject to fluctuations primarily as a result of
competitive pressures on selling prices, changes in the mix of products sold,
the timing and success of new product introduction and the scheduling of orders
by customers.
The Company generally warrants that its products will be free from defects in
workmanship and materials for a one-year period. Defective products returned to
the Company within the warranty period are replaced after a confirming
evaluation by the Company's quality control staff. The Company has not
experienced significant warranty returns to date.
Manufacturing
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The Company has qualified and utilizes third party suppliers for the manufacture
of silicon wafers. Such suppliers are capable of providing CMOS processing
technologies ranging from 0.35 to 3 micron. All of the Company's wafers
currently are manufactured by outside suppliers, three of which supply the
substantial majority of the Company's wafers. The Company and the suppliers
typically agree on production schedules based on order backlog and demand
forecasts for the next three months.
Although most of the Company's relationships with its wafer suppliers do not
currently provide for the supplier to supply, or the Company to purchase,
substantial minimum wafer quantities, the Company has, on occasion, made
negotiated commitments to purchase specified minimum wafer quantities in
exchange for supply commitments and/or pricing concessions. During the past
fiscal year the Company entered into a wafer purchase contract with Chartered
Semiconductor Manufacturing PTE. Ltd. ("CSM") pursuant to which the Company
advanced to CSM a deposit of $2 million as part of a mutual commitment for CSM
to supply and the Company to purchase an agreed minimum quarterly quantity of
wafers over a five-year period from April, 1996 through December, 2000. In
addition CSM agreed to provide to the Company certain price concessions as part
of such commitment. Under its agreement with CSM the Company is required to
increase its deposit to up to $20 million during the five year term. Any
failure of either CSM and/or the Company to comply with its supply or purchase
commitment, as is applicable, will result in the assessment of specified
liquidated damages against the party failing to comply with its commitment. The
Company had previously entered into a similar agreement with one of its other
wafer suppliers, American Microsystems, Inc. but has subsequently amended such
agreement to remove any material purchase and supply commitment as well as any
associated penalties.
During fiscal 1995 the Company operated its own testing facilities at Valley
Forge, Pennsylvania, to ensure the quality of both purchased wafers and
assembled products. Such facilities included IC testing equipment and a staff
of product engineering, test and planning personnel. In addition, a significant
portion of final testing of certain finished products had been performed by
subcontractors in California and in the Philippines. During fiscal 1996 the
Company transferred the remaining testing activities it performed in-house to
offshore subcontractors. To ensure that the quality of the Company's product is
maintained, personnel have been put in place to closely supervise these offshore
facilities. Exit costs from relocating its in-house facilities were provided as
part of the one-time charge taken by the Company in the third quarter of fiscal
1995, with transition costs related to relocating equipment and operations
offshore being expensed as incurred. This transfer of test operations was
completed during the current fiscal year.
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Turtle Beach generally uses contracted manufacturing and packaging services as
well as parts and components which are generally available from multiple vendors
as part of their standard product/service offerings. Certain components,
however, are available from sole or limited source suppliers. Turtle Beach
typically purchases these sole and limited source components pursuant to
purchase orders placed from time to time in the ordinary course of business and
has no guaranteed supply arrangements with such suppliers (including certain of
the Company's audio IC components.)
The Company believes that adequate capacity will be available to support its
manufacturing requirements. The Company's reliance, however, on multiple,
internationally located, outside subcontractors involves several risks,
including capacity constraints or delays in timely delivery and reduced control
over delivery schedules, quality assurance and costs. The Company is
continuously evaluating new sources of supply and is seeking to obtain
additional sources of supply and capacity for more advanced process
technologies, although, there can be no assurance that such additional sources
and capacity can be obtained. The occurrence of any supply or other problem
resulting from these risks could have a material adverse effect on the Company's
operating results.
Research and Development
------------------------
The Company believes that it must continually introduce new products to take
advantage of market opportunities and maintain its competitive position.
Research and development efforts concentrate on the design and development of
new leading edge products for the Company's markets and the continual
enhancement of the Company's design capabilities. Expenditures for research and
development were approximately $12.1 million, $11.4 million and $10.6 million in
fiscal 1996, 1995 and 1994, respectively, and include expenses related to the
development of the Company's recently introduced timing and communication
products as well its multimedia and custom ASIC products. Such expenses
typically include the addition of engineering personnel and increased
investments in design tools and support overheads related to new and existing
product development.
The Company expects to continue to increase its spending for research and
development in absolute dollar amounts in the foreseeable future. Because
design of the Company's products is extremely complex, the Company has
experienced delays from time to time in completing products on a timely basis.
The design of the Company's products is an extremely complex iterative process
involving the development of a prototype product through computer-aided circuit
design, the generation of photo masks for the manufacturing process and the
fabrication of wafers. Throughout this process, the Company's engineering staff
reviews preliminary performance data against the original product
specifications. Resulting variances, if any, may require redesign of previously
completed elements and result in the lengthening of the design, and thus the
production cycle.
Patents, Licenses and Trademarks
--------------------------------
The Company holds several patents as well as copyrights, mask works and
trademarks with respect to its various products and expects to continue to file
applications for the same in the future as a means of protecting its technology
and market position. In addition, the Company seeks to protect its proprietary
information and know-how through the use of trade secrets, confidentiality
agreements and other security measures. There can be no assurance, however,
that these measures and/or others will be adequate to safeguard the Company's
interests or preserve the Company's leading edge in certain of its technology
and products or protect it from allegations regarding potential patent
infringement. To augment product feature sets or accelerate development
schedules, the Company licenses certain technologies, however, no single license
is deemed to be material to the consolidated business of the Company. In
certain instances, the Company has performed design services pursuant to an
agreement by which it transferred certain of its
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intellectual property rights in the final product to its customer. Such
transfer is also not deemed material to the consolidated business of the
Company.
As is typical in the semiconductor industry, the Company from time to time has
been notified that it may be infringing certain patents and other intellectual
property rights of others. Such matters are evaluated and reviewed with
counsel. To date, matters of this nature have not resulted in material
litigation against the Company. There can be no assurance, however, that
litigation will not be commenced in the future regarding any claim of
infringement of any intellectual property right, or that, if required, any
licenses or other rights could be obtained on acceptable terms.
Competition
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In general, the semiconductor and PC component industries are intensely
competitive and characterized by rapid technological changes, price erosion,
cyclical shortages of materials, and variations in manufacturing yields and
efficiencies. The Company's ability to compete in this dynamic and
opportunistic environment depends on factors both within and outside its
control, including new product introduction, product quality, product
performance and price, cost-effective manufacturing, general economic
conditions, the performance of competition and the growth and evolution of the
industry in general. In the latter regard there are several substantial
entities, the Company not being one of them, in the industry who could and do
exert significant influence in determining the pace and key trends in the
development of PCs and PC components. Moreover, some of the Company's current
and potential competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. Competitors also
include privately owned and emerging companies attempting to secure a share of
the market for the Company's products.
The Company has directed significant resources towards the objective of
establishing growth in PC video/graphics accelerator and networking
transceiver markets. In order to succeed the Company will potentially have to
displace larger and more established competitors in these markets. There can be
no assurance that the Company will be successful in its efforts or that even if
market penetration were to be achieved, competitive responses would not have a
material adverse impact on future profitability.
Cautionary Statement Concerning Forward Looking Statements
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This report contains certain forward-looking statements that are subject to
risks and uncertainties. Forward looking statements include, without
limitation, information under the captions "Products and Product Applications"
and elsewhere in this report, relating to planned product introductions and/or
statements preceded by, followed by or that include the words "believes","
expects", "anticipates", "intends" or similar expressions. For such statements
the Company claims the protection of the safe harbor for forward looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere in the
report and in the documents incorporated herein by reference, could cause the
results to differ materially from those expressed in such forward looking
statements.
The Company's products are in various stages of their product life cycles. The
Company's success is highly dependent upon its ability to develop new products,
to introduce them to the marketplace ahead of the competition, and to have them
selected for design into products of leading systems manufacturers. These
factors have become increasingly important to the Company's results of
operations because the rate of change in the dynamic markets served by the
Company continues to accelerate. Since product life cycles are continually
becoming shorter, revenue may be affected quickly if new product introductions
are delayed. Since the gross margins of semiconductor products typically decline
as competitive products are introduced, both revenue and profitability are
impacted by the Company's success at introducing new products quickly. Also, the
Company must deliver product to customers according to customer schedules. If
delays occur, then revenue and gross margins for current and follow-on products
may be affected as customers may shift to
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competitors to meet their requirements. There can be no assurance that the
Company will continue to compete successfully because of these factors.
A substantial portion of the sales of the Company's products depend largely on
sales of PCs and peripherals for PCs. Should the PC market decline or
experience slower growth, then a decline in the order rate for the Company's
products could occur during a period of inventory correction by the PC and
peripheral device manufacturers. This could result in a decline in revenue or a
slower rate of revenue growth during the inventory correction period. A
downturn in the PC market could also affect the financial health of some of the
Company's customers, which could affect the Company's ability to collect
outstanding accounts receivable from these customers. Furthermore, the intense
price competition in the PC industry is expected to continue to put pressure on
the price of all PC components.
The Company's reliance on subcontractors for wafer manufacture, assembly and
test involves several risks, including capacity constraints or delays in timely
delivery and reduced control over delivery schedules, quality assurance and
costs. The Company is continuously evaluating new sources of supply and is
seeking to obtain additional sources of supply and capacity for more advanced
process technologies, although there can be no assurance that such additional
sources and capacity can be obtained. The occurrence of any supply or other
problem resulting from these risks could have an adverse effect on the Company's
operating results.
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,
continuing demand for its custom ASIC products, acceptance of the Company's
newly introduced 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. In addition, if
revenue or earnings fail to meet expectations of the investment community, there
could be an immediate adverse effect on the trading price of the Company's
common stock.
Executive Officers of the Registrant
------------------------------------
The following sets forth certain information with regard to executive officers
of Integrated Circuit Systems, Inc.
<TABLE>
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Name Age Position
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<S> <C> <C>
Henry I. Boreen......... 69 Interim Chief Executive Officer, and Director
Hock E. Tan............. 44 Senior Vice President, Chief Operating Officer
and Chief Financial Officer
Ronald J. Wenger........ 53 Vice President of Sales
</TABLE>
Mr. Boreen has been a director of the Company since December 1984 and chairman
of the board of directors since April 1995. In August 1996 Mr Boreen was
appointed to the additional position of interim chief executive officer pending
a search for a new chief executive officer for the Company. Since 1984 Mr.
Boreen has been a principal of HIB International. Since 1989 Mr. Boreen has
also served as chairman of AM Communications, Inc., a manufacturer of
telecommunications equipment. Mr. Boreen
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has over 25 years of experience in the integrated circuits industry and was the
founder and chairman of Solid State Scientific, a semiconductor manufacturer.
Mr. Tan has served as Senior Vice President and Chief Financial Officer since
February 1995 after joining the Company in August 1994. In June 1996 Mr. Tan
was appointed to the additional post of Chief Operating Officer. Mr. Tan was
Vice President of Finance of Commodore International Ltd. from 1992 to 1994.
Mr. Tan has served as Managing Director of Pacven Investment Ltd. from 1988 to
1992 and was Managing Director of Hume Industries (M) Ltd. from 1983 to 1988.
His career also includes senior financial positions with PepsiCo, Inc. and
General Motors. Mr. Tan holds an MBA from Harvard Business School and an MS in
Mechanical Engineering from Massachusetts Institute of Technology.
Mr. Wenger joined the Company in April 1995 as Vice President of Sales. Mr.
Wenger has over 25 years experience in developing electronic component sales for
various companies in the semiconductor industry. Prior to joining the Company,
Mr. Wenger served as Vice President, Sales and Marketing of Intellisense Corp
and VP Sales-East for Fairchild Semiconductor. He had held various senior sales
positions with Catalyst Semiconductor, Fujitsu Microelectronics, and Signetics
Corp.
During calendar 1996 David W. Sear and Perry A. Denning resigned their positions
as CEO and President, and Vice President Operations, respectively. In addition
N. Werner Anderson retired. During the Company's search for a new CEO, Henry I.
Boreen, the Company's chairman, has been appointed interim CEO.
Employees
---------
As of June 29, 1996, the Company had 206 full-time employees, 75 of whom were
engaged in research and development, 51 in sales, marketing and technical
support, 37 in finance and administration, and 43 in operations. The Company's
employees are not represented by any collective bargaining agreements, and the
Company has never experienced a work stoppage.
Item 2. PROPERTIES
The Company's principal facilities consist of a 61,000 square-foot building in
Norristown, Pennsylvania, which serves as the corporate headquarters and is used
for product development, testing, sales, marketing and administration. This
facility was purchased in September 1992, and financed with a mortgage payable
in monthly installments over 15 years, in the amount of $1,830,000 (increased to
$2,268,000 in November, 1993 to cover building improvements.) During the third
quarter of fiscal 1996 the Company repaid the remaining balance of this
mortgage. Additionally, interim financing was provided by a second mortgage in
the amount of $1,647,000 which was due and repaid on July 30, 1993 by drawing on
the revolving line of credit. The line of credit was repaid on April 29, 1994
with the proceeds from a $2,000,000 loan that had been granted from Pennsylvania
Industrial Development Authority (PIDA). The PIDA loan is payable in monthly
installments over 15 years at an interest rate of 2%.
The Company also utilizes three West Coast facilities. The one located in San
Jose, California, consists of 26,686 square feet of office space leased pursuant
to an agreement which expires in August 1998. The space is used for product
development, testing, sales, marketing and administration. In addition ARK
Logic currently leases a facility of 5,772 square feet pursuant to an agreement
which expires in July 1998, which facility will be used by ARK Logic for the
development, sales and marketing of integrated circuits for multimedia
applications. Turtle Beach currently leases approximately 17,000 square feet of
office space in Fremont, California, under a lease which expires in December
2000. This facility is used by Turtle Beach for the development, sales and
marketing of multimedia kits for PCs. Turtle Beach also leases 12,720 square
feet of office space in York, Pennsylvania, under a lease which expires in
August 2001. This facility was previously used by Turtle Beach for the
development, sales and marketing of audio products for multimedia
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and professional applications. The Company's Turtle Beach subsidiary is
currently making arrangements to sublease a significant portion of this facility
and has already negotiated an agreement with its landlord amending the subject
lease to exclude approximately 2800 square feet from the leased space. The
Company believes that its existing facilities are adequate to meet its current
requirements.
Item 3. LEGAL PROCEEDINGS
From time to time , various inquiries, potential claims and charges and
litigation (collectively "claims") are made, asserted or commenced by or against
the Company, principally arising from or related to contractual relations and
possible patent infringement. Such claims are reviewed and discussed with
counsel, and although the actual outcome of any claim cannot be predicted, the
Company does not believe separately and in the aggregate that any such claims
currently pending will have any material adverse effect on the Company's
consolidated financial position or the results of its operations. Further
information pertinent to the item is set forth on page 6 hereof, under the
heading "Patents, Licenses and Trademarks."
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on the
NASDAQ National Market System under the symbol ICST. In addition, the Company
has been selected for listing on the Chicago Board Options Exchange with trading
in the option beginning on September 5, 1995. Below are the quarterly high and
low closing sale prices of the Company's common stock for the fiscal years ended
1996 and 1995, as reported by the "NASDAQ Stock Market."
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter ended Sept 29 and Sept 30 $18.875 $13.625 $11.75 $ 9.75
Second quarter ended Dec 30 and Dec 31 15.875 10.750 10.75 7.13
Third quarter ended Mar 30 and Mar 31 12.250 6.500 12.56 7.63
Fourth quarter ended Jun 29 and Jun 30 14.750 9.625 15.00 10.00
</TABLE>
At June 29, 1996, there were approximately 294 holders of record and in excess
of 4,000 beneficial holders of the Company's common stock. The Company has not
paid cash dividends on its common stock and intends to continue a policy of
retaining any earnings for reinvestment in its business.
10
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Five Year Summary
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------
June 29 June 30
1996 1995 1994 1993 1992
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues $100,485 $104,385 $93,824 $77,577 $36,536
Cost of sales 62,547 50,530 45,798 37,312 17,449
Research and development 12,073 11,350 10,647 9,156 6,767
Operating income 2,827 10,321 18,110 17,440 5,670
Net income 3,915 4,923 12,218 10,690 3,822
Earnings per common and
common equivalent share
(primary) $ 0.34 $ 0.45 $ 1.11 $1.06 $ .41
Earnings per common and
common equivalent share
(assuming full dilution) $ 0.34 $ 0.43 $ 1.10 $1.04 $ .40
Shares used in computing
earnings per common and
common equivalent share
(primary) 11,592 11,045 11,051 10,085 9,399
Shares used in computing
earnings per common and
common equivalent share
(assuming full dilution) 11,598 11,424 11,070 10,304 9,574
</TABLE>
<TABLE>
<CAPTION>
June 29 June 30
1996 1995 1994 1993 1992
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital $ 53,017 $ 51,931 $35,227 $32,246 $11,921
Total assets 90,967 82,182 73,452 55,034 24,299
Long-term debt, less current portion 1,631 3,480 3,775 3,780 1,863
Shareholders' equity 69,164 62,484 55,726 41,434 14,465
</TABLE>
SEE ACCOMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Annual Results of Operations
The following table sets forth income statement line items as a percentage of
total revenue for the periods indicated and should be read in conjunction with
the Consolidated Financial Statements and notes thereto.
(Expressed as a percentage of total revenue)
<TABLE>
<CAPTION>
Year ended
June 29 June 30
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 62.2 48.4 48.9
Research and development expense 12.0 10.9 11.3
Selling, general and administrative expense 19.7 19.8 20.5
---------------------------
Operating income before one-time charges 6.1 20.9 19.3
One-time charges:
Change in business strategies - 3.7 -
Facility closing 1.7 - -
Discontinued product lines - 3.4 -
Write-off of in-process R&D 1.5 3.9 -
---------------------------
Operating Income 2.9 9.9 19.3
Interest and other income (1.5) (1.1) (0.9)
Interest expense 0.7 0.8 0.5
Minority interest 1.6 0.5 -
---------------------------
Income before income taxes 5.3 9.7 19.7
Income tax expense 1.4 5.0 6.7
---------------------------
Net income 3.9% 4.7% 13.0%
===========================
</TABLE>
Revenue
The Company achieved revenue of $100.5 million in fiscal year 1996 as compared
to $104.4 million and $93.8 million in fiscal years 1995 and 1994,
respectively. This decrease in fiscal 1996 revenue was primarily attributable to
decreased volume shipments of FTG and custom ASIC components, partially offset
by increased shipments of Turtle Beach products.
Frequency Timing Generators
FTG components for motherboard and peripheral applications for PCs contributed a
declining percentage of the Company's total revenue over the last three years,
constituting approximately 42%, 48% and 60% of total revenue in fiscal years
1996, 1995 and 1994, respectively. This decline is largely attributable to a
declining market share, and more recently a general slowdown in the PC component
market. Although the market for FTG motherboard and PC peripheral applications
will likely remain an important source of revenue, the Company intends to
increase its presence in new and growing applications for FTG in wireless
communications and other non-PC applications, which applications comprised less
than 10% of its total FTG revenue in fiscal 1996.
Timing & Communications
Although currently representing less than ten percent of consolidated revenue,
the Company believes that transition to Fast Ethernet in the LAN marketplace
will continue to offer opportunities for the Company's communication products
during fiscal 1997. Timing and communications component revenue represented
approximately 7% of total revenue in fiscal years 1996 and 1995, and
approximately 5% in fiscal 1994.
12
<PAGE>
Multimedia Products
ARK Logic. Multimedia component revenue (from the IC components for PC audio and
graphics, including the display adapter chips developed by ARK Logic) comprised
13%, 14% and 11% of total revenue for fiscal years 1996, 1995 and 1994,
respectively. The decrease from fiscal year 1995 largely reflects the delay in
the introduction of new video graphics motherboard solutions.
Turtle Beach. While Turtle Beach continued to significantly increase its revenue
during fiscal 1996, the PC audio upgrade business remains a challenge for the
Company, and there can be no assurance that break-even performance for Turtle
Beach can be reliably achieved or sustained. The Company continues to explore
alternatives which will enable Turtle Beach to be separately measured in both
financial and business terms, while maximizing the return on the Company's
investment in Turtle Beach for the Company's shareholders. Revenue from Turtle
Beach grew during fiscal years 1996, 1995 and 1994 on the strength of expanded
distribution outlets and new product introductions and represented approximately
21%, 12% and 7% of total revenue in fiscal years 1996, 1995 and 1994,
respectively.
Custom ICs
Revenue from custom ICs comprised 17%, 19%and 17% of total revenue in fiscal
years 1996, 1995 and 1994, respectively, and include design revenue representing
partial reimbursement of research and development expenditures.
Foreign Revenue Foreign revenue, which resulted primarily from sales to
offshore customers, largely in the Pacific Rim, were 48%, 56% and 41% of total
revenue in fiscal years 1996, 1995 and 1994, respectively. The decrease in
fiscal 1996 largely reflects a reduced market share in the Far East. The
Company's sales are denominated in U.S. dollars.
Backlog Backlog was $23.0 million at June 29, 1996, compared to $35.4 million
at June 29, 1995, and $22.2 million at June 30, 1994. The decrease in fiscal
1996 is primarily due to over capacity in the PC component market and delay in
the Company's introduction of new products.
Cost of Sales
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, quality control and manufacturing
support operations and royalty expenses related to licensing and technology
agreements. Cost of sales as a percentage of total revenue was 62.2% in fiscal
1996 as compared to 48.4% in fiscal 1995 and 48.9% in fiscal 1994. The increase
in the cost of sales percentage in fiscal year 1996 was primarily attributable
to the declining sales prices in the PC component business.
Research & Development
Research and development expense expressed as a percentage of revenue was 12.0%
in fiscal 1996 as compared to 10.9% in fiscal year 1995, and 11.3% in fiscal
1994. In dollar terms, research and development spending increased 6.4% from
fiscal year 1995 to 1996, primarily as a result of the hiring of additional
engineering personnel, investment in new design tools, an increase in support
costs related to new product development and product enhancement programs for
existing standard products, including the Company's recently introduced timing
and communication products as well its multimedia products.
Operating Income
Expressed as a percentage of revenue, operating income was 2.9%, 9.9% and 19.3%
in fiscal years 1996, 1995 and 1994, respectively. In dollar terms, operating
income was $2.8 million in fiscal year 1996 compared to $10.3 million and $18.1
million in fiscal years 1995 and 1994, respectively. Fiscal 1996 includes one-
time charges of $3.3 million primarily as the result of Turtle Beach's
acquisition of certain assets of Value Media, which included a $1.5 million
write-off of in -process research and development, and the transfer of Turtle
Beach's York, PA operations to Fremont, CA, which resulted in a $1.8 million
charge for facility closing. Fiscal year 1995 includes one time charges of
$11.5 million primarily associated with a write-off of in-process R&D arising
from the acquisition of ARK Logic, as well as severance and other exit costs
associated with the redirection of the Company's multimedia strategy and the
transfer of its test operations to offshore subcontractors. Operating income
before one-time charges were $6.1 million, or 5.9% of revenue, in fiscal year
1996 as compared to 20.9% in fiscal 1995.
13
<PAGE>
Income Taxes
After consideration of minority interest, the provision for income taxes was
37.8%, 48.7% and 33.9% for fiscal years 1996, 1995 and 1994, respectively. The
effective income tax rate for fiscal 1996 reflects a $1.1 million reversal due
to a change in estimate for state taxes. The effective tax rate for fiscal 1995
reflects a $4.1 million, non-deductible intangible write-offs related to the
acquisition of ARK Logic of $4.1 million.
Net Income
Net income was $3.9 million or 34 cents per share for fiscal 1996 as compared to
$4.9 million or 45 cents per share for fiscal 1995, and $12.2 million or $1.11
per share for fiscal 1994. Excluding one-time charges in fiscal 1996 and one-
time charges in 1995, net income for fiscal year 1996 was $5.9 million or $0.51
per share, compared to $13.8 million or $1.21 per share for fiscal year 1995,
and $12.2 million or $1.10 per share for fiscal 1994.
Liquidity, Capital Resources and Inflation
During fiscal year 1996, the Company generated $12.5 million in cash from its
operating activities as compared to $14.1 million during fiscal year 1995. The
decrease in fiscal year 1996 was primarily due to a decrease in operating
results offset by improved collections and inventory turns. The Company's days
sales outstanding was reduced from 75 days in fiscal 1995 to 64 days in fiscal
1996. The Company's inventory turns per year increased from 2.9 times in fiscal
1995 to 3.6 times in fiscal year 1996.
At June 29, 1996, the Company's principal sources of liquidity included
approximately $30.5 million in cash and investments as compared to $22.5 million
at June 30, 1995. The investments primarily consist of commercial paper,
government bonds and marketable securities with various maturities up to about
three months. During fiscal 1996, the Company renegotiated its revolving/term
loan credit facility with its commercial bank to extend the expiration date to
December 31, 1997. The facility is subject to certain covenants, including the
maintenance of certain financial ratios and minimum tangible net worth
requirements, as well as a prohibition against the payment of cash dividends
without prior bank approval. The Company was in compliance with all covenants
as of June 29, 1996. During fiscal year 1996, the Company made a draw down of
$2.3 million on its revolving line of credit. At June 29, 1996, there was a
$2.3 million balance outstanding under this facility. During fiscal 1996 the
Company also repaid the balance of a mortgage loan with respect to its
Norristown, PA facility, resulting in a cash outflow of approximately $1.6
million.
Expenditures for property and equipment were $4.7 million in fiscal year 1996 as
compared to $3.7 million in fiscal year 1995. Expenditures in all fiscal years
primarily included equipment used in product design and testing. The Company
intends to continue to invest in capital equipment to support continued growth.
During the past fiscal year the Company entered into a wafer purchase contract
with Chartered Semiconductor Manufacturing PTE. Ltd. ("CSM") pursuant to which
the Company advanced to CSM a deposit of $2.0 million as part of a mutual
commitment for CSM to supply and the Company to purchase an agreed minimum
quarterly quantity of wafers over a five-year period from April, 1996 through
December, 2000. In addition CSM agreed to provide to the Company certain price
concessions as part of such commitment. Under its agreement with CSM the
Company is required to increase its deposit to up to $20 million during the five
year term. Any failure of either CSM and/or the Company to comply with its
supply or purchase commitment, as is applicable, will result in the assessment
of specified liquidated damages against the party failing to comply with its
commitment. The Company had previously entered into a similar agreement with
one of its other wafer suppliers, American Microsystems, Inc. but has
subsequently amended such agreement to remove any material purchase and supply
commitment as well as any associated penalties.
During the second quarter of 1996, the Company's Turtle Beach subsidiary
acquired the PC multimedia and communications peripheral product lines of
ValueMedia, Inc. ("ValueMedia") for 1.0 million shares of Turtle Beach's common
stock (valued at $2.7 million) and cash of $0.4 million, aggregating to $3.1
million. In January 1996, Turtle Beach issued 500,000 shares of its common
stock, valued at $2.67 per share, to the Company as consideration of the
cancellation by the Company of indebtedness in the principal amount of
$1,325,000 owing to the Company by Turtle Beach. In February 1996, the Company
purchased from ValueMedia 183,700 shares of common stock of Turtle Beach for a
cash payment of $490,479. After these transactions, the Company owned 80.8% of
the common stock of Turtle Beach.
14
<PAGE>
The Company acquired a 51% interest in ARK Logic during the third quarter of
fiscal 1995 Pursuant to the terms of such acquisition and under certain
circumstances as set forth therein, at any time between the eighteenth month and
the seventh year anniversary of the effective date of the acquisition, the
Company may acquire the remaining 49% of ARK Logic or certain members of the
prior management group of ARK Logic may require the Company to buy such minority
interest, each at a price based upon the fair market valuation determined at
such time.
The Company believes that the existing sources of liquidity and funds expected
to be generated from operations will adequately fund the Company's anticipated
working capital and other operating needs through at least fiscal year 1997. The
Company has acquired technology companies in the past, and may continue to make
strategic acquisitions in the future. Such potential transactions may require
substantial resources which, to the extent not provided by internally generated
sources, would require the Company to seek access to debt or equity markets.
The Company has not adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"), which will become effective for the year ended
June 28, 1997. The Company believes that the adoption of this statement will not
have a material financial impact.
The Company has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which will become
effective for the year ended June 28, 1997. The Company believes that the
adoption of this statement will not have a material financial impact.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
July 1, 1994. The adoption of this statement did not have a material financial
impact. The Company previously classified its investments as held-to-maturity.
However, effective cash management increasingly requires a flexible approach to
asset management that is inconsistent with this classification. Accordingly,
in fiscal 1995 the Company reclassified its investments as available-for-sale.
Inflation has not had a significant impact on the Company.
Update on Impact of One-Time Charges Taken in FY 1996 and FY 1995
The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a
one-time charge of $11.5 million taken during the third quarter of fiscal 1995.
The Company indicated in prior filings that the actions associated with this
charge would generate annual savings in excess of $5.0 million, primarily
through a reduction of salary and associated overhead and expenses as a result
of approximately 70 fewer employees and consultants at the Company's various
facilities. This reduction affected substantially all employee groups and
required the payment of approximately $2.1 million in severance over the twenty
seven month period ending June 28, 1997. The actions contemplated by this
charge have largely been accomplished and a substantial portion of the expected
savings has been realized. The full impact of such savings will not, however,
be realized until fiscal 1997. The Company does not currently expect these
savings will be materially offset by anticipated increased expenses or reduced
revenue associated with the activities leading to this charge. In addition, as
of the date of this filing, the Company has recovered approximately $250,000 by
disposing of certain of the assets which were written off. Of the total charge,
approximately $9.0 million was related to non-cash items. The charge is not
expected to affect future cash outflows other than for the severance payments of
approximately $210,000.
The Company's Form 10-Q for the second quarter of fiscal 1996, discussed a one-
time charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. The subject charge included severance of $0.3 million paid over
the remainder of fiscal 1996, relating to the reduction of approximately 20
employees as a result of the closing of Turtle Beach's York, PA facility. In
addition, the charge included a reserve for terminating the lease for the York
facility and a write-off of fixed and other assets as a result of the closure of
the York facility. The Company has since negotiated with the landlord of this
facility to take back a portion of the leased space and is in negotiations to
sub-lease a significant portion of the remaining space. Accordingly such
reserve has subsequently been reduced. The Company expected to generate annual
savings of approximately $.6 million, primarily as a result of the reductions in
personnel and associated overhead. The full impact of such savings will not,
however, be realized until the first quarter of fiscal year 1997. The Company
does not currently expect these savings to be materially offset by anticipated
increased expenses or reduced revenue associated with the activities leading to
this charge. Of the total
15
<PAGE>
charge, approximately $2.3 million, net of tax, was related to non-cash items.
The charge is not expected to affect future cash outflows of approximately
$100,000.
16
<PAGE>
Independent Auditors Report
The Board of Directors and Shareholders
Integrated Circuit Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Circuit Systems, Inc. and subsidiaries as of June 29, 1996 and June 30, 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 29, 1996.
In connection with our audits of the consolidated financial statements, we have
also audited the consolidated financial statement schedule, for each of the
years in the three-year period ended June 29, 1996, as listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Circuit
Systems, Inc. and subsidiaries as of June 29, 1996 and June 30, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 29, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities in 1995 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities."
/s/KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
July 30, 1996
17
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets (In thousands)
<TABLE>
<CAPTION>
June 29 June 30
Assets 1996 1995
---------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $30,457 $9,960
Marketable securities - current $24 $12,525
Accounts receivable, net $15,405 $18,825
Inventory, net $17,059 $15,504
Deferred income taxes $2,475 $3,550
Other current assets $3,054 $3,483
--------------------
Total current assets $68,474 $63,847
--------------------
Property and equipment, net $14,628 $13,358
Deposits on purchase contracts $5,575 $4,240
Goodwill $1,813 $409
Other assets $477 $328
--------------------
Total assets $90,967 $82,182
====================
Liabilities and Shareholders' Equity
Current Liabilities:
Note payable to bank $2,315 -
Current portion of long-term obligations $117 $294
Accounts payable $10,221 $5,863
Accrued salaries and bonuses $449 $1,231
Accrued expenses and other current liabilities $2,355 $4,528
Total current liabilities $15,457 $11,916
Long-term debt, less current portion $1,631 $3,480
Deferred income taxes $788 $997
--------------------
Total liabilities $17,876 $16,393
Minority interest $3,927 $3,305
Shareholders' Equity:
Preferred stock, authorized 5,000 shares, none - -
issued
Common stock, no par value, authorized 50,000
shares; issued 11,389 and 11,110 shares at June
29, 1996 and June 30, 1995,
respectively $32,674 $29,449
Less treasury stock, at cost (1996 - 35 shares) ($460) -
Retained earnings $36,950 $33,035
--------------------
Total shareholders' equity $69,164 $62,484
--------------------
Total liabilities and shareholders' equity $90,967 $82,182
====================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
Consolidated Statements of Operations
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year ended
----------------------------------------
June 29 June 30
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Revenue $100,485 $104,385 $ 93,824
Cost and expenses:
Cost of sales 62,547 50,530 45,798
Research and development expense 12,073 11,350 10,647
Selling, general and
administrative expense 19,781 20,664 19,269
One-time charges:
Change in business strategies - 3,822 -
Discontinued product lines - 3,606 -
Facility closing 1,757 - -
Write-off of in-processresearch
and development costs 1,500 4,092 -
----------------------------------------
Operating income 2,827 10,321 18,110
Interest and other income (1,467) (1,175) (848)
Interest expense 657 831 483
Minority interest (1,654) 545 -
----------------------------------------
Income before income taxes 5,291 10,120 18,475
Income tax expense 1,376 5,197 6,257
----------------------------------------
Net income $ 3,915 $ 4,923 $ 12,218
========================================
Earnings per common and common
equivalent share:
Primary $ 0.34 $ 0.45 $ 1.11
========================================
Assuming full dilution $ 0.34 $ 0.43 $ 1.10
========================================
Shares used to compute earnings per
common and common equivalent share:
Primary 11,592 11,045 11,051
========================================
Assuming full dilution 11,598 11,424 11,070
========================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Total Number of
Common Treasury Retained shareholders' shares
stock stock earnings equity outstanding
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1993 $ 25,540 $ - $ 15,894 $ 41,434 10,422
Shares issued upon conversion of 475 - - 475 218
warrants
Shares issued upon exercise of stock 331 - - 331 188
options
Tax benefits related to stock options 1,268 - - 1,268 -
Net income - - 12,218 12,218 -
-------------------------------------------------------------------
Balances at June 30, 1994 27,614 - 28,112 55,726 10,828
Shares issued upon exercise of stock 1,440 - - 1,440 282
options
Tax benefits related to stock options 395 - - 395 -
Net income - - 4,923 4,923 -
-------------------------------------------------------------------
Balances at June 30, 1995 29,449 - 33,035 62,484 11,110
Shares issued upon exercise of stock 2,811 - - 2,811 279
options
Tax benefits related to stock options 506 - - 506 -
Acquisition of treasury stock - (460) - (460) (35)
Subsidiaries' equity transactions (92) - - (92) -
Net income - - 3,915 3,915 -
-------------------------------------------------------------------
Balances at June 29, 1996 $ 32,674 $ (460) $ 36,950 $ 69,164 11,354
===================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (In thousands)
Year ended
--------------------------------------
June 29 June 30
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,915 $ 4,923 $ 12,218
Increase (decrease) in cash to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,321 3,148 2,056
Minority interest (1,654) 545 -
(Gain)loss on sale of assets 39 - -
Deferred income taxes 866 (217) (1,130)
Write-off of in-process R&D costs 1,500 4,092 -
Facility closing, non-cash portion 1,215
Change in business strategy charges, - 929 -
noncash portion
Write-down of discontinued product - 3,606 -
lines
Accounts receivable 3,420 670 (6,055)
Inventory (2,465) (4,530) (6,078)
Other assets, net 1,405 (233) (1,776)
Accounts payable, accrued expenses 1,387 1,318 2,192
and other liabilities
Income taxes (451) (113) (1,156)
-------------------------------------------
Net cash provided by operating activities 12,498 14,138 271
-------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,681) (3,719) (4,640)
Proceeds from sale of fixed assets 144 745 60
Proceeds from sales of marketable securities - 2,004 -
Proceeds from maturities of 18,316 13,309 9,480
marketable securities
Purchases of marketable securities (5,940) (8,376) (17,177)
Deposits on purchase contracts (2,000) (5,500) -
Investment in subsidiary, net of
cash acquired (986) (2,060) -
-------------------------------------------
Net cash provided by (used in) investing activities 4,853 (3,597) (12,277)
-------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit
agreement 2,315 (867) 867
Payments on subordinated notes payable - - (600)
Proceeds from long-term debt - - 791
Repayments of long-term debt (2,026) (375) (667)
Increase (decrease) in bank overdrafts - (2,061) 2,061
Exercise of stock options 2,811 1,440 331
Tax benefit of stock option exercise 506 395 1,268
Issuance (repurchase) of common stock, net (460) - 475
-------------------------------------------
Net cash provided by (used in) financing activities 3,146 (1,468) 4,526
-------------------------------------------
Net increase (decrease) in cash 20,497 9,073 (7,480)
Cash and cash equivalents:
Beginning of year 9,960 887 8,367
-------------------------------------------
End of year $30,457 $ 9,960 $ 887
===========================================
Supplemental disclosures of cash flow information
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Cash payments during the period for:
Interest $ 308 $ 372 $ 426
Income taxes $ 1,407 $ 6,120 $ 7,275
===========================================
For a description of certain non-cash investing
and financing transactions refer to footnote 2
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
Notes to Consolidated Financial Statements
The Company designs, manufactures and markets mixed signal integrated circuits
("ICs") primarily for timing, multimedia and networking solutions for the PC
industry. The Company also designs, manufactures and markets custom,
application specific ICs developed pursuant to product development projects with
selected customers. In addition, the Company's Turtle Beach subsidiary develops
and markets PC sound board/multmedia upgrade and related software products.
(1) Summary of Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries (wholly and majority-owned), after elimination of
all significant intercompany accounts and transactions. Certain amounts have
been reclassified to conform with current year presentation. The effect of
adjustments to the Company's carrying values of subsidiaries resulting from
their underlying equity transactions is included in the Company's common stock.
Reporting Periods
In fiscal 1996 the Company changed its fiscal year to a 52/53 week operating
cycle that ends on the Saturday nearest June 30. All of the reporting periods
presented herein represents a 52-week operating cycle.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents at June 29, 1996 consist of cash, overnight retail repurchase
agreements (held in U.S. Treasury obligations), money market funds and
commercial paper.
Marketable Securities
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), which requires certain investments to be categorized as
either held-to-maturity, trading, or available-for-sale. The Company previously
classified its investments as held-to-maturity. However, effective management
of financial activities increasingly requires a flexible approach to asset and
liability management that is inconsistent with this classification.
Accordingly, at June 29, 1996 and June 30, 1995, marketable equity and debt
securities are classified as available-for-sale and are stated at fair value.
The transfer was accounted for at fair value and no gain or loss was recognized.
Marketable equity and debt securities available for current operations are
classified as current assets.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest expense. Realized gains and losses
are included in other income or expense.
In accordance with SFAS 115, prior years' financial statements have not been
restated to reflect the change in accounting method. There was no cumulative
effect as a result of adopting SFAS 115 in fiscal year 1995.
Inventory
Inventory is stated at the lower of standard cost which approximates actual
cost (FIFO basis), or market.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets of generally
30 years for buildings and between 18 months and 10 years for all other
property, including equipment and building improvements. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life.
Goodwill
The purchase price in excess of the fair value of net assets acquired is
amortized on a straight-line basis over periods of 5 to 7 years. Accumulated
amortization was $311,000 and $45,000 as of June 29, 1996 and June 30, 1995,
respectively.
23
<PAGE>
Carrying value of long-term assets
The Company evaluates the carrying value of long-term assets, including
goodwill, based upon current and anticipated undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated cash flows will
be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value. The Company has not adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived
Assets Disposed of," (SFAS 121), which will become effective for the year ended
June 28, 1997. The Company believes that the adoption of this statement will
not have a material financial impact.
Revenue Recognition
Product sales are recognized as revenue upon shipment to the customer.
Estimated allowances are established to recognize the right of return from
selected customers. Custom IC revenue is generated pursuant to development and
production contracts and include design revenue representing partial
reimbursement of research and development expenditures. The research and
development costs funded by customers were $612,000, $698,000 and $1,221,000 for
fiscal years 1996, 1995 and 1994, respectively.
Concentration of Credit Risk
The Company sells its products primarily to original equipment manufacturers and
distributors in North America, Europe and the Pacific Rim. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
credit losses. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers and their dispersion
across many geographic areas. See Note 18.
Income Taxes
Income taxes are computed in accordance with Statement of Financial Accounting
Standards No. 109. The Company files a consolidated federal tax return with its
80% or more owned subsidiaries and, accordingly, any dividends from included
companies are not taxable to the Company.
Earnings per Common Share
Primary earnings per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options to purchase common stock (using the
treasury stock method based on average price over the period). Fully diluted
earnings per share is based on the weighted average number of shares and
equivalent shares outstanding (using the treasury stock method based on ending
price, if higher), unless anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. In addition, they affect the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates and assumptions.
Accounting for Stock-based Compensation
The Company has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123"), which will become
effective for the year ended June 28, 1997. The Company believes that the
adoption of this statement will not have a material financial impact.
Reclassification of Accounts
Certain reclassifications have been made to conform prior year's balances to the
current year presentation.
(2) Acquisitions
During the second quarter of 1996, the Company's Turtle Beach subsidiary
acquired the PC multimedia and communications peripheral product lines of
ValueMedia, Inc. ("ValueMedia") for 1.0 million shares of Turtle Beach's common
stock (valued at $2.7 million) and cash of $0.4 million, aggregating to $3.1
million. The issuance of 1.0 million shares represented 26.6% of Turtle Beach's
common stock. ValueMedia is a developer and marketer of peripheral kits for
personal computers. For financial reporting purposes, the transaction was
accounted for by the purchase method of accounting. Turtle Beach immediately
wrote off the portion of the acquisition premium related to in-process research
and development of $1.5 million. This write-off is separately disclosed in the
statement of operations as a non-recurring charge. The excess of the purchase
price over the fair value of the net assets acquired of $1.6 million will be
amortized
24
<PAGE>
over seven years. In January 1996, Turtle Beach issued 500,000 shares of its
common stock, valued at $2.67 per share, to the Company as consideration of the
cancellation by the Company of indebtedness in the principal amount of
$1,325,000 owing to the Company by Turtle Beach. In February 1996, the Company
purchased from ValueMedia 183,700 shares of common stock of Turtle Beach for a
cash payment of $490,479. After these transactions, the Company owned 80.8% of
the common stock of Turtle Beach.
During the third quarter of 1995, the Company acquired a 51% interest in ARK
Logic, Inc. (ARK Logic) for approximately $7.3 million in cash. The Company
purchased a 37% stake in the form of newly issued common shares of ARK Logic for
$5.3 million and 14% from an existing investor group for $2.0 million.
Pursuant to the terms of such acquisition and under certain circumstances as set
forth therein, at any time between the eighteen month and the seventh year
anniversary of the effective date of the acquisition, the Company may acquire
the remaining 49% of ARK Logic or certain members of the prior management group
of ARK Logic may require the Company to buy such minority interest, each at a
price based upon the fair market valuation determined at such time. The
acquisition has been accounted for as a purchase and ARK Logic's operations have
been included in the accompanying consolidated financial statements from January
1, 1995. The excess of the purchase price over the estimated fair value of the
net tangible assets acquired has been recorded as goodwill and is amortized over
5 years. Intangibles of $4.1 million (representing the estimated fair market
value of in-process research and development projects) were written off in the
quarter ended March 31, 1995.
(3) Non-recurring Charges
The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a
one-time charge of $11.5 million taken during the third quarter of fiscal 1995.
This charge included a reduction of approximately 70 employees from
substantially all employee groups and requires the payment of approximately
$2.1 million in severance over the twenty seven month period ending June 28,
1997. The full impact of any savings will not, however, be realized until
fiscal 1997. The Company does not currently expect these savings will be
materially offset by anticipated increased expenses or reduced revenue
associated with the activities leading to this charge. In addition, as of the
date of this filing, the Company has recovered approximately $250,000 by
disposing of certain of the assets which were written off. Of the total charge,
approximately $9.0 million was related to non-cash items. The charge is not
expected to affect future cash outflows other than for the remaining severance
payments of approximately $210,000.
The Company's Form 10-Q for the second quarter of fiscal 1996, discussed a one-
time charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. The subject charge included severance of $0.3 million paid over
the remainder of fiscal 1996, relating to the reduction of approximately 20
employees as a result of the closing of Turtle Beach's York, PA facility. In
addition, the charge included a reserve for terminating the lease for the York
facility and a write-off of fixed and other assets as a result of the closure of
the York facility. The Company has since negotiated with the landlord of this
facility to take back a portion of the leased space and is in negotiations to
sub-lease a significant portion of the remaining space. Accordingly such
reserve has subsequently been reduced. The full impact of any savings will
not, however, be realized until the first quarter of fiscal year 1997. The
Company does not currently expect these savings to be materially offset by
anticipated increased expenses or reduced revenue associated with the activities
leading to this charge. Of the total charge, approximately $2.3 million, net of
tax, was related to non-cash items. The charge is not expected to affect future
cash outflows other than for payments of approximately $100,000 associated with
the York facility.
(4) Purchase Commitments
Although most of the Company's relationships with its wafer suppliers do not
currently provide for the supplier to supply, or the Company to purchase,
substantial minimum wafer quantities, the Company has, on occasion, made
negotiated commitments to purchase specified minimum wafer quantities in
exchange for supply commitments and/or pricing concessions. During the past
fiscal year the Company entered into a wafer purchase contract with Chartered
Semiconductor Manufacturing PTE. Ltd. ("CSM") pursuant to which the Company
advanced to CSM a deposit of $2 million as part of a mutual commitment for CSM
to supply and the Company to purchase an agreed minimum quarterly quantity of
wafers over a five-year period from April, 1996 through December, 2000. In
addition CSM agreed to provide to the Company certain price concessions as part
of such commitment. Under its agreement with CSM the Company is required to
increase its deposit to up to $20 million during the five year term. Any
failure of either CSM and/or the Company to comply with its supply or purchase
commitment, as is applicable, will result in the assessment of specified
liquidated damages against the party failing to comply with its commitment.
This non-interest bearing deposit is recorded as a long term asset under the
caption, "Deposits on purchase contracts." The Company had previously
entered into a similar agreement with one of its other wafer suppliers, American
Microsystems, Inc. but has subsequently amended such agreement to remove any
material purchase and supply commitment ,as well as any resulting penalties. The
deposit made to secure these commitments was recorded as a long term asset
under the caption "Deposits on
25
<PAGE>
purchase contracts". The Company records interest on such deposit on a
quarterly basis as interest income in the Company's statement of operations.
(5) Marketable Securities
The estimated fair value of each investment approximates the cost and therefore
there are no unrealized gains or losses as of June 29, 1996 and June 30, 1995.
Proceeds from the sale or maturity of the investments were $18.3 million and
$15.3 million in fiscal 1996 and 1995, respectively. Gross realized losses were
$3,000 and $31,000 in fiscal 1996 and 1995, respectively. The cost of
securities sold is based on the specific identification method. Marketable
securities classified as current assets at June 30, 1995, are due within one
year and include primarily municipal auction rate cumulative preferred stock and
municipal bonds.
(6) Accounts Receivable
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June 29 June 30
1996 1995
------------------------------
<S> <C> <C>
Accounts receivable $ 17,512 $ 20,188
Less: reserves for allowances
and doubtful accounts (2,107) (1,363)
------------------------------
$ 15,405 $ 18,825
==============================
(7) Inventory
The components of inventories are as follows
(in thousands):
June 29 June 30
1996 1995
------------------------------
Work-in-process $ 4,430 $ 9,407
Finished parts 14,864 9,984
Less: obsolescence reserve (2,235) (3,887)
------------------------------
Inventory, net $ 17,059 $ 15,504
==============================
(8) Property and Equipment
Property and equipment consists of the following (in thousands):
June 29 June 30
1996 1995
------------------------------
Land and building $ 5,358 $ 5,118
Machinery and equipment 16,252 13,340
Furniture and fixtures 1,440 1,547
Leasehold improvements 219 218
------------------------------
$ 23,269 $ 20,223
Less: accumulated depreciation and amortization 8,641 6,865
------------------------------
Property and equipment, net $ 14,628 $ 13,358
==============================
</TABLE>
Depreciation and amortization expense related to property, plant and equipment
was $2,935,000 , $2,462,000 and $1,910,000 in 1996, 1995 and 1994, respectively.
(9) Debt
In February 1996, the Company renegotiated its revolving/term loan credit
facility with a commercial bank to extend the expiration to December 31, 1997.
The facility is subject to certain covenants, including the maintenance of
certain financial ratios, minimum tangible net worth requirements, and a
prohibition against the payment of cash dividends without prior bank approval.
The Company was in compliance with all covenants as of June 29, 1996. At June
29, 1996, the Company had $2,315,000 outstanding under this facility.
The line of credit available for future borrowings at June 29, 1996 was $14.7
million; $3 million was reserved for outstanding letters of credit. Advances
under the revolving portion of the facility bear interest pegged at either the
bank's prime rate or the LIBOR rate. Advances under the term portion of the
facility bear interest pegged at the bank's prime rate.
26
<PAGE>
A summary of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
June 29 June 30
1996 1995
------------------------
<S> <C> <C>
Mortgage, payable in monthly installments through
September, 2007, interest at prime plus
1/8% ( 9.125% at June 30, 1995) $ - $ 1,883
PIDA second mortgage, payable in monthly
installments through April 2009, interest at 2% 1,746 1,865
Lease obligations and other 2 26
------------------------
$ 1,748 $ 3,774
Less current portion 117 294
------------------------
Long-term debt, less current portion $ 1,631 $ 3,480
========================
During the third quarter of fiscal 1996 the Company repaid the remaining balance
of a mortgage loan.
Aggregate annual maturities of long-term debt as of June 29, 1996 (in
thousands):
1997 $ 117
1998 123
1999 126
2000 128
2001 131
2002 and beyond 1,123
-----------
$1,748
===========
</TABLE>
(10) Lease Obligations
The Company leases certain of its facilities under operating lease agreements,
some of which have renewal options.
Rental expense under operating lease agreements, net of sublease income, was
$638,000, $512,000 and $427,000 in 1996, 1995, and 1994, respectively.
Future minimum lease commitments under the Company's operating leases (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 411
1998 337
1999 56
---------
$ 804
=========
</TABLE>
(11) Fair Value of Financial Instruments
Estimated fair value of financial instruments is provided in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable - The
carrying amounts of these items approximate their fair values at June 29,
1996 due to the short term maturities of these instruments.
Long-term debt - Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues for which quoted market
prices are not available. The carrying value of this item approximates its
fair value at June 29, 1996.
27
<PAGE>
(12) Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
------------------------------
June 29 June 30
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $1,324 $4,236 $ 5,862
State (814) 1,178 1,525
------------------------------
Total current $ 510 $5,414 $ 7,387
------------------------------
Deferred tax (benefit):
Federal $ 341 $ (227) $ (556)
State 525 10 (574)
------------------------------
Total deferred 866 (217) (1,130)
------------------------------
Total income tax expense $1,376 $5,197 $ 6,257
==============================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
June 29 June 30
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 852 $ 563 $1,017
Inventory valuation 903 1,601 1,770
Change in business strategy reserves 102 626 -
Net operating loss carry forward 529 194 194
Intangible asset 584 - -
Accrued expenses and other 416 566 259
----------------------------
Gross Deferred tax assets $3,386 $3,550 $3,240
Less valuation allowance 911 - -
----------------------------
Net deferred tax asset 2,475 3,550 3,240
Deferred tax liabilities:
Depreciation $ 773 $ 836 $ 770
Other 15 161 134
----------------------------
Deferred tax liabilities $ 788 $ 997 $ 904
----------------------------
Net Deferred tax asset $1,687 $2,553 $2,336
----------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, potential limitations with respect
to the utilization of loss carryforwards, and tax planning strategies in making
this assessment. Based upon the projections for future taxable income over the
periods which deferred tax assets are deductible and the potential limitations
of loss and credit carryforwards, management believes it is more likely than not
the Company will realize a portion of these deductible differences, net of
existing valuation allowances at June 29, 1996. The Company will periodically
assess and re-evaluate the status of its recorded deferred tax asset.
28
<PAGE>
(12) Income Taxes (Cont'd)
The actual tax expense differs from the "expected" tax expense computed by
applying the statutory Federal corporate income tax rate of 35% in all fiscal
years to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
June 29 June 30
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Computed expected tax expense $ 1,273 $3,733 $6,466
Change in estimate of state taxes (1,065) - -
Change in valuation of allowance 911 - -
Research and development tax credits - - (841)
Foreign trade income exemption (91) (124) (104)
State taxes (net of federal income tax 188 772 618
benefit)
Utilization of net operating loss carry forward - (383) -
Tax-exempt interest and dividends (86) (237) (200)
Acquisition costs - - 81
In-process research and development write-off - 1,432 -
Other 246 4 237
------------------------------
$ 1,376 $5,197 $6,257
==============================
</TABLE>
At June 29, 1996, one of the Company's subsidiaries had state net operating loss
carry-forwards of approximately $1,000,000, expiring through 1998. During the
fourth quarter of fiscal 1996, the Company changed its estimate of accrued state
taxes.
(13) Employee Benefit Plans
The Company has a bonus plan which covers substantially all employees with at
least six months of service. Bonuses under this plan are based on the Company
achieving specified revenue and profit objectives and on individuals meeting
specified performance objectives. Amounts charged to expense for the plan were
$1,082,000, $1,896,000 and $1,842,000 in fiscal years 1996, 1995 and 1994,
respectively.
The Company has a 401(k) employee savings plan which provides for contributions
to be held in trust by corporate fiduciaries. Employees are permitted to
contribute up to 12 percent of their annual compensation. Under the plan, the
Company makes matching contributions equal to 150% of the first 1% contributed,
125% of the second 1% contributed, 100% of the third 1% contributed, 75% of the
fourth 1% contributed and 50% of the next 2% up to a maximum of 6 percent of
annual compensation, subject to IRS limits. The amounts contributed by the
Company and charged to expense in fiscal years 1996, 1995 and 1994 were
$330,000, $285,000 and $226,000, respectively.
(14) Stock Option Plans
The Company has various stock option plans (the Plans) under which key employees
and non-employee directors and advisors may be granted incentive stock options
and non-qualified options through November 2002.
Incentive stock options are granted at prices not less than the fair market
value at the date of grant, as determined by the market price for the Company's
common stock, and become exercisable as determined by the Company's stock option
committee, generally over four or five years. Options can be granted for terms
of up to ten years. Non-qualified stock options have also previously been
granted from time to time to certain key employees and directors at prices at
fair market value with various vesting provisions.
29
<PAGE>
Stock option transactions during fiscal years 1996, 1995 and 1994 are summarized
as follows (in thousands, except price per share):
<TABLE>
<CAPTION>
Options Options outstanding under the Plan
available for --------------------------------------
grant under Number of Price Aggregate
the Plan shares per share Price
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance June 30, 1993 306 1,149 $0.85 - $15.83 $12,276
Additional shares reserved 1,000 - -
Granted (1,150) 1,150 2.17 - 15.75 13,740
Exercised - (188) 0.05 - 5.50 (331)
Terminated 281 (281) 1.15 - 15.83 (3,378)
Termination of Turtle
Beach Plans (50) - -
-------------------------------------------------------
Balance June 30, 1994 387 1,830 $0.85 - $15.83 $22,307
Additional shares reserved 500 - -
Granted (2,758) 2,758 7.75 - 12.25 28,523
Exercised - (282) 0.85 - 10.25 (1,440)
Terminated 1,972 (1,972) 2.17 - 15.83 (25,179)
--------------------------------------------------------
Balance June 30, 1995 101 2,334 $2.17 - $15.75 $24,211
Additional shares reserved 600 - -
Granted (906) 906 9.88 - 14.38 11,051
Exercised - (278) 2.17 - 11.38 (2,811)
Terminated 502 (502) 5.50 - 17.38 (5,951)
--------------------------------------------------------
Balance June 29, 1996 297 2,460 $2.17 - $15.75 $ 26,500
</TABLE>
At June 29, 1996, options for 876,000 shares were exercisable at prices ranging
from $3.65 to $15.75 at an aggregate exercise price of $9,216,000. Income tax
benefits attributable to non-qualified stock options exercised and disqualifying
dispositions of incentive stock options are credited to common stock.
(15) Treasury Stock
In January, 1996, the Company's Board of Directors authorized the repurchase of
up to 1.0 million shares of the Company's common stock. As of June 29, 1996, the
Company has repurchased 35,000 shares valued at $460,000, using the cost method.
(16) Business Segment and Geographic Information
The Company operates primarily within one business segment, which is the design,
development and marketing of mixed-signal (analog/digital) integrated circuits
and related board level products. Foreign sales consist of shipments primarily
to the Pacific Rim, which were approximately 47.8%, 55.7% and 41.0% of revenue
in 1996, 1995 and 1994, respectively.
30
<PAGE>
(17) Quarterly Data (unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 29, 1996 and June 30, 1995 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
Sept.29, Dec. 30, Mar.30, June 29, Sept.30, Dec. 31, Mar. 31, June 30,
1995 1995 1996 1996 1994 1994 1995 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $28,290 $33,123 $17,349 $21,723 $22,549 $25,883 $27,793 $28,160
Cost of sales 14,390 19,136 13,945 15,076 10,062 12,468 13,428 14,572
Research and 2,522 3,392 3,080 3,079 2,708 2,931 2,837 2,874
development
Operating income 6,569 2,245 (4,751) (1,236) 4,448 5,260 (5,487) 6,100
(loss)
Net income (loss) $ 4,161 $1,894 $(2,087) $ (53) $2,860 $ 3,335 $(5,177) $ 3,905
Earnings (loss)
per common and
common
equivalent share:
Primary and $0.35 $0.16 $(0.18) $0.00 $ 0.26 $ 0.30 $(0.47) $ 0.34
fully diluted 0.35 0.16 (0.18) 0.00 0.26 0.30 (0.47) 0.34
Shares used to
compute
earnings per
common and
common
equivalent share:
Primary 11,894 11,682 11,341 11,331 10,982 10,979 11,055 11,327
Assuming full 11,897 11,687 11,345 11,331 11,003 10,979 11,057 11,653
dilution
</TABLE>
(18) Major Customers
During fiscal 1996 shipments to Intel (including all Intel and Intel
subcontractor locations) accounted for eleven percent of the Company's
consolidated revenue.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
31
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information with respect to directors required by this Item is incorporated
by reference to the section entitled "Election of Directors" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
section entitled "Executive Compensation" in the Company's definitive Proxy
statement for its 1996 Annual Meeting of Shareholders. Those portions of the
Proxy Statement included in response to Item 402(k) and Item 402(l) of
Regulation S-K are not incorporated by reference into Part III.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by reference to the
section entitled "Beneficial Ownership of Common Stock" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
section entitled "Executive Compensation-Certain Transactions" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.
32
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report.
(1) Consolidated Financial Statements
The following consolidated financial statements of the Registrant
and Independent Auditor's Report of KPMG Peat Marwick LLP, are
included in Item 8 of this Report.
Independent Auditors' Report
Consolidated Balance Sheets as of June 29, 1996 and June 30,
1995
Consolidated Statements of Operations for the years ended
June 29, 1996 and June 30, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the
years
ended June 29, 1996 and June 30, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
June 29, 1996 and June 30, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Consolidated Financial Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are inapplicable or the
information is provided in the Consolidated Financial Statements including the
Notes thereto.
(b) Report on Form 8-K
No reports were made on Form 8-K during the last quarter of the fiscal
year.
(c) Exhibits
* 3.1 Articles of Incorporation of the Registrant, as amended. (Exhibit 3.1
to the registrant's registration statement, No. 33-39728, on Form S-1,
filed on May 6, 1991 [the "1991 Registration Statement"])
* 3.2 Articles of Amendment dated December 10, 1992 of the Registrant's
Articles of Incorporation. (Exhibit 28.5 to the registrant's statement,
No. 33-57418, on Form S-3, filed on January 25, 1993 [the "1993 S-3
Registration Statement"])
* 3.3 Amended and Restated Bylaws of the Registrant. (Exhibit 3.3 to the 1991
Registration Statement)
33
<PAGE>
* 3.4 Amendment to Amended and Restated Bylaws of the Registrant. (Exhibit
3.4 to the registrant's 1993 Annual Report on Form 10-K [the "1993 Form
10-K"])
4 Except for Exhibit 10.16 hereof, there are no instruments, with respect
to long-term debt of the Registrant, that involve indebtedness for
securities authorized thereunder, exceeding 10% of the total assets of
the registrant and its subsidiaries on a consolidated basis. The
registrant agrees to file a copy, of any instrument or argument
defining the rights of holders of long-term debt of the registrant,
upon request of the Securities and Exchange Commission
+*10.1 1989 Incentive Stock Option Plan, as amended. (Exhibit 10.9 to the 1991
Registration Statement)
+*10.2 1991 Stock Option Plan. (Exhibit 10.10 to the 1991 Registration
Statement)
+*10.3 Amendment dated June 17, 1991 to the 1991 Stock Option Plan. (Exhibit
10.18 to the 1991 Registration Statement)
+*10.4 Amendment dated November 19, 1991 to the 1991 Stock Option Plan.
(Exhibit 10.21 to the registrant's 1992 Annual Report on Form 10-K [the
"1992 Form 10-K"])
+*10.5 Amendment dated January 24, 1992 to the 1991 Stock Option Plan.
(Exhibit 10.22 to the 1992 Form 10-K)
+*10.6 1992 Stock Option Plan. (Exhibit 4.1 to the registrant's registration
statement, No. 33-55902, on Form S-8, filed on December 17, 1992.
+*10.7 Key Employee Agreement between Registrant and Mark R. Guidry, effective
November 30, 1992. (Exhibit 28.2 to the 1993 S-3 Registration
Statement)
+*10.8 Amendment to the Registrant's 1992 Stock Option Plan, dated December
10, 1992. (Exhibit 28.4 to the 1993 S-3 Registration Statement)
*10.9 Lease Agreement dated June 13, 1988 between VLSI Design Associates and
Sobrato Group. (Exhibit 10.27 to the registrant's registration
statement, No. 33-54142, on Form S-4, filed on November 3, 1992
*10.10 Lease between Turtle Beach Systems, Inc. and Winship Land Associates
III dated May 28, 1993.(Exhibit 10.27 to the 1993 Form 10-K)
*10.11 First Amendment to lease, dated May 13, 1993 between the registrant and
The Sobrato Group. (Exhibit 10.28 to the 1993 Form 10-K)
+*10.12 1992 Stock Option Plan, as amended as of October 21, 1993. (Exhibit 4.1
to the registrant's registration statement, No. 33-73208, on Form S-8,
filed on December 21, 1993 [the "1993 S-8 Registration Statement"]
+*10.13 Amendment to the Registrant's 1992 Stock Option Plan, dated July
22, 1993. (Exhibit 4.2 to the 1993 S-8 Registration Statement)
+*10.14 Amendment to the Registrant's 1992 Stock Option Plan, dated November
22, 1994. (Exhibit 4.1 to the 1994 S-8 Registration Statement)
+ 10.15 $20,000,000 Revolving Credit Agreement between Mellon Bank, N.A. and
the registrant dated June 5, 1995.
+*10.16 Wafer purchase contract dated October 12, 1994 between the Company and
American Microsystems, Inc. (Exhibit 10 to the Registrant Form 10-Q for
the quarter ended September 30, 1994)
+*10.17 Agreement dated November 21, 1994 between the Company and Edward H.
Arnold (Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended December 31, 1994)
* 10.18 Wafer purchase contract dated November 8, 1995 between the Company and
Chartered Semiconductor Manufacturing Pte. Ltd. (Exhibits 10(a) and
10(b) to the Registrant Form 10-Q for the quarter ended December 30,
1995)
* 10.19 Amendment to the Registrant's 1992 Stock Option Plan, dated November
21, 1995. (Exhibit 99.1 to the 1996 S-8 Registration Statement)
+ 10.20 Agreement dated August 2, 1996 between the Company and David W. Sear
34
<PAGE>
+ 10.21 Agreement dated August 30, 1996 between the Company and Hock E. Tan
11 Statement re computation of per share income
*13 Portions of the 1996 Annual Report to Shareholders for fiscal year
ended June 29, 1996
*22 Subsidiaries of the Registrant (Exhibit 22 to the 1993 Form 10-K)
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules
* Incorporated by reference
+ Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of this report.
35
<PAGE>
SCHEDULE II
INTEGRATED CIRCUIT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 29, 1996, June 30, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
beginning of charged to end of
period costs and Deductions period
expenses
Description ---------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 29, 1996:
Valuation reserves:
Accounts receivable $1,363 $6,020/1/ $5,276/1/ $2,107
Inventory $3,887 $ 994 $2,646 $2,235
Year ended June 30, 1995:
Valuation reserves:
Accounts receivable $2,461 $ 499 $1,597 $1,363
Inventory $4,297 $5,142 $5,552 $3,887
Year ended June 30, 1994:
Valuation reserves:
Accounts receivable $ 972 $1,489 $ - $2,461
Inventory $2,107 $2,190 $ - $4,297
</TABLE>
- ---------------------
/1/ Reflects an increase in the valuation account for accounts receivable
primarily as a result of the slow down in the PC component market and
negotiated product return from a small number of significant Turtle Beach
customers.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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: September 13, 1996 By: /s/ HENRY BOREEN
----------------------------
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
INTEGRATED CIRCUIT SYSTEMS, INC.
Date: September 13, 1996 By: /s/ HOCK E. TAN
-----------------------------
Senior Vice President and Chief Financial
Officer, and Secretary
Date: September 13, 1996 By: /s/ HENRY I. BOREEN
-----------------------------
Henry I. Boreen, Chairman of the Board
Date: September 13, 1996 By: /s/ EDWARD H. ARNOLD
-----------------------------
Edward H. Arnold, Director
Date: September 13, 1996 By: /s/ RUDOLF GASSNER
-----------------------------
Rudolf Gassner, Director
Date: September 13, 1996 By: /s/ HOWARD L. MORGAN
-----------------------------
Howard L. Morgan, Director
Date: September 13, 1996 By: /s/ JOHN L. PICKITT
-----------------------------
John L. Pickitt, Director
Date: September 13, 1996 By: /s/ STAVRO PRODROMOU
-----------------------------
Stavro Prodromou
37
<PAGE>
EXHIBIT 10.20
SEVERANCE AGREEMENT
-------------------
This Severance Agreement (the "Agreement") is made on this 2nd day of
August, 1996 (the "Effective Date"), by and among Integrated Circuit Systems,
Inc., a Pennsylvania corporation (the "Company"), and David W. Sear, Ph.D.
("Employee").
WHEREAS, Employee has served as the President and Chief Executive Officer
of the Company;
WHEREAS, by mutual consent Employee is resigning as the President and
Chief Executive Officer;
WHEREAS, the parties hereto desire to enter into this Agreement on the date
hereof to set forth their agreement with respect to said resignation and certain
other matters in connection therewith upon the terms and conditions hereinafter
set forth; and
WHEREAS, the parties desire that this Agreement supersede any agreement,
arrangement or understanding with respect to the terms of the employment of
Employee by the Company binding on Employee and the Company, except as referred
to in Section 13(a) hereof.
NOW, THEREFORE, in consideration of the covenants and conditions set forth
in this Agreement, the parties, intending to be legally bound, agree as follows:
1. Termination of Employment.
(a) Employee hereby voluntarily and irrevocably resigns from all of his
positions as a director, officer, employee, partner, principal, agent,
representative, consultant or otherwise, with or in (i) the Company and its
affiliates, or (ii) any other corporation, partnership or other entity in
respect of which he was serving at the request of the Company, in each case
effective as of 5:00 p.m., Philadelphia time, on the Effective Date. The Company
and Employee acknowledge and agree that all rights and obligations of any nature
of the Company and Employee with respect to such employment or positions shall
be duly and effectively terminated at 5:00 p.m., Philadelphia time, on the
Effective Date. Employee acknowledges that his employment relationship with the
Company was permanently and irrevocably severed as of the Effective Date and
agrees that the Company and its affiliates have no obligation, contractual or
otherwise, to rehire, re-employ, recall or rehire him in the future.
(b) Employee further acknowledges and agrees that payments made or to
be made and benefits provided or to be provided hereunder are in lieu of any and
all compensation and benefits of any nature whatsoever due to Employee under the
terms of any agreement, arrangement or understanding (whether written or oral)
binding upon the Company and Employee.
<PAGE>
FINAL
2. Severance Compensation. In full consideration of Employee's execution
of this Agreement and his agreement to be legally bound by its terms, the
Company has paid or agrees to pay Employee the following amounts, and has
provided or agrees to provide the following benefits to Employee:
(a) The Company has paid Employee, and Employee hereby acknowledges
receipt of the sum of $216,667 (minus all payroll deductions required by law or
authorized by Employee). In addition, Employee shall promptly receive payment
in respect of unused vacation days to which Employee is entitled.
(b) Employee acknowledges and agrees that he has not earned any bonus
under the Company's bonus plan in respect of the period ended June 30, 1996.
The Company agrees that Employee will be eligible to receive a bonus in respect
of the period ending September 30, 1996 to the same extent as would otherwise
have been the case had Employee remained an employee of the Company through such
date, but no representation of any nature is made by the Company as to whether a
bonus will be earned by Employee in respect of such period or the amount
thereof, and Employee acknowledges that all determinations in that regard shall
be made solely by the Compensation Committee of the board of directors of the
Company in its discretion and shall be final and binding upon Employee.
(c) Employee acknowledges that the period within which the Company must
make available the purchase of health insurance under the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") will commence as of the Effective
Date. If and only to the extent permitted under the Company's health insurance
plans, the Company shall provide Employee until August 31, 1997 with health
insurance coverage of the nature (and subject to the same deductibles and cost-
sharing features) as may be provided by the Company to its senior executive
officers during such period. If the Company is unable to include Employee in
such health insurance plan during any portion of such period and Employee
instead purchases health insurance from the Company under COBRA, then the
Company will pay Employee during such portion of this period an amount equal to
160% of the cost of obtaining such insurance from the Company pursuant to
COBRA. Notwithstanding the foregoing, this section shall no longer be
applicable when Employee is employed by a new employer that provides health
insurance to its employees on a comparable cost-sharing basis to that provided
by the Company. Except as expressly stated above, Employee shall not be
entitled to any benefits provided to employees of the Company after the
Effective Date.
(d) Employee shall be reimbursed for the reasonable business expenses
incurred by him prior to the Effective Date in connection with the performance
of services as president and chief executive officer of the Company upon
presentation of an itemized account and written proof of such expenses in
accordance with the Company's policies.
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FINAL
(e) The Company has previously granted Employee options to acquire a
total of 250,000 shares of the Company's common stock (the "Stock Options")
pursuant to the Company's 1992 Stock Option Plan, as amended (the "1992 Plan").
Notwithstanding Section 12.3 of the 1992 Plan, but subject in all respects to
(i) all of the other provisions of the 1992 Plan and the option agreements
pursuant to which the Stock Options were granted and (ii) compliance by Employee
after the Effective Date with the provisions of this Agreement, the Company and
the Employee agree that all of the Stock Options shall be fully vested and shall
be exercisable in full through the close of business, Philadelphia time, on
August 31, 1997. Employee acknowledges that, as a result of the foregoing, if
any of the Stock Options were intended to qualify as incentive stock options,
such Stock Options will no longer so qualify and will be treated as nonqualified
stock options.
(f) Employee alone, and not the Company, will be solely responsible for
payment of all federal, state and local taxes required to be paid by him in
respect of the payments to be made and benefits to be provided to him under this
Agreement, and Employee acknowledges that such payments and benefits may be
subject to tax withholding.
3. Return of Company Property. By August 31, 1996, Employee will return
to the Company all lists, records, documents, credit cards, building passes,
computers and other materials or property of any nature in his possession,
custody or control which are or were owned by the Company or any of its
subsidiaries or affiliates, and Employee will not retain or deliver to any other
persons or entities copies thereof or permit any copies thereof to be made by
any other person or entity.
4. General Release.
(a) In consideration of the foregoing, (including without limitation
the promises and payments as described in Section 2 above, which are in excess
of that to which Employee would have otherwise been entitled upon termination of
employment), Employee hereby knowingly, willingly and voluntarily remises,
waives, releases and forever discharges the Company and its subsidiaries and
affiliates, the directors, officers, employees, advisors and agents of the
Company and its subsidiaries and affiliates, and the heirs, executors,
administrators, successors and assigns of such parties (collectively referred to
as the "Releasees") of and from any and all manner of actions and causes of
action, suits, debts, dues, accounts, bonds, covenants, contracts, agreements,
judgments, claims and demands whatsoever in law or equity which Employee, his
heirs, executors, administrators or assigns has, had or may hereafter have
against the Releasees or any of them from or by reason of any cause, matter or
thing whatsoever from the beginning of his employment with the Company to the
Effective Date, excepting only claims against the Company relating to its
obligations under this Agreement and including, without in any way limiting the
generality of the foregoing, any and all matters relating to his employment by
the Company and the termination thereof and execution of this Agreement, any and
all claims under any federal, state or local law, including the Pennsylvania
Human Relations Act, 43 P.S. (S)
3
<PAGE>
FINAL
951 et seq. and the California Fair Employment and Housing Act, Title VII of the
Civil Rights Act of 1964, as amended, 42 U.S.C. (S) 2000e et seq., the Age
Discrimination in Employment Act, as amended, 29 U.S.C. (S) 621 et seq., the
Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. (S) 1001
et seq., any common law claims and all claims for counsel fees and costs.
Employee covenants and agrees never to commence, aid in any way, prosecute or
permit to be commenced against the Releasees any action or other proceeding
based upon any matters which are the subject of or covered by the foregoing.
Nothing in this Section 4 shall affect or modify in any manner (i) the rights of
Employee and the obligations of the Company to indemnify Employee for acts or
matters occurring prior to the Effective Date, if and to the extent required
pursuant to Article 23 of the Company's By-Laws or the Pennsylvania Business
Corporation Law, in each case as in effect on or prior to the Effective Date,
and (ii) the rights, if any, of Employee under any directors and officers
insurance policy purchased by the Company and in effect in respect of periods on
or prior to the Effective Date.
(b) Employee represents that it is his intention in executing this
Agreement that it shall be effective as a bar to each and every claim, demand,
suit, action, cause of action, and debt which he may have against Releasees; and
in furtherance of this intention Employee HEREBY EXPRESSLY WAIVES AND ALL RIGHTS
AND BENEFITS CONFERRED UPON HIM BY THE PROVISIONS OF SECTION 1542 OF THE CIVIL
CODE OF CALIFORNIA WHICH PROVIDES AS FOLLOWS:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT
TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Notwithstanding Section 1542 of the Civil Code of California, Employee expressly
consents that this Agreement shall be given full force and effect according to
each and all of its express terms and provisions, including as well those
relating to unknown and unspecified claims, demands, suits, actions, causes of
action and debts, if any, and those relating to any other claims, demands,
suits, actions, causes of action and debts hereinabove specified.
5. Developments.
(a) Employee agrees that all inventions, original works of authorship,
developments, concepts, improvements or trade secrets, whether or not patentable
or registrable under copyright or similar laws and whether or not related to or
useful in the business of the Company (collectively, the "Developments") which
Employee, either by himself or in conjunction with any other person or persons,
has at any time during the period of his employment by the Company prior to the
Effective Date conceived, developed or reduced to
4
<PAGE>
FINAL
practice, or caused to be conceived, developed or reduced to practice, are or
shall become and remain the sole and exclusive property of the Company. Employee
hereby assigns, transfers and conveys, and agrees to so assign, transfer and
convey, all of his right, title and interest in and to any and all such
Developments, and agrees to disclose fully as soon as practicable, in writing,
all such Developments to the board of directors of the Company. At any time and
from time to time, upon the request and at the expense of the Company, Employee
will execute and deliver any and all instruments, documents and papers, give
evidence and do any and all other acts which, in the opinion of counsel for the
Company, are or may be necessary or desirable to document such transfer or to
enable the Company to file and prosecute applications for and to acquire,
maintain and enforce any and all patents, trademark registrations, copyrights,
mask work rights or other intellectual property rights of any nature under
United States or foreign law with respect to any such Developments or to obtain
any extension, validation, re-issue, continuance or renewal of any such rights.
The Company will be responsible for the preparation of any such instruments,
documents and papers and for the prosecution of any such proceedings and will
reimburse Employee for all reasonable expenses incurred by him in compliance
with the provisions of this Section.
(b) Notwithstanding the foregoing, Employee and the Company acknowledge
that the provisions of (a) above do not apply to any "invention" which qualifies
fully under the provisions of California Labor Code Section 2870, a copy of
which has been provided to Employee. However, Employee represents that there
are no "inventions" that meet the criteria in California Labor Code Section 2870
included within the definition of Developments as set forth in (a) above.
6. Confidential Information.
(a) Employee recognizes and acknowledges that by reason of his
employment by and service with the Company he has had access to confidential
information of the Company and its subsidiaries and affiliates, including,
without limitation, information and knowledge pertaining to research activities,
products and services offered or being considered, mergers and other major
corporate transactions being considered, inventions, innovations, designs,
ideas, plans, trade secrets, proprietary information, manufacturing, packaging,
advertising, distribution and sales methods and systems, sales and profit
figures, customer and client lists, and relationships between the Company and
its subsidiaries and affiliates and employees, consultants, scientific
collaborators, dealers, distributors, wholesalers, customers, clients, suppliers
and others who have had or will have business dealings with the Company and its
subsidiaries and affiliates ("Confidential Information"). Employee acknowledges
that such Confidential Information is a valuable and unique asset and covenants
that he will not disclose any such Confidential Information to any person for
any reason whatsoever without the prior written authorization of the board of
directors of the Company, unless such information is in the public domain
through no fault of Employee or except as may be required by law. The Company
5
<PAGE>
FINAL
will use its best efforts to identify to Employee promptly upon request whether
any specific information specified in Employee's request then constitutes
Confidential Information.
(b) Employee recognizes that the Company has received from third
parties their confidential or proprietary information subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. Employee shall hold all such confidential or
proprietary information in the strictest confidence and shall not disclose it to
any person or entity or use it except as consistent with the Company's
agreements with such third parties.
7. Non-Competition.
(a) Until February 2, 1997, Employee will not, unless acting with the
prior written consent of the board of directors of the Company, directly or
indirectly, own, manage, operate, join, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, advisor, employee, partner, principal, agent, representative,
consultant or otherwise with or use or permit his name to be used in connection
with, any business or enterprise engaged in (i) the design, marketing, or sale
of (A) integrated circuits for audio/graphic control functions for personal
computers/workstations, or (B) integrated circuits for local area network
applications, or (ii) any other business in which the Company or any of its
subsidiaries or affiliates is engaged as of the Effective Date, or which the
Company by notice to the Employee given within 30 days after the Effective Date
advises him that it intends to pursue within the 6-month period following the
Effective Date (together, the "Business"). It is recognized by Employee that the
Business as engaged in by the Company is and will continue to be international
in scope, and that geographical limitations on this non-competition covenant
(and the non-solicitation covenant set forth in Section 8 below) are therefore
not appropriate.
(b) The foregoing restriction shall not be construed to prohibit the
ownership by Employee of not more than 5% of any class of securities of any
corporation which is engaged in the Business having a class of securities
registered pursuant to the Securities Exchange Act of 1934, as amended, provided
that such ownership represents a passive investment and that neither Employee
nor any group of persons including Employee in any way, either directly or
indirectly, manages or exercises control of any such corporation, guarantees any
of its financial obligations, otherwise takes any part in its business other
than exercising his rights as a shareholder, or seeks to do any of the
foregoing. In addition, the foregoing restriction shall not be construed to
prohibit the employment of Employee by an entity engaged in the Business as long
as Employee does not, directly or indirectly, participate in the Business.
8. No Solicitation. Employee will not, either directly or indirectly, (i)
until February 2, 1997, call on or solicit any person, firm, corporation or
other entity who or which, at the Effective Date or at any time during the one-
year period prior to the Effective Date, was a
6
<PAGE>
FINAL
customer of the Company or any of its subsidiaries or affiliates with respect to
the activities prohibited by Section 7 hereof or (ii) until August 2, 1997,
solicit the employment of any person who was employed by the Company or any of
its subsidiaries or affiliates on a full or part-time basis at the Effective
Date, unless prior to any such solicitation of employment such person (A) was
involuntarily discharged by the Company or such subsidiary or affiliate or (B)
voluntarily terminated his or her relationship with the Company or such
subsidiary or affiliate.
9. Equitable Relief.
(a) Employee acknowledges that the restrictions contained in Sections
5, 6, 7 and 8 hereof are reasonable and necessary to protect the legitimate
interests of the Company and its subsidiaries and affiliates, that the Company
would not have entered into this Agreement in the absence of such restrictions,
and that any violation of any provision of those Sections will result in
irreparable injury to the Company, its subsidiaries and affiliates. Employee
represents that his experience and capabilities are such that the restrictions
contained in Sections 7 and 8 hereof will not prevent Employee from obtaining
employment or otherwise earning a living at the same general level of economic
benefit as he has previously enjoyed immediately prior to the Effective Date.
(b) Employee agrees that the Company shall be entitled to preliminary
and permanent injunctive relief, without the necessity of proving actual
damages, as well as to an equitable accounting of all earnings, profits and
other benefits arising from any violation of Sections 5, 6, 7 or 8 hereof, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled. In the event that any of the provisions of
Sections 5, 6, 7 or 8 hereof should ever be adjudicated to exceed the time,
geographic, product or service, or other limitations permitted by applicable law
in any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, product or service, or other
limitations permitted by applicable law.
(c) Employee irrevocably and unconditionally (i) agrees that any suit,
action or other legal proceeding arising out of this Agreement, including
without limitation, any action commenced by the Company for preliminary and
permanent injunctive relief and other equitable relief, may be brought in any
court of competent jurisdiction in the Commonwealth of Pennsylvania or any other
court of competent jurisdiction, provided that any suit, action or other legal
proceeding brought against the Company shall be brought and adjudicated in the
United States District Court for the Eastern District of Pennsylvania, or, if
such court will not accept jurisdiction, in any court of competent civil
jurisdiction sitting in Montgomery County, Pennsylvania, (ii) consents to the
non-exclusive jurisdiction of any such court in any such suit, action or
proceeding, and (iii) waives any objection which Employee may have to the laying
of venue of any such suit, action or proceeding in any such court. Employee
also irrevocably and unconditionally consents to the service of any process,
pleading, notices or other papers in any manner permitted by the notice
provisions of Section 12 hereof.
7
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FINAL
(d) Employee agrees that he will provide, and that the Company may
similarly provide, a copy of Sections 5, 6, 7 and 8 of this Agreement to any
business or enterprise (i) which he may directly or indirectly own, manage,
advise, operate, finance, join, control or participate in the ownership,
management, operation, financing, or control of or (ii) with which he may be
connected with as an officer, director, advisor, employee, partner, principal,
agent, representative, consultant or otherwise, or in connection with which he
may use or permit his name to be used; provided, however, that this provision
shall not apply in respect of Sections 7 and 8 of this Agreement after
expiration of the time periods set forth therein.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED
UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, WITHOUT GIVING EFFECT TO THE
PRINCIPLES OF CONFLICTS OF LAW THEREOF.
11. Litigation Expenses. In the event of a lawsuit by either party to
enforce the provisions of this Agreement, the prevailing party shall be entitled
to recover reasonable costs, expenses and attorney's fees from the other party.
12. Notices. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Integrated Circuit Systems, Inc.
2435 Boulevard of the Generals
P.O. Box 968
Valley Forge, Pennsylvania 19482
Attention: Chairman
With a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: David R. King, Esquire
8
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FINAL
If to Employee, to:
David W. Sear, Ph.D.
14810 Clara Street
Los Gatos, CA 95030
With a required copy to:
J. Michael Bewley, Esq.
Suite 1425
2 North Second Street
San Jose, CA 95113-1304
or to such other names or addresses as the Company or Employee, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
13. Contents of Agreement; Amendment and Assignment.
(a) This Agreement supersedes all prior agreements and sets forth the
entire understanding among the parties hereto with respect to the subject matter
hereof, except that this Agreement shall not supersede and shall be in addition
to any agreements between Employee and the Company with respect to
confidentiality or other intellectual property rights. This Agreement may not
be changed, modified, extended or terminated except upon written amendment
executed by Employee and approved by the board of directors of the Company and
executed on behalf of the Company by a duly authorized officer. Without
limitation of the foregoing, Employee and the Company acknowledge that the
effect of this provision is that no oral modifications of any nature whatsoever
to this Agreement shall be permitted.
(b) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto.
14. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance is held invalid or unenforceable in any
jurisdiction, the remainder of this Agreement, and the application of such
provision to such person or circumstance in any other jurisdiction or to other
persons or circumstances in any jurisdiction, shall not be affected thereby.
15. Remedies Cumulative; No Waiver. No remedy conferred upon the Company
by this Agreement is intended to be exclusive of any other remedy, and each and
every
9
<PAGE>
FINAL
such remedy shall be cumulative and shall be in addition to any other remedy
given hereunder or now or hereafter existing at law or in equity. No delay or
omission by the Company in exercising any right, remedy or power hereunder or
existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by the Company from time to time
and as often as may be deemed expedient or necessary by the Company in its sole
discretion.
16. Miscellaneous. All section headings are for convenience only. This
Agreement may be executed in counterparts, each of which is an original. It
shall not be necessary in making proof of this Agreement or any counterpart
hereof to produce or account for any of the other counterparts.
17. Consultation with Legal Counsel, Etc. EMPLOYEE REPRESENTS AND
ACKNOWLEDGES THAT (i) HE HAS BEEN ADVISED BY THE COMPANY TO CONSULT HIS OWN
LEGAL COUNSEL WITH RESPECT TO THE AGREEMENT, (ii) HE HAS HAD FULL OPPORTUNITY,
PRIOR TO EXECUTION OF THIS AGREEMENT, TO REVIEW THOROUGHLY THIS AGREEMENT WITH
HIS COUNSEL, AND THAT HE HAS DONE SO, (iii) HE HAS READ AND FULLY UNDERSTANDS
THE TERMS AND PROVISIONS OF THIS AGREEMENT AND (iv) HE IS KNOWINGLY AND
VOLUNTARILY EXECUTING THIS AGREEMENT. Employee agrees to indemnify the Company
and hold it harmless at all times after the date hereof against and in respect
of any damages, liabilities, costs or expenses of any nature incurred by the
Company by reason of any failure or breach by Employee of Employee's
representations, acknowledgments, covenants or agreements contained in this
Agreement. Employee acknowledges that no promise or inducement for this
Agreement has been made excepts as set forth herein and that this Agreement is
executed without Employee's reliance upon any statement or representation by or
on behalf of the Company.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
INTEGRATED CIRCUIT SYSTEMS, INC.
By: /s/ Henry I. Boreen
-----------------------------
Name: Henry I. Boreen
Title: Chairman
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FINAL
EMPLOYEE
/s/ David W. Sear
--------------------------
David W. Sear, Ph.D.
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EXHIBIT 10.21
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") dated as of August 30, 1996 between
Integrated Circuit Systems, Inc., a Pennsylvania corporation (the "Company"),
and Hock E. Tan ("Employee").
WHEREAS, Employee is presently employed as Chief Operating Officer
of the Company (the "Position");
WHEREAS, the Company desires to continue Employee's employment and Employee
desires to continue to be employed by the Company, upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby employs Employee, and Employee hereby
accepts such employment and agrees to perform his duties and responsibilities
hereunder, in accordance with the terms and conditions hereinafter set forth.
1.1. Employment Term. The period of Employee's employment by the Company
pursuant to this Agreement (the "Employment Term") shall commence retroactive to
July 1, 1996 and shall continue until and end on June 30, 1998, unless
terminated prior thereto in accordance with Section 5 hereof; provided, however,
that the Employment Term shall automatically be extended for successive 12-month
periods after the prior ending date if neither the Company nor the Employee
shall have notified the other in writing of its respective intention not to
further renew the Employment Term under this Agreement for any such successive
12-month period by June 1 of any year.
1.2. Duties and Responsibilities.
(a) During the Employment Term, Employee shall serve in the previously
identified Position
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and shall perform all duties and accept all responsibilities incidental to such
Position or as may be assigned to him by the Company's Chief Executive Officer
(Employee's "Supervisor"), and he shall cooperate fully with such Supervisor,
the board of directors and other executive officers of the Company.
(b) Employee represents to the Company that he is not subject or a party to
(and Employee agrees during the Employment Term not to become subject or a party
to) any employment agreement, non-competition covenant, non-disclosure agreement
or other agreement, covenant, understanding or restriction of any nature which
would prohibit Employee from executing this Agreement and performing fully his
duties and responsibilities hereunder, or which would in any manner, directly or
indirectly, limit or affect the duties and responsibilities which may now or in
the future be assigned to Employee by the Company, including without limitation
any duties and responsibilities relating to the business in which the Company
(including its subsidiaries) is engaged during the Employment Term or for which
Employee has notice during such Employment Term that the Company is planning to
be engaged within the six (6) month period following any expiration or
termination of this Agreement (the "Business" of the Company).
1.3. Extent of Service. During the Employment Term, Employee agrees to
use his best efforts to carry out his duties and responsibilities under Section
1.2 hereof and to devote his full time, attention and energy thereto; provided,
however, that Employee shall only be required to transfer to locations where the
Company may at such time maintain its headquarters (including without
limitation, the metropolitan Philadelphia, Pennsylvania area) if the board of
directors of the Company determines that such relocation is in the best
interests of the Company and Employee is provided with the relocation benefits
set forth on Exhibit A hereto. The foregoing shall not be construed as
preventing Employee from making (after disclosure to the Company in accordance
with the Company's policies) passive investments in other businesses or
enterprises, provided that Employee agrees not to become engaged in any
investment or business activity that may interfere with his ability to discharge
his duties and responsibilities to the Company. Employee further agrees not to
work either on a part time or independent contracting basis, or
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serve as a director, officer or in any other capacity, for any other business or
enterprise during the Employment Term without the prior consent of the Company.
1.4. Base Compensation.
(a) For all the services rendered by Employee hereunder, the Company shall
pay Employee an annual salary at the rate of $ 160,005.00 (such amount, as it
may be increased from time to time in accordance with this Section 1.4(a), is
referred to herein as the "Annual Salary") for each full year of the Employment
Term, plus such additional amounts, if any, as may be approved by the Company in
accordance with its policies and procedures, less withholding required by law or
agreed to by Employee, payable in installments at such times as the Company
customarily pays its other senior officers (but in any event no less often than
monthly). The Company agrees that Employee's salary will be reviewed at least
annually by the Companyin accordance with its policies and procedures to
determine if an increase is appropriate, which increase shall be in the sole
discretion of such board of directors or compensation committee. Employee
acknowledges and agrees that such salary may also be subject to reduction,
without violation of this Agreement, in the event of a concurrent reduction on a
comparable basis of its other senior officers.
(b) During the Employment Term, Employee shall also be entitled to
participate in such vacation pay, retirement and other fringe benefit plans for
senior officers of the Company, if any, as may be authorized from time to time
by the Company in its sole discretion.
1.5. Incentive Compensation. In addition to the compensation set forth in
Section 1.4 hereof, Employee shall be entitled to participate in such incentive
compensation plans, if any, as may be applicable to its senior officers, and as
may be established from time to time in respect of each fiscal year during the
Employment Term by the Company in its sole discretion, the terms and provisions
of which shall also be in the sole discretion of the Company, which terms and
provisions shall be controlling with respect to the manner in which any such
incentive compensation is earned, accrued, vested, paid or otherwise made
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available to its participants.
2. Expenses. Employee shall be reimbursed for the reasonable business
expenses incurred by him in connection with his performance of services
hereunder during the Employment Term upon presentation of an itemized account
and written proof of such expenses in accordance with policies established by
the Company.
3. Developments; Confidential Information; Etc. Employee acknowledges,
that, as a condition of Employee's first becoming an employee of the Company,
and as a condition of continued employment he executed the Company's standard
form(s) of confidential information and invention assignment agreements (the
"Confidentiality Agreements"), copies of which are attached hereto as Exhibit B.
Employee further acknowledges that as a condition of entering into this
Agreement, Employee has reconfirmed, and does hereby reconfirm that all of the
provisions of the Confidentiality Agreements have been, are currently and will
continue to be valid and binding upon him to the full extent set forth therein,
and enforceable against Employee to the full extent set forth therein.
4. Arbitration and Equitable Relief.
(a) Employee acknowledges that the restrictions contained in the
Confidentiality Agreements are reasonable and necessary to protect the
legitimate interests of the Company and its affiliates, that the Company would
not have entered into this Agreement in the absence of such restrictions, and
that any violation of any provision of the Confidentiality Agreements will
result in irreparable injury to the Company. Employee represents that his
experience and capabilities are such that the restrictions contained in the
Confidentiality Agreements will not prevent Employee from obtaining employment
or otherwise earning a living at the same general level of economic benefit as
anticipated by this Agreement. Employee further represents and acknowledges
that (i) he has been advised by the Company to consult his own legal counsel in
respect of this Agreement and the statements set forth herein and in respect of
the Confidentiality Agreements, and (ii) that he has, prior to execution of this
Agreement and the Confidential
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Information and Invention Assignment Agreement, reviewed this Agreement and the
Confidentiality Agreements with his counsel.
(b) Except as provided in Section 4(c) below, Employee and the Company
agree that any dispute or controversy arising out of or relating to any
interpretation, construction, performance or breach of this Agreement, shall be
exclusively settled by arbitration to be held in the City of Philadelphia,
Pennsylvania, in accordance with the National Rules for the Resolution of
Employment Disputes as then in effect of the American Arbitration Association.
A panel of three arbitrators shall be chosen in accordance with such rules to
conduct the arbitration, unless Employee and the Company agree in writing to
have such disputes settled by a single arbitrator. The arbitrators may grant
injunctions or other relief in such dispute or controversy, but shall have no
authority to set aside or review any decision of the board of directors or its
compensation committee or of the Accounting Firm made hereunder unless such
decisions are shown by clear and convincing evidence to have been made in bad
faith. The decision of the arbitrators shall be final, conclusive and binding
on the parties to the arbitration. Judgment may be entered on the arbitrators'
decision in any court having jurisdiction. The Company and Employee shall each
pay one-half of the costs and expenses of such arbitration, and each of the
Company and Employee shall separately pay its counsel fees and expenses,
subject, however, to the right of the arbitrators to assess costs and expenses
in circumstances where such arbitrators deem it appropriate to do so. If a
party shall attempt to vacate or appeal from an arbitration award or obtain an
order staying the arbitration, and such party (the "non-prevailing party") is
unsuccessful in obtaining such judicial relief, then the non-prevailing party
will be responsible for all attorney's fees and costs incurred by the other
party in connection therewith.
(c) Employee agrees that the Company shall be entitled (in addition to
seeking relief pursuant to an arbitration pursuant to (b) above) to preliminary
and permanent injunctive relief, without the necessity of proving actual
damages, as well as an equitable accounting of all earnings, profits and other
benefits arising from any violation of the Confidentiality Agreements, which
rights shall be cumulative and in
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<PAGE>
addition to any other rights or remedies to which the Company may be entitled as
set forth in the Confidentiality Agreements or otherwise. Employee irrevocably
and unconditionally (i) agrees that any such suit, action or other legal
proceeding commenced by the Company may be brought in the United States District
Court for the Eastern District of Pennsylvania or in any court of general
jurisdiction in Montgomery County, Pennsylvania, (ii) consents to the non-
exclusive jurisdiction of any such court in any such suit, action or proceeding,
and (iii) waives any objection which Employee may have to the laying of venue of
any such suit, action or proceeding in any such court. Employee also irrevocably
and unconditionally consents to the service of any process, pleadings, notices
or other papers in a manner permitted by the notice provisions of Section 11
hereof. In the event of any such lawsuit, the Company, if the prevailing party,
shall be entitled to recover its reasonable costs of pursuing such action
(including attorney's fees and expenses) from Employee.
(d) In the event that any of the provisions of the Confidentiality
Agreements should ever be held or adjudicated to exceed the time, geographic,
product or service, or other limitations permitted by applicable law in any
jurisdiction, then such provisions shall be deemed reformed in such jurisdiction
to the maximum time, geographic, product or service, or other limitations
permitted by applicable law.
(e) Employee agrees that he will provide, and that the Company may
similarly provide, a copy of the Confidentiality Agreements to any business or
enterprise (i) which he may directly or indirectly own, manage, operate,
finance, join, control or participate in the ownership, management, operation,
financing, control or control of, or (ii) with which he may be connected with as
an officer, director, employee, partner, principal, agent, representative,
consultant or otherwise, or in connection with which he may use or permit his
name to be used.
5. Termination. The Employment Term shall terminate prior to its
expiration as set forth in Section 1.1 above, and Employee's employment by the
Company shall be terminated, upon the occurrence of any of the following events
(and in accordance with the following provisions associated with such
6
<PAGE>
events):
5.1. Disability. In the event that Employee is unable fully to perform
his duties and responsibilities hereunder to the full extent required by the
board of directors of the Company by reason of illness, injury or incapacity for
more than 90 days, during which time he shall continue to be compensated as
provided in Section 1.4 hereof (less any payments due Employee under disability
benefit programs, including Social Security disability, worker's compensation
and disability retirement benefits), the Employment Term may be terminated by
the Company, and the Company shall have no further liability or obligation to
Employee for compensation hereunder; provided, however, that Employee will be
entitled to receive the payments prescribed under any disability benefit plan
which may be in effect for employees of the Company and in which he participated
at the date of such disability, and a pro rata portion to the date of disability
of any earned incentive compensation, if any, referred to in Section 1.5 hereof
in respect of the fiscal year during which Employee first became disabled. In
the event of any dispute under this Section 5.1 and to the extent determined by
the Company to be job-related and consistent with business necessity, Employee
shall submit to a physical examination by a licensed physician selected by the
Company.
5.2. Death. In the event that Employee dies during the Employment Term,
the Company shall pay to his executors, legal representatives or administrators
an amount equal to the installment of his Annual Salary set forth in Section 1.4
hereof for the month in which he dies, and thereafter the Company shall have no
further liability or obligation hereunder to his executors, legal
representatives, administrators, heirs or assigns or any other person claiming
under or through him; provided, however, that Employee's estate or designated
beneficiaries shall be entitled to receive the payments prescribed for such
recipients under any death benefit plan which may be in effect for employees of
the Company and in which Employee participated at the date of such death, and a
pro rata portion to the date of such death of any earned incentive compensation,
if any, referred to in Section 1.5 hereof in respect of the fiscal year during
which
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Employee died.
5.3. Cause. Nothing in this Agreement shall be construed to prevent
termination of the Employment Term by the Company at any time for "cause." For
purposes of this Agreement, "cause" shall mean (a) dishonesty, misconduct,
commission of a crime involving moral turpitude, use of alcohol or drugs in such
a manner or to an extent that job performance is impaired, drug abuse,
misappropriation of funds, disparagement of the Company (or its management or
employees), or (b) failure of Employee to perform or observe during the
Employment Term any of the terms or provisions of this Agreement or at any time
any of the terms or provisions of the Confidentiality Agreements, to comply
fully with the lawful directives of the of the Company, or any other proper
cause determined in good faith by the Company; provided, however, that
Employee's conduct shall not constitute "cause" within the meaning of (b) above
unless and until (i) the Company shall have provided Employee with notice
setting forth with specificity (1) the conduct deemed to constitute such
"cause," (2) reasonable action, if any, that would remedy the objectionable
conduct, and (3) a reasonable time (not less than 10 days) within which Employee
may take such remedial action (provided, however, that the Company shall not be
required to provide additional time for remedial action in the event of repeated
instances of the conduct deemed to constitute cause for which it has already
given prior notice and time for remedial action in accordance with the
provisions of this Agreement), and (ii) Employee shall not have taken such
specified remedial action within such specified reasonable time. The Company's
liability, if any, for payments to Employee by virtue of any wrongful
termination of Employee's employment pursuant to this Agreement shall be reduced
by and to the extent of any earnings received by or accrued for the benefit of
Employee during any unexpired part of the Employment Term.
5.4. Without Cause. The Company shall have the right to terminate the
Employment Term without cause at any time by giving Employee written notice of
such termination. Under such circumstances (and except in circumstances where
Section 6 hereof is applicable), the Company shall
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<PAGE>
continue for a period of 12 months from the effective date of such termination
(a) the Annual Salary, (b) in accordance with (and to the extent permitted by)
the provisions of the Company's health plans then in existence and the
provisions of the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") as
supplemented or amended, and subject to any deductibles, limitations,
exclusions, and any co-payments and other cost sharing features thereof, any
medical insurance benefits to which Employee was entitled immediately prior to
the receipt of notice of termination (or, at the Company's option, pay Employee
an amount in cash equal, on an after-tax basis, to the premiums for such
coverages), and (c) to vest and permit the exercise of such stock options as
have been granted to the employee prior to the effective date of such
termination, in accordance with and subject to the provisions of the applicable
stock option plans and the option agreements pursuant to which the options were
granted (but excluding provisions such as 12.3 of the 1992 Plan which would
otherwise result in the cancellation of such options upon termination of
employment.) The foregoing notwithstanding, any obligation to provide medical
insurance or payment in lieu thereof, shall expire when Employee is employed by
a new employer that provides health insurance to its employees on a comparable
cost-sharing basis to that provided by the Company. Employee acknowledges that
as a result of the foregoing, any stock options intended to qualify as incentive
stock options will no longer qualify and accordingly will be treated as non-
qualified stock options. Employee shall only have the right to receive payment
for incentive compensation, if any, referred to in Section 1.5 hereof to which
Employee would have been entitled in respect of fiscal years completed prior to
the effective date of such termination. Except as expressly stated in this
paragraph, upon the termination of this Agreement Employee shall not be entitled
to any payments or benefits which may be provided to employees of the Company.
Payments and benefits to be provided hereunder shall in all respects be
conditioned upon (i) the prior receipt by the Company from Employee of a general
release of all claims of any nature whatsoever which Employee had, has or may
have against the Company and related parties relating to his employment by the
Company (other than his entitlement under any employee benefit plan or
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program sponsored by the Company in which he participated and under which he has
accrued a benefit) or the termination thereof, and a covenant of reasonable
scope and duration, not to directly or indirectly engage in any Business of the
Company, such release and covenant to be in form and substance reasonably
satisfactory to counsel for the Company, and (ii) continued compliance by
Employee with the Confidentiality Agreements and with the provisions of this
Agreement that continue after termination of the Employment Term.
5.5 Resignation for Good Reason. Employee shall have the right to
terminate the Employment Term at any time for Good Reason, by giving the Company
90 days' written notice of such termination. For purposes of this Agreement
"Good Reason" shall mean, exclusively, a resignation (a) within two years after
the initial occurrence of a "Change in Control" of the Company as defined in
Section 24 of the Integrated Circuit Systems, Inc. 1992 Stock Option Plan as in
effect on the date of this Agreement (the "1992 Plan"), or (b) based upon (i) a
failure of the Company to observe or perform any of the material terms or
provisions of this Agreement (including, for example, any reduction in the
Annual Salary other than a reduction which is a concurrent reduction on a
comparable basis of all senior officers), (ii) the exclusion of Employee from
participation in any new compensation or benefit arrangement generally offered
to senior officers of the Company, or (iii) a material reduction in Employee's
level of responsibility, position (including office and title, but not including
reporting relationships), authority or duties (including changes resulting from
the assignment to Employee of any duties and responsibilities inconsistent with
his Position as in effect on the date of this Agreement), in each case as
determined by Employee acting reasonably and in good faith. Employee's notice
of termination hereunder shall specify the basis for Employee's determination of
"Good Reason"; provided, however, that the Company's conduct shall not
constitute "Good Reason" unless and until (i) Employee shall have given the
Company written notice setting forth with specificity (1) the conduct deemed to
constitute "Good Reason," (2) reasonable action that would remedy the
objectionable conduct, and (3) a reasonable time (not less than 10 days)
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within which the Company may take such remedial action, and (ii) the Company
shall not have taken such specified remedial action within such specified
reasonable time. Under such circumstances the Company shall continue for a
period of 12 months from the effective date of such termination (i) the Annual
Salary (which may at Company's option be paid in a lump sum), and (ii) in
accordance with (and to the extent permitted by) the provisions of the Company's
health plans then in existence and the provisions of the Consolidated Omnibus
Reconciliation Act of 1985 ("COBRA") as supplemented or amended, and subject to
any deductibles, limitations, exclusions, and any co-payments and other cost
sharing features thereof, any medical insurance benefits to which Employee was
entitled immediately prior to the receipt of notice of termination (or, at the
Company's option, pay Employee an amount in cash equal, on an after-tax basis,
to the premiums for such coverages). and (iii) to vest and permit the exercise
of such stock options as have been granted to the employee prior to the
effective date of such termination, in accordance with and subject to the
provisions of the applicable stock option plans and the option agreements
pursuant to which the options were granted (but excluding provisions such as
12.3 of the 1992 Plan which would otherwise result in the cancellation of such
options upon termination of employment.) The foregoing notwithstanding, any
obligation to provide medical insurance or payment in lieu thereof, shall expire
when Employee is employed by a new employer that provides health insurance to
its employees on a comparable cost-sharing basis to that provided by the
Company. Employee acknowledges that as a result of the foregoing, any stock
options intended to qualify as incentive stock options will no longer qualify
and accordingly will be treated as non-qualified stock options. Employee shall
only have the right to receive payment for incentive compensation, if any,
referred to in Section 1.5 hereof to which Employee would have been entitled in
respect of fiscal years completed prior to the effective date of such
termination. Except as expressly stated in this paragraph, upon the termination
of this Agreement Employee shall not be entitled to any payments or benefits
which may be provided to employees of the Company. Payments and benefits to be
provided hereunder shall in all respects be conditioned upon (i) the prior
receipt by the
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Company from Employee of a general release of all claims of any nature
whatsoever which Employee had, has or may have against the Company and related
parties relating to his employment by the Company (other than his entitlement
under any employee benefit plan or program sponsored by the Company in which he
participated and under which he has accrued a benefit) or the termination
thereof, and a covenant of reasonable scope and duration, not to directly or
indirectly engage in any Business of the Company, such release and covenant to
be in form and substance reasonably satisfactory to counsel for the Company, and
(ii) continued compliance by Employee with the Confidentiality Agreements and
with the provisions of this Agreement that continue after termination of the
Employment Term.
5.6. Resignation for Other than Good Reason. Employee shall have the
right to terminate the Employment Term at any time for any reason or no reason
by giving the Company 90 days' written notice of such termination. Upon such
termination of the Employment Term (and except in circumstances where Section
5.5 hereof is applicable), the Company shall not have any further liability or
obligation to Employee other than to provide Employee with any unpaid salary and
benefits pursuant to Sections 1.4(a) and 1.4(b) hereof that have accrued through
the effective date of termination, and the incentive compensation, if any,
referred to in Section 1.5 hereof to which Employee would have been entitled in
respect of fiscal years completed prior to the effective date of such
termination.
6. Coordination of Benefits; No Set-Off.
(a) Other severance plans generally, or policies or agreements, if any,
applicable to Employee or to employees of the Company generally, and any other
severance payments required by applicable statutes or provided under government
programs, may provide compensation and benefits to Employee upon events which
would also require the Company pursuant to this Agreement to provide
compensation or continue benefits. In such event, Employee shall be entitled
only to the largest cash compensation provided for under any of such agreements,
plans, policies, statutes or programs, including this Agreement, and the maximum
benefit continuance provided for under any of such agreements, plans, policies,
statutes or
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programs, including this Agreement.
(b) Except as specifically set forth in (a) above, the Company's obligation
to make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any circumstances, including,
without limitation, any set-off, counterclaim, recoupment, defense or other
right which the Company may have against Employee or others.
7. Certain Reduction of Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event that it shall be determined as set forth herein that any payment or
distribution by, or benefit provided by, the Company to or for the benefit of
Employee, whether paid or payable, made available to or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
that it would be economically advantageous to the Company to reduce the Payment
to avoid the limitation of the Company's deduction for such excess parachute
payments under Section 280G of the Code, the aggregate present value of amounts
payable or distributable to or for the benefit of Employee pursuant to this
Agreement (such payments, benefits or distributions pursuant to this Agreement
are hereinafter referred to as "Agreement Payments") shall be reduced (but not
below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount
expressed in present value which maximizes the aggregate present value of
Agreement Payments without causing any Payment not to be deductible by the
Company under Section 280G of the Code. For purposes of this Section 7, present
value shall be determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations to be made under this Section 7 shall be made by
KPMG Peat Marwick LLP, or the Company's independent public accountant
immediately prior to the Change of Control if other than KPMG Peat Marwick LLP
(the "Accounting Firm"), which firm shall use its best efforts to provide its
determinations and any supporting calculations both to the Company and Employee
within 15 days of any
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termination for which payment under Section 5 is required hereunder. Any such
determination by the Accounting Firm shall be final and binding upon the Company
and Employee. Employee shall in Employee's sole discretion determine which and
how much of the Agreement Payments shall be eliminated or reduced consistent
with the requirements of this Section 7. Within five days after the Company's
determination, the Company shall pay (or cause to be paid) or distribute (or
cause to be distributed) to or for the benefit of Employee such amounts as are
then due to Employee under this Agreement.
(c) As a result of the uncertainty in the application of Section 280G of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Agreement Payments, as the case may be, will have
been made by the Company which should not have been made ("Overpayment") or that
additional Agreement Payments which have not been made by the Company could have
been made ("Underpayment"), in each case, consistent with the calculations
required to be made hereunder. Within two years after the applicable
termination of employment, the Accounting Firm shall review the determination
made by it pursuant to the preceding paragraph. In the event that the
Accounting Firm determines that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to Employee which
Employee shall repay to the Company together with interest at the applicable
Federal rate provided for in Section 7872(f)(2) of the Code (the "Federal
Rate"); provided, however, that no amount shall be payable by Employee to the
Company if and to the extent such payment would not affect the limitations on
the amount which is not deductible under Section 280G of the Code. In the event
that the Accounting Firm determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Employee together with interest at the Federal Rate.
(d) All of the fees and expenses of the Accounting Firm in performing the
determinations referred to in subsections (b) and (c) above shall be borne
solely by the Company. The Company agrees to indemnify and hold harmless the
Accounting Firm of and from any and all claims, damages and expenses of any
nature resulting from or relating to its determinations pursuant to subsections
(b) and (c) above,
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except for claims, damages or expenses resulting from the gross negligence or
willful misconduct of the Accounting Firm.
8. Survival. Notwithstanding expiration of the Employment Term,
Employee's obligations under the Confidentiality Agreements shall survive and
remain in full force and effect for the periods therein provided, and Employee's
representations under Sections 1.2(b) and 3 of this Agreement, the provisions
for arbitration and equitable relief under Section 4 of this Agreement, the
provisions for certain payments after the Employment Term in Sections 5 and 6 of
this Agreement, and Sections 9, 10, 11, 12, 13 and 14 of this Agreement shall
continue in full force and effect.
9. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED
UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT GIVING EFFECT TO ANY
CONFLICT OF LAWS PROVISIONS.
10. Notices. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Integrated Circuit Systems, Inc.
2435 Boulevard of the Generals
Norristown, PA 19403
Attention: Chairman
If to Employee, to:
____________________
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____________________
____________________
____________________
or to such other names or addresses as the Company or Employee, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
11. Contents of Agreement; Amendment and Assignment.
(a) This Agreement and the Confidentiality Agreements supersede all prior
agreements and set forth the entire understanding among the parties hereto with
respect to the subject matter hereof or thereof and cannot be changed, modified,
extended or terminated except upon written amendment approved by the Company and
executed on its behalf by a duly authorized officer. Without limitation of the
foregoing, Employee acknowledges that the effect of this provision is that no
oral modifications of any nature whatsoever to this Agreement or the
Confidentiality Agreements shall be permitted. In addition, nothing in this
Agreement or in the Confidentiality Agreements shall be construed as giving
Employee any right to be retained in the employ of the Company beyond the
expiration of the Employment Term, and Employee specifically acknowledges that
if his employment by the Company continues beyond the expiration of the
Employment Term, he shall be an employee-at-will of the Company, and thus
subject to discharge at any time by the Company with or without cause and
without compensation of any nature (except as specifically provided in Section
5).
(b) Employee acknowledges that from time to time, the Company may
establish, maintain and distribute employee manuals or handbooks or personnel
policy manuals, and officers or other representatives of the Company may make
written or oral statements relating to personnel policies and procedures. Such
manuals, handbooks and statements are intended only for general guidance. No
policies, procedures or statements of any nature by or on behalf of the Company
(whether written or oral,
16
<PAGE>
and whether or not contained in any employee manual or handbook or personnel
policy manual), and no acts or practices of any nature, shall be construed to
modify this Agreement or the Confidentiality Agreements or to create express or
implied obligations of any nature to Employee.
(c) All of the terms and provisions of this Agreement and the
Confidentiality Agreements shall be binding upon and inure to the benefit of and
be enforceable by the respective heirs, executors, administrators, legal
representatives, successors and assigns of the parties hereto, except that the
duties and responsibilities of Employee hereunder are of a personal nature and
shall not be assignable or delegatable in whole or in part by Employee.
12. Severability. If any provision of this Agreement or application
thereof to anyone or under any circumstances is held to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction.
13. Remedies Cumulative; No Waiver. No remedy conferred upon the Company
by this Agreement or by the Confidentiality Agreements is intended to be
exclusive of any other remedy, and each and every such remedy shall be
cumulative and shall be in addition to any other remedy given hereunder or now
or hereafter existing at law or in equity. No delay or omission by the Company
in exercising any right, remedy or power hereunder, under the Confidentiality
Agreements, or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by the Company
from time to time and as often as may be deemed expedient or necessary by the
Company in its sole discretion.
14. Miscellaneous. All section headings are for convenience only. This
Agreement may be executed in several counterparts, each of which is an original.
It shall not be necessary in marking proof of
17
<PAGE>
this Agreement or any counterpart hereof to produce or account for any of the
other counterparts.
[INTENTIONALLY LEFT BLANK]
18
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement on August __, 1996.
INTEGRATED CIRCUIT SYSTEMS, INC.
Attest:
[SEAL]
______________________________ By____________________________
Secretary Name:________________________
Title:______________________
Witness:
______________________________ ________________________________
Employee
19
<PAGE>
EXHIBIT 11
INTEGRATED CIRCUIT SYSTEMS, INC.
COMPUTATION OF PER SHARE INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
June 29 June 30
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Primary
- -------
Net income $ 3,915 $ 4,923 $12,218
======= ======= =======
Common and common equivalent shares
outstanding:
Weighted average common shares outstanding 11,278 10,936 10,731
Assumed exercise of stock options 314 109 320
------- ------- -------
11,592 11,045 11,051
======= ======= =======
Net income per share $ 0.34 $ .45 $ 1.11
======= ======= =======
Fully Diluted
- -------------
Net income $ 3,915 $ 4,923 $12,218
======= ======= =======
Common and common equivalent shares
outstanding:
Weighted average common shares outstanding 11,278 10,936 10,731
Assumed exercise of stock options 320 488 320
Assumed exercise of warrants - - 19
------- ------- -------
11,598 11,424 11,070
======= ======= =======
Net income per share $ 0.34 $ .43 $ 1.10
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Integrated Circuit Systems, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 333-07293, 33-41407, 33-55902, 33-69676, 33-73208 and 33-87086) on form
S-8 and registration statement (No. 33-70202) on form S-3 of Integrated Circuit
Systems, Inc. of our report, related to the consolidated balance sheets of
Integrated Circuit Systems, Inc., and subsidiaries as of June 29, 1996 and June
30, 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows and related schedule for each of the years in the three-
year period ended June 29, 1996, which report appears in the June 29, 1996
annual report on form 10-K of Integrated Circuit Systems, Inc.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities in 1995 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities."
/s/KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
September 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> JUN-29-1996
<CASH> 30,457
<SECURITIES> 24
<RECEIVABLES> 17,512
<ALLOWANCES> 2,107
<INVENTORY> 17,059
<CURRENT-ASSETS> 68,474
<PP&E> 23,269
<DEPRECIATION> 8,641
<TOTAL-ASSETS> 90,967
<CURRENT-LIABILITIES> 15,457
<BONDS> 1,631
0
0
<COMMON> 32,674
<OTHER-SE> 36,490
<TOTAL-LIABILITY-AND-EQUITY> 90,967
<SALES> 100,485
<TOTAL-REVENUES> 100,485
<CGS> 62,547
<TOTAL-COSTS> 62,547
<OTHER-EXPENSES> 35,111
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 657
<INCOME-PRETAX> 5,291
<INCOME-TAX> (1,376)
<INCOME-CONTINUING> 3,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,915
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
