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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 28, 1997
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 registration was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
------
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 August 29, 1997, based on the closing sales
price, was $428,074,896. 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 August
29, 1997: 12,407,968 shares
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on October 23, 1997 are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
-------
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 FTG
products were initially used in video graphics applications in personal
computers ("PCs"), but subsequently expanded to include 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 products for data communication applications. The Company currently
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.
ACQUISITIONS/DIVESTITURES
Over the past several years, the Company has pursued strategic acquisitions.
More recently, however, in an effort to focus limited engineering resources on
higher return product lines, the Company has selectively pruned its product
portfolio.
In the second quarter of fiscal 1993, the Company acquired Avasem Corporation
("Avasem"), a privately held company producing 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.,
("Turtle Beach") 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 solely
in exchange of common stock of the Company, and were accounted for as pooling of
interests. Accordingly, all financial information for periods prior to the
acquisition has been restated to reflect the combined operations of these
companies prior to the acquisition. In the third quarter of fiscal 1995, the
Company acquired a 51% interest in ARK Logic, Inc., ("ARK Logic") 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 upgrade product lines of Value Media, Inc., ("Value Media")
a privately held company that developed and marketed multimedia peripheral kits
for PCs. These two acquisitions were accounted for using the purchase method of
accounting. In the third quarter of fiscal 1997, the Company acquired
MicroClock, Inc., a leading producer of clock synthesizer integrated circuits
for multimedia applications including PC, audio, digital set-top boxes, DVD, PC
networking disk drives and modems. This acquisition was accounted for using the
purchase method, and accordingly that
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operation is now included in the Company's consolidated financial statements
from the date of the acquisition.
In the first quarter of fiscal 1997, the Company sold Galaxy Power, Inc.,
containing its battery charge controller product line, to Edward H. Arnold,
former chairman and CEO of the Company in a tax-free transaction in which a gain
was recorded. In the second quarter of fiscal 1997, Turtle Beach merged with
Voyetra Technologies, Inc., ("Voyetra") a supplier of music and audio software
and the Company thereby exchanged its approximately 87% interest in Turtle Beach
for an approximately 35% interest in the combined entity. There was no gain or
loss recorded on this transaction and the Company has since accounted for its
investment in Voyetra using the equity method. During the fourth quarter of
fiscal 1997, the Company determined that significant events and changes in
circumstances had occurred that indicated it was probable that its investment in
Voyetra would not be reasonable and accordingly recorded an impairment loss on
this investment. In the fourth quarter of fiscal 1997, the Company sold for cash
approximately 80 percent of its equity position in ARK Logic, Inc., which was
previously recorded as discontinued operations in the third quarter of fiscal
1997, to Vision 2000 Ventures, Ltd., a privately held Cayman Islands investment
holding company. The Company now owns approximately 11 percent.
PRODUCTS AND PRODUCT APPLICATIONS
---------------------------------
FREQUENCY TIMING GENERATORS
MOTHERBOARD AND PERIPHERAL APPLICATIONS. The Company supplies a broad line of
FTG products for use in PC motherboard and peripheral applications, which
provide the numerous frequency outputs required for various timing functions
required by personal 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 and communication ports. The Company has continued to expand its
presence in this market, and products designed for these applications
contributed over 90% of the Company's FTG revenues in fiscal 1997.
Major OEM customers in fiscal 1997 include: Intel, Compaq, IBM, Hewlett-Packard
and Seagate.
COMMUNICATIONS APPLICATIONS. The Company also supplies high frequency (900 MHz
and higher) FTGs for communication applications. To date, communications
applications of this nature have not been significant, and high-frequency FTGs
for this application comprised less than 10% of its total FTG revenue in fiscal
1997. The Company's goal is to increase its penetration of the market by, among
other things, introducing new products for wireless communications and hardware
to support new standards for USB and IEEE 1394 ("firewire").
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DATA COMMUNICATIONS
The Company has also 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 applications and
the Fast Ethernet market. During the fourth quarter 1996, the Company
introduced a single chip, CMOS, 10/100 megabit per second PHYceiver/TM/ product
for Fast Ethernet applications. In fiscal 1997, the Company sold over 1 million
of these chips to customers such as Compaq, Hitachi, Hewlett Packard, Lexmark,
Racore and Silicon Graphics. The Company believes that transition to Fast
Ethernet in the LAN marketplace continues to offer opportunities for the
Company's communication products.
ADVANCED TECHNOLOGIES
The Company has developed and sold leading edge mixed-signal ICs customized to
specific needs of 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.
Certain of the Company's custom IC products are sold into the medical market for
applications which include a blood glucose measurement instrument and hearing
aids. 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.
TURTLE BEACH SYSTEMS. On November 29, 1996, Turtle Beach and Voyetra entered
into an Agreement and Plan of Merger, (the "Merger Agreement") pursuant to which
the Company's 87% interest in Turtle Beach was in exchange for an approximately
35% equity interest in the combined business. Effective November 29, 1996, the
Company accounted for its investment in Voyetra under the equity method of
accounting, and recorded an impairment loss on this investment in the fourth
quarter of fiscal 1997 (see Management's Discussion & Analysis, pg. 17 for
additional details).
ARK LOGIC. ARK Logic supplies 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. During the third quarter of fiscal 1997, the Company made a strategic
decision to dispose of its majority interest in ARK Logic. Accordingly, the
Company presented ARK Logic as a discontinued operation and all prior periods
have been restated to reflect this presentation. Revenues from ARK Logic for
fiscal 1997, 1996 and 1995 were $1.8 million, $10.2 million and $6.6 million,
respectively. Subsequently, on June 17, 1997, the Company sold most of its
interest in ARK Logic. The Company continues to hold an 11% equity interest in
ARK Logic.
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SALES AND MARKETING
-------------------
The Company markets its IC component products worldwide through a network of
independent sales representatives and distributors managed by a direct sales
force of employees. During fiscal 1997, the Company conducted its direct sales
efforts through its offices in Norristown, PA, San Jose, CA and Taipei, Taiwan.
The Company has over 400 OEM customers, including Compaq, DEC, Fujitsu Devices,
Hewlett Packard, IBM, Intel, SCI, Silicon Graphics, Solectron, and Sun
Microsystems. No customer represented 10% or more of the Company's revenues in
fiscal 1997.
Foreign sales are directly conducted by sales representatives and distributors
located in the Pacific Rim and Europe, and managed through a Taiwan sales office
and San Jose facility. Foreign sales are denominated in U.S. dollars and are
subject to risks common to export activities, including governmental regulation
and trade barriers.
At June 28, 1997, the Company's backlog was approximately $35.5 million, as
compared to $21.7 million at June 29, 1996. 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 within 60 days advance notice
without significant penalty to the customers. The Company has experienced a
reduction in customer 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.
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
-------------
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 0.5 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. The Company has an
outstanding wafer supply contract with Chartered Semiconductor Manufacturing PTE
Ltd. ("CSM") pursuant to which the Company is required to place a deposit of
$10.0 million in exchange for a commitment by CSM to supply an agreed minimum
quarterly quantity of wafers over a five-year period from April 1996 through
December 2000. The Company has also outstanding a similar agreement with one of
its other wafer suppliers, American Microsystems, Inc.
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During the fourth quarter of fiscal 1997, the Company initiated plans to set up
a test and drop-ship facility in Singapore's Kolam Ayer Industrial PARK to
achieve faster delivery of its products to customers throughout the Pacific Rim.
The Singapore facility will handle wafer probe and final testing for various
integrated circuits used in personal computers, data storage devices and other
peripheral applications. As contemplated, the facility will begin operation in
the first quarter of fiscal 1998, and will eventually be capitalized to test and
ship in excess of 40 million devices annually.
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 $13.5 million, $10.5 million and $11.0 million
in fiscal 1997, 1996 and 1995, respectively, and include expenses related to the
development of the Company's recently introduced data communication products as
well its FTG and custom ASIC products. Such expenses typically include costs
for engineering personnel, prototype and wafer mask costs, and investment 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.
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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. No single license,
however, 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 intellectual property rights
in the final product to its customer. Such transfers are 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 networking transceiver markets. In order to succeed, the
Company may occasionally 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
----------------------------------------------------------
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
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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, there is a risk of product obsolescence, and revenue may be
adversely affected 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 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
testing 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
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investment community, there could be an immediate adverse effect on the trading
price of the Company's common stock.
The Company has been active in mergers and acquisitions. Risk exists that one
or more failed acquisitions, including inefficient integration of the acquired
business, could have a material adverse effect.
EXECUTIVE OFFICERS OF THE REGISTRANT
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The following sets forth certain information with regard to executive officers
of Integrated Circuit Systems, Inc.
<TABLE>
<CAPTION>
Name Age Position
-------------------- --------- -----------------------------------------------------
<S> <C> <C>
Henry I. Boreen 70 Chairman of the Board
Stavro E. Prodromou 53 President and Chief Executive Officer
Hock E. Tan 45 Senior Vice President, Chief Operating Officer and
Chief Financial Officer
Martin Goldberg 50 Vice President of Sales
K. Venkateswaren 53 Vice President, Data Communications Group
Greg Richmond 37 Vice President, Frequency Timing Generator Group
</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 has over 35 years of experience in the
integrated circuits industry, and was the founder and chairman of Solid State
Scientific, a semiconductor manufacturer.
Dr. Prodromou served as President and Chief Executive Officer since April 1997.
Dr. Prodromou became a director of the Company in October 1993. Dr. Prodromou
has been Chairman, President and Chief Executive Officer of Palo Alto Digital
Systems, Inc. from 1991 to 1997. In addition, Dr. Prodromou has been President
of Underscore Technologies since early 1996. From 1987 to 1991, Dr. Prodromou
served as President and Chief Executive Officer of Poqet Computer Corporation.
Dr. Prodromou has served as Executive Vice President of Fairchild Semiconductor
Corporation, and in executive and technical management positions with General
Electric Company, Mattel Electronics and Texas Instruments. Dr. Prodromou holds
an MS and Ph.D. from the Polytechnic Institute of New York.
Mr. Tan has served as Senior Vice President and Chief Financial Officer since
February 1995 after joining the Company in August 1994. In April 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.
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Mr. Goldberg was appointed Vice President of Sales in November 1996. Prior to
this, since 1995, he was President and Chief Executive Officer of Turtle Beach
Systems. He joined the Company as the Director of Far East Sales in 1993. From
1990 to 1993, Mr. Goldberg served as Vice President, Business Development, for
Harris Adacom Corporation, and prior to that was Vice President and Chief
Operating Officer for Datapoint Corporation. His career also includes senior
level sales and marketing positions with Alpha Micro Systems, SEEQ Technology,
and United Technologies. Mr. Goldberg graduated from Long Island University
with a BS in Physics.
Dr. Venkateswaren has served as Vice President, Data Communications Group since
December 1996. He was one of the founders of Avasem Corporation and, since 1982,
had been Vice President of Engineering of Avasem (and the Company after its
acquisition of Avasem). Dr. Venkateswaren has also served in senior design
engineering positions with Fairchild Semiconductor and Rockwell International.
Dr. Venkateswaren holds a M.Tech. in Electrical Engineering from the Indian
Institute of Technology, Bombay, India, and a Ph.D. in Electrical Engineering
from the University of Waterloo, Canada. He did Post-Doctoral Fellowships at
the University of Waterloo, Canada and the University of California.
Mr. Richmond has been Vice President, Frequency Timing Generator Group, since
February 1996. He joined the Company in 1993 as the Director of Engineering,
Frequency Timing Generators Group. He held senior engineering positions at EXAR
Corporation from 1986 to 1993, and at International Microcircuits Inc. from 1982
to 1986. Mr. Richmond holds a B.S.E.E. from Walla Walla College and an M.S.E.E.
from Stanford University.
EMPLOYEES
---------
As of June 28, 1997, the Company had 177 full-time employees, 67 of whom were
engaged in research and development, 48 in sales, marketing and technical
support, 25 in finance and administration, and 37 in manufacturing support and
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 a sales office located in Taipei, Taiwan, which
consists of 1,300 square feet of office space leased pursuant to an agreement
which expires in October 1997.
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The Company also utilizes a test and drop-ship facility located in Singapore,
which consists of 16,000 square feet of space leased pursuant to an agreement
which expires in February 2001. The space is used for testing, sales and
administration.
The Company also utilizes a West Coast facility located in San Jose, California,
which 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. 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 have not been adequately reserved or 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".
In connection with the merger of Turtle Beach and Voyetra, the Company and
Voyetra have asserted various claims against each other. However, the Company's
management is of the belief that resolution of such claims would not be likely
to have a material adverse effect on the Company's consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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, options on
the Company's common stock are traded on the Chicago Board Options Exchange.
Below are the quarterly high and low closing sale prices of the Company's common
stock for the fiscal years ended 1997 and 1996, as reported by the "NASDAQ Stock
Market".
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
High Low High Low
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<S> <C> <C> <C> <C>
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First quarter ended Sept 28 and Sept 29 $12.625 $ 6.875 $18.875 $13.625
Second quarter ended Dec 28 and Dec 30 14.125 10.250 15.875 10.750
Third quarter ended Mar 29 and Mar 30 17.500 13.000 12.250 6.500
Fourth quarter ended Jun 28 and Jun 29 22.725 12.625 14.750 9.625
</TABLE>
On June 28, 1997, there were approximately 218 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.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
June 28 June 29 June 30
-----------------------------
1997 1996 1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues $104,359 $91,330 $97,745 $93,824 $77,577
Cost of sales 59,137 54,848 45,649 45,798 37,312
Research and development 13,521 10,547 10,995 10,647 9,156
In process research and development costs 11,196 1,500 -- -- --
Operating income 5,387 4,200 13,223 18,110 17,440
Income (loss) from continuing operations (7,510) 4,636 8,483 12,218 10,690
Loss from discontinued operations (909) (721) (3,560) -- --
Net income (loss) (8,419) 3,915 4,923 12,218 10,690
Primary earnings (loss) per common and common
equivalent share (continuing operations) $ (0.65) $ 0.40 $ 0.77 $ 1.11 $ 1.06
Primary earnings (loss) per common and common
equivalent shares (discontinued operations) (0.08) (0.06) (0.32) -- --
-------------------------------------------------
Primary earnings (loss) per common and common
equivalent shares $ (0.73) $ 0.34 $ 0.45 $ 1.11 $ 1.06
=================================================
Primary shares used in computing earnings (loss)
per common and common equivalent share 11,474 11,592 11,045 11,051 10,085
=================================================
Fully diluted earnings (loss) per common and
common equivalent shares (continuing operations) $ (0.65) $ 0.40 $ 0.74 $ 1.10 $ 1.04
Fully diluted earnings (loss) per common and
common equivalent shares (discontinued operations) (0.08) (0.06) (0.31) -- --
-------------------------------------------------
Fully diluted earnings (loss) per common and
common equivalent shares $ (0.73) $ 0.34 $ 0.43 $ 1.10 $ 1.04
=================================================
Fully diluted shares used in computing
earnings (loss) per common and common equivalent shares 11,474 11,598 11,424 11,070 10,304
=================================================
June 28 June 29 June 30
-----------------------------
1997 1996 1995 1994 1993
-------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $ 48,260 $48,023 $45,470 $35,227 $32,246
Total assets 90,622 87,570 77,691 73,452 55,034
Long-term debt, less current portion 1,503 1,631 3,480 3,775 3,780
Shareholders' equity 70,147 69,164 62,484 55,726 41,434
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT FISCAL YEAR 1997 TRANSACTIONS
On November 29, 1996 the Company signed an Agreement and Plan of Merger (the
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach
Systems to Voyetra Technologies Inc. ("Voyetra") in exchange for an
approximately 35% equity interest in Voyetra. Commencing with the date of the
Merger Agreement, the Company accounts for its investment in Voyetra under the
equity method of accounting. In the fourth quarter of fiscal 1997, the Company
recognized an impairment of the asset of approximately $7.1 million, as further
discussed below.
On February 28, 1997 the Company acquired all the capital stock of MicroClock,
Inc. ("MicroClock"), a producer of clock synthesizer integrated circuits for
multimedia applications. The acquisition was accounted for under the purchase
method of accounting and resulted in a special charge of $11.2 million related
to the write-off of in process research and development costs and the recording
of goodwill of $1.7 million, which will be amortized over the next 7 years. The
operating results of MicroClock have been recorded in the Company's statements
since the date of acquisition.
During the quarter ended March 29, 1997, the Company announced its decision to
dispose of its majority interest in ARK Logic within a 12-month period.
Accordingly, the Company has since presented ARK Logic as a discontinued
operation, and all prior periods have been restated to reflect this
presentation. Following this, on June 17, 1997, the Company completed the sale
of approximately 80% of its holding in ARK Logic to Vision 2000 Ventures, Ltd.,
an investment holding company. Revenues from ARK Logic were $1.8 million, $10.2
million and $6.6 million for fiscal years 1997, 1996 and 1995, respectively.
The Company maintains an 11% interest in ARK Logic.
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.
14
<PAGE>
(Expressed as a percentage of total revenue)
<TABLE>
<CAPTION>
Year Ended
------------------------------
June 28 June 29 June 30
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 56.7 60.1 46.7
Research and development expense 13.0 11.5 11.3
Selling, general and administrative
expense 14.5 20.2 20.9
Special charges:
Change in business strategies -- -- 3.9
Discontinued product lines -- -- 3.7
Facility closing -- 1.9 --
Write-off of in-process research and development costs 10.6 1.7 --
------------------------------
Operating income 5.2 4.6 13.5
Interest and other income (1.7) (1.5) (1.2)
Interest expense 0.6 0.6 0.7
Impairment in equity investment 6.8 -- --
Minority interest (0.1) (1.1) --
Equity loss of investee 0.8 -- --
------------------------------
Income (loss) before income taxes and discontinued
operations (1.2) 6.6 14.0
Income tax expense 6.0 1.5 5.3
------------------------------
Income (loss) from continuing operations (7.2) 5.1 8.7
Income (loss) from discontinued operations (0.9) (0.8) (3.7)
------------------------------
Net income (loss) (8.1%) 4.3% 5.0%
==============================
</TABLE>
REVENUE
The Company achieved revenue of $104.4 million in fiscal year 1997, as compared
to $91.3 million and $97.7 million in fiscal years 1996 and 1995, respectively.
This increase in fiscal 1997 revenue was primarily attributable to increased
volume shipments of FTG products and the introduction of Data Communication
transceiver products, partially offset by the deconsolidation of Turtle Beach,
effective in the second quarter of fiscal 1997.
FREQUENCY TIMING GENERATORS
FTG components for motherboard and peripheral applications for PCs contributed
approximately 53.7%, 45.6% and 51.5% of total revenue in fiscal years 1997, 1996
and 1995, respectively. This increase over fiscal 1996 is largely attributable
to market share gains, which includes 3.6% growth as a result of the acquisition
of MicroClock. Although the market for FTG motherboard and PC peripheral
applications will continue to be a major source of revenue, the Company intends
to increase its presence in the applications of wireless communications and
consumer electronics, which comprised less than 10% of total FTG revenue in
fiscal 1997.
15
<PAGE>
DATA COMMUNICATIONS
Data Communication component revenue represented approximately 15.4% of total
revenue in fiscal year 1997, with very little corresponding revenue in the prior
year, reflecting introduction of the new 1890 transceiver at the end of fiscal
1996.
ADVANCED TECHNOLOGIES
Revenue from Advanced Technologies comprised 24.4%, 30.8% and 36.0% of total
revenue in fiscal years 1997, 1996 and 1995, respectively, and includes
engineering and design revenue representing reimbursement of research and
development expenditures. The declining trend in advanced technology products,
as a percentage of revenue, reflects overall increases in revenue from FTG and
Data Communication components.
TURTLE BEACH
As a result of the merger of Turtle Beach and Voyetra, the revenues of Turtle
Beach were de-consolidated from November 30, 1996. The Company's 35% share of
net losses at Voyetra was recorded under the equity method of accounting.
Accordingly, revenues were 6.5% of total revenues in fiscal 1997, as compared to
23.3% in fiscal 1996 and 12.5% in fiscal 1995.
During the fourth quarter of fiscal 1997, the Company determined that
significant events and changes in circumstances had occurred that indicated it
was probable that its investment in Voyetra would not be recoverable.
Accordingly, the Company recorded an impairment loss of approximately $7.1
million on its investment in Voyetra in the fourth quarter of 1997.
FOREIGN REVENUE
Foreign revenue, which resulted primarily from sales to offshore customers was
60.3%, 46.8% and 55.1% of total revenue in fiscal years 1997, 1996 and 1995,
respectively. The increase in fiscal 1997 reflects significant growth in Far
East markets. The Company's sales are denominated in U.S. dollars.
BACKLOG
Backlog was $35.5 million at June 28, 1997, compared to $21.7 million at June
29, 1996, and $32.7 million at June 30, 1995. The Company has experienced a
reduction in customer order lead times for its IC products and its "turns"
business (i.e., orders placed by customers for immediate or short-term delivery)
has grown to a significant share of its quarterly revenue. The increase in
fiscal 1997 is primarily due to the Company's introduction of the 1890
transceiver 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, shipping, quality control and
manufacturing support operations. Cost of sales as a percentage of total
revenue was 56.7% in fiscal 1997, as compared to 60.1% in fiscal 1996 and 46.7%
in fiscal 1995. The decrease in the cost of sales in fiscal year 1997 reflects
reduced costs and favorable product mix.
16
<PAGE>
RESEARCH & DEVELOPMENT
Research and development expense expressed as a percentage of revenue was 13.0%
in fiscal 1997, as compared to 11.5% in fiscal year 1996, and 11.3% in fiscal
1995. In dollar terms, research and development spending increased 28.2% from
fiscal year 1996 to 1997, primarily as a result of the hiring of additional
engineering personnel, investment in new design tools, and increased activity
related to new product development and enhancement programs for existing
standard products.
SELLING, GENERAL AND ADMINISTRATION
Selling, general and administration expense represents 14.5%, 20.2% and 20.9% of
total revenues in fiscal years 1997, 1996 and 1995, respectively. In monetary
terms, expenses have decreased 9.6% from fiscal 1995 to fiscal 1996, and
decreased 18.2% from fiscal 1996 to fiscal 1997. The primary reason for the
decrease in fiscal 1997 is the deconsolidation of Turtle Beach and in addition,
the Company has implemented tight fiscal controls which have decreased spending.
OPERATING INCOME
Expressed as a percentage of revenue, operating income was 5.2%, 4.6% and 13.5%
in fiscal years 1997, 1996 and 1995, respectively. In dollar terms, operating
income was $5.4 million in fiscal year 1997 compared to $4.2 million and $13.2
million in fiscal years 1996 and 1995, respectively. Fiscal 1997 includes a
special charge of $11.2 million as a result of the write-off of in-process
research and development costs arising from the acquisition of MicroClock.
Fiscal 1996 includes special 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 special charges
of $7.4 million primarily associated with 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. Accordingly,
operating income before special charges was 15.8% of revenue in fiscal year
1997, as compared to 8.2% and 21.1% in fiscal 1996 and 1995, respectively.
EQUITY INVESTMENT AND MINORITY INTEREST
On November 29, 1996, the Company signed a Merger Agreement to merge Turtle
Beach Systems with Voyetra in exchange for an approximately 35% equity interest
in the combined business. In connection with the merger, the Company also
entered into a Revolving Credit Agreement and Note ("Revolving Credit
Agreement") with Voyetra, pursuant to which the Company has agreed to make loans
to Voyetra up to an aggregate of $3.5 million, subject to certain covenants. The
Company accounts for its investment in Voyetra under the equity method of
accounting, and recorded an impairment loss on this investment in the fourth
quarter of fiscal 1997. The minority interest represents the ownership interest
in Turtle Beach Systems that the Company did not own prior to the merger.
17
<PAGE>
During the fourth quarter of fiscal 1997 the Company determined that significant
events and changes in circumstances had occurred subsequent to the merger that
indicated it was probable that its investment in Voyetra would not be
recoverable. In the opinion of the Company's management, Voyetra was
experiencing an adverse shift in the fundamentals of its business which resulted
in deteriorating gross profit margins and a substantial increase in operating
losses. In addition, during the fourth quarter of fiscal 1997 the Company
notified Voyetra that they had violated certain covenants and were in default
under the Revolving Credit Agreement (see Related Party footnote 19). As such,
the Company is under no obligation to provide financing under the Revolving
Credit Agreement. Management of the Company believes that other alternatives for
third party financing for Voyetra are limited. As a result of these significant
events in the fourth quarter, management of the Company estimated that the
undiscounted cash flows anticipated for Voyetra would not be sufficient to
recover the carrying value of the Company's investment and a write-down to fair
value was required. Consequently, in the fourth quarter of fiscal 1997, the
Company recorded an impairment loss of $7.1 million on its investment in Voyetra
which is included in the Statement of Operations as Impairment in equity
investment.
The Company and Voyetra have asserted various claims against each other.
However, the Company's management is of the belief that resolution of such
claims would not be likely to have a material adverse effect on the Company's
consolidated financial condition.
INCOME TAXES
After adjusting for minority interest and equity investment, the Company's
effective tax rate related to income from continuing operations was 95.8%, 27.8%
and 37.8% for fiscal years 1997, 1996 and 1995, respectively. The increased
effective tax rate for fiscal 1997 includes a $11.2 million non-deductible
intangible write-off related to the acquisition of MicroClock, Inc. and a $7.1
million capital loss for the impairment of the Voyetra investment. The reduced
effective income tax rate for fiscal 1996 reflects a favorable $1.1 million
reversal in estimate for state taxes.
18
<PAGE>
NET INCOME (LOSS)
Fiscal 1997 reflects a net loss of $8.4 million or $0.73 per share for fiscal
1997, as compared to net income of $3.9 million or $0.34 per share for fiscal
1996, and $4.9 million or $0.45 per share for fiscal 1995. Excluding special
charges, equity investment and minority interest, however, net income for fiscal
year 1997 was $10.6 million or $0.92 per share, compared to $6.0 million or
$0.52 per share for fiscal year 1996, and $12.4 million or $1.12 per share for
fiscal 1995.
DISCONTINUED OPERATIONS
During the third quarter of fiscal 1997, the Company implemented a plan, with
approval by the Board of Directors, to dispose of its majority interest in their
subsidiary, ARK Logic, within a 12-month period. Unlike the Company's core
business of developing mixed signal components, ARK Logic uses different design
tools and technology to engineer complex digital circuits. Accordingly, the
Company has presented ARK Logic as discontinued operations and all prior periods
have been restated to reflect this presentation. The Company recorded a charge
of $1.5 million in the third quarter, including severance and facility
termination costs. Subsequently, on June 17, 1997, the Company sold
approximately 80% of its holdings in ARK Logic to Vision 2000 Ventures, Ltd for
which a gain of $2.4 million, including the reversal of severance and facility
termination accruals, was recorded. The Company maintains an 11% interest in
ARK Logic.
LIQUIDITY, CAPITAL RESOURCES AND INFLATION
On June 28, 1997, the Company's principal sources of liquidity included
approximately $26.4 million in cash and investments, as compared to $27.4
million at June 29, 1996. The investments primarily consist of commercial
paper, government bonds and marketable securities with various maturities up to
about one year. During fiscal year 1997, the Company generated $10.3 million in
cash from its operating activities, as compared to $11.5 million during fiscal
year 1996. The decrease in fiscal year 1997 was primarily due to increases in
accounts receivable as a result of revenue increases partially offset by
increased accounts payable. Notwithstanding, the Company's days sales
outstanding was reduced from 63 days in fiscal 1996 to 51 days in fiscal 1997,
while inventory turns increased from 3.7 times in fiscal 1996 to 4.2 times in
fiscal year 1997.
Expenditures for property and equipment were $3.4 million in fiscal year 1997 as
compared to $4.4 million in fiscal year 1996. The Company intends to continue
to invest in capital equipment to support continued growth.
During fiscal year 1997, the Company engaged in certain transactions which had
material impact on its cash flows. During fiscal 1997, under its existing wafer
supply contract with Chartered Semiconductor Manufacturing PTE, Ltd. ("CSM"),
the Company advanced to CSM deposits totaling $6.0 million as part of a
commitment for CSM to supply an agreed minimum quantity of wafers over a five-
year period from April 1996 through December 2000. In addition, CSM agreed to
provide to the Company favored pricing as part of such commitment. Under its
agreement with CSM, the Company will be required to increase its deposit to up
to $10.0 million during the five-year term. The contract requires CSM to refund
the Company's deposit by progressive installments based upon the volume of
purchases made by the Company. The Company had previously entered into a
similar agreement with one of its other wafer suppliers, American Microsystems,
Inc., by which deposits totaling $5.5 million were placed and $2.0 million
repaid during fiscal 1997.
19
<PAGE>
On February 28, 1997 the Company acquired all the capital stock of MicroClock, a
producer of clock synthesizer integrated circuits for multimedia applications,
for approximately $16.4 million satisfied in the form of approximately $6.4
million in cash and 608,504 shares of ICS common stock. The Company's shares
exchanged in the transaction are restricted for one year, therefore, the shares
were valued at a discount from the closing price on the date of issuance based
on an independent valuation. The acquisition was accounted for under the
purchase method of accounting and resulted in a charge of $11.2 million related
to the write-off of in process research and development costs and the recording
of goodwill of $1.7 million, which will be amortized over the next 7 years.
Revenues and results of operations of MicroClock were not significant to the
Company's consolidated statement of operations for the year ended June 29, 1997.
On November 29, 1996, the Company signed a Merger Agreement to sell its
approximately 87% interest in Turtle Beach to Voyetra in exchange for an
approximately 35% equity interest in Voyetra. Voyetra is a supplier of music and
audio software. The Company deconsolidated Turtle Beach and accounted for its
investment using the equity method. In connection with the merger, the Company
also entered into a Revolving Credit Agreement with Voyetra, pursuant to which
the Company has agreed to make loans to Voyetra up to an aggregate of $3.5
million, subject to certain restrictions and covenants. As of June 28, 1997,
Voyetra was not in compliance with certain covenants. As such, the Company has
decided to cease funding under the Revolving Credit Agreement.
Reflecting an adverse shift in the fundamentals of the business of Voyetra, as
well as the PC audio upgrade industry during the fourth quarter of 1997, the
Company recorded an impairment loss of $7.1 million on its investment in
Voyetra. This impairment loss was based on the decline in the financial results
of Voyetra, and a determination that the undiscounted cash flows from the
business would not be sufficient to recover the carrying value of the Company's
investment. The Company and Voyetra have asserted various claims against each
other. However, the Company's management is of the belief that resolution of
such claims would not likely have a material adverse effect on the Company's
consolidated financial position.
On June 17, 1997, the Company sold approximately 80% of its share holdings in
ARK Logic to Vision 2000 Ventures, Ltd. for cash of approximately $2.4 million,
of which 20% is held in escrow. As part of such divestiture, a shareholders'
agreement, which was put in place pursuant to terms of the acquisition of a 51%
interest in ARK Logic in fiscal 1995 and which could require the Company to buy
the remaining 49% minority interest in ARK Logic at a future period, was
terminated.
During fiscal 1997, stock repurchased, net of proceeds from stock options
exercised, was $0.3 million, versus $2.4 million in the prior year.
During fiscal 1996, the Company renegotiated its $20 million 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 28, 1997. On June 28, 1997, there was no balance outstanding under
this facility, reflecting repayment of $2.3 million drawn down on the credit
line in the prior year.
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
20
<PAGE>
through the next fiscal year. 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.
Inflation has not had a significant impact on the Company.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has not adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which will become effective in the second quarter of
fiscal 1998. 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. 130,
"Reporting Comprehensive Income", which will become effective for fiscal year
1999. 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. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
will become effective for fiscal year 1999. The Company believes that the
adoption of this statement will not have a material financial impact.
UPDATE ON IMPACT OF SPECIAL CHARGES TAKEN IN FY 1996 AND FY 1995
The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a
special charge of $11.5 million (which includes $4.1 million related to
discontinued operations) taken during the third quarter of fiscal 1995. The
actions contemplated by this charge have largely been accomplished and the
expected saving has been realized. The charge will not affect future cash
outflows, as all obligations have been met.
The Company's Form 10-Q for the second quarter of fiscal 1996 discussed a
special charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. The Company generated annual savings of approximately $0.6
million, primarily as a result of the reductions in personnel and associated
overhead. Of the total charge, approximately $2.3 million, net of tax, was
related to non-cash items. The charge will not affect future cash outflows, as
all obligations have been met.
21
<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 28, 1997 and June 29, 1996,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 28, 1997.
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 28, 1997. 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 28, 1997 and June 29, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 28, 1997, 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
August 4, 1997
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 28 June 29
Assets 1997 1996
-------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $18,425 $27,376
Marketable securities - current 7,981 24
Accounts receivable, net 20,690 13,705
Inventory, net 13,542 16,237
Deferred income taxes 1,139 2,475
Other current assets 4,435 2,976
-------------------
Total current assets 66,212 62,793
Property and equipment, net 14,104 14,135
Net assets of discontinued operations -- 3,294
Deposits on purchase contracts 8,000 5,575
Goodwill, net 1,600 1,495
Other assets 706 278
-------------------
Total assets $90,622 $87,570
====================
Liabilities and Shareholders' Equity
Current Liabilities:
Note payable to bank $ -- $ 2,315
Current portion of long-term obligations 206 117
Accounts payable 12,565 9,648
Accrued salaries and bonuses 935 460
Accrued expenses and other current liabilities 1,900 2,230
Income taxes payable 2,346 --
-------------------
Total current liabilities 17,952 14,770
Long-term debt, less current portion 1,503 1,631
Deferred income taxes and other liabilities 1,020 788
-------------------
Total liabilities 20,475 17,189
-------------------
Minority interest -- 1,217
Commitments (notes 5 and 11) -- --
Shareholders' Equity:
Preferred stock, authorized 5,000 shares, none
issued -- --
Common stock, no par value, authorized 50,000
shares; issued 12,445 and 11,389 shares at 45,366 32,674
June 28, 1997 and June 29, 1996, respectively
Less treasury stock, at cost (286 and 35 shares at
June 28, 1997 and June 29, 1996, respectively) (3,749) (460)
Currency translation adjustment (1) --
Retained earnings 28,531 36,950
-------------------
Total shareholders' equity 70,147 69,164
-------------------
Total liabilities and shareholders' equity $90,622 $87,570
===================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended
------------------------------
June 28 June 29 June 30
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Revenue $104,359 $91,330 $97,745
Cost and expenses:
Cost of sales 59,137 54,848 45,649
Research and development expense 13,521 10,547 10,995
Selling, general and administrative expense 15,118 18,478 20,450
Special charges:
Change in business strategies -- -- 3,822
Discontinued product lines -- -- 3,606
Facility closing -- 1,757 --
Write-off of in-process research and development costs 11,196 1,500 --
------------------------------
Operating income 5,387 4,200 13,223
Interest and other income (1,800) (1,332) (1,126)
Interest expense 599 578 715
Impairment in equity investment 7,072 -- --
Minority interest (154) (1,058) --
Equity loss of investee 866 -- --
------------------------------
Income (loss) before income taxes from continuing operations (1,196) 6,012 13,634
Income tax expense 6,314 1,376 5,151
------------------------------
Income (loss) from continuing operations (7,510) 4,636 8,483
Discontinued operations
Loss from operations (1,773) (721) (3,560)
Gain on disposal 864 -- --
------------------------------
Loss from discontinued operations (909) (721) (3,560)
------------------------------
Net income (loss) $ (8,419) $ 3,915 $ 4,923
==============================
Primary earnings (loss) per common and common equivalent
share:
Income (loss) from continuing operations $ (0.65) $ 0.40 $ 0.77
Loss from discontinued operations (0.15) (0.06) (0.32)
Gain on disposal 0.07 -- --
------------------------------
$ (0.73) $ 0.34 $ 0.45
==============================
Fully diluted earnings (loss) per common and common
equivalent share:
Income (loss) from continuing operations $ (0.65) $ 0.40 $ 0.74
Loss from discontinued operations (0.15) (0.06) (0.31)
Gain on disposal 0.07 -- --
------------------------------
$ (0.73) $ 0.34 $ 0.43
==============================
Shares used to compute earnings (loss) per common
and common equivalent share:
Primary 11,474 11,592 11,045
==============================
Fully diluted 11,474 11,598 11,424
==============================
</TABLE>
24
<PAGE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Total Number of
Common Treasury Retained Shareholders' Shares
Stock Stock Earnings Currency Equity Outstanding
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 $27,614 $ -- $28,112 $-- $ 55,726 10,828
Shares issued upon exercise of stock options 1,440 -- -- -- 1,440 282
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 options 2,811 -- -- -- 2,811 279
Tax benefits related to stock options 506 -- -- -- 506 --
Purchase of common stock -- (460) -- -- (460) (35)
Subsidiaries equity transaction (92) -- -- -- (92) --
Net income -- -- 3,915 -- 3,915 --
----------------------------------------------------------------------
Balances at June 29, 1996 32,674 (460) 36,950 -- 69,164 11,354
Shares issued upon exercise of stock options 10,807 -- -- -- 10,807 1,056
Tax benefits related to stock options 2,039 -- -- -- 2,039 --
Purchase of common stock -- (10,466) -- -- (10,466) (792)
Acquisition of MicroClock, Inc. 34 7,966 -- -- 8,000 609
Sale of Galaxy Power -- (789) -- -- (789) (68)
Subsidiaries equity transactions (188) -- -- -- (188) --
Currency translation adjustment -- -- -- (1) (1) --
Net loss -- -- (8,419) -- (8,419) --
----------------------------------------------------------------------
Balances at June 28, 1997 $45,366 $ (3,749) $28,531 $(1) $ 70,147 12,159
======================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
------------------------------
June 28 June 29 June 30
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,419) $ 3,915 $ 4,923
Increase (decrease) in cash to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,659 3,129 3,039
Minority interest and equity investment 7,492 (1,058) --
(Gain) loss on sale of assets (356) 42 63
Loss from discontinued operations 909 721 3,560
Deferred income taxes 1,541 866 (217)
Write-off of in-process research & development costs 11,196 1,500 --
Facility closing, non-cash portion -- 1,215 --
Change in business strategy charges, noncash portion -- -- 929
Write-down of discontinued product lines -- -- 3,606
Accounts receivable (8,808) 1,850 3,418
Inventory 2 (2,754) (3,256)
Other assets, net (687) 560 704
Accounts payable, accrued expenses and other liabilities 3,480 1,895 (592)
Income taxes 292 (405) (158)
------------------------------
Net cash provided by operating activities 10,301 11,476 16,019
------------------------------
Cash flows from investing activities:
Capital expenditures (3,358) (4,390) (3,508)
Proceeds from sale of fixed assets 107 129 745
Proceeds from sales of marketable securities 845 -- 2,004
Proceeds from sale of discontinued operations 1,925 -- --
Proceeds from maturities of marketable securities 10,499 18,316 13,309
Purchases of marketable securities (19,205) (5,940) (8,376)
Deposits on purchase contracts, net (4,002) (1,020) (5,500)
Investment in discontinued operations -- -- (7,466)
Investment in subsidiary, net of cash acquired (6,074) (986) --
------------------------------
Net cash provided by (used in) investing activities (19,263) 6,109 (8,792)
------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreement (2,315) 2,315 (867)
Repayments of long-term debt (138) (2,027) (375)
Decrease in bank overdrafts -- -- (2,061)
Exercise of stock options 10,807 2,811 1,440
Tax benefit of stock option exercise 2,039 506 395
Purchase of common stock (10,466) (460) --
Other 84 -- --
------------------------------
Net cash provided by (used in) financing activities 11 3,145 (1,468)
------------------------------
Net increase (decrease) in cash (8,951) 20,730 5,759
Cash and cash equivalents:
Beginning of year 27,376 6,646 887
------------------------------
End of year $ 18,425 $27,376 $ 6,646
==============================
Supplemental disclosures of cash information:
Cash payments during the period for:
Interest $ 58 $ 308 $ 304
==============================
Income taxes $ 2,336 $ 1,407 $ 6,120
==============================
</TABLE>
For a description of certain non-cash investing and financing transactions,
refer to footnotes 2 and 19.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company designs, manufactures and markets mixed signal integrated circuits
("ICs") primarily for timing and networking solutions for the PC industry and
also markets custom, application-specific ICs developed pursuant to product
development projects with selected customers.
(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. The effect of
adjustments to the Company's carrying values of subsidiaries resulting from
their underlying equity transactions is included in the Company's stockholders'
equity.
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 28, 1997 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 28, 1997 and June 29, 1996, 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 income. Realized gains and losses are
included in other income or expense.
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.
28
<PAGE>
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 7 years. Accumulated amortization was
$4.4 million and $0.2 million as of June 28, 1997 and June 29, 1996,
respectively. During the fourth quarter of 1997, the Company recorded an
impairment loss of $7.1 million, of which $3.9 million is related to goodwill.
This decision to record an impairment was based on the decline in the financial
results of Voyetra and a determination that the cash flows from the business
would not be sufficient to recover the carrying value of the Company's
investment. See footnote 3 for further details.
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 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) in fiscal year ending June 28, 1997. See footnote
3 for a discussion of an impairment charge in the Voyetra investment, which was
recorded in the fourth quarter of fiscal 1997.
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. Design revenue is recognized pursuant to development and production
contracts for custom ICs representing partial reimbursement of research and
development expenditures.
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 from specific customers is limited due to the large number of
customers and their dispersion across many geographic areas, however, there is a
substantial concentration in the personal computer industry. See footnote 18 for
geographic information.
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, which included Turtle Beach for the first five
months of the fiscal year 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).
29
<PAGE>
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 average or ending price, if higher, over the period), unless anti-dilutive.
No common stock equivalents were included in the fiscal 1997 calculation since
the effect would have been 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 adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which became effective
for the year ended June 28, 1997. The Company continues to apply APB25 and
related interpretation in accounting for its stock options to employees and
directors. See footnote 15 for pro forma disclosures.
Reclassification of Accounts
Certain reclassifications have been made to conform prior year's balances to the
current year presentation. During the third quarter of fiscal 1997, the Company
classified ARK Logic as discontinued operations, and all prior periods have been
restated to reflect this presentation.
New Accounting Pronouncements
The Company has not adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which will become effective in the second quarter of
fiscal 1998. 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. 130,
"Reporting Comprehensive Income", which will become effective for fiscal year
1999. 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. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
will become effective for fiscal year 1999. The Company believes that the
adoption of this statement will not have a material financial impact.
(2) ACQUISITIONS/MERGERS
On November 29, 1996 the Company signed an Agreement and Plan of Merger, (the
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach
Systems, Inc. ("Turtle Beach") to Voyetra Technologies Inc. ("Voyetra"), in
exchange for an approximately 35% equity interest in Voyetra. Voyetra is a
supplier of music and audio software. No gain or loss was initially recorded on
this transaction in accordance with APB 29 "Accounting for Nonmonetary
Transactions", which states that the exchange of similar productive assets
(i.e., investments accounted for by the equity method) not held for sale in the
ordinary course of business does not result in the culmination of the earnings
process. The Company's proportionate share of underlying equity in Voyetra was
approximately $3.5 million. The excess of the Company's carrying value over
their proportionate share of underlying
30
<PAGE>
equity was approximately $4.3 million. The Company accounts for its investment
in Voyetra under the equity method of accounting. In connection with the merger,
the Company also entered into a Revolving Credit Agreement and Note (the "
Revolving Credit Agreement") with Voyetra, pursuant to which the Company has
agreed to make loans to Voyetra up to an aggregate of $3.5 million, subject to
certain covenants. (See Related Party footnote 19). The Company recorded an
impairment loss on this investment in the fourth quarter of fiscal 1997. (See
Disposition/Impairment footnote 3).
On February 28, 1997 the Company acquired all the capital stock of MicroClock,
Inc. ("MicroClock"), a producer of clock synthesizer integrated circuits for
multimedia applications, for approximately $16.4 million satisfied in the form
of approximately $6.4 million in cash and 608,504 shares of ICS common stock.
The Company's shares exchanged in the transaction are restricted from sale for
one year, therefore, the shares were valued at a discount from the closing price
on the date of issuance based on an independent valuation. The acquisition was
accounted for under the purchase method of accounting and resulted in a charge
of $11.2 million related to the write-off of in-process research and development
costs and the recording of goodwill of $1.7 million, which will be amortized
over the next 7 years. Revenues and results of operations of MicroClock were not
significant to the Company's consolidated statement of operations for the year
ended June 29, 1997.
(3) DISPOSITIONS/IMPAIRMENT
In the first quarter of fiscal 1997, the Company sold its Galaxy Power, Inc.
subsidiary, which owned the assets related to the battery charge controller
product line, for $0.8 million to Edward H. Arnold, former Chairman and CEO of
the Company. The purchase consideration was satisfied by transfer of 68,387
shares of the Company's stock and was based on a valuation made by an
independent appraiser. See Related Party footnote (19).
During the third quarter of fiscal 1997, the Company implemented a plan, with
approval by the Board of Directors, to dispose of its majority interest in their
subsidiary, ARK Logic, within a 12-month period. Accordingly, the Company had
presented ARK Logic as discontinued operations and all prior periods have been
restated to reflect this presentation. The Company recorded a charge of $1.5
million in the third quarter, including severance and facility termination
costs. Subsequently, the Company sold approximately 80% of its holdings in ARK
Logic to Vision 2000 Ventures, Ltd. ("Vision 2000") for which a gain of $2.4
million, including the reversal of severance and facility termination accruals,
was recorded. The sale and purchase agreement required 20% of the sales price to
be held in escrow for two years. The amounts from discontinued operations are
not tax effected, as ARK Logic was not consolidated for tax purposes and ARK
Logic has net operating loss carryforwards. Revenues from ARK Logic for fiscal
1997, 1996 and 1995 were $1.8 million, $10.2 million and $6.6 million,
respectively.
31
<PAGE>
During the fourth quarter of fiscal 1997 the Company determined that significant
events and changes in circumstances had occurred subsequent to the merger that
indicated it was probable that its investment in Voyetra would not be
recoverable. In the opinion of the Company's management, Voyetra was
experiencing an adverse shift in the fundamentals of its business which resulted
in deteriorating gross profit margins and a substantial increase in operating
losses. In addition, during the fourth quarter of fiscal 1997 the Company
notified Voyetra that they had violated certain covenants and were in default
under the Revolving Credit Agreement (see Related Party footnote 19). As such,
the Company believes that it is under no obligation to provide financing under
the Revolving Credit Agreement. Management of the Company believes that other
alternatives for third party financing for Voyetra are limited. As a result of
these significant events in the fourth quarter, management of the Company
estimated that the undiscounted cash flows anticipated for Voyetra would not be
sufficient to recover the carrying value of the Company's investment and a
write-down to fair value was required. Consequently, in the fourth quarter of
fiscal 1997, the Company recorded an impairment loss of $7.1 million on its
investment in Voyetra which is included in the Statement of Operations as
Impairment in equity investment.
The Company and Voyetra have asserted various claims against each other.
However, the Company's management is of the belief that resolution of such
claims would not likely have a material adverse effect on the Company's
consolidated financial position.
(4) SPECIAL CHARGES
The Company's Form 10-Q for the third quarter of fiscal 1997, discussed a $11.2
million charge for write-off of in-process research and development cost as a
result of the MicroClock acquisition. The charge will not affect future cash
outflows.
The Company's Form 10-Q for the second quarter of fiscal 1996, discussed a
special charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. Of the total charge, approximately $2.3 million, net of tax, was
related to non-cash items. The charge will not affect future cash outflows, as
such obligations have been met.
The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a
special charge of $11.5 (which includes $4.1 million related to discontinued
operations) million taken during the third quarter of fiscal 1995. Of the total
charge, approximately $9.0 million was related to non-cash items. The charge
will not affect future cash outflows, as such obligations have been met.
(5) PURCHASE COMMITMENTS
During fiscal 1997, under an existing wafer supply contract with Chartered
Semiconductor Manufacturing PTE Ltd. ("CSM") the Company advanced to CSM a
deposit of $6.0 million as part of a commitment for CSM to supply 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
favorable price concessions as part of such commitment. Under its agreement with
CSM the Company is required to increase its deposit to up to $10.0 million
during the five-year term. As of June 28, 1997, the remaining commitment under
this agreement of $2.0 million is due by September 1, 1997. This non-interest
bearing deposit is recorded as a long term asset under the caption "Deposits on
purchase contract" and will be progressively repaid from January 1, 1998, as
wafers are purchased. The Company had previously entered into a similar
agreement with American Microsystems, Inc., by which it placed a $5.5 million
deposit which has been progressively repaid as wafer purchases were made.
32
<PAGE>
As of June 28, 1997, approximately $2.6 million of deposit was outstanding which
the Company expects to receive within the next twelve months. The deposit made
to secure these commitments was recorded as a current asset under the caption
"Other current assets".
(6) MARKETABLE SECURITIES
The estimated fair value of each investment approximates the cost and,
therefore, there are no unrealized gains or losses as of June 28, 1997 and June
29, 1996. Proceeds from the sale or maturity of the investments were $11.3
million and $18.3 million in fiscal 1997 and 1996, respectively. The cost of
securities sold is based on the specific identification method. Marketable
securities and commercial paper classified as current assets at June 28, 1997
are due within one year.
(7) ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June 28 June 29
1997 1996
-------------------
<S> <C> <C>
Accounts receivable $21,133 $15,784
Less: reserves for allowances and doubtful accounts (443) (2,079)
-------------------
$20,690 $13,705
===================
</TABLE>
(8) INVENTORY
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
June 28 June 29
1997 1996
---------------------
<S> <C> <C>
Work-in-process $ 9,362 $ 6,876
Finished parts 6,553 11,362
Less: obsolescence reserve (2,373) (2,001)
---------------------
Inventory, net $13,542 $16,237
=====================
</TABLE>
(9) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 28 June 29
1997 1996
---------------------
<S> <C> <C>
Land and building $ 5,394 $ 5,359
Machinery and equipment 18,601 15,624
Furniture and fixtures 1,240 1,383
Leasehold improvements 258 208
--------------------
$25,493 $22,574
Less: accumulated depreciation and amortization 11,389 8,439
--------------------
Property and equipment, net $14,104 $14,135
====================
</TABLE>
33
<PAGE>
Depreciation and amortization expense related to property, plant and equipment
was $3.6 million, $2.8 million and $2.4 million in 1997, 1996 and 1995,
respectively.
(10) 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 28, 1997. On June
28, 1997, the Company had no outstanding borrowings under this facility.
The line of credit available for future borrowings at June 28, 1997 was $17.0
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.
A summary of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
June 28 June 29
1997 1996
------------------
<S> <C> <C>
PIDA second mortgage, payable in monthly
installments through April 2009,
interest at 2% $1,636 $1,746
Lease obligations and other 73 2
------------------
$1,709 $1,748
Less current portion 206 117
------------------
Long-term debt, less current portion $1,503 $1,631
==================
</TABLE>
Aggregate annual maturities of long-term debt as of June 28, 1997 (in
thousands):
<TABLE>
<S> <C>
1998 $ 206
1999 126
2000 128
2001 131
2002 133
2003 and beyond 985
------
$1,709
======
</TABLE>
(11) LEASE OBLIGATIONS
The Company leases certain of its facilities under operating lease agreements,
some of which have renewal options.
34
<PAGE>
Rental expense under operating lease agreements, net of sublease income, was
$0.3 million, $0.5 million and $0.5 million in 1997, 1996 and 1995,
respectively.
Future minimum lease commitments under the Company's operating leases (in
thousands):
<TABLE>
<S> <C>
1998 $ 612
1999 300
2000 244
2001 152
------
$1,308
======
</TABLE>
In connection with merger of Turtle Beach and Voyetra, the Company has
guaranteed lease payments relating to the Fremont facility which total $379,000.
(12) 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 28,
1997 due to the short-term maturities of these instruments.
Marketable securities - The estimated fair value of each investment
approximates the amortized cost and as such no unrealized gain or loss has
been recorded.
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 on June 28,
1997.
35
<PAGE>
(13) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
----------------------------
June 28 June 29 June 30
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $4,248 $1,324 $4,190
State 525 (814) 1,178
----------------------------
Total current $4,773 $ 510 $5,368
----------------------------
Deferred tax expense (benefit):
Federal $1,299 $ 341 $ (227)
State 242 525 10
----------------------------
Total deferred 1,541 866 (217)
----------------------------
Total income tax expense $6,314 $1,376 $5,151
============================
</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>
Year Ended
---------------------------
June 28 June 29 June 30
1997 1996 1995
---------------------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 171 $ 852 $ 563
Inventory valuation 744 903 1,601
Change in business strategy reserves -- 102 626
Net operating loss carry forward 195 529 194
Capital loss carry forward 2,136 -- --
Intangible asset -- 584 --
Basis in investee 692 -- --
Accrued expenses and other 291 416 566
---------------------------
Gross deferred tax assets 4,229 3,386 3,550
Less valuation allowance 3,090 911 --
---------------------------
Deferred tax asset 1,139 2,475 3,550
Deferred tax liabilities:
Depreciation 899 773 836
Other 94 15 161
---------------------------
Deferred tax liabilities 993 788 997
---------------------------
Net deferred tax asset $ 146 $1,687 $2,553
===========================
</TABLE>
36
<PAGE>
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 carry forwards, 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 carry forwards, 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 28, 1997. The Company will periodically
assess and re-evaluate the status of its recorded deferred tax assets.
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>
Year Ended
-----------------------------
June 28 June 29 June 30
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Computed expected tax expense (benefit) $ (736) $ 1,481 $3,526
Change in estimate of state taxes -- (1,065) --
Loss in equity investments 2,778 (371) --
Loss from discontinued operations 318 252 1,246
Gain from sale of Galaxy Power (174) -- --
Change in valuation allowance -- 911 --
Foreign trade income exemption -- (91) (124)
State taxes (net of federal income tax 228 188 772
benefit)
Utilization of net operating loss carry -- -- (383)
forward
Tax-exempt interest and dividends (29) (86) (237)
In-process research and development 3,904 -- --
write-off
Other 25 157 351
-----------------------------
$6,314 $ 1,376 $5,151
=============================
</TABLE>
As of June 28, 1997, the Company has state operating loss carry forwards of
approximately $3.0 million expiring through 2000. The Company also has a
capital loss carry forward of approximately $5.2 million expiring in 2012.
During the fourth quarter of fiscal 1996, the Company changed its estimate of
accrued state taxes.
(14) 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
37
<PAGE>
for the plan were $1.9 million, $1.1 million and $1.9 million in fiscal years
1997, 1996 and 1995, 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 were $0.3 million in each of the three fiscal
years.
(15) STOCK OPTION PLANS
The Company has various stock option plans (the "Plans") under which key
employees and non-employee directors and consultants may be granted incentive
stock options and non-qualified options through November 2002.
The Company's 1997 Equity Compensation Plan ("the 1997 Plan") was approved by
the Board of Directors and will be presented as a proposal to approve and ratify
the adoption by shareholders at the Shareholders' Meeting on October 23, 1997.
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 various employees and directors at prices at fair
market value with various vesting provisions. Stock option transactions during
fiscal years 1997, 1996 and 1995 are summarized as follows (in thousands, except
price per share):
<TABLE>
<CAPTION>
Options Available
For Grant Under Weighted Average
The Plans Number of Shares Exercise Price
---------------------------------------------------------
<S> <C> <C> <C>
Balance June 30, 1994 398 1,837 $12.14
Additional shares reserved 500 -- --
Granted (2,765) 2,765 10.32
Exercised -- (282) 5.09
Terminated 1,969 (1,969) 12.77
---------------------------------------------------------
Balance June 30, 1995 102 2,350 $10.31
Additional shares reserved 600 -- --
Granted (934) 934 11.96
Exercised -- (279) 10.09
Terminated 548 (548) 11.81
---------------------------------------------------------
Balance June 29, 1996 316 2,457 $10.63
Additional shares reserved 300 -- --
Granted (951) 951 12.22
Exercised -- (1,055) 10.23
Terminated 366 (366) 11.08
---------------------------------------------------------
Balance June 28, 1997 31 1,987 $11.52
=========================================================
</TABLE>
38
<PAGE>
As of June 28, 1997, options for 0.5 million shares were exercisable at prices
ranging from $0.08 to $15.75 at an aggregate exercise price of $7.6 million.
Income tax benefits attributable to non-qualified stock options exercised and
disqualifying dispositions of incentive stock options are credited to common
stock.
During fiscal 1997, 0.4 million stock options have been granted to employees
under the Plans, at an exercise price of $13.25, the fair market value at grant
date, for terms of five years. The Company is currently in the process of
converting such grants to non-qualified stock options not subject to the Plans.
Such options are not included in the above table but are considered in the SFAS
123 pro forma disclosure that follows.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- -------------------------------
Weighted Average
Remaining
Range of Number Contractual Life Weighted Average Number Weighted Average
Exercise Price Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$0.08 - $ 4.89 40 2.71 $ 1.42 16 $ 1.35
$6.86 - $10.25 515 3.03 10.02 200 10.15
$10.38 - $13.25 1133 3.89 11.81 228 10.81
$13.50 - $15.44 298 3.80 14.24 76 14.69
- ------------------------------------------------------------------- -------------------------------
$0.08 - $15.44 1,987 3.63 $11.52 520 $10.84
</TABLE>
The Company applies APB 25 and related interpretations in accounting for stock
option plans. Had compensation cost been recognized consistent with SFAS 123,
the Company's consolidated net earnings (loss) and earnings (loss) per share
would have been as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------
<S> <C> <C> <C>
Net income (loss) As reported $ (8,419) $3,915
(000 omitted) Pro forma (10,405) 3,330
Earnings (loss) per share
Primary As reported $ (0.73) $ 0.34
Pro forma (0.91) 0.29
Fully diluted As reported $ (0.73) $ 0.34
Pro forma (0.91) 0.29
</TABLE>
The per share weighted-average fair value of stock options issued by the Company
during 1997 and 1996 was $6.57 and $6.69, respectively.
The following assumptions were used by the Company to determine the fair value
of stock options granted using the Black-Scholes option-pricing model:
<TABLE>
<S> <C>
Dividend yield 0%
Expected volatility 60-65%
Average expected option life 4 years
Risk-free interest rate 5.34% to 6.71%
</TABLE>
Pro forma net income (loss) reflects only options granted in fiscal 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro
39
<PAGE>
forma net income (loss) amounts presented above because compensation cost is
reflected over an option's vesting period, and compensation cost for options
granted prior to July 1, 1995 is not considered.
(16) EARNINGS PER SHARE
The Company has not adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which will become effective in the second quarter of
fiscal 1998. The following represents a pro forma earnings (loss) per share to
disclose the effects of this statement on the Company's reported amounts:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996 Fiscal 1995
-----------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $(7,510) $ 4,636 $ 8,483
Income (loss) from discontinued operations (909) (721) (3,560)
-----------------------------------------
Net income (loss) $(8,419) $ 3,915 $ 4,923
=========================================
Basic EPS:
Income (loss) from continuing operations $ (0.65) $ 0.41 $ 0.78
Income (loss) from discontinued operations (0.08) (0.06) (0.33)
-----------------------------------------
Basic EPS $ (0.73) $ 0.35 $ 0.45
=========================================
Weighted-average shares outstanding 11,474 11,278 10,936
=========================================
Diluted EPS:
Income (loss) from continuing operations $ (0.65) $ 0.40 $ 0.77
Income (loss) from discontinued operations (0.08) (0.06) (0.32)
-----------------------------------------
Diluted EPS $ (0.73) $ 0.34 $ 0.45
=========================================
Weighted-average shares outstanding 11,474 11,278 10,936
Assume exercise of options -- 314 109
-----------------------------------------
Weighted-average shares outstanding
and dilutive potential common shares 11,474 11,592 11,045
=========================================
</TABLE>
(17) TREASURY STOCK
In January 1996, the Company's Board of Directors authorized a program to
repurchase up to 1.0 million shares of the Company's common stock. As of June
28, 1997, the Company has repurchased 0.8 million shares valued at $10.9 million
using the cost method. In connection with the sale of its battery charge
controller product line, the Company received 68,387 shares of the Company's
common stock valued at $11.537 per share, which is included in treasury stock
(see Related Party footnote 19). In connection with the Company's acquisition
of MicroClock, the Company issued 0.6 million shares which were taken from
treasury stock (see Acquisition/Merger footnote 2). As of June 28, 1997, the
40
<PAGE>
Company had 0.3 million shares in treasury stock valued at $3.7 million, held at
an average cost of $13.09.
(18) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily within one business segment, which is the design,
development and marketing of integrated circuits and related board level
products. Foreign sales consist of shipments primarily to the Pacific Rim and
Europe and which were approximately 60.3%, 46.8% and 55.1% of revenue in 1997,
1996 and 1995, respectively.
(19) RELATED PARTY
On September 25, 1996, the Company sold its battery charge controller product
line to Edward H. Arnold, a former director and former Chief Executive Officer
of the Company. Although the Company had been involved in this product line
since 1991, it was not considered part of the Company's core business and the
associated products did not materially contribute to the Company's revenue. In
making this sale the Company determined that further investment in such a
product line was not consistent with the strategic direction of the Company.
Under the terms of such tax-free sale, Mr. Arnold acquired all outstanding
shares of the Company's wholly-owned subsidiary which owned the intellectual
property rights and working capital assets of this product in exchange for
68,387 shares of the Company's common stock valued at $11.537 per share (the
average closing price for the 10 days prior to the sale). The sale price of $0.8
million was based upon a valuation made by an independent appraiser and involved
a premium over such valuation. In addition, the Company will receive a royalty
of 2% for all sales during the three-year period after September 25, 1996 as
consideration for a trademark license associated with this product line. The
Company has recorded the gain in the statement of operations as follows: the
battery charge controller inventory sold was recorded as revenue ($0.6 million)
with its corresponding costs in cost of sales ($0.3 million), and the gain on
the remaining assets is recorded as other income ($0.2 million).
In the first quarter of fiscal 1997, the Company and David Sear, the former
President and Chief Executive Officer, entered into a severance agreement. Dr.
Sear received $0.3 million in the form of cash, accelerated stock options, and
health benefits at the time of his departure.
In the first quarter of fiscal 1997, the Company and Henry I. Boreen, Chairman
of the Board, entered into an employment agreement as Interim Chief Executive
Officer. For his services in this capacity, Mr. Boreen received a grant of
75,000 stock options at an exercise price of $10.38 per share which was equal to
the closing price on the date of grant, and which option has a term of ten years
and becomes exercisable in monthly installments over the six month period
following the date of grant.
In the second quarter of fiscal 1997, the Company entered into a Revolving
Credit Agreement with Voyetra under which the Company extends a line of credit
up to $3.5 million, subject to certain limitations and certain financial
covenants. As of June 28, 1997, the Company believes that Voyetra was not in
compliance with respect to these financial covenants. See footnote 3 for
further information.
(20) MAJOR CUSTOMERS
41
<PAGE>
During fiscal 1997 and 1995, no customer represented 10% or more of the
Company's revenues. During fiscal 1996 shipments to Intel (including all Intel
subcontractors) accounted for 11% of the Company's consolidated revenue.
42
<PAGE>
(21) QUARTERLY DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 28, 1997 and June 29, 1996 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------------------
September 28 December 28 March 29 June 28 September 29 December 30 March 30 June 29
1996 1996 1997 1997 1995 1995 1996 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $21,381 $27,445 $ 25,121 $30,412 $25,185 $29,753 $15,382 $21,010
Cost of sales 13,677 16,278 13,504 15,678 11,888 16,664 11,891 14,405
Research and development 2,851 3,215 3,512 3,943 2,307 3,022 2,495 2,723
In process R&D costs -- -- 11,196 -- -- 1,500 -- --
Operating income (loss) 822 3,847 (6,222) 6,940 6,418 2,106 (3,748) (576)
Income (loss) from continuing
operations 996 2,739 (7,980) (3,265) 4,094 1,838 (1,726) 430,
Income (loss) from
discontinued operations (367) (493) (2,845) 2,796 67 55 (360) (483)
-------------------------------------------------------------------------------------------------
Net income (loss) $ 629 $ 2,246 $(10,825) $ (469) $ 4,161 $ 1,893 $(2,086) $ (53)
=================================================================================================
Income (loss) from continuing
operations $ 0.09 $ 0.24 $ (0.68) $ (0.27) $ 0.34 $ 0.16 $ (0.15) $ 0.04
Income (loss) from
discontinued operations (0.03) (0.04) (0.24) 0.23 0.01 0.00 (0.03) (0.04)
-------------------------------------------------------------------------------------------------
Net income (loss) $ 0.06 $ 0.20 $ (0.92) $ (0.04) $ 0.35 $ 0.16 $ (0.18) 0.00
=================================================================================================
Shares used to compute
earnings per common and
common equivalent share:
Weighted shares outstanding 11,346 11,379 11,771 11,939 11,894 11,682 11,317 11,331
=================================================================================================
</TABLE>
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders.
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.
44
<PAGE>
Independent Auditors' Report
Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996
Consolidated Statements of Operations for years ended June 28,
1997, June 29, 1996 and June 30, 1995
Consolidated Statements of Shareholders' Equity for the years
ended June 28, 1997, June 29, 1996 and June 30, 1995
Consolidated Statements of Cash Flows for the years ended June
28, 1997, June 29, 1996 and June 30, 1995
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)
* 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)
45
<PAGE>
+*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)
46
<PAGE>
* 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
+ 10.21 Agreement dated August 30, 1996 between the Company and Hock E. Tan
+ 10.22 Agreement dated September 3, 1997 between the Company and Henry I.
Boreen
+ 10.23 Agreement dated April 2, 1997 between the Company and Stavro E.
Prodromou
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.
47
<PAGE>
SCHEDULE II
INTEGRATED CIRCUIT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 28, 1997, June 29, 1996 and June 30, 1995
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Charged
Beginning of to Costs and Balance at
Description Period Expenses Deductions End of Period
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 28, 1997:
Valuation reserves:
Accounts receivable $2,079 $ 172 $ 1,808/1/ $ 443
Inventory 2,001 372 -- 2,373
Year ended June 29, 1996:
Valuation reserves:
Accounts receivable $1,363 $ 5,992/2/ $ 5,276/2/ $2,079
Inventory 3,887 760 2,646 2,001
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
</TABLE>
___________________________
/1/ Reflects the de-consolidation of Turtle Beach.
/2/ 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.
48
<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 8, 1997 By: /S/ STAVRO PRODROMOU
-----------------------
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 17, 1997 By: /S/ HOCK E. TAN
-----------------------------
Senior Vice President, Chief Financial Officer
and Secretary
Date: September 17, 1997 By: /S/ HENRY I. BOREEN
-----------------------------
Henry I. Boreen, Chairman of the Board
Date: September 17, 1997 By: /S/ EDWARD M. ESBER JR.
-----------------------------
Edward M. Esber, Director
Date: September 17, 1997 By: /S/ RUDOLF GASSNER
-----------------------------
Rudolf Gassner, Director
Date: September 17, 1997 By: /S/ JOHN L. PICKITT
-----------------------------
John L. Pickitt, Director
Date: September 17, 1997 By: /S/ STAVRO E. PRODROMOU
-----------------------------
Stavro E. Prodromou, Director
49
<PAGE>
EXHIBIT 11
INTEGRATED CIRCUIT SYSTEMS, INC.
COMPUTATION OF PER SHARE INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
-----------------------------
June 28 June 29 June 30
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Primary
Income (loss) from continuing operations $(7,510) $ 4,636 $ 8,483
Loss from discontinued operations (909) (721) (3,560)
-----------------------------
Net income (loss) $(8,419) $ 3,915 $ 4,923
=============================
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 11,474 11,278 10,936
Assumed exercise of stock options -- 314 109
-----------------------------
11,474 11,592 11,045
=============================
Income (loss) from continuing operations $ (0.85) $ 0.40 $ 0.77
Loss from discontinued operations (0.08) (0.06) (0.32)
-----------------------------
Net income (loss) per share $ (0.73) $ 0.34 $ 0.45
=============================
Fully Diluted
Income (loss) from continuing operations $(7,510) $ 4,636 $ 8,483
Loss from discontinued operations (909) (721) (3,560)
-----------------------------
Net income (loss) $(8,419) $ 3,915 $ 4,923
=============================
Common and common equivalent shares
outstanding:
Weighted average common shares 11,474 11,278 10,936
outstanding
Assumed exercise of stock options -- 320 488
-----------------------------
11,474 11,598 11,424
Income (loss) from continuing operations $ (0.65) $ 0.40 $ 0.74
Loss from discontinued operations (0.08) (0.06) (0.31)
-----------------------------
Net income (loss) per share $ (0.73) $ 0.34 $ 0.43
=============================
</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. 333-27113, 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 dated August 4, 1997, related to the
consolidated balance sheets of Integrated Circuit Systems, Inc. and subsidiaries
as of June 28, 1997 and June 29, 1996, 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 28, 1997, which report appears
in the June 28, 1997 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 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> JUN-28-1997
<CASH> 18,425
<SECURITIES> 7,981
<RECEIVABLES> 21,133
<ALLOWANCES> 443
<INVENTORY> 13,542
<CURRENT-ASSETS> 66,212
<PP&E> 25,493
<DEPRECIATION> 11,389
<TOTAL-ASSETS> 90,622
<CURRENT-LIABILITIES> 17,952
<BONDS> 1,503
0
0
<COMMON> 45,366
<OTHER-SE> 24,781
<TOTAL-LIABILITY-AND-EQUITY> 90,622
<SALES> 104,359
<TOTAL-REVENUES> 104,359
<CGS> 59,137
<TOTAL-COSTS> 59,137
<OTHER-EXPENSES> 39,835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599
<INCOME-PRETAX> (1,196)
<INCOME-TAX> 6,314
<INCOME-CONTINUING> (7,510)
<DISCONTINUED> (909)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,419)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
