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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 27, 1998
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
Aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of August 28, 1998, based on the closing sales
price, was $101,682,820. 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
28, 1998: 12,325,111 shares
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PART I
ITEM 1. BUSINESS
GENERAL
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Integrated Circuit Systems, Inc. (the "Company") was incorporated in
Pennsylvania in 1976, and began by designing and marketing custom application
specific integrated circuits ("ASICs") for various industrial customers. In
particular, the Company was noted for its unique expertise in designing ASICs
which combined both analog and digital, or "mixed-signal", technology. By 1988,
the Company had adopted a strategy of developing proprietary integrated circuits
("ICs") to capitalize on its complex mixed-signal design technology and
pioneered the market for frequency timing generators ("FTGs") which provide the
timing signals or "clocks" necessary to synchronize high performance electronic
systems. FTGs replaced the multiple crystal oscillators and other peripheral
circuitry previously used to generate and synchronize timing signals, thus
providing savings in board space, power consumption and cost. The Company's 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
While the Company has pursued strategic acquisitions, in an effort to focus
limited engineering resources on higher return product lines, the Company has
also 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 have 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 chips. In the second quarter of fiscal 1996, the Company's Turtle
Beach subsidiary acquired the PC multimedia and communications
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upgrade product lines of Value Media, Inc., ("Value Media") a privately held
company that developed and marketed multimedia peripheral kits for PCs. 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. These acquisitions were accounted for using the purchase method, and
are accordingly 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. During the fourth quarter of fiscal 1997, the
Company determined that significant events and changes in circumstances had
occurred that indicated an impairment loss on this investment. Subsequently, the
Company disposed of its investment in Voyetra in exchange for extinguishment of
certain potential liabilities with respect to Turtle Beach. 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's remaining ownership interest in Ark Logic, approximately 11%, was
written off in the fourth quarter of fiscal 1997.
PRODUCTS AND PRODUCT APPLICATIONS
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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 the non-PC market, and products designed for these applications
contributed over 20% of the Company's FTG revenues in fiscal 1998.
Major OEM customers in fiscal 1998 include: Acer, Asustek, Intel, Compaq, IBM,
Hewlett-Packard, Siemens, and Seagate.
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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. During
the first quarter 1997, the Company introduced a single chip, CMOS, 10/100
megabit per second PHYceiver product for Fast Ethernet applications. A cost
reduced version of this product was engineered during the fiscal year. In fiscal
1998, the Company sold over 3.5 million of these chips to customers such as
Compaq, Hitachi, Hewlett Packard, Lexmark, Racore and Silicon Graphics.
While this product experienced strong demand, the Company was unable to fully
respond to potential backlog due to capacity constraints. Reflecting this and
increased competition in the market from new participants in single channel
10/100 megabit transceivers as well as new generations of integrated
transceivers, the Company has recently lost market share and experienced severe
price erosion.
SYSTEMS TECHNOLOGY
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.
SALES AND MARKETING
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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 1998, the Company conducted its direct sales
efforts through its offices in Norristown, PA, San Jose, CA, Houston, TX, 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 1998.
Foreign sales are directly conducted by sales representatives and distributors
located in the Pacific Rim and Europe, and managed by direct sales staff in the
Taiwan sales office and the 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.
The Company includes in its backlog customer released orders with firm schedules
for shipment within the next twelve months. These orders may not be canceled
generally without 30 days advance notice. 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
within the same quarter) 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 introductions 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
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period are replaced or refunded after a confirming evaluation by the Company's
quality control staff. The Company has not experienced significant warranty
returns to date.
MANUFACTURING
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The Company qualifies and utilizes third party suppliers for the manufacture of
silicon wafers. Such suppliers are capable of providing CMOS processing
technologies ranging from 0.35 to 3.0 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 its 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 had placed 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. As of June 27, 1998, approximately $7.9 million remains on deposit with
CSM pursuant to this arrangement.
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 handles wafer probe and final testing for various
integrated circuits used in personal computers, data storage devices and other
peripheral applications. The facility began testing devices in the first quarter
of 1998 and shipments began in the second quarter of fiscal 1998.
The Company believes that adequate capacity will be available to support its
manufacturing requirements. The Company's reliance, however, on multiple,
offshore, 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 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 problems
resulting from these risks could have a material adverse effect on the Company's
operating results.
RESEARCH AND DEVELOPMENT
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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 $19.8 million, $13.5 million and $10.5 million in
fiscal 1998, 1997 and 1996, respectively, and include expenses related to the
development of the Company's recently introduced data communication products as
well its FTG and custom 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.
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The Company expects to continue to increase its spending for research and
development in absolute dollar amounts in the foreseeable future. Because design
of the Company's products is extremely complex, the Company has experienced
delays from time to time in completing products on a timely basis. The design of
the Company's products is an extremely complex iterative process involving the
development of a prototype product through computer-aided circuit design, the
generation of photo masks for the manufacturing process and the fabrication of
wafers. Throughout this process, the Company's engineering staff reviews
preliminary performance data against the original product specifications.
Resulting variances, if any, may require redesign of previously completed
elements and result in the lengthening of the design, and thus the production
cycle.
PATENTS, LICENSES AND TRADEMARKS
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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 customers. 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.
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FORWARD-LOOKING STATEMENTS
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The statements contained or incorporated by reference in this Annual Report
on Form 10-K or the Exhibits hereto that are not historical facts or statements
of current condition are forward-looking statements. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "forecasts," "estimates," "plans,"
"continues," "may," "will," "should," "anticipates" or "intends," or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. These forward-looking statements, such
as statements regarding Year 2000, anticipated future new product introductions,
revenues, capital expenditures, acquisitions, management and production
activities, and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's results, performance or achievements include, but are
not limited to, the "Risk Factors" set forth below, and general economic
conditions, including economic conditions related to the semiconductor and PC
industries. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward looking statements.
Furthermore, the Company disclaims any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered.
DEPENDENCE ON CONTINUOUS INTRODUCTION OF NEW PRODUCTS BASED ON THE LATEST
TECHNOLOGY
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
Product life cycles are continually becoming shorter, which causes the gross
margins of semiconductor products to decline precipitously as the next
generation of competitive products (which are often more technologically
sophisticated) are introduced. Because of this almost inevitable product
obsolescence and declining margins, the Company's future success is highly
dependent upon its ability to continually develop new products using the latest
and most cost-effective technologies, introduce them in commercial quantities to
the marketplace ahead of the competition and have them selected for inclusion in
products of leading systems manufacturers. There can be no assurance that the
Company will be able to regularly develop and introduce such new products on a
timely basis or that products developed by the Company, including recently
introduced products, will be selected by systems manufacturers for incorporation
into their products. The Company's failure to develop such new products, or to
have its products available in commercial quantities ahead of competitive
products and selected for inclusion in products of systems manufacturers, would
have a material adverse effect on the Company's results of operations and
financial condition.
INTENSELY COMPETITIVE INDUSTRY
The semiconductor and PC component industries are intensely competitive. The
Company's ability to compete depends highly on elements outside the Company's
control, such as general economic conditions affecting the semiconductor and PC
industries and the introduction of new products and technologies by competitors.
Most of the Company's competitors and potential competitors have significantly
greater financial, technical, manufacturing and marketing resources than the
Company. These competitors include major multinational corporations possessing
worldwide wafer
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fabrication and integrated circuit production facilities and diverse,
established product lines. Competitors also include emerging companies
attempting to obtain a share of the existing market for the Company's current
and proposed products. To the extent that the Company's products achieve market
acceptance, competitors typically seek to offer competitive products or embark
on pricing strategies which, if successful, could have a material adverse effect
on the Company's results of operation and financial condition.
The Company has directed significant resources towards the objective of
establishing growth in networking transceiver markets. In order to succeed, the
Company may 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 the networking
transceiver products would be profitable or that competitive responses would not
have a material adverse impact on future profitability.
DEPENDENCE ON FREQUENCY TIMING PRODUCTS
The Company's frequency timing generator products for use in motherboard and
peripheral applications for PCs accounted for approximately 51.4%, 53.7% and
45.6% of the Company's total revenue in fiscal years 1998, 1997 and 1996,
respectively. The Company believes that competitors increasingly are becoming
second source suppliers of products which could be substituted for certain of
the Company's PC video graphics products. Some suppliers of other complementary
IC video products, such as video graphics controllers, have begun to integrate
the video timing generator function into other products, primarily for lower
performance applications. As a result, the Company has experienced, and may
continue to experience, downward pricing pressure on and competition in certain
of its PC video graphics frequency timing generator products. Future sales may
be materially and adversely affected by the availability and sales of these
competing products. Additionally, there can be no assurance that the Company
will be able to increase revenues in the future relating to its frequency timing
generator products.
DEPENDENCE ON PC INDUSTRY
A substantial portion of the sales of the Company's products depend largely
on sales of PCs and peripherals for PCs. The PC industry is subject to extreme
price competition, rapid technological change, evolving standards, short product
life cycles and continuous erosion of average selling prices. 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 PC
and peripheral device manufacturers, which could result in a decline in revenue
or a slower rate of revenue growth for the Company. 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 such customers. Furthermore, the intense price competition in the PC
industry is expected to continue to put pressure on the price of all PC
components, including the Company's products, thus reducing profit margins.
The PC industry also depends upon sales worldwide, and recent economic
turmoil in the Pacific Rim will substantially reduce sales of PCs in that
geographic area. The ultimate impact on the Company cannot be determined at
this time. Similar regional economic crisis, whether in developing or mature
markets, could also impact sales of PCs and peripherals for PCs, and thus impact
sales of the Company's products.
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DEPENDENCE ON OUTSIDE WAFER FOUNDRIES AND ASSEMBLERS
The Company currently depends entirely upon third party suppliers for the
manufacture of the silicon wafers from which its finished circuits are
manufactured, and for the assembly of finished integrated circuits from silicon
wafers.
There can be no assurance that the Company will be able to obtain adequate
quantities of processed silicon wafers within a reasonable period of time or at
commercially reasonable rates , and the semiconductor industry has experienced
disruptions from time to time in the supply of processed silicon wafers due to
quality or yield problems or capacity limitations. Virtually all of the
Company's wafers are manufactured by three outside foundries. If one or more of
these foundries are unable or unwilling to produce adequate supplies of
processed wafers on a timely basis, it could cause significant delays and
expense in locating a new foundry and redesigning circuits to be compatible with
the new manufacturer's process and, consequently, could have a material adverse
effect on the Company's results of operation and financial condition.
The Company also relies entirely upon third parties for the assembly of
finished integrated circuits from processed silicon wafers. The Company
currently relies on four assemblers, two of which produce most of the Company's
finished integrated circuits. While the Company believes that there is
typically a greater availability of assemblers than silicon wafer foundries, it
could none the less incur significant delays and expense if one or more of the
assemblers upon which the Company currently relies become unable or unwilling to
assemble finished integrated circuits from silicon wafers.
Two of the foundries that manufacture the silicon wafers from which finished
circuits are manufactured, and all of the third parties used by the Company to
assemble finished integrated circuits, are located in the Pacific Rim. The
Company has typically relied upon production and assembly in this geographic
area because of the abundance of third parties performing these services, as
well as the geographic proximity to manufacturers of PCs and other equipment in
that region that use the Company's products. The impact of the current
financial crisis in the Pacific Rim countries on the Company's operations in
this area cannot yet be determined. It is possible, among other things, that
one or more of the Company's key suppliers could face insolvency or other
financial risks due to the economic crisis in that region which would require
them to cease operations. This could cause a delay in the Company's production
and delivery of commercial quantities of its products, which in turn could
materially adversely affect the Company's revenues and financial condition. See
"Risks Associated with International Business Activities."
RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS ACTIVITIES
For the fiscal years 1998, 1997 and 1996, the Company generated approximately
58.8%, 60.3% and 46.8% of its net sales, respectively, from international
markets. These sales were generated primarily from the Company's customers in
the Pacific Rim region and included sales to foreign corporations, as well as to
foreign subsidiaries of U.S. corporations. The Company estimates that in fiscal
1998, approximately one-half of the Company's sales in international markets
were to foreign corporations, with the bulk of them being in Taiwan.
In addition, two of the Company's wafer suppliers and all of the Company's
assemblers are located in the Pacific Rim. Several countries in this region
have experienced currency devaluation and/or difficulties in financing short-
term obligations. There can be no assurance that the effect of this economic
crisis on the Company's wafer suppliers will not impact the Company's wafer
supply or assembly operations, or that the effect on the Company's customers in
that region will not adversely
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affect both the demand for the Company's products and the collectibility of
receivables. See "Dependence on Outside Wafer Foundries and Assemblers."
The Company's international business activities in general are subject to a
variety of potential risks resulting from certain political, economic and other
uncertainties including, without limitation, political risks relating to a
substantial number of the Company's customers being in Taiwan. Certain aspects
of the Company's operations are subject to governmental regulations in the
countries in which the Company does business, including those relating to
currency conversion and repatriation, taxation of its earnings and earnings of
its personnel, and its use of local employees and suppliers. The Company's
operations are also subject to the risk of changes in laws and policies in the
various jurisdictions in which the Company does business which may impose
restrictions on the Company. The Company cannot determine to what extent future
operations and earnings of the Company may be effected by new laws, new
regulations, changes in or new interpretations of existing laws or regulations
or other consequences of doing business outside the U.S.
The Company's activities outside the U.S. are subject to additional risks
associated with fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. Additionally, worldwide
semiconductor pricing is influenced by currency fluctuations, and the recent
devaluation of the currencies of several countries in the Pacific Rim could have
a significant impact on the prices of the Company's products if its competitors
offer products at significantly lower prices in an effort to maximize cash flows
to finance short-term, dollar denominated obligations; such devaluations could
also impact the competitive position of the Company's customers in Taiwan and
elsewhere, which could impact the Company's sales.
RISKS ASSOCIATED WITH ACQUISITIONS; INTEGRATION OF OPERATIONS
An element of the Company's growth strategy has been to pursue strategic
acquisitions that expand and complement the Company's business. Acquisitions
involve a number of risks inherent in assessing the values, strengths,
weaknesses and profitability of acquisition candidates including: adverse short-
term effects on the Company's operating results; diversion of management's
attention; dependence on retaining key personnel; amortization of acquired
intangible assets; and risks associated with unanticipated problems and latent
liabilities or contingencies. In addition, the Company's acquisitions of other
companies and product lines will require the integration of their operations
into those of the Company. There can be no assurance that the Company will be
able to identify appropriate acquisition candidates, or successfully integrate
acquired operations to realize cost-savings or other synergies, and the failure
to do so could have a material adverse effect on the Company's results of
operations and financial condition.
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly and annual operating results have been subject to
substantial fluctuation in the past, and are likely to similarly fluctuate in
the future as a result of a wide variety of factors, including competitive
pressures on selling prices, timing and cancellation of customer orders,
fluctuations in production yields, changes in the mix of products sold,
availability of wafer supply, possible disruptions of operations caused new
foundries or other vendors, political and economic instability in foreign
markets affecting both ultimate customers of the Company's products and the
availability of third-party suppliers for the manufacture, assembly and testing
of silicon wafers and finished circuits, seasonal patterns of spending and
manufacturing inefficiencies associated with the development and start up of
new products.
<PAGE>
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, fluctuating demand for its custom ASIC
products, acceptance of the Company's newly introduced products and market
acceptance of its customers' products. In addition, the Company is subject to
fluctuations in the annual business cycles of its original equipment
manufacturer "OEMs" customers.
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY TECHNOLOGY
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. With respect to patents, there can be
no assurance that any applications for patent protection will be granted, or, if
granted, will offer meaningful protection. Additionally, there can be no
assurance that competitors will not develop, patent or gain access to similar
know-how and technology, or reverse engineer the Company's products, or that any
confidentiality agreements upon which the Company relies to protect its trade
secrets and other proprietary information will be adequate to protect the
Company's proprietary technology. The occurrence of any such events could have
a material adverse effect on the Company's results of operations and financial
condition.
Patents covering a variety of semiconductor designs and processes are held by
various companies. The Company has from time to time received, and may in the
future receive, communications from third parties claiming that the Company may
be infringing certain of such parties' patents and other intellectual property
rights. Any infringement claim or other litigation against or by the Company
could have a material adverse effect on the Company's results of operations and
financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon its ability to attract and retain highly-
skilled technical, managerial and marketing personnel. The Company believes
that its future success in developing marketable products and achieving a
competitive position will depend in large part upon whether it can attract and
retain skilled personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining the personnel it requires to successfully develop new and enhanced
products and to continue to grow and operate profitably. Furthermore, retention
of scientific and engineering personnel in the Company's industry typically
requires the Company to present attractive equity incentive packages, which
could lead to additional dilution.
Virtually all of the Company's key engineers worked at other companies or at
universities and research institutions before joining the Company. Disputes may
arise as to whether technology developed by such engineers while employed by or
associated with the Company was first discovered when they were employed by or
associated with others in a manner that would give third parties rights to such
technology superior to the rights, if any, of the Company. Disputes of this
nature have occurred in the past, and are expected to continue to arise in the
future, and there can be no assurance that the Company will prevail in any such
disputes. To the extent that consultants, vendors or other third parties apply
technological information independently developed by them or by others to the
Company's proposed products, disputes may also arise as to the proprietary
rights to such information, which may not be resolved in favor of the Company.
<PAGE>
PRODUCT LIABILITY EXPOSURE AND POTENTIAL UNAVAILABILITY OF INSURANCE
Certain of the Company's custom IC products are sold into the medical markets
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 other applications or that any indemnification
or insurance available to the Company will be adequate to protect it from
liability. A product liability claim, product recall or other claim, as well as
any claims for uninsured liabilities or in excess of insured liabilities, could
have a material adverse effect on the Company's results of operations and
financial condition.
VOLATILITY OF THE COMPANY'S STOCK PRICE
Since the initial public offering of the Company's Common Stock in 1991, the
market value of the Company's Common Stock has been subject to significant
fluctuation. The market price of the Company's Common Stock is likely to
continue to be subject to significant fluctuations in response to operating
results and other factors. In addition, the stock market in recent years has
experienced price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of the companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Company's Common Stock.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following sets forth certain information with regard to executive officers
of Integrated Circuit Systems, Inc.
<TABLE>
<CAPTION>
Name Age Position
- ------------------- -------- -------------------------------------------------------------
<S> <C> <C>
Henry I. Boreen 71 Chief Executive Officer, Chairman of the Board
Hock E. Tan 47 Senior Vice President, Chief Operating Officer and
Chief Financial Officer
Martin Goldberg 51 Vice President of Sales
K. Venkateswaren 54 Vice President, Engineering Services
Greg Richmond 38 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 March 1998, 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. From 1989 to January 1998,
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.
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
<PAGE>
includes senior financial positions with PepsiCo, Inc. and General Motors. Mr.
Tan holds an MBA from Harvard Business School and an MS in Mechanical
Engineering from Massachusetts Institute of Technology.
Mr. 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 was appointed Vice President, Engineering Services in July
1998. He also has served as Vice President, Data Communications Group. 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 27, 1998, the Company had 259 full-time employees, 91 of whom were
engaged in research and development, 23 in sales, 18 in marketing and technical
support, 34 in finance and administration, and 93 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, and administration. This facility was
purchased in September 1992, and is currently financed with 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 November 2000.
The Company also utilizes a test and shipping facility located in Singapore,
which consists of 16,000 square feet of space leased pursuant to an agreement
which expires in August 2000. The space is used for testing, warehousing, sales
and administration.
<PAGE>
The Company also utilizes a West Coast operation located in San Jose,
California, which consists of 26,686 square feet of office space leased pursuant
to an agreement which expires in December 1998. The space is used for product
development, sales, marketing and administration. In December 1998, the West
Coast operation will be relocating to a new facility currently under
construction in San Jose, which will consist of 70,000 square feet of office
space pursuant to a new lease agreement to be executed upon completion of the
facility which will expire in December 2008. The Company believes that its
current and new 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".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on the
NASDAQ National Market System under the symbol ICST. In addition, 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 1998 and 1997, as reported by the "NASDAQ Stock
Market".
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
------------------------------------------------------
High Low High Low
------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter ended Sept 27 and Sept 28 39.813 20.875 12.625 6.875
Second quarter ended Dec 27 and Dec 28 42.750 20.125 14.125 10.250
Third quarter ended Mar 28 and Mar 29 35.188 19.688 17.500 13.000
Fourth quarter ended Jun 27 and Jun 28 21.375 12.375 22.725 12.625
</TABLE>
On June 27, 1998, there were approximately 168 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.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SUMMARY
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------
June 27 June 28 June 29 June 30
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue $ 160,634 $ 104,359 $ 91,330 $ 97,745 $ 93,824
Cost of sales 88,859 59,137 54,848 45,649 45,798
Research and development 19,797 13,521 10,547 10,995 10,647
In process research and development costs -- 11,196 1,500 -- --
Operating income 32,300 4,851 4,025 13,223 18,110
Income (loss) from continuing operations 21,375 (7,510) 4,636 8,483 12,218
Loss from discontinued operations -- (909) (721) (3,560) --
Net income (loss) 21,375 (8,419) 3,915 4,923 12,218
Basic income (loss) per common share (continuing
operations) $ 1.73 $ (0.65) $ 0.41 $ 0.78 $ 1.14
Basic income (loss) per common share (discontinued
operations) -- (0.08) (0.06) (0.33) --
-------------------------------------------------------------
Basic income (loss) per common share $ 1.73 $ (0.73) $ 0.35 $ 0.45 $ 1.14
=============================================================
Basic shares used in computing income (loss) per
common share 12,343 11,474 11,278 10,936 10,712
=============================================================
Diluted income (loss) per common and common
equivalent share (continuing operations) $ 1.63 $ (0.65) $ 0.40 $ 0.77 $ 1.11
Diluted loss per common and common
equivalent share (discontinued operations) -- (0.08) (0.06) (0.32) --
-------------------------------------------------------------
Diluted income (loss) per common and
common equivalent share $ 1.63 $ (0.73) $ 0.34 $ 0.45 $ 1.11
=============================================================
Diluted shares used in computing income (loss) per
common and common equivalent share 13,141 11,474 11,592 11,045 11,030
=============================================================
June 27 June 28 June 29 June 30
1998 1997 1996 1995 1994
-------------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $ 65,113 $ 48,260 $ 48,023 $ 45,470 $ 35,227
Total assets 108,009 90,622 87,570 77,691 73,452
Long-term debt, less current portion 1,380 1,503 1,631 3,480 3,775
Shareholders' equity 89,768 70,147 69,164 62,484 55,726
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include, without
limitation, information under the captions "Products and Product Applications"
and elsewhere in this report, relating to planned product introductions and/or
statements preceded by, followed by or that include the words "believes",
"expects", "anticipates", "intends" or similar expressions. For such statements
the Company claims the protection of the safe harbor for forward looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The important information that follows, 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.
ANNUAL RESULTS OF OPERATIONS
The following table sets forth statement of operation line items as a percentage
of total revenue for the periods indicated and should be read in conjunction
with the Consolidated Financial Statements and notes thereto.
(Expressed as a percentage of total revenue)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
June 27 June 28 June 29
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 55.3 56.7 60.1
Research and development expense 12.3 13.0 11.5
Selling, general and administrative expense 12.1 14.5 20.2
Amortization of goodwill 0.2 0.5 0.2
Special charges:
Facility closing -- -- 1.9
Write-off of in-process research and development costs -- 10.6 1.7
---------------------------------------------
Operating income 20.1 4.7 4.4
Interest and other income (1.2) (1.7) (1.5)
Interest expense -- 0.1 0.4
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 21.3 (1.2) 6.6
Income tax expense 8.0 6.0 1.5
---------------------------------------------
Income (loss) from continuing operations 13.3 (7.2) 5.1
Loss from discontinued operations -- (0.9) (0.8)
---------------------------------------------
Net income (loss) 13.3% (8.1%) 4.3%
=============================================
</TABLE>
<PAGE>
REVENUE
The Company achieved revenue of $160.6 million in fiscal year 1998, as compared
to $104.4 million and $91.3 million in fiscal years 1997 and 1996, respectively.
This increase in fiscal 1998 revenue was attributable to demand increases across
all product lines.
FREQUENCY TIMING GENERATORS
The Company's FTG component revenue increased $26.5 million to $82.6 million for
fiscal 1998 as compared to prior year. The acquisition of MicroClock, Inc. in
the third quarter of fiscal 1997 accounted for $14.1 million of the increase
with the remaining amount attributable to strong demand from PC motherboard OEM
customers. The average selling price for FTGs remained the same year to year
from fiscal 1997 to fiscal 1998 while volume increased 45.0%.
FTG components for motherboard and peripheral applications for PCs contributed
approximately 51.4%, 53.7% and 45.6% of total revenue in fiscal years 1998, 1997
and 1996, respectively. Although the market for FTG motherboard and PC
peripheral applications is expected to continue to be a major source of
revenue, the Company intends to increase its presence in applications for
communications and consumer electronics, which comprised less than 10% of total
FTG revenue in fiscal 1998.
DATA COMMUNICATIONS
Data Communications' component revenue represented approximately 25.2% of total
revenue in fiscal year 1998, as compared to 15.4% in fiscal 1997 and very little
corresponding revenue in fiscal 1996, reflecting the introduction of the new
1890 transceiver at the end of fiscal 1996. The Company has experienced
increased competition in the market for single channel 10/100mb LAN
transceivers, which has led to the cancellations of orders and severe price
erosion for this product line.
SYSTEMS TECHNOLOGY
Revenue from Systems Technology comprised 23.4%, 24.4% and 30.8% of total
revenue in fiscal years 1998, 1997 and 1996, respectively, and includes
engineering and design revenue. The declining trend in Systems Technology's
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, Turtle Beach was de-
consolidated commencing November 30, 1996. The Company's 35% share of net
losses at Voyetra was recorded under the equity method of accounting during the
remainder of fiscal 1997. Revenues were 6.5% and 23.3% of total revenue in
fiscal 1997 and 1996 respectively.
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.
<PAGE>
FOREIGN REVENUE
Foreign revenue, which resulted primarily from sales to offshore customers was
58.8%, 60.3% and 46.8% of total revenue in fiscal years 1998, 1997 and 1996,
respectively. The decrease in fiscal 1998 reflects a substantial increase of
Data Communications shipments in North America. The Company's sales are largely
denominated in U.S. dollars.
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 55.3% in fiscal 1998, as compared to 56.7% in fiscal 1997 and 60.1%
in fiscal 1996. The decrease in the cost of sales in fiscal year 1998 reflects
reduced material costs and a favorable product mix.
RESEARCH & DEVELOPMENT
Research and development expense expressed as a percentage of revenue was 12.3%
in fiscal 1998, as compared to 13.0% in fiscal year 1997, and 11.5% in fiscal
1996. In dollar terms, research and development spending increased 46.4% from
fiscal year 1997 to 1998, primarily as a result of hiring 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 12.1%, 14.5% and 20.2% of
total revenues in fiscal years 1998, 1997 and 1996 respectively. In monetary
terms, expenses have increased 28.6% from fiscal 1997 to fiscal 1998, but
decreased 18.2% from fiscal 1996 to fiscal 1997. The increase from 1997 to 1998
primarily represents increases in variable costs associated with the revenue
growth. The decrease from fiscal 1996 to fiscal 1997 represents the
deconsolidation of Turtle Beach.
OPERATING INCOME
Expressed as a percentage of revenue, operating income was 20.1%, 4.7% and 4.4%
in fiscal years 1998, 1997 and 1996, respectively. In dollar terms, operating
income was $32.3 million in fiscal year 1998 compared to $4.9 million and $4.0
million in fiscal years 1997 and 1996, 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. Accordingly, operating income before
special charges was 20.1% of revenue in fiscal year 1998, as compared to 15.4%
and 8.0% in fiscal 1997 and 1996, respectively.
<PAGE>
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 agreed to make loans to
Voyetra up to an aggregate of $3.5 million, subject to certain covenants. 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. The minority interest represents the ownership interest
in Turtle Beach Systems that the Company did not own prior to the merger.
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 experienced 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. As such, the Company was under no
obligation to provide financing under the Revolving Credit Agreement. As a
result of these significant events in the fourth quarter of fiscal 1997,
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.
In the second quarter of fiscal 1998, Voyetra filed a complaint in the Supreme
Court of the State of New York against the Company. At the end of the second
quarter, the Company and Voyetra reached a settlement. Voyetra would release
the Company from all claims and all obligations with respect to the
Voyetra/Turtle Beach merger agreement in exchange for assumption of certain
liabilities of Turtle Beach by the Company, a $200,000 cash payment and return
of Voyetra stock held by the Company. As of June 27, 1998, the Company has
settled these obligations and returned the Voyetra stock.
INCOME TAXES
After adjusting for minority interest and equity investment, the Company's
effective tax rate related to income from continuing operations was 37.5%, 95.8%
and 27.8% for fiscal years 1998, 1997, and 1996, respectively. The effective
tax rate for fiscal 1998 reflected tax exempt status of the Company's Singapore
operation, which has been given pioneer status, or exemption of taxes on non-
passive income for five years. 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.
<PAGE>
NET INCOME (LOSS)
Fiscal 1998 reflects a net income of $21.4 million, or $1.63 per diluted share,
as compared to a net loss of $8.4 million, or ($0.73) per diluted share, for
fiscal 1997, and income of $3.9 million, or $0.34 per diluted share, for fiscal
1996. Excluding special charges, equity investment related charges and minority
interest, however, net income for fiscal year 1997 was $10.6 million or $0.92
per diluted share and $6.0 million or $0.52 per diluted share for fiscal year
1996.
DISCONTINUED OPERATIONS
During the third quarter of fiscal 1997, the Company implemented a plan, with
approval of 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 of fiscal 1997, including severance
and other exit 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's remaining ownership interest
in ARK Logic (approximately 11%) was written off in the fourth quarter of fiscal
1997.
LIQUIDITY, CAPITAL RESOURCES AND INFLATION
As of June 27, 1998, the Company's principal sources of liquidity included
approximately $41.8 million in cash and investments, as compared to $26.4
million at June 28, 1997. The investments primarily consist of commercial
paper, government bonds and marketable securities with various maturities up to
about one year. During fiscal year 1998, the Company generated $23.4 million in
cash from its operating activities, as compared to $10.4 million during fiscal
year 1997. The increase in fiscal year 1998 was primarily due to improved
operating results, decreased accounts receivable as a result of improved
collection efforts and reduced inventory. The increase in cash flow was offset
by increased tax payments. The Company's days sales outstanding were reduced
from 51 days in fiscal 1997 to 46 days in fiscal 1998, while inventory turns
increased from 4.2 times in fiscal 1997 to 6.7 times in fiscal year 1998.
Expenditures for property and equipment were $8.1 million in 1998 as compared to
$3.4 million in fiscal year 1997. The increased expenditures are primarily
attributable to the start up of the Singapore facility and the investment in
design and testing tools and software.
During fiscal 1998, under its existing wafer supply contract with Chartered
Semiconductor Manufacturing PTE, Ltd. ("CSM"), the Company advanced the final
$2.0 million installment of its deposit with CSM whereby CSM would supply an
agreed minimum quantity of wafers over a five-year period from April 1996
through December 2000. The contract requires CSM to refund the Company's
deposit by progressive installments based upon the volume of purchases made by
the Company. CSM has refunded $2.1 million to the Company in fiscal 1998. As
of June 27, 1998 and June 28, 1997, amounts due from CSM were $7.9 million and
$8.0 million, respectively. 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 in fiscal 1995 and the Company
received $2.6 million from AMI in fiscal 1998 extinguishing the balance of any
outstanding deposit at AMI.
<PAGE>
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. In connection with the merger, the Company also entered into a
Revolving Credit Agreement with Voyetra, pursuant to which the Company 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 decided to cease funding under the
Revolving Credit Agreement.
On November 5, 1997, Voyetra filed a complaint in the Supreme Court of the State
of New York against the Company. On December 31, 1997, the Company and Voyetra
reached a settlement in which Voyetra agreed to release the Company from all
claims and relieve the Company of all obligations with respect to the
Voyetra/Turtle Beach merger agreement in exchange for assumption of certain
liabilities of Turtle Beach, a $200,000 cash payment and the return of Voyetra
stock held by the Company. As of June 27, 1998, the Company has settled these
obligations and returned the Voyetra stock held by the Company to Voyetra.
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 required the Company to buy the remaining 49% minority interest
in ARK Logic at a future period, was terminated.
During fiscal 1998, the Company repurchased $13.0 million of its common stock
versus $10.5 million in the prior year. Proceeds and the tax benefit for stock
option exercises were $11.2 million in fiscal 1998 versus $12.8 million in the
prior year.
During fiscal 1998, the Company renegotiated its $20 million revolving/term loan
credit facility with its commercial bank to extend the expiration date to
December 31, 1999. 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 27, 1998. On June 27, 1998, there was no balance outstanding under
this facility.
In January 1998, the Board of Directors authorized a new stock repurchase
program, which provided for the purchase from time to time of 1.5 million shares
of the Company's common stock. The timing and amount of shares repurchased will
be determined at the discretion of the Company's management. As of June 27,
1998, the Company holds approximately 0.8 million shares in treasury stock
valued at $16.7 million, using the cost method.
The Company believes that the existing sources of liquidity and funds expected
to be generated from operations will adequately fund the Company's anticipated
working capital and other operating needs through 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.
<PAGE>
CERTAIN RISKS
For the fiscal years 1998, 1997 and 1996, the Company generated approximately
58.8%, 60.3%, and 46.8% of its net sales, respectively, from international
markets. These sales were generated primarily from the Company's customers in
the Pacific Rim region and included sales to foreign corporations, as well as to
foreign subsidiaries of U.S. corporations. The Company estimates that in fiscal
1998, over one-half of the Company's sales in international markets were to
foreign corporations, with the bulk of them being in Taiwan.
In addition, two of the Company's wafer suppliers and all of the Company's
assemblers are located in the Pacific Rim. Several countries in this region
have experienced currency devaluation and/or difficulties in financing short-
term obligations. There can be no assurance that the effect of this economic
crisis on the Company's wafer suppliers will not impact the Company's wafer
supply or assembly operations, or that the effect on the Company's customers in
that region will not adversely affect both the demand for the Company's products
and the collectivity of receivables.
The Company's international business activities, in general, are subject to a
variety of potential risks resulting from certain political, economic and other
uncertainties including, without limitation, political risks relating to a
substantial number of the Company's customers being in Taiwan. Certain aspects
of the Company's operations are subject to governmental regulations in countries
which the Company does business, including those relating to currency conversion
and repatriation, taxation of its earnings and the earnings of its personnel,
and its use of local employees and suppliers. The Company's operations are also
subject to the risk of changes in laws and policies in the various jurisdictions
in which the Company does business which may impose restrictions on the Company.
The Company cannot determine to what extent future operations and earnings of
the Company may be effected by new laws, new regulations, changes in or new
interpretations of existing laws or regulations or other consequences of doing
business outside the U.S.
The Company's activities outside the U.S. are subject to additional risks
associated with fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. Additionally, worldwide
semiconductor pricing is influenced by currency fluctuations and the recent
devaluation of the currencies of several countries in the Pacific Rim could have
a significant impact on the prices of the Company's products if its competitors
offer products at significantly lower prices in an effort to maximize cash flows
to finance short-term, dollar denominated obligations; such devaluations could
also impact the competitive position of the Company's customers in Taiwan and
elsewhere, which could impact the Company's sales.
INFLATION
Inflation has not had a significant impact on the Company.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, a temporarily inability to
process transactions, send invoices, or engage in normal business activities.
<PAGE>
Currently, the Company has a formal program in place and well underway that
includes analysis of potentially affected business and process systems and
replacement or correction of all non-compliant critical business and process
systems that it will need in the new millennium. In concert with this effort,
all suppliers that are critical to the function of the Company are being
surveyed to insure readiness and non-disruption to the Company supply chain.
The Company intends to have their internal application systems, infrastructure
and procedures, and manufacturing and control processes Year 2000 compliant by
mid-1999.
The Company will be required to modify or replace certain portions of its
internal systems. The Company is using internal resources to reprogram or
replace and test the software for Year 2000 changes. If these changes or
conversions to new systems are not made in time, the Year 2000 Issue could have
a material impact on the operations of the Company.
The Company relies on subcontractors for wafer manufacture, assembly and testing
of products. The Company has sent questionnaires to these critical suppliers to
determine the extent to which the Company's operations are exposed to failure of
Year 2000 issues. The Company is waiting on responses from these suppliers.
There can be no assurance that the Company will be successful in its efforts to
resolve any Year 2000 issues and continue receiving products from these
suppliers. The failure of resolving these issues could result in a shut-down of
some or all the Company's operations, which would have a material adverse effect
on the Company.
The Company utilizes third-party network equipment and software products, which
may or may not be Year 2000 compliant. The Company has begun formal
communications, through questionnaires, with critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are Year 2000 capable. The Company is currently awaiting
responses to these questionnaires. The Company does not currently have any
information concerning the Year 2000 compliance status of its customers. If any
of the Company's significant customers and suppliers do not successfully and in
a timely manner achieve Year 2000 compliance, the Company's business or
operations could be adversely affected. There can be no assurance that another
company's failure to ensure Year 2000 capability would not have an adverse
effect on the Company. The products that the Company sells are not date-
sensitive, and therefore product related exposures are low.
The total expense of the Year 2000 project is currently estimated at
approximately $100,000, which is not material to the Company's business
operations or financial condition. If required modifications to existing
software and conversions to new software are not made, or are not completed in a
timely manner, the Year 2000 could have a material impact on the operations of
the Company. While delays in the implementation of the Year 2000 solutions, or
failure of any critical technology components to operate properly in the Year
2000, could affect the Company's operations, the Company believes that
resolution of the Year 2000 issue will not require material additional costs and
will not have a material adverse effect on the Company's results of operations.
There can be no assurance that these costs will not be material to the Company
or that the Company will be able to resolve these issues in a timely manner.
The expenses of the Year 2000 project are being funded through operating cash
flows.
The Company has not yet fully developed a comprehensive contingency plan to
address situations that may result if the Company is unable to achieve Year 2000
readiness of its critical operations. There can be no assurance that the
Company will be able to develop a contingency plan that will adequately address
issues that may arise in the year 2000. The failure of the Company to
successfully resolve such issues could result in shut-down of some or all of the
Company's operations, which would have a material adverse effect on the Company.
<PAGE>
The costs of the plan and the date on which the Company believes it will
complete the Year 2000 modification are based on management's best estimates,
which were derived utilizing numerous assumptions regarding future events,
including the continued availability of certain resources, third-party
modification plans and other factors. There can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has not adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", which will become effective for
fiscal year 1999. The Company will adopt the requirements of this statement in
fiscal 1999.
The Company has not adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which becomes effective for fiscal year
1999. The Company will adopt the requirements of this statement in fiscal 1999.
In February, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and other Post Retirement
Benefits". This statement is effective for fiscal years beginning after
December 15, 1997. The Company will adopt the requirements of this statement in
fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. The Company has not
yet fully analyzed the impact of this statement on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's sales are denominated in U.S. dollars, accordingly, the Company
currently does not engage in foreign currency hedging or other market structure
derivative trading activities.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
June 27 June 28
Assets 1998 1997
---------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 25,340 $18,425
Marketable securities 16,480 7,981
Accounts receivable, net 20,335 20,690
Inventory, net 12,839 13,542
Deferred income taxes 2,069 1,139
Prepaid income taxes 1,067 --
Other current assets 2,633 4,435
---------------------------------
Total current assets 80,763 66,212
Property and equipment, net 17,884 14,104
Deposits on purchase contracts 7,864 8,000
Other assets 1,498 2,306
---------------------------------
Total assets $108,009 $90,622
=================================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term obligations $ 143 $ 206
Accounts payable 11,047 12,565
Accrued salaries and bonuses 1,788 935
Accrued expenses and other current liabilities 2,672 1,900
Income taxes payable -- 2,346
---------------------------------
Total current liabilities 15,650 17,952
Long-term debt, less current portion 1,380 1,503
Deferred income taxes and other liabilities 1,211 1,020
---------------------------------
Total liabilities 18,241 20,475
---------------------------------
Commitments and contingencies (See Notes 5 and 11) -- --
Shareholders' Equity:
Preferred stock, authorized 5,000 shares, none
issued -- --
Common stock, no par value, authorized 50,000
shares; issued 13,099 and 12,445 shares at
June 27, 1998 and June 28, 1997, respectively 56,604 45,366
Less treasury stock, at cost (774 and 286 shares at
June 27, 1998 and June 28, 1997, respectively) (16,742) (3,749)
Currency translation adjustment -- (1)
Retained earnings 49,906 28,531
---------------------------------
Total shareholders' equity 89,768 70,147
---------------------------------
Total liabilities and shareholders' equity $108,009 $90,622
=================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
June 27 June 28 June 29
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Revenue $160,634 $104,359 $91,330
Cost and expenses:
Cost of sales 88,859 59,137 54,848
Research and development 19,797 13,521 10,547
Selling, general and administrative 19,444 15,118 18,478
Special charges:
Facility closing -- -- 1,757
Write-off of in-process research and development costs -- 11,196 1,500
Goodwill amortization 234 536 175
---------------------------------------------------
Operating income 32,300 4,851 4,025
Interest and other income (1,984) (1,800) (1,332)
Interest expense 64 63 403
Impairment in equity investment -- 7,072 --
Minority interest -- (154) (1,058)
Equity loss of investee -- 866 --
---------------------------------------------------
Income (loss) before income taxes from continuing operations 34,220 (1,196) 6,012
Income tax expense 12,845 6,314 1,376
---------------------------------------------------
Income (loss) from continuing operations 21,375 (7,510) 4,636
Discontinued operations
Loss from operations -- (1,773) (721)
Gain on disposal -- 864 --
---------------------------------------------------
Loss from discontinued operations -- (909) (721)
---------------------------------------------------
Net income (loss) $ 21,375 $ (8,419) $ 3,915
===================================================
Basic income (loss) per common share:
Income (loss) from continuing operations $ 1.73 $ (0.65) $ 0.41
Loss from discontinued operations -- (0.15) (0.06)
Gain on disposal -- 0.07 --
---------------------------------------------------
$ 1.73 $ (0.73) $ 0.35
===================================================
Diluted income (loss) per common and common equivalent share:
Income (loss) from continuing operations $ 1.63 $ (0.65) $ 0.40
Loss from discontinued operations -- (0.15) (0.06)
Gain on disposal -- 0.07 --
---------------------------------------------------
$ 1.63 $ (0.73) $ 0.34
===================================================
Shares used to compute income (loss) per common
and common equivalent share:
Basic 12,343 11,474 11,278
===================================================
Diluted 13,141 11,474 11,592
===================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Cumulative Total Number of
Common Treasury Retained Translation Shareholders' Shares
Stock Stock Earnings Adjustment Equity Outstanding
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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) --
---------------------------------------------------------------------------
Balance at June 28, 1997 45,366 (3,749) 28,531 (1) 70,147 12,159
Shares issued upon exercise of stock options 7,014 -- -- -- 7,014 653
Tax benefits related to stock options 4,224 -- -- -- 4,224 --
Purchase of common stock -- (12,993) -- -- (12,993) (487)
Currency translation adjustment -- -- -- 1 1 --
Net income -- -- 21,375 -- 21,375 --
---------------------------------------------------------------------------
Balance at June 27, 1998 $56,604 $(16,742) $49,906 $ 0 $ 89,768 12,325
===========================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------
June 27 June 28 June 29
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 21,375 $ (8,419) $ 3,915
Increase (decrease) in cash to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,577 3,659 3,129
Minority interest and equity investment -- 7,492 (1,058)
(Gain) loss on sale of assets 633 (356) 42
Loss from discontinued operations -- 909 721
Deferred income taxes (712) 1,541 866
Write-off of in-process research & development costs -- 11,196 1,500
Facility closing, non-cash portion -- -- 1,215
Stock compensation -- 84 --
Accounts receivable 355 (8,808) 1,850
Inventory 703 2 (2,754)
Other assets, net (234) (687) 560
Accounts payable, accrued expenses and other liabilities 81 3,480 1,895
Income taxes payable (3,413) 292 (405)
-------------------------------------------------------
Net cash provided by operating activities 23,365 10,385 11,476
-------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (8,139) (3,358) (4,390)
Proceeds from sale of fixed assets 10 107 129
Proceeds from sales of marketable securities 13,269 845 --
Proceeds from sale of discontinued operations -- 1,925 --
Proceeds from maturities of marketable securities 21,069 10,499 18,316
Purchases of marketable securities (43,429) (19,205) (5,940)
Deposits on purchase contracts, net 2,711 (4,002) (1,020)
Investment in subsidiary, net of cash acquired -- (6,074) (986)
-------------------------------------------------------
Net cash provided by (used in) investing activities (14,509) (19,263) 6,109
-------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreement -- (2,315) 2,315
Repayments of long-term debt (186) (138) (2,027)
Proceeds from exercise of stock options 7,014 10,807 2,811
Tax benefit of stock option exercise 4,224 2,039 506
Purchase of common stock (12,993) (10,466) (460)
-------------------------------------------------------
Net cash provided by (used in) financing activities (1,941) (73) 3,145
-------------------------------------------------------
Net increase (decrease) in cash 6,915 (8,951) 20,730
Cash and cash equivalents:
Beginning of year 18,425 27,376 6,646
-------------------------------------------------------
End of year $ 25,340 $ 18,425 $27,376
=======================================================
Supplemental disclosures of cash information:
Cash payments during the period for:
Interest $ 65 $ 58 $ 308
=======================================================
Income taxes $ 11,840 $ 2,336 $ 1,407
=======================================================
</TABLE>
For a description of certain non-cash investing and financing transactions,
refer to footnote 2.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<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 wholly-owned subsidiaries, 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 represent 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 27, 1998 consist of cash, overnight retail repurchase
agreements (held in U.S. Treasury obligations), money market funds and
commercial paper.
Marketable Securities
Marketable securities at June 27, 1998, consist of debt and equity securities.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement No. 115") in fiscal 1995. Under Statement No. 115, the
Company classifies all of its debt securities as held to maturity and records
them at amortized cost. The Company's equity securities are classified as
trading securities and unrealized holding gains and losses are included in
earnings.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost (FIFO basis) or market.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets of generally
30 years for buildings and between 18 months and 10 years for all other
property, including equipment and building improvements. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life.
Goodwill
The purchase price in excess of the fair value of net assets acquired is
amortized on a straight-line basis over 7 years. Accumulated amortization was
$0.3 million and $80,000 as of June 27, 1998 and June 28, 1997, respectively.
During the fourth quarter of 1997, the Company recorded an impairment loss of
$7.1 million, of which $3.9 million represented a goodwill write-off. This
decision to record an
29
<PAGE>
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 loss 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
undiscounted cash flows. 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 ended
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. Refer to 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 fiscal 1997.
Earnings per Common Share
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is based on
the weighted average number of common shares and potential common stock ("PCS")
outstanding during the period. PCS consists of stock options to purchase common
shares (using the treasury stock method based on average price over the period
covered by the calculation), unless anti-dilutive. No PCS 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.
30
<PAGE>
Accounting for Stock-based Compensation
The Company has adopted the disclosure provisions of 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 APB 25 and related interpretation in accounting for its stock
options to employees and directors. Refer to 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.
New Pronouncements
The Company has not adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", which will become effective for
fiscal year 1999. The Company will adopt the requirements of this statement in
fiscal 1999.
The Company has not adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which becomes effective for fiscal year
1999. The Company will adopt the requirements of this statement in fiscal 1999.
In February, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and other Post Retirement
Benefits". This statement is effective for fiscal years beginning after
December 15, 1997. The Company will adopt the requirements of this statement in
fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. The Company has not
yet fully analyzed the impact of this statement on its financial statements.
(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 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 equity was
approximately $4.3 million. Subsequent to the transaction, the Company
accounted 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 Arrangement (the " Revolving Credit Agreement") with Voyetra,
pursuant to which the Company agreed to make loans to Voyetra up to an aggregate
of $3.5 million, subject to certain covenants. The Company recorded an
impairment loss on this investment in the fourth quarter of fiscal 1997. (See
Disposition/Impairment footnote 3).
31
<PAGE>
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, consisting of $6.4
million in cash and 608,504 shares of ICS common stock. The Company's shares
exchanged in the transaction were 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 is being amortized over 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 28,
1997, and accordingly, proforma information as if the transaction had occurred
on June 29, 1996, has not been presented.
(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 reacquisition of
68,387 shares of the Company's stock held by Arnold and was based on a valuation
made by an independent appraiser.
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
its subsidiary, ARK Logic, within a 12-month period. Accordingly, the
Company presented ARK Logic as a discontinued operations and all prior periods
have been restated to reflect this presentation. In connection with these
events, the Company recorded a charge of $1.5 million in the third quarter
fiscal 1997, 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 $0.9 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 and 1996 were $1.8
million and $10.2 million, respectively.
During the fourth quarter of fiscal 1997 the Company determined that significant
events and changes in circumstances had occurred subsequent to the Voyetra
transaction 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. As such, the Company concluded that it
was under no obligation to provide financing under the Revolving Credit
Agreement. As a result of these significant events in the fourth quarter of
fiscal 1997, 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. In the
second quarter of fiscal 1998, Voyetra filed a complaint in the Supreme Court of
the State of New York against the Company. At the end of the second quarter,
the Company and Voyetra reached a settlement. Voyetra would release the Company
from all claims and all obligations with respect to the
32
<PAGE>
Voyetra/Turtle Beach merger agreement in exchange for assumption of certain
liabilities of Turtle Beach, a $200,000 cash payment and return of Voyetra stock
held by the Company. As of June 27, 1998, the Company has settled these
obligations and returned the Voyetra stock.
(4) PURCHASE COMMITMENTS
During fiscal 1998, under an existing wafer supply contract with Chartered
Semiconductor Manufacturing PTE Ltd. ("CSM") the Company advanced the final
$2.0 million installment of its deposit with CSM whereby CSM would supply an
agreed minimum quarterly quantity of wafers over a five-year period from April
1996 through December 2000 at favorable prices. 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. As of June 27, 1998, CSM has repaid $2.1 million of the Company's
deposit. As of June 27, 1998 and June 28, 1997 amounts due from CSM were $7.9
million and $8.0 million respectively. The Company had previously entered into a
similar agreement with American Microsystems, Inc., ("AMI") by which it placed a
$5.5 million deposit which has been progressively repaid as wafer purchases were
made. The Company received $2.6 million from AMI in fiscal 1998 extinguishing
the balance of any outstanding deposit at AMI.
(5) OTHER AGREEMENTS
In fiscal 1998, the Company entered into a non-transferable and non-exclusive
license with Philips Electronics to the Company to use their technical
information for data transmission systems. In consideration of the licenses and
rights granted, the Company, during fiscal 1998, has paid and accrued
approximately $0.5 million in royalty fees.
(6) MARKETABLE SECURITIES
The Company invests in debt securities which are recorded as held to maturity.
The estimated fair value of each investment approximates the cost, and
therefore, there were no unrealized gains or losses as of June 27, 1998 and June
28, 1997. The Company also invests in equity securities which are recorded at
trading securities. The securities are recorded at market value. The company
recorded unrealized losses of approximately $.1 million in the statement of
operations for fiscal 1998. There were no unrealized gains or losses as of June
28, 1997. Proceeds from the sale or maturity of the investments were $34.3
million and $11.3 million in fiscal 1998 and fiscal 1997, respectively. All
investments are due within on year and therefore, are classified as current
assets at June 27, 1998.
(7) ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June 27 June 28
1998 1997
----------------------------
<S> <C> <C>
Accounts receivable $22,128 $21,133
Less: reserves for returns and doubtful accounts (1,793) (443)
----------------------------
$20,335 $20,690
============================
</TABLE>
33
<PAGE>
(8) INVENTORY
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
June 27 June 28
1998 1997
----------------------------
<S> <C> <C>
Work-in-process $ 6,370 $ 9,362
Finished parts 9,829 6,553
Less: obsolescence reserve (3,360) (2,373)
----------------------------
Inventory, net $12,839 $13,542
============================
</TABLE>
(9) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 27 June 28
1998 1997
------------------------------
<S> <C> <C>
Land and building $ 5,562 $ 5,394
Machinery and equipment 25,918 18,601
Furniture and fixtures 1,630 1,240
Leasehold improvements 308 258
------------------------------
$ 33,418 $ 25,493
Less: accumulated depreciation and amortization (15,534) (11,389)
------------------------------
Property and equipment, net $ 17,884 $ 14,104
==============================
</TABLE>
Depreciation and amortization expense related to property, plant and equipment
was $4.3 million, $3.3 million and $2.8 million in 1998, 1997 and 1996,
respectively.
(10) DEBT
In the fourth quarter of fiscal 1998, the Company renegotiated its
revolving/term loan credit facility with a commercial bank to extend the
expiration to December 31, 1999. The facility is subject to certain covenants,
including the maintenance of certain financial ratios, minimum tangible net
worth requirements, restrictions on the magnitude of stock repurchases and
payment of cash dividends. The Company was in compliance with all covenants as
of June 27, 1998. On June 27, 1998, the Company had no outstanding borrowings
under this facility. The facility is subject to a commitment fee equal to 1/8%
on the unused portion due and payable quarterly in arrears.
The line of credit available for future borrowings at June 27, 1998 was $20.0
million; which includes $3.0 million 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.
34
<PAGE>
A summary of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
June 27 June 28
1998 1997
---------------------------
<S> <C> <C>
PIDA second mortgage, payable in monthly
installments through April 2009, interest at 2% $1,503 $1,636
Lease obligations and other 20 73
---------------------------
$1,523 $1,709
Less current portion 143 206
---------------------------
Long-term debt, less current portion $1,380 $1,503
===========================
</TABLE>
Aggregate annual maturities of long-term debt as of June 27, 1998 (in thousands)
<TABLE>
<S> <C>
1999 $ 143
2000 130
2001 131
2002 133
2003 136
2004 and beyond 850
------
$1,523
======
</TABLE>
(11) LEASE OBLIGATIONS
The Company leases certain of its facilities under operating lease agreements,
some of which have renewal options.
Rental expense under operating lease agreements, net of sublease income, was
$0.6 million, $0.3 million and $0.5 million in 1998, 1997 and 1996,
respectively.
Future minimum lease commitments under the Company's operating leases are as
follows as of June 27, 1998 (in thousands):
<TABLE>
<S> <C>
1999 $ 1,331
2000 1,515
2001 1,304
2002 1,300
2003 and after 9,183
-------
$14,633
=======
</TABLE>
(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.
35
<PAGE>
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 27,
1998 due to the short-term maturities of these instruments.
Marketable securities - The estimated fair value of each held to maturity
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 is not materially different from its fair
value on June 27, 1998.
(13) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
June 27 June 28 June 29
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $11,685 $4,248 $1,324
State 1,837 525 (814)
Foreign 35 -- --
-------------------------------------------------
Total current $13,557 $4,773 $ 510
-------------------------------------------------
Deferred tax expense (benefit):
Federal $ (627) $1,299 $ 341
State (85) 242 525
-------------------------------------------------
Total deferred (712) 1,541 866
-------------------------------------------------
Total income tax expense $12,845 $6,314 $1,376
=================================================
</TABLE>
36
<PAGE>
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 27 June 28 June 29
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 664 $ 171 $ 852
Inventory valuation 1,208 744 903
Change in business strategy reserves -- -- 102
Net operating loss carry forward 195 195 529
Capital loss carry forward 2,137 2,136 --
Intangible asset -- -- 584
Basis in equity investment 692 692 --
Accrued expenses and other 318 291 416
---------------------------------------
Gross deferred tax assets 5,214 4,229 3,386
Less: valuation allowance 3,145 3,090 911
---------------------------------------
Deferred tax asset 2,069 1,139 2,475
Deferred tax liabilities:
Depreciation 1,018 899 773
Other 193 94 15
---------------------------------------
Deferred tax liabilities 1,211 993 788
---------------------------------------
Net deferred tax asset $ 858 $ 146 $1,687
=======================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become
deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, potential limitations with respect to the
utilization of loss 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 these deductible differences, net of existing
valuation allowances (both federal and state) at June 27, 1998. The Company will
periodically reassess and re-evaluate the status of its recorded deferred tax
assets.
37
<PAGE>
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 27 June 28 June 29
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Computed expected tax expense (benefit) $11,977 $ (736) $ 1,481
State taxes (net of federal income tax benefit) 1,248 228 188
Foreign trade income exemption (1,012) -- (91)
Capital contribution 346 -- --
Tax-exempt interest and dividends (13) (29) (86)
In-process research and development write-off -- 3,904 --
Loss in equity investments -- 2,778 (371)
Loss from discontinued operations -- 318 252
Gain from sale of Galaxy Power -- (174) --
Change in estimate of state taxes -- -- (1,065)
Change in valuation allowance -- -- 911
Other 299 25 157
-----------------------------------------------
$12,845 $6,314 $ 1,376
===============================================
</TABLE>
As of June 27, 1998, 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, resulting in a credit to income of $1.1 million.
(14) EMPLOYEE BENEFIT PLANS
The Company has a bonus plan which covers permanent full-time employees with at
least six months of service. Bonuses under this plan are based on the Company
achieving specified revenue and profit objectives and on individuals meeting
specified performance objectives. Amounts charged to expense for the plan were
$3.6 million, $1.9 million and $1.1 million in fiscal years 1998, 1997 and 1996,
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 $0.5 million in fiscal 1998 and $0.3 million
in both fiscal years 1997 and 1996.
(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.
38
<PAGE>
The Company's 1997 Equity Compensation Plan ("the 1997 Plan") was approved,
ratified and adopted 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 fair market
value with various vesting provisions. Stock option transactions during fiscal
years 1998, 1997 and 1996 are summarized as follows (in thousands, except price
per share):
<TABLE>
<CAPTION>
Options Available
For Grant Under Weighted Average
The Plans Options Outstanding Exercise Price
-----------------------------------------------------------------------
<S> <C> <C> <C>
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 (966) 966 12.22
Exercised -- (1,055) 10.23
Terminated 400 (400) 11.08
-----------------------------------------------------------------------
Balance June 28, 1997 50 1,968 $11.58
Additional Shares reserved 2,000 -- --
Granted (418) 418 23.59
Exercised -- (650) 10.72
Terminated 391 (391) 14.22
-----------------------------------------------------------------------
Balance June 27, 1998 2,023 1,345 $14.95
=======================================================================
</TABLE>
As of June 27, 1998, options for 0.4 million shares were exercisable at weighted
average exercise prices ranging from $1.22 to $35.25 at an aggregate exercise
price of $4.9 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 1998 and 1997, 0.6 million stock options were granted to employees
outside the plan at weighted exercise price of $17.16, the fair market value at
grant date, for terms of five years. Such options are non-qualified and are not
included in the above table but are included in SFAS No. 123 proforma disclosure
that follows.
39
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- ------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Price 06/27/1998 Contractual Life Exercise Price 06/27/1998 Exercise Price
- ----------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
$0.08 - $3.69 15 2.3 $ 1.57 .02 $ 1.22
$3.69 - $7.38 10 3.2 $ 6.86 3 $ 6.86
$7.38 - $11.06 261 2.4 $10.22 93 $10.36
$11.06 - $14.75 710 4.4 $12.92 182 $13.04
$14.75 - $18.44 128 4.0 $15.81 54 $16.02
$18.44 - $22.13 15 8.2 $19.63 4 $19.50
$22.13 - $25.81 134 4.6 $24.87 0 $ 0.00
$33.19 - $36.88 72 4.3 $35.25 16 $35.25
------------------------------------------------------------- -----------------------------
1,345 4.0 $14.95 352 $13.82
</TABLE>
The Company applies APB 25 and related interpretations in accounting for stock
option plans. Had compensation cost been recognized consistent with SFAS No.
123, the Company's consolidated net earnings (loss) and earnings (loss) per
share would have been as follows (in thousands except per share data:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $21,375 $ (8,419) $3,915
Pro forma 16,868 (10,405) 3,330
Earnings (loss) per share
Basic As reported $ 1.73 $ (0.73) $ 0.35
Pro forma 1.37 (0.91) 0.29
Diluted As reported $ 1.63 $ (0.73) $ 0.34
Pro forma 1.28 (0.91) 0.29
</TABLE>
The per share weighted-average fair value of stock options issued by the Company
were $14.77, $6.57, and $6.69 for fiscal 1998, 1997 and 1996 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 60-81%
Average expected option life 4 years
Risk-free interest rate 5.34% - 6.4%
</TABLE>
Pro forma net income (loss) reflects only options granted in fiscal 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No.123 is not reflected in the pro 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.
40
<PAGE>
(16) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 was issued to simplify the computation of EPS and to make U.S.
standards more compatible with the EPS standards of other countries and that of
the International Accounting Standards Committee. SFAS 128 is effective for
financial statements for periods ending after December 15, 1997. The Company
adopted SFAS 128 in the second quarter of fiscal 1998.
The calculations of Earnings Per Share (EPS) were (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income (loss) from continuing operations $21,375 $(7,510) $ 4,636
Loss from discontinued operations -- (909) (721)
----------------------------------------------
Net income (loss) $21,375 $(8,419) $ 3,915
Average common shares outstanding 12,343 11,474 11,278
Basic EPS:
Income/loss from continuing operations $ 1.73 $ (0.65) $ 0.41
Loss from discontinued operations -- (0.08) (0.06)
----------------------------------------------
Net income/(loss) $ 1.73 $ (0.73) $ 0.35
Diluted EPS:
Income (loss) from continuing operations $21,375 $(7,510) $ 4,636
Loss from discontinued operations -- (909) (721)
----------------------------------------------
Net income (loss) $21,375 $(8,419) $ 3,915
Average common shares outstanding 12,343 11,474 11,278
Effect of dilutive options 798 -- 314
----------------------------------------------
Average number of common shares assuming 13,141 11,474 11,592
dilution
Diluted EPS:
Income (loss) from continuing operations $ 1.63 $ (0.65) $ 0.40
Loss from discontinued operations -- (0.08) (0.06)
----------------------------------------------
Net income/(loss) $ 1.63 $ (0.73) $ 0.34
</TABLE>
(17) TREASURY STOCK
In January 1998, the Company's Board of Directors authorized a revised program
to repurchase up to 1.5 million shares of the Company's common stock. The
timing and amount of shares repurchased will be determined at the discretion of
the Company's management. As of June 27, 1998, the Company has repurchased an
aggregate of 1.3 million shares valued at $23.9 million using the cost method.
In connection with the sale of its battery charge controller product line, the
Company received 68,387
41
<PAGE>
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 27, 1998, the Company had 0.8 million shares in treasury stock valued at
$16.7 million, held at an average cost of $21.64.
(18) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily within one business segment which is the design,
development and marketing of integrated circuits. Foreign sales consist of
shipments primarily to the Pacific Rim and Europe and which were approximately
58.8%, 60.3% and 46.8% of revenues in fiscal 1998, 1997 and 1996 respectively.
(19) RELATED PARTY TRANSACTIONS
In the third quarter of fiscal 1998, the Company entered into a severance
agreement with Stavro Prodromou, the former President and Chief Executive
Officer. Dr. Prodromou received $135,000 in cash severance and health benefits
at the time of his departure, and was granted up to a one year period to
exercise 125,000 of his stock options. His remaining options were canceled.
On May 6, 1998, the Company entered into an employment agreement with Henry
Boreen to serve as the Company's interim CEO until September 11, 1998. The term
of this agreement may be extended by the Company at its sole option. Mr.
Boreen's base compensation is $10,000 per month, plus a grant of 50,000
stock options at an exercise price at fair market price at date of grant,
which immediately vested. On September 14, 1998, the Company made an
amendment to this agreement to extend the term to December 31, 1998. The
amendment also increased Mr. Boreen's base compensation to $12,000 per month
plus a grant of 30,000 stock options at an exercise price at fair value at the
date of grant, which immediately vest.
On May 11, 1998, each non-employee director entered into a consulting agreement
with the Company for management consulting services. The term of each of the
consulting agreement ends on December 31, 1998, and to the extent service (not
to exceed ten days per month) of any such director were to be retained, he would
receive cash compensation of $2,000 per day.
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
42
<PAGE>
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. The
Company recorded a charge of $0.3 million in connection with this agreement.
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 became exercisable in monthly installments over the six month period
following the date of grant.
(20) RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS ACTIVITIES
For the fiscal years 1998, 1997 and 1996, the Company generated approximately
58.8%, 60.3% and 46.8% of its net sales, respectively, from international
markets. These sales were generated primarily from the Company's customers in
the Pacific Rim region and included sales to foreign corporations, as well as to
foreign subsidiaries of U.S. corporations. The Company estimates that in fiscal
1998, approximately one-half of the Company's sales in international markets
were to foreign corporations, with the bulk of them being in Taiwan.
In addition, two of the Company's wafer suppliers and all of the Company's
assemblers are located in the Pacific Rim. Several countries in this region
have experienced currency devaluation and/or difficulties in financing short-
term obligations. There can be no assurance that the effect of this economic
crisis on the Company's wafer suppliers will not impact the Company's wafer
supply or assembly operations, or that the effect on the Company's customers in
that region will not adversely affect both the demand for the Company's products
and the collectivity of receivables. See "Manufacturing".
The Company's international business activities in general are subject to a
variety of potential risks resulting from certain political, economic and other
uncertainties including, without limitation, political risks relating to a
substantial number of the Company's customers being in Taiwan. Certain aspects
of the Company's operations are subject to governmental regulations in the
countries in which the Company does business, including those relating to
currency conversion and repatriation, taxation of its earnings and earnings of
its personnel, and its use of local employees and suppliers. The Company's
operations are also subject to the risk of changes in laws and policies in the
various jurisdictions in which the Company does business which may impose
restrictions on the Company. The Company cannot determine to what extent
future operations and earnings of the Company may be effected by new laws, new
regulations, changes in or new interpretations of existing laws or regulations
or other consequences of doing business outside the U.S.
The Company's activities outside the U.S. are subject to additional risks
associated with fluctuating currency values and exchange rates, hard currency
shortages and controls on currency change. Additionally, worldwide semiconductor
pricing is influenced by currency fluctuations and the recent devaluation of the
currencies of several countries in the Pacific Rim could have a significant
impact on the prices of the Company's products if its competitors offer products
at significantly lower prices in an effort to maximize cash flows to finance
short-term, dollar denominated obligations; such devaluations
43
<PAGE>
could also impact the competitive position of the Company's customers in Taiwan
and elsewhere, which could impact the Company's sales.
(21) MAJOR CUSTOMERS
During fiscal 1998 and 1997, 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.
44
<PAGE>
(22) QUARTERLY DATA UNAUDITED
The following is a summary of the unaudited quarterly results of operations for
the years ended June 27, 1998 and June 28, 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------
September 27 December 27 March 28 June 27 September 28 December 28 March 29 June 28
1997 1997 1998 1998 1996 1996 1997 1997
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $38,585 $43,045 $43,545 $35,459 $21,381 $27,445 $ 25,121 $30,412
Cost of sales 21,052 23,457 23,977 20,373 13,677 16,278 13,504 15,678
Research and development 4,236 5,321 5,540 4,700 2,851 3,215 3,512 3,943
In process R&D costs -- -- -- -- -- -- 11,196 --
Operating income (loss) 8,143 9,137 9,070 5,950 763 3,777 (6,416) 6,727
Income (loss) from
continuing operations 5,042 6,021 6,208 4,104 996 2,739 (7,980) (3,265)
Income (loss) from
discontinued operations -- -- -- -- (367) (493) (2,845) 2,796
------------------------------------------------------------------------------------------------
Net income (loss) $ 5,042 $ 6,021 $ 6,208 $ 4,104 $ 629 $ 2,246 $(10,825) $ (469)
------------------------------------------------------------------------------------------------
Income (loss) from continuing $ 0.38 $ 0.45 $ 0.48 $ 0.33 $ 0.09 $ 0.24 $ (0.68) $ (0.27)
operations per share (diluted)
Income (loss) from
discontinued operations -- -- -- -- (0.03) (0.04) (0.24) 0.23
------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ 0.45 $ 0.48 $ 0.33 $ 0.06 $ 0.20 $(0.92) $(0.04)
------------------------------------------------------------------------------------------------
Diluted Weighted shares
outstanding 13,337 13,375 13,066 12,612 11,346 11,379 11,771 11,939
------------------------------------------------------------------------------------------------
</TABLE>
45
<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 following biographical information is furnished as to each person
nominated for election as a director.
<TABLE>
<CAPTION>
NAME AGE POSITION
========== === ================
<S> <C> <C>
Henry I. Boreen/(1)/ 71 Chairman of the Board, Interim CEO
Edward M. Esber, Jr.(2) 46 Director
Rudolf Gassner/(2)/ 63 Director
John L. Pickitt/(1)(2)/ 65 Director
</TABLE>
/(1)/ Member of the Compensation and Stock Option Committee.
/(2)/ Member of the Audit Committee.
MR. BOREEN became a director of the Company in December 1984 and chairman
of the Board of Directors in April 1995. In March 1998, Mr. Boreen was
appointed to the additional position of interim Chief Executive Officer. Mr.
Boreen also served as Interim Chief Executive Officer from August 1996 to April
1997 of the Company. Mr. Boreen has been a principal of HIB International, an
electronics consulting company, since 1984, and has also served as a director 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.
MR. ESBER became a Director of the Company in June 1997. He has served as
Chairman and Director of Solopoint, Inc., a personal communications management
products company, since March 1998 and President , CEO and Director since
October 1995. He served as Chairman, President and Chief Executive Officer of
Creative Insights, Inc. from March 1994 to June 1995. From May 1993 to May
1994, Mr. Esber was President and Chief Operating Officer of Creative Labs, Inc.
Mr. Esber is also a member of the Board of Directors of Borealis Technology
Corporation, Quantum Corporation, Socket Communications and Trustee of Case
Reserve Institute of Technology.
MR. GASSNER became a Director of the Company in June 1992. He has been
employed by AMP Incorporated, a leading producer of electrical and electronic
connecting and interconnection systems, in various positions since 1966. Since
January 1992, he has served as the Vice President of AMP's Capital Goods
Business Unit and since 1996, has served as President AMP's Global PC Division.
In January, 1997, he was appointed Corporate Vice President AMP Incorporated.
Mr. Gassner also serves as a Director of ITI and NetBuy.
GENERAL PICKITT (RET.) became a director of the Company in March 1994. He
previously served in the United States Air Force for 32 years in various
capacities in the fields of research and development, planning, international
operations and senior management until his retirement as a Lt. General in 1987.
From January 1988 until December 1994, he served as Chief Executive Officer of
the Computer and Business Equipment Manufacturers Association. General Pickitt
is currently a management consultant.
46
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended June 27, 1998,
June 28, 1997 and June 29, 1996, the compensation paid by the Company to those
persons who were at any time during the last completed fiscal year, the
Company's chief executive officer, and its next most highly compensated
executive officers whose total annual salary and bonus was in excess of $100,000
for the last completed fiscal year.
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ---------------------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME ANNUAL STOCK UNDERLYING OTHER
AND COMPEN- AWARD(S) OPTIONS/ LTIP COMPEN-
PRINCIPAL FISCAL SALARY BONUS SATION ($) SARS PAYOUTS SATION
POSITION YEAR ($) ($)/(1)/ ($)/(2)/ (#) ($) ($)/(3)/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry I. Boreen, 1998 66,923 - - - 58,000 - -
----
Interim CEO 1997 96,923 40,020 - - 75,000 - -
----
Hock E. Tan, Senior 1998 209,997 168,000 - - - - 5,254
----
Vice President, CFO 1997 166,273 112,660 - - 50,000 - 5,182
----
and Secretary 1996 158,851 89,461 - - 33,000/(6)/ - 7,120
----
Martin Goldberg, Vice 1998 168,846 82,875 - - 3,750 - 428
----
President, Sales/(4)/ 1997 149,540 67,200 - - 34,500 - 346
----
1996 146,515 48,734 - - 100,000/(6)/ - 346
----
Stavro E.Prodromou, 1998 167,678 144,000 - - 8,000 - 135,504/(8)/
----
President and Chief 1997 47,307/(5)/ - - - 254,000/(7)/ - 432
----
Executive Officer
K. Venkateswaren, 1998 169,423 69,483 - - 3,000 - 5,178
----
Vice President, 1997 158,471 49,047 - - 49,500 - 5,106
----
Engineering 1996 149,605 50,338 - - 20,000 - 6,968
----
Services
Greg Richmond, 1998 161,479 66,517 - - 2,800 - 5,158
----
Vice President, 1997 151,183 46,012 - - 14,000 - 5,090
----
FTG 1996 135,620 44,727 - - 50,000 - 7,349
----
====================================================================================================================================
</TABLE>
47
<PAGE>
(1) Includes cash bonuses for services rendered in the applicable fiscal year.
(2) The Company has on occasion provided certain personal benefits to its
executive officers, the amount of such benefits to any of the above-named
individuals did not, however, exceed the lesser of $50,000 or 10% of salary
and bonus of such individual for the applicable fiscal year.
(3) Includes amounts contributed by the Company (I) under the Company's 401(k)
Plan as follows: Mr. Tan - $1,216 for 1998, $4750 for 1997 and $6774 for
1996; Mr. Richmond - $1,381 for 1998, $4,750 for 1997 and $7,025 for 1996;
Dr. Venkateswaren - $1,588 for 1998, $4,750 for 1997 and $6,645 for 1996;
(ii) for premiums for a life insurance policy as follows: Dr. Prodromou -
$504 for 1998, and $432 for 1997; Mr. Tan - $504 for 1998, $432 for
1997,and $346 for 1996; Mr. Goldberg $428 for 1998, $346 for 1997, and $347
for 1996; Mr. Richmond - $408 for 1998; $340 for 1997, and $324 for 1996;
Dr. Venkateswaren - $428 for 1998; $356 for 1997, and $323 for 1996.
(4) Mr. Goldberg transferred from Turtle Beach Systems, Inc. to the Company in
November 1996 as Vice President of Sales.
(5) Dr. Prodromou joined the Company in April 1997 as President and Chief
Executive Officer.
(6) Options granted by Turtle Beach Systems, Inc. to acquire shares of common
stock of Turtle Beach Systems, Inc., a subsidiary of the Company. Such
options were granted at a purchase price equal to $2.67 per share which was
determined by the board of directors of Turtle Beach to be the fair market
value of such stock on the date the options were granted. The options have
been terminated and are unexercisable.
(7) Due to Dr. Prodromou's resignation, 125,000 options were canceled.
(8) Includes severance payments made to Dr. Prodromou on March 20, 1998.
The following table sets forth the option grants during the fiscal year
ended June 27, 1998 for the individuals named in the Summary Compensation Table.
<TABLE>
<CAPTION>
====================================================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term
- ------------------------------------------------------------------------------------------------------------------------------------
% OF TOTAL OPTIONS EXERCISE OR
GRANTED TO EMPLOYEES BASE PRICE EXPIRATION 5% ($) 10% ($)
OPTIONS IN FISCAL YEAR ($/SH) DATE
NAME GRANTED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Henry I. Boreen 50,000 8.23% 16.0625 4/21/03 $221,889 $490,316
8,000 1.32% 35.25 10/23/02 77,911 172,164
Hock E. Tan -- -- -- -- -- --
Martin Goldberg 3,750 0.62% 25.625 8/04/02 $ 60,433 $153,149
Stavro E. Prodromou 8,000 1.32% 35.25 10/23/02 $ 77,911 $172,164
Greg Richmond 2,800 0.46% 25.625 8/04/02 $ 45,123 $114,351
K. Venkateswaren 3,000 0.49% 5.625 8/04/02 $ 48,346 $122,519
====================================================================================================================================
</TABLE>
48
<PAGE>
The following table sets forth aggregate option exercises during the fiscal
year ended June 27, 1998 and option values for the individuals named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
====================================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
SECURITIES IN-THE-MONEY OPTIONS
UNDERLYING AT FY-END ($)/(1)/
UNEXERCISED OPTIONS
NAME SHARES ACQUIRED VALUE AT FISCAL YEAR EXERCISABLE/
ON EXERCISE (#) REALIZED ($) END(#) UNEXERCISABLE
EXERCISABLE/
UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry Boreen 87,000 $1,989,480 54,000/4,000 0/0
Hock E. Tan 100,000 $1,665,250 25,000/75,000 $129,688/$335,938
Martin Goldberg 42,375 $ 303,227 0/35,875 0/$46,262
Stavro E. Prodromou 24,000 $ 297,000 62,500/62,500 $152,344/$152,344
Greg Richmond 46,500 $ 863,160 6,000/38,300 $ 24,937/$169,967
K. Venkateswaren 162,300 $ 735,171 1,875/52,625 $ 5,664/$202,755
====================================================================================================================================
</TABLE>
/(1)/ Unless otherwise indicated the value is based on closing price of $15.69
per share on June 27, 1998, less the option exercise price.
49
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of August 11, 1998 by:
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's Common Stock, (ii) each director of the Company, (iii) each
executive officer named in the summary compensation table below and (iv) the
directors and executive officers as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the
shares listed.
<TABLE>
<CAPTION>
Percent of
Number of Shares Shares
Name of Beneficial Owner Beneficially Owned/(1)/ Outstanding
- -------------------------- ----------------------- ------------
<S> <C> <C>
Henry I. Boreen 404,540 3.3%
Edward M. Esber, Jr. 9,000
Rudolf Gassner 28,500 *
John L. Pickitt 20,000 *
Stavro E. Prodromou 76,500 *
Hock E. Tan 54,526\(2)\ *
Martin Goldberg 937 *
K. Venkateswaren 7,963 *
Greg Richmond 9,753 *
</TABLE>
Directors and executive officers
as a group (9) 611,719 4.9%
______________
* Less than 1%.
(1) Includes options exercisable within 60 days of the above date to purchase
the following respective shares of the Company's Common Stock issued
pursuant to Company stock option plans: Mr. Boreen - 54,000, Dr.
Prodromou -62,500, Mr.Gassner - 18,000, Mr. Pickitt - 17,000, Mr. Tan-
37,500, Mr. Goldberg - 937, Dr. Venkateswaren - 6,375 and Mr. Richmond -
7,450; as well as shares issued pursuant to and being held by the Company's
401k plan: Mr. Tan - 1,216, Dr. Venkateswaren - 1,588 and Mr. Richmond -
1,381 as determined from reports by the plan administrator.
(2) 15,810 of these shares of the Company's Common Stock are held in a trust,
of which Mr. Tan is the sole trustee, for the benefit of members of Mr.
Edward H. Arnold's family. Mr. Arnold was formerly Chairman Emeritus of the
Board of Directors. Mr. Tan disclaims beneficial ownership of such shares.
50
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS RELATED TRANSACTIONS
None
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 consolidated financial statements listed in the accompanying index
to financial statements and financial schedule are filed or
incorporated by reference as a part of this report.
(2) Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this report
(b) Reports on Form 8-K
On April 23, 1998, the Company filed a current report on Form 8-K, which
was included as an exhibit to the third quarter earnings release. The earnings
release disclosed that the Company had experienced increased competition in the
market for single channel 10/100mb LAN transceivers, which led to cancellation
of orders and severe price erosion for this product line. While recent market
acceptance of several new frequency timing products for multimedia and
communication applications has been positive, the new frequency timing products
did not deliver sufficient revenue and earnings in the fourth quarter to offset
the decline from networking transceivers.
51
<PAGE>
SCHEDULE II
INTEGRATED CIRCUIT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 27, 1998, June 28, 1997 and June 29, 1996
(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 27, 1998:
Valuation reserves:
Accounts receivable $ 443 $ 1,478 $ 128 $1,793
Inventory 2,373 987 -- 3,360
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
</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.
52
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed as part of, or incorporated by reference
into this report.
* 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 10.15 hereof, there are no instruments, with
respect to long-term debt of the Registrant, that involve indebtedness
for securities authorized thereunder, exceeding 10% of the total
assets of the registrant and its subsidiaries on a consolidated basis.
The registrant agrees to file a copy, of any instrument or argument
defining the rights of holders of long-term debt of the registrant,
upon request of the Securities and Exchange Commission
+*10.1 1989 Incentive Stock Option Plan, as amended. (Exhibit 10.9 to the
1991 Registration Statement)
+*10.2 1991 Stock Option Plan. (Exhibit 10.10 to the 1991 Registration
Statement)
+*10.3 Amendment dated June 17, 1991 to the 1991 Stock Option Plan. (Exhibit
10.18 to the 1991 Registration Statement)
+*10.4 Amendment dated November 19, 1991 to the 1991 Stock Option Plan.
(Exhibit 10.21 to the registrant's 1992 Annual Report on Form 10-K
[the "1992 Form 10-K"])
+*10.5 Amendment dated January 24, 1992 to the 1991 Stock Option Plan.
(Exhibit 10.22 to the 1992 Form 10-K)
+*10.6 1992 Stock Option Plan. (Exhibit 4.1 to the registrant's registration
statement, No. 33-55902, on Form S-8, filed on December 17, 1992.)
+*10.7 Key Employee Agreement between Registrant and Mark R. Guidry,
effective November 30, 1992. (Exhibit 28.2 to the 1993 S-3
Registration Statement)
+*10.8 Amendment to the Registrant's 1992 Stock Option Plan, dated December
10, 1992. (Exhibit 28.4 to the 1993 S-3 Registration Statement)
53
<PAGE>
*10.9 Lease Agreement dated June 13, 1988 between VLSI Design Associates and
Sobrato Group. (Exhibit 10.27 to the registrant's registration
statement, No. 33-54142, on Form S-4, filed on November 3, 1992)
*10.10 Lease between Turtle Beach Systems, Inc. and Winship Land Associates
III dated May 28, 1993. (Exhibit 10.27 to the 1993 Form 10-K)
*10.11 First Amendment to lease, dated May 13, 1993 between the registrant
and The Sobrato Group. (Exhibit 10.28 to the 1993 Form 10-K)
+*10.12 1992 Stock Option Plan, as amended as of October 21, 1993. (Exhibit
4.1 to the registrant's registration statement, No. 33-73208, on Form
S-8, filed on December 21, 1993 (the "1993 S-8 Registration
Statement")
+*10.13 Amendment to the Registrant's 1992 Stock Option Plan, dated July 22,
1993. (Exhibit 4.2 to the 1993 S-8 Registration Statement)
+*10.14 Amendment to the Registrant's 1992 Stock Option Plan, dated November
22, 1994. (Exhibit 4.1 to the 1994 S-8 Registration Statement)
+ 10.15 $20,000,000 Revolving Credit Agreement between Mellon Bank, N.A. and
the registrant dated June 5, 1995.
+*10.16 Wafer purchase contract dated October 12, 1994 between the Company and
American Microsystems, Inc. (Exhibit 10 to the Registrant Form 10-Q
for the quarter ended September 30, 1994)
+*10.17 Agreement dated November 21, 1994 between the Company and Edward H.
Arnold (Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended December 31, 1994)
* 10.18 Wafer purchase contract dated November 8, 1995 between the Company and
Chartered Semiconductor Manufacturing Pte. Ltd. (Exhibits 10(a) and
10(b) to the Registrant Form 10-Q for the quarter ended December 30,
1995)
* 10.19 Amendment to the Registrant's 1992 Stock Option Plan, dated November
21, 1995. (Exhibit 99.1 to the 1996 S-8 Registration Statement)
+ 10.20 Agreement dated August 2, 1996 between the Company and David W. Sear
+ 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
+ 10.24 1997 Equity Plan, (Exhibit in the Registration Statement No. 333-50939
on Form S-8 filed on April 24, 1998. ) (The 1998 S-8 Registration
Statement)
54
<PAGE>
+ 10.25 Agreement dated March 20, 1998 between the Company and Stavro E.
Prodromou
+ 10.26 Agreement dated May 6, 1998 between the Company and Henry Boreen
+ 10.27 Consulting Agreement dated May 11, 1998 between the Company and Edward
M. Esber, Jr.
+ 10.28 Consulting Agreement dated May 11, 1998 between the Company and Rudolf
Gassner
+ 10.29 Consulting Agreement dated May 11, 1998 between the Company and John
L. Pickitt
* 13 Portions of the 1998 Annual Report to Shareholders for fiscal year
ended June 27, 1998
*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.
55
<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 21, 1998 BY: /S/HENRY I. BOREEN
--------------------------------
CHIEF EXECUTIVE OFFICER
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 21, 1998 BY: /S/ HOCK E. TAN
----------------------------------------------
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND SECRETARY
DATE: SEPTEMBER 21, 1998 BY: /S/ HENRY I. BOREEN
----------------------------------------------
HENRY I. BOREEN, CHAIRMAN OF THE BOARD
DATE: SEPTEMBER 21, 1998 BY: /S/ EDWARD M. ESBER JR.
----------------------------------------------
EDWARD M. ESBER, DIRECTOR
DATE: SEPTEMBER 21, 1998 BY: /S/ RUDOLF GASSNER
----------------------------------------------
RUDOLF GASSNER, DIRECTOR
DATE: SEPTEMBER 21, 1998 BY: /S/ JOHN L. PICKITT
----------------------------------------------
JOHN L. PICKITT, DIRECTOR
58
<PAGE>
EXHIBIT 10.25
SEVERANCE AGREEMENT
--------- ---------
This Severance Agreement (the "Agreement") is made on this 20th day of
March 1998 (the "Effective Date"), by and among Integrated Circuits Systems,
Inc., a Pennsylvania corporation (the "Company"), and Stavro E. Prodromou, Ph.D.
("Employee").
Whereas, Employee has served as the President and Chief Executive Officer
of the Company:
Whereas, by mutual consent Employee is resigning as President and Chief
Executive Officer;
Whereas, the parties hereto desire to enter into this Agreement on the date
hereof to set forth their agreement with respect to said resignation and certain
other matters in connection therewith upon the terms and conditions hereinafter
set forth; and
Whereas, the parties desire that this Agreement supersede any agreement,
arrangement or understanding with respect to the terms of the employment of
Employee by the Company binding on Employee and the Company, except as referred
to in Section 13(a) hereof.
NOW THEREFORE, in consideration of the covenants and conditions set forth
in this Agreement, the parties, intending to be legally bound, agree as follows:
1. Termination of Employment.
-------------- ----------
(a) Employee hereby voluntarily and irrevocably resigns from all
of his positions as a director, officer, employee, partner, principal, agent,
representative, consultant or otherwise, with or in (i) the Company and its
affiliates, or (ii) any other corporation, partnership or other entity in
respect of which he was serving at the request of the Company, in each case
effective as of 5:00 p.m., Philadelphia time, on the Effective Date. Employee
acknowledges that his employment relationship with the Company was permanently
and irrevocably severed as of the Effective Date and agrees that the Company and
its affiliates have no obligation, contractual or otherwise, to rehire, re-
employ, recall or rehire him in the future.
(b) Employee further acknowledges and agrees that payments made
or to be made and benefits provided or to be provided hereunder are in lieu of
any and all compensation and benefits of any nature whatsoever due to Employee
under the terms of any agreement, arrangement or understanding (whether written
or oral) binding upon the Company and Employee.
<PAGE>
2. Severance Compensation. In full consideration of Employee's
----------------------
execution of this Agreement and his agreement to be legally bound by its terms,
the Company has paid or agrees to pay Employee the following amounts, and has
provided or agrees to provide the following benefits to Employee:
(a) The company has paid Employee, and Employee hereby
acknowledges receipt of the sum of $120,000 (minus all payroll deductions
required by law or authorized by Employee). In addition, Employee shall promptly
receive payment in respect of unused vacation days to which Employee is
entitled. The Company has paid employee, and Employee hereby acknowledges
receipt of the sum of $15,000 (minus all payroll deductions required by law or
authorized by Employee) in lieu of relocation expenses.
(b) Employee acknowledges and agrees that he has earned and been
paid in full bonus under the Company's bonus plan in respect of the period ended
December 31, 1997. The Company agrees that Employee will be eligible to receive
a bonus in respect of the quarter ending March 28, 1998 to the same extent as
would otherwise have been the case had Employee remained an employee of the
Company through such date, but no representation of any nature is made by the
Company as to whether a bonus will be earned by Employee in respect of such
period or the amount thereof. Employee and Company agree that all determinations
in that regard shall be made solely by the Compensation Committee of the board
of directors of the Company which shall be determined in its discretion in a
manner that is fair, consistent and equitable with bonuses granted to Employee
and to other employees of similar responsibility and bonus eligibility, during
the same and prior periods, and such determination shall be final and binding
upon Employee.
(c) Employee acknowledges that the period within which the
Company must make available the purchase of health insurance under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") will commence
as of the Effective Date. If and only to the extent permitted under the
Company's health insurance plans, the Company shall provide Employee until
September 30, 1998 with health insurance coverage of the nature (and subject to
the same deductibles and cost-sharing features) as may be provided by the
Company to its senior executive officers during such period. If the Company is
unable to include Employee in such health insurance plan during any portion of
such period and Employee instead purchases health insurance from the Company
under COBRA, then the Company will pay Employee during such portion of this
period an amount equal to 160% of the cost of obtaining such insurance from the
Company pursuant to COBRA. Notwithstanding the foregoing, this section shall no
longer be applicable when Employee is employed by a new employer that provides
health insurance to its employees on a comparable cost-sharing basis to that
provided by the Company. Except as expressly stated above, Employee shall not be
entitled to any benefits provided to employees of the Company after the
Effective Date.
(d) Employee shall be reimbursed for the reasonable business
expenses (including certain relocation expenses) incurred by him prior to the
Effective Date in connection with the performance of services as president and
chief executive officer of the Company upon presentation of an itemized account
and written proof of such expenses in accordance with the Company's policies.
-2-
<PAGE>
(e) The Company has previously granted Employee options to
acquire a total of 250,000 shares of the Company's common stock (the "Stock
Options") pursuant to the Company's 1992 Stock Option Plan, as amended (the
"1992 Plan"). Notwithstanding Section 12.3 of the 1992 Plan, but subject in all
respects to (i) all of the other provisions of the 1992 Plan and the option
agreements pursuant to which the Stock Options were granted and (ii) compliance
by Employee after the Effective Date with the provisions of this Agreement, the
Company and the Employee agree that the first 125,000 shares of the Stock
Options shall vest as scheduled (62,500 options on April 2, 1998 and the
remaining 62,500 options on April 2, 1999) and be exercisable in full through
the close of business, Philadelphia time, on October 2, 1999. The Company and
Employee agree that the remaining 125,000 options will expire immediately.
Employee acknowledges that, as a result of the foregoing, if any of the options
were intended to qualify as incentive stock options, such Stock Options will no
longer so qualify and will be treated as nonqualified stock options.
(t) Employee alone, and not the Company, will be solely
responsible for payment of all federal, state and local taxes required to be
paid by him in respect of the payments to be made and benefits to be provided to
him under this Agreement, and Employee acknowledges that such payments and
benefits may be subject to tax withholding.
3. Return of Company Property. By April 19, 1998, Employee will
--------------------------
return to the Company all lists, records, documents, credit cards, building
passes, computers and other materials or property of any nature in his
possession unless mutual arrangements have been made for Employee to purchase
certain equipment, custody or control which are or were owned by the Company or
any of its subsidiaries or affiliates, and Employee will not retain or deliver
to any other persons or entities copies thereof or permit any copies thereof to
be made by any other person or entity. The Company grants to Employee the right
to purchase the Hitachi notebook computer used by Employee for a sum of
$1,000.00, which right will expire on before April 19, 1998. The Company further
agrees to forward all personal mail and package deliveries to Employee, and to
provide and maintain electronic mail and voice mail accounts and services in its
Valley Forge and San Jose facilities for the exclusive use of Employee from the
Effective Date until September 30, 1998.
4. General Release
---------------
(a) In consideration of the foregoing, (including without
limitation the promises and payments as described in Section 2 above, which may
be in excess of that to which Employee would have otherwise been entitled upon
termination of employment), Employee hereby knowingly, willingly and voluntarily
remises, waives, releases and forever discharges the Company and its
subsidiaries and affiliates, the directors, officers, employees, advisors and
agents of the Company and its subsidiaries and affiliates, and the heirs,
executors, administrators, successors and assigns of such parties (collectively
referred to as the "Releasees") of and from contracts, agreements, judgements,
claims and demands whatsoever in law or equity which the Releasees or any of
them from or by reason of any cause, matter or thing whatsoever from the
beginning of his employment with the
-3-
<PAGE>
Company to the Effective Date, excepting only claims against the Company
relating to its obligations under this Agreement and including, without in any
way limiting the generality of the foregoing, any and all matters relating to
his employment by the Company and the termination thereof and execution of this
Agreement, any and all claims under any federal, state or local law, including
the Pennsylvania Human Relations Act, 43 P.S. & 951 et seq, and the California
Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, as
amended, 42 U.S.C. & 2000e et seq., the Age Discrimination in Employment Act, as
amended, 29, U.S.C. &
1001 et seq., any common law claims and all claims for counsel fees and costs.
Employee covenants and agrees never to commence, aid in any way (unless
compelled by any court or government agency), prosecute or permit to be
commenced against the Releasees any action or other proceeding based upon any
matters which are the subject of or covered by the foregoing. Nothing in this
Section 4 shall affect or modify in any manner (i) the rights of Employee and
the obligations of the Company to indemnify Employee for acts or matters
occurring prior to the Effective Date, if and to the extent required pursuant to
Article 23 of the Company's By-Laws or the Pennsylvania Business Corporation
Law, in each case as in effect on or prior to the Effective Date, and (ii) the
rights, if any, of Employee under any directors and officers insurance policy
purchased by the Company and in effect in respect of periods on or prior to the
Effective Date.
(b) In consideration of Employee's release and of the premises
and agreements set forth in this Agreement, Company hereby knowingly, willingly,
and voluntarily remises, waives, releases and forever discharges Employee and
his heirs, executors, administrators, successors and assigns (collectively
referred to as the "Employee Releasees") of and from contracts, agreements,
judgements, claims and demands whatsoever in law or equity which the Employee
has from or by reason of any cause, matter or thing whatsoever from the
beginning of his employment with the Company to the Effective Date, and
including, without in any way limiting the generality of the foregoing, any and
all matters relating to his employment by the Company, and any and all claims
under any federal, state or local law, and any common law claims and all claims
for counsel fees and costs, excepting only claims against the Employee relating
to his obligations under this Agreement.
(c) Each party represents that it is their intention in
executing this Agreement that it shall be effective as a part of each and every
claim, demand, suit, action, cause of action, and debt which it may have against
Releasees, and Employee Releasees, respectively; and in furtherance of this
intention each party
HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS AND BENEFITS CONFERRED UPON IT BY THE
PROVISIONS OF SECITON 1542 OF THE CIVIL CODE OF CALIFORNIA WHICH PROVIDES AS
FOLLOWS:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Notwithstanding Section 1542 of the Civil Code of California, each party
expressly consents that this Agreement shall be given full force and effect
according to each
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<PAGE>
and all of its express terms and provisions, including as well those relating to
unknown and unspecified claims, demands, suits, actions, causes of action and
debts, if any, and those relating to any other claims, demands, suits actions,
causes of action and debts hereinabove specified.
5. Developments
------------
(a) Employee agrees that all inventions, original works of
authorship, developments, concepts, improvements or trade secrets, whether or
not patentable or registrable under copyright or similar laws and whether or not
related to or useful in the business of the Company (collectively, the
"Developments") which Employee, either by himself or in
(This section left blank intentionally)
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<PAGE>
conjunction with any other person or persons, has at any time during the period
of his employment by the Company prior to the Effective Date conceived,
developed or reduced to practice, or caused to be conceived, developed or
reduced in practice, are or shall become and remain the sole and exclusive
property of the Company. Employee hereby assigns, .transfers and conveys, and
agrees to so assign, transfer and convey, all of his right, title and interest
in and to any and all such Developments, and agrees to disclose fully as soon as
practicable, in writing, all such developments to the board of directors of the
Company. At any time and from time to time, upon the request and at the expense
of the Company. Employee will execute and deliver any and all instruments,
documents and papers, give evidence and do any and all other acts which, in the
opinion of counsel for the Company, are or may be necessary or desirable to
document such transfer or enable the Company to file and prosecute applications
for and to. acquire, maintain and enforce any and all patents, trademark
registrations, copyrights, mask work rights or other Intellectual property
rights of any nature under United States or foreign law with respect to any such
Developments or obtain any extension, validation, re-issue, continuance or
renewal of any such rights, The Company will be responsible for the preparation
of any such instruments, documents and papers and for the prosecution of any
such proceedings and will reimburse Employee for all reasonable expenses
incurred by him in compliance with the provisions of this Section.
(b) Notwithstanding the foregoing, Employee and the Company
acknowledge that the provisions of (a) above do not apply to any "invention"
which qualifies fully under the provisions of California Labor Code Section
2870, a copy of which has been provided to Employee. However, Employee
represents that there are no "inventions" that meet the criteria in California
Labor Code Section 2870 included within the definition of Developments as set
forth in (a) above.
6. Confidential Information.
------------ -----------
(a) Employee recognizes and acknowledges that by reason of his
employment by and service with the Company he has had access to confidential
information of the Company and its subsidiaries and affiliates, Including,
without limitation, Information and knowledge pertaining to research activities,
products and services offered or being considered, mergers and other major
corporate transactions being considered, inventions, innovations, designs,
Ideas, plans, trade secrets, proprietary information, manufacturing, packaging,
advertising, distribution and sales methods and systems, sales and profit
figures, customer and client lists, and relationships between the Company and
its subsidiaries and affiliates and employees, consultants, scientific
collaborators, dealers, distributors, wholesalers, customers, clients, suppliers
and others who have bad or will have business dealings with the Company and its
subsidiaries and affiliates ("Confidential Information"). Employee acknowledges
that such Confidential Information is a valuable and unique asset and covenants
that he will not disclose any such Confidential Information to any person for
any reason whatsoever without the prior
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<PAGE>
written authorization of the board of directors of the Company, unless compelled
by any court or government agency, or such information is in the public domain
through no fault of Employee or except as may be required by law. The Company
will use its best efforts to identify to Employee promptly upon request whether
any specific information specified in Employee's request then constitutes
Confidential Information.
(b) Employee recognizes that the Company has received from third
parties their confidential or proprietary information subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. Employee shall hold all such confidential or
proprietary information in the strictest confidence and shall not disclose it to
any person or entity or use it except as consistent with the Company's
agreements with such third parties.
7. Non-Competition
---------------
(a) Until September 30, 1998, Employee will not, unless acting
with the prior written consent of the Board of Directors of the Company,
directly or indirectly, own, manage, operate, join, control, finance or
participate in the ownership, management, operation, control or financing of, or
be connected as an officer, director, advisor, employee, partner, principal,
agent, representative, consultant or otherwise with or use or permit his name to
be used in connection with, any business or enterprise engaged in (i) the
design, marketing, or sale of (A) integrated circuits for frequency timing
generation control functions for personal computers/workstations, or (B)
integrated circuits for local area network applications, or (ii) any other
business in which the Company or any of its subsidiaries or affiliates is
engaged as of the Effective Date, or which the Company by written notice to the
Employee given within 30 days after the Effective Date advises him that it
intends to pursue within the 6-month period following the Effective Date
(together, the "Business"). It is recognized by Employee that the Business as
engaged in by the Company is and will continue to be international in scope, and
that geographical limitations on this non-competition covenant (and the non-
solicitation covenant set forth in Section 8 below) are therefore not
appropriate.
(b) The foregoing restriction shall not be construed to prohibit
the ownership by Employee of not more than 5% of any class of securities of any
corporation which is engaged in the Business having a class of securities
registered pursuant to the Securities Exchange Act of 1934, as amended, provided
that such ownership represents a passive investment and that neither Employee
nor any group of persons including Employee in any way, either directly or
indirectly, manages or exercises control of any such corporation, guarantees any
of its financial obligations, otherwise takes any part in its business other
than exercising his rights as a shareholder, or seeks to do any of the
foregoing. In addition, the foregoing restriction shall not be construed to
prohibit the employment of Employee by an entity engaged in the Business as long
as Employee does not, directly or indirectly, participate in the business.
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<PAGE>
8. No Solicitation.
---------------
Employee will not, either directly or indirectly, (i) until September 30, 1998,
call on or solicit any person, firm, corporation or other entity who or which,
at the Effective Date or at any time during the one-year period prior to the
Effective Date, was a customer of the Company or any of its subsidiaries or
affiliates with respect to the activities prohibited by Section 7 hereof or (ii)
until September 30, 1998, solicit the employment of any person who was employed
by the Company or any of its subsidiaries or affiliates on a full or part-time
basis at the Effective Date, unless prior to any such solicitation of employment
such person (A) was involuntarily discharged by the Company or such subsidiary
or affiliate or (b) voluntarily terminated his or her relationship with the
Company or such subsidiary or affiliate.
9. Equitable Relief.
----------------
(a) Employee acknowledges that the restrictions contained in
Sections 5, 6, 7 and 8 hereof are reasonable and necessary to protect the
legitimate interests of the Company and its subsidiaries and affiliates, that
the Company would not have entered into this Agreement in the absence of such
restrictions, and that any violation of any provision of those Sections will
result in irreparable injury to the Company, its subsidiaries and affiliates.
Employee represents that his experience and capabilities are such that the
restrictions contained in Sections 7 and 8 hereof will not prevent Employee from
obtaining employment or otherwise earning a living at the same general level of
economic benefit as he has previously enjoyed immediately prior to the Effective
Date.
(b) Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violation of Sections 5, 6,7 or 8 hereof
should ever be adjudicated to exceed the time, geographic, product or service,
or other limitations permitted by applicable law in any jurisdiction, then such
provisions shall be deemed reformed in such jurisdiction to the maximum time,
geographic, product or service, or other limitations permitted by applicable
law.
(c) Employee irrevocably and unconditionally (i) agrees that any
suit, action or other legal proceeding arising out of this Agreement, including
without limitation, any action commenced by the Company for preliminary and
permanent injunctive relief and other equitable relief, may be brought in any
court of competent jurisdiction in the Commonwealth of Pennsylvania or any other
court of competent jurisdiction, provided that any suit, action or other legal
proceeding brought against the Company shall be brought and adjudicated in the
United States District Court for the Eastern District of Pennsylvania, or, if
such court will not accept jurisdiction, in any court of competent civil
jurisdiction sitting in Montgomery County, Pennsylvania, (ii) consents to the
non-exclusive jurisdiction of any such court in any such suit,
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<PAGE>
action or proceeding and (iii) waives any objection which Employee may have to
the laying of venue of any such suit. action or proceeding in any such court.
Employee also Irrevocably and unconditionally consents to the service of any
process, pleading, notices or other papers in any manner permitted by the notice
provisions of Section 12 hereof.
(d) Employee agrees that he will provide, and that the Company
may similarly provide, a copy of Sections 5,6,7 and 8 of this Agreement to any
business or enterprise (I) which he may directly or indirectly own, manage,
advise, operate, finance, join, control or participate in the ownership,
management operation, financing or control of or(ii) with which he maybe
connected with as an officer, director, advisor, employee, partner, principal,
agent. representative, consultant or otherwise, or in connection with which he
may use or permit his name to be used until September 30, 1998
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
--------- ---
INTERPRETED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
11. In the event of a law suit by either party to enforce the
provisions of this Agreement, the prevailing party shall be entitled to recover
reasonable costs, expenses and attorney's fees from the other party.
12. Notices All notices and other communications required or
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall deemed to have been given when hand delivered or mailed by
registered or certified mail, return receipt requested as follows (provided that
notice of change of address shall be deemed given only when received):/
If to the Company, to: return receipt requested
Integrated Circuit Systems, Inc.
2435 Boulevard of the Generals
P.O. Box 968
Valley Forge, Pennsylvania 19482
Attention: Chairman
With a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
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<PAGE>
Attention: David R. King, Esquire If to Employee, to:
Stavro E. Prodromou, Ph.D.
710 Mill Grove
Audubon, PA 19403
with a required copy to:
Richey Fisher Whitman and Klein
1717 Embarcadero
Palo Alto, CA 94303
Attention: Terry Kelly, Esq.
or to such other names or addresses as the Company or Employee, as the case may
be shall designate by notice to each other person entitled to receive notices in
the manner specified in this Section.
13. Contents of Agreement: Amendment and Assignment
----------- ---------- ------------------------
(a) This Agreement supersedes all prior agreements and sets
forth the entire understanding among the parties hereto with respect to the
subject matter hereof, except that this Agreement shall not supersede and shall
be in addition to any agreements between Employee and the Company with respect
to confidentiality or other intellectual property rights. This Agreement may not
be changed, modified, extended or terminated except upon written amendment
executed by Employee and approved by the board of directors of the Company and
executed on behalf of the Company by a duly authorized officer. Without
limitation of the foregoing, Employee and the Company acknowledge that the
effect of this provision is that no oral modifications of any nature whatsoever
to this Agreement shall be permitted.
(b) All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto.
14. Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder of this Agreement, and the
application of such provision to such person or circumstance in any other
jurisdiction or to other persons or circumstances in any jurisdiction, shall not
be affected thereby.
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<PAGE>
15. Remedies Cumulative: No Waiver. No remedy conferred upon the
------------------------------
Company by this Agreement is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in equity.
No delay or omission by the Company in exercising any right, remedy or power
hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by the Company
from time to time and as often as may be deemed expedient or necessary by the
Company in its sole discretion.
16. Miscellaneous. All section headings are for convenience only.
-------------
This Agreement may be executed in counterparts, each of which is an original. It
shall not be necessary in making proof of this Agreement or any counterpart
hereof to produce or account for any of the other counterparts.
17. Consultation with Legal Counsel, Etc. EMPLOYEE REPRESENTS AND
------------ ------------------- ---
ACKNOWLEDGES THAT (i) HE HAS BEEN ADVISED BY THE COMPANY TO CONSULT HIS OWN
LEGAL COUNSEL WITH RESPECT TO THE AGREEMENT, (ii) HE HAS HAD FULL OPPORTUNITY,
PRIOR TO EXECUTION OF THIS AGREEMENT, TO REVIEW THOROUGHLY THIS AGREEMENT WITH
HIS COUNSEL, AND THAT HE HAS DONE SO, (iii) HE HAS READ AND FULLY UNDERSTANDS
THE TERMS AND PROVISIONS OF THIS AGREEMENT AND (iv) HE IS KNOWINGLY AND
VOLUNTARILY EXECUTING THIS AGREEMENT. Employee acknowledges that no promise or
inducement for this Agreement has been made except as set forth herein and that
this Agreement is executed without Employee's reliance upon any statement or
representation by or on behalf of the Company.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Agreement as of the date first above written.
INTEGRATED CIRCUIT SYSTEMS, INC.
BY:
Name: Henry I. Boreen
Title: Chairman
EMPLOYEE
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<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") dated as of May 6, 1998 by and
between INTEGRATED CIRCUIT SYSTEMS, INC., a Pennsylvania corporation (the
"Company") and HENRY I. BOREEN ("Employee").
1. EMPLOYMENT. The Company hereby employs Employee as its Chief Executive
Officer (the "Position"), and Employee hereby accepts such employment and agrees
to perform Employee's duties and responsibilities hereunder, in accordance with
the terms and conditions hereinafter set forth.
1.1 EMPLOYMENT TERM. The period of Employee's employment by the
Company pursuant to this Agreement (the "Employment Term") shall commence _____
and shall continue for a six-month period thereafter, ending ______, unless
terminated prior thereto in accordance with Section 5 hereof; provided, however,
that the Employment Term shall automatically be extended by the Company, at its
sole option.
1.2 DUTIES AND RESPONSIBILITIES.
(a) During the Employment Term, Employee shall serve in the
previously identified Position and shall perform all duties and accept all
responsibilities incident to such Position or as may be assigned to him by the
Company's Board of Directors.
(b) Employee represents to the Company that Employee is not subject
to or party to (and except for the present Agreement and any other agreement
with the Company, Employee agrees during the Employment Term not to become
subject to or a party to) any employment agreement, non-competition covenant,
non-disclosure agreement or other agreement, covenant, understanding or
restriction of any nature which would prohibit Employee from executing this
Agreement and performing fully Employee's duties and responsibilities hereunder,
or which would in any manner, directly
<PAGE>
or indirectly, limit or affect the duties and responsibilities which may now or
in the future be assigned to Employee by the Company, including without
limitation any duties and responsibilities relating to the business in which the
Company (including its subsidiaries) is engaged during the Employment Term or
for which Employee has notice during such Employment Term that the Company is
planning to be engaged within the six (6) month period following any expiration
or termination of this Agreement (the "Business" of the Company).
1.3 EXTENT OF SERVICE. During the Employment Term, Employee agrees
to use best efforts to carry out the duties and responsibilities under Section
1.2 hereof and to devote full time, attention and energy thereto. Employee
further agrees not to work either on a part time or independent contracting
basis, or serve as a director, officer or in any other capacity, or to otherwise
become engage in any business activity or enterprise (including any material
investment therein) during the Employment Term without the prior disclosure to
and consent of the Company in accordance with its policies. The foregoing shall
not, however, be construed as prohibiting the ownership of not more than 5% of
any class of securities registered pursuant to the Securities Exchange Act of
1934, as amended, provided that such ownership represents solely a passive
investment and the Employee does not in any way manage, control, perform
services for or otherwise take any role therein which may create a conflict of
interest or otherwise interfere with Employee's ability to discharge Employee's
duties and responsibilities to the Company.
1.4 BASE COMPENSATION.
(a) For all the services rendered by Employee hereunder, the Company
shall pay Employee a salary at a monthly rate of Ten Thousand ($10,000.00)
dollars per month.
(b) During the Employment Term, Employee shall also be entitled to
participate in such vacation pay, retirement, other fringe benefit plans and
prerequisites, if any, as may be duly authorized from time to time by the
Company, in its sole discretion, the terms and provisions of which plans and
prerequisites shall also be in the sole discretion of the Company, which terms
and provisions shall be controlling with
2
<PAGE>
respect to the manner in which any such benefit or prerequisite is earned,
accrued, vested, paid or otherwise available.
1.5 INCENTIVE COMPENSATION. In addition to the compensation set forth
in Section 1.4 hereof, Employee shall be entitled to participate in such
incentive compensation plans, if any, as may be applicable to its management
level employees, and as may be duly established from time to time in respect to
the Employment Term by the Company in its sole discretion, which terms and
provisions shall be controlling with respect to the manner in which any such
incentive compensation is earned, accrued, vested, paid or otherwise made
available to its participants.
2. EXPENSES. Employee shall be reimbursed for the reasonable business
expenses incurred by Employee in connection with Employee's performance of
services hereunder during the Employment Term upon presentation of an itemized
account and written proof of such expenses in accordance with policies duly
established by the Company. Termination of Employee's Employment Term in
accordance with Section 5 of this Agreement shall not terminate the obligation
to reimburse expenses properly incurred prior to the date of such termination in
accordance with the Company's policies.
3. CONFIDENTIAL INFORMATION; NON-SOLICITATION AND NON-COMPETITION.
Employee acknowledges and agrees that (i) Employee has executed or will execute
the Company's standard forms of confidential information (the "Confidentiality
Agreements"), (ii) during Employee's employment and for a period of eighteen
(18) months after the employment of Employee by Company has ended, Employee will
not, directly or indirectly, solicit the employment of any person who was
employed by the Company or any of its subsidiaries on a full or part time basis
at the time of Employee's employment, unless such person was (1) involuntarily
discharged by the Company or such subsidiary or (2) voluntarily terminated his
or her relationship with the Company prior to Employee's termination and (iii)
during Employee's employment and for a twelve (12) month period immediately
following any termination of such employment,
3
<PAGE>
without the prior written consent of the Company, directly or indirectly, engage
in, participate in, have any interest on behalf of Employee or others in, or
permit Employee's name to be used with any corporation or other entity or
enterprise which competes with the Business in the geographical areas where the
Company conducts such Business, whether as an employee, officer, director,
agent, consultant, investor, security holder, creditor, guarantor, partner,
joint venturer, beneficiary under a trust or otherwise (subparagraphs (ii) and
(iii) are collectively the "Restrictive Covenants").
4. ARBITRATION AND EQUITABLE RELIEF.
(a) Employee acknowledges that the restrictions contained in the
Confidentiality Agreements and Restrictive Covenants are reasonable and
necessary to protect the legitimate interests of the Company and its affiliates,
that the Company would not have entered into this Agreement in the absence of
such restrictions, and that any violation of any provision of the
Confidentiality Agreements or Restrictive Covenants will result in irreparable
injury to the Company. Employee represents that Employee's experience and
capabilities are such that the restrictions contained in the Confidentiality
Agreements and Restrictive Covenants will not prevent Employee from obtaining
employment or otherwise earning a living at the same general level of economic
benefit as anticipated by this Agreement. Employee further represents and
acknowledges that (i) as a condition of entering into this Agreement, Employee
has reconfirmed, and does hereby reconfirm that all of the provisions of the
Confidentiality Agreements and Restrictive Covenants are and will continue to be
valid and binding upon Employee, and enforceable against Employee to the full
extent set forth therein, (ii) Employee has been advised by the Company to
consult Employee's own legal counsel in respect of this Agreement and the
statements set forth herein and in respect of the Confidentiality Agreements and
Restrictive Covenants, and (iii) that Employee has, prior to execution of this
Agreement and the Confidentiality Agreements, reviewed this Agreement, the
Confidentiality Agreements and the Restrictive Covenants with Employee's
counsel.
(b) Except as provided in Section 4(c) below, Employee and the Company
agree that any dispute or controversy arising out of or relating to any
interpretation,
4
<PAGE>
construction, performance or breach of this Agreement, shall be exclusively
settled by arbitration to be held in the county and state set forth in the
following paragraph, in accordance with the National Rules for the Resolution of
Employment Disputes as then in effect of the American Arbitration Association. A
panel of three arbitrators shall be chosen in accordance with such rules to
conduct the arbitration, unless Employee and the Company agree in writing to
have such disputes settled by a single arbitrator. The arbitrators may grant
injunctions or other relief in such dispute or controversy, but shall have no
authority to set aside or review any decision of the board of directors or its
compensation committee which under the terms of this Agreement or the
controlling Company benefit plan or policy are discretionary with the Company,
unless such decisions are shown by clear and convincing evidence to have been
made in bad faith. The decision of the arbitrators shall be final, conclusive
and binding on the parties to the arbitration. Judgment may be entered on the
arbitrators' decision in any court having jurisdiction. The Company and Employee
shall each pay one-half of the costs and expenses of such arbitration, and each
of the Company and Employee shall separately pay its counsel fees and expenses,
subject, however, to the right of the arbitrators to assess costs and expenses
in circumstances where such arbitrators deem it appropriate to do so. If a party
shall attempt to vacate or appeal from an arbitration award or obtain an order
staying the arbitration, and such party (the "non-prevailing party") is
unsuccessful in obtaining such judicial relief, then the non-prevailing party
will be responsible for all attorney's fees and costs incurred by the other
party in connection therewith.
(c) Employee agrees that the Company shall be entitled (in addition to
seeking relief pursuant to an arbitration pursuant to (b) above) to preliminary
and permanent injunctive relief, without the necessity of proving actual
damages, as well as an equitable accounting of all earnings, profits and other
benefits arising from any violation of the Confidentiality Agreements or
Restrictive Covenants, which rights shall be cumulative and in addition to any
other rights or remedies to which the Company may be entitled as set forth in
the Confidentiality Agreements or otherwise. Employee irrevocably and
unconditionally (i) agrees that any such suit, action or other legal proceeding
commenced by the Company may be brought in the United States District Court for,
or in any court of
5
<PAGE>
general jurisdiction in the county of Montgomery, Commonwealth of Pennsylvania,
(ii) consents to the non-exclusive jurisdiction of any such court in any such
suit, action or proceeding, and (iii) waives any objection which Employee may
have to the laying of venue of any such suit, action or proceeding in any such
court. Employee also irrevocably and unconditionally consents to the service of
any process, pleadings, notices or other papers in a manner permitted by the
notice provisions of Section 10 hereof.
(d) In the event that any of the provisions of the Confidentiality
Agreements or Restrictive Covenants should ever be held or adjudicated to exceed
the time, geographic, product or service, or other limitations permitted by
applicable law in any jurisdiction, then such provisions shall be deemed
reformed in such jurisdiction to the maximum time, geographic, product or
service, or other limitations permitted by applicable law.
(e) Employee agrees that Employee will provide, and that the Company may
similarly provide, a copy of the Confidentiality Agreements and Restrictive
Covenants to any business or enterprise (i) which Employee may directly or
indirectly own, manage, operate, finance, join, control or participate in the
ownership, management, operation, financing, control or control of, or (ii) with
which Employee may be connected with as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise, or in connection with
which Employee may use or permit Employee's name to be used.
5. TERMINATION. The Employment Term shall terminate prior to its
expiration as set forth in Section 1.1 above, and Employee's employment by the
Company shall be terminated, upon the occurrence of any of the following events
(and in accordance with the following provisions associated with such events):
5.1. DISABILITY. In the event that Employee is unable fully to perform
Employee's duties and responsibilities hereunder to the full extent required by
the board of directors of the Company by reason of illness, injury or incapacity
for more than ninety (90) days, during which time Employee shall continue to be
compensated as provided in Section 1.4 hereof (less any payments due Employee
under disability benefit
6
<PAGE>
programs, including Social Security disability, worker's compensation and
disability retirement benefits), the Employment Term may be terminated by the
Company, and the Company shall have no further liability or obligation to
Employee for compensation hereunder; provided, however, that Employee will be
entitled to receive the payments prescribed under any disability benefit plan
which may be in effect for employees of the Company and in which Employee
participated at the date of such disability, and a pro-rata portion to the date
of disability of any earned incentive compensation, if any, referred to in
Section 1.5 hereof in respect of the fiscal year during which Employee first
became disabled. In the event of any dispute under this Section 5.1 and to the
extent determined by the Company to be job-related and consistent with business
necessity, Employee shall submit to a physical examination by a licensed
physician selected by the Company.
5.2. DEATH. In the event that Employee dies during the Employment Term,
the Company shall pay to Employee's executors, legal representatives or
administrators an amount equal to the installment of Employee's Monthly Salary
set forth in Section 1.4 hereof for the month in which Employee dies, and a pro-
rata portion to the date of such death of any earned incentive compensation, if
any, referred to in Section 1.5 hereof in respect of the fiscal year during
which Employee died, and thereafter the Company shall have no further liability
or obligation hereunder to Employee's executors, legal representatives,
administrators, heirs or assigns or any other person claiming under or through
him; provided, however, that Employee's estate or designated beneficiaries shall
be entitled to receive the payments prescribed for such recipients under any
death benefit plan which may be in effect for employees of the Company and in
which Employee participated at the date of such death.
5.3. CAUSE. Nothing in this Agreement shall be construed to prevent
termination of the Employment Term by the Company at any time for "cause." For
purposes of this Agreement, "cause" shall mean (a) dishonesty, wanton or willful
misconduct, commission of a crime involving moral turpitude, substance abuse,
misappropriation of funds, disparagement of the Company (or its management or
employees), or (b) failure of
7
<PAGE>
Employee to perform, observe and fully comply during the Employment Term with
any of the terms or provisions of this Agreement or the lawful directives of the
Company, or at any time any of the terms or provisions of the Confidentiality
Agreements or Restrictive Covenants, or any other proper cause determined in
good faith by the Company; provided, however, that Employee's conduct shall not
constitute "cause" within the meaning of (b) above unless and until (i) the
Company shall have provided Employee with notice setting forth with specificity
(1) the conduct deemed to constitute such "cause," (2) reasonable action, if
any, that would remedy the objectionable conduct, and (3) a reasonable time
within which Employee may take such remedial action (provided, however, that the
Company shall not be required to provide additional time for remedial action in
the event of repeated instances of the conduct deemed to constitute cause for
which it has already given prior notice and time for remedial action in
accordance with the provisions of this Agreement), and (ii) Employee shall not
have taken and accomplished such specified remedial action within such specified
reasonable time. The Company's liability, if any, for payments to Employee by
virtue of any wrongful termination of Employee's employment pursuant to this
Agreement shall be reduced by and to the extent of any earnings received by or
accrued for the benefit of Employee during any unexpired part of the Employment
Term.
5.4. WITHOUT CAUSE. The Company shall have the right to terminate the
Employment Term without cause at any time by giving Employee written notice of
such termination. Under such circumstances the Company shall continue for a
period of ___ (_) months from the effective date of such termination (the
"Severance Period") (a) the Monthly Salary, (b) in accordance with (and to the
extent permitted by) the provisions of the Company's health plans then in
existence and the provisions of the Consolidated Omnibus Reconciliation Act of
1985 ("COBRA") as supplemented or amended, and subject to any deductibles,
limitations, exclusions, and any co-payments and other cost sharing features
thereof, any medical insurance benefits to which Employee was entitled
immediately prior to the receipt of notice of termination (or, at the Company's
option, pay Employee an amount in cash equal, on an after-tax basis, to the
premiums for such coverages), and (c) to continue to vest and permit the
exercise of such stock options as
8
<PAGE>
have been granted to the employee prior to the effective date of such
termination, in accordance with and subject to the provisions of the applicable
stock option plans and the option agreements pursuant to which the options were
granted. The foregoing notwithstanding, (i) any obligation to provide medical
insurance or payment in lieu thereof, shall expire when Employee is employed by
a new employer that provides health insurance to its employees on a comparable
cost-sharing basis to that provided by the Company, and (ii) Employee
acknowledges that as a result of the foregoing, any stock options intended to
qualify as incentive stock options will no longer qualify and accordingly will
be treated as non-qualified stock options. Employee shall only have the right to
receive payment for incentive compensation, if any, referred to in Section 1.5
hereof to which Employee would have been entitled in accordance with and subject
to the provisions of the applicable plans or programs as duly adopted by the
Company. Except as expressly stated in this paragraph, upon the termination of
this Agreement Employee shall not be entitled to any payments or benefits which
may be provided to employees of the Company. Payments and benefits to be
provided hereunder shall in all respects be conditioned upon (1) the prior
receipt by the Company from Employee of a general release of all claims of any
nature whatsoever which Employee had, has or may have against the Company and
related parties relating to Employee's employment by the Company (other than
Employee's entitlement under any employee benefit plan or program sponsored by
the Company in which Employee participated and under which Employee has accrued
a benefit) or the termination thereof, such release and covenant to be in form
and substance reasonably satisfactory to counsel for the Company, and (2)
continued compliance by Employee with the Confidentiality Agreements and, for
the duration of the Severance Period, the Restrictive Covenants.
5.5 RESIGNATION FOR GOOD REASON. Employee shall have the right to
terminate the Employment Term at any time for Good Reason, by giving the Company
ninety (90) days' prior written notice of such termination. For purposes of this
Agreement "Good Reason" shall mean, exclusively, a resignation based upon (a) a
failure of the Company to observe or perform any of the material terms or
provisions of this Agreement (including, for example, any reduction in the
Monthly Salary other than a
9
<PAGE>
reduction which is a concurrent reduction on a
comparable basis of the other management level employees), or (b) a material
reduction in Employee's level of responsibility, position (including office and
title, but not including reporting relationships), authority or duties
(including changes resulting from the assignment to Employee of any duties and
responsibilities inconsistent with Employee's Position as in effect on the date
of this Agreement), in each case as determined by Employee acting reasonably and
in good faith. Employee's notice of termination hereunder shall specify the
basis for Employee's determination of "Good Reason"; provided, however, that the
Company's conduct shall not constitute "Good Reason" unless and until (i)
Employee shall have given the Company written notice setting forth with
specificity (1) the conduct deemed to constitute "Good Reason," (2) reasonable
action that would remedy the objectionable conduct, and (3) a reasonable time
within which the Company may take such remedial action, and (ii) the Company
shall not have taken and accomplished such specified remedial action within such
specified reasonable time. Under such circumstances the Company shall continue
for the Severance Period (as defined in the previous paragraph) (a) the Monthly
Salary, (b) in accordance with (and to the extent permitted by) the provisions
of the Company's health plans then in existence and the provisions of the
Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") as supplemented or
amended, and subject to any deductibles, limitations, exclusions, and any co-
payments and other cost sharing features thereof, any medical insurance benefits
to which Employee was entitled immediately prior to the receipt of notice of
termination (or, at the Company's option, pay Employee an amount in cash equal,
on an after-tax basis, to the premiums for such coverages), and (c) to continue
to vest and permit the exercise of such stock options as have been granted to
the employee prior to the effective date of such termination, in accordance with
and subject to the provisions of the applicable stock option plans and the
option agreements pursuant to which the options were granted. The foregoing
notwithstanding, (i) any obligation to provide medical insurance or payment in
lieu thereof, shall expire when Employee is employed by a new employer that
provides health insurance to its employees on a comparable cost-sharing basis to
that provided by the Company, and (ii) Employee acknowledges that as a result of
the foregoing, any stock options intended to qualify as incentive stock options
will no longer qualify and
10
<PAGE>
accordingly will be treated as non-qualified stock options. Employee shall only
have the right to receive payment for incentive compensation, if any, referred
to in Section 1.5 hereof to which Employee would have been entitled in
accordance with and subject to the provisions of the applicable plans or
programs as duly adopted by the Company. Except as expressly stated in this
paragraph, upon the termination of this Agreement Employee shall not be entitled
to any payments or benefits which may be provided to employees of the Company.
Payments and benefits to be provided hereunder shall in all respects be
conditioned upon (1) the prior receipt by the Company from Employee of a general
release of all claims of any nature whatsoever which Employee had, has or may
have against the Company and related parties relating to Employee's employment
by the Company (other than Employee's entitlement under any employee benefit
plan or program sponsored by the Company in which Employee participated and
under which Employee has accrued a benefit) or the termination thereof, such
release and covenant to be in form and substance reasonably satisfactory to
counsel for the Company, and (2) continued compliance by Employee with the
Confidentiality Agreements, and, for the duration of the Severance Period, the
Restrictive Covenants.
6. COORDINATION OF BENEFITS; NO SET-OFF. Other severance plans generally,
or policies or agreements, if any, applicable to Employee or to employees of the
Company generally, and any other severance payments required by applicable
statutes or provided under government programs, may provide compensation and
benefits to Employee upon events which would also require the Company pursuant
to this Agreement to provide compensation or continue benefits. In such event,
Employee shall be entitled only to the largest cash compensation provided for
under any of such agreements, plans, policies, statutes or programs, including
this Agreement, and the maximum benefit continuance provided for under any of
such agreements, plans, policies, statutes or programs, including this
Agreement.
7. CERTAIN REDUCTION OF PAYMENTS.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event that it shall be determined as set forth herein that any payment or
distribution by, or benefit
11
<PAGE>
provided by, the Company to or for the benefit of Employee, whether paid or
payable, made available to or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would constitute an "excess
parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), and that it would be economically
advantageous to the Company to reduce the Payment to avoid the limitation of the
Company's deduction for such excess parachute payments under Section 280G of the
Code, the aggregate present value of amounts payable or distributable to or for
the benefit of Employee pursuant to this Agreement (such payments, benefits or
distributions pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced (but not below zero) to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value which
maximizes the aggregate present value of Agreement Payments without causing any
Payment not to be deductible by the Company under Section 280G of the Code. For
purposes of this Section 7, present value shall be determined in accordance with
Section 280G(d)(4) of the Code.
(b) All determinations to be made under this Section 7 shall be made by
the Company's firm of independent public accountants (the "Accounting Firm"),
which firm shall use its best efforts to provide its determinations and any
supporting calculations both to the Company and Employee within fifteen (15)
days of any termination for which payment under Section 5 is required hereunder.
Any such determination by the Accounting Firm shall be final and binding upon
the Company and Employee. Employee shall in Employee's sole discretion determine
which and how much of the Agreement Payments shall be eliminated or reduced
consistent with the requirements of this Section 7. Within ten (10) days after
the Company's determination, the Company shall pay (or cause to be paid) or
distribute (or cause to be distributed) to or for the benefit of Employee such
amounts as are then due to Employee under this Agreement.
(c) As a result of the uncertainty in the application of Section 280G of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Agreement Payments, as the case may be, will have
been made by the Company
12
<PAGE>
which should not have been made ("Overpayment") or that additional Agreement
Payments which have not been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. Within two years after the applicable termination of employment,
the Accounting Firm shall review the determination made by it pursuant to the
preceding paragraph. In the event that the Accounting Firm determines that an
Overpayment has been made, any such Overpayment shall be treated for all
purposes as a loan to Employee which Employee shall repay to the Company
together with interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no amount
shall be payable by Employee to the Company if and to the extent such payment
would not affect the limitations on the amount which is not deductible under
Section 280G of the Code. In the event that the Accounting Firm determines that
an Underpayment has occurred, any such Underpayment shall be promptly paid by
the Company to or for the benefit of Employee together with interest at the
Federal Rate.
(d) All of the fees and expenses of the Accounting Firm in performing the
determinations referred to in subsections (b) and (c) above shall be borne
solely by the Company. The Company agrees to indemnify and hold harmless the
Accounting Firm of and from any and all claims, damages and expenses of any
nature resulting from or relating to its determinations pursuant to subsections
(b) and (c) above, except for claims, damages or expenses resulting from the
gross negligence or willful misconduct of the Accounting Firm.
8. SURVIVAL. Notwithstanding expiration or termination of the Employment
Term and except as is expressly set forth herein, Employee's obligations under
the Confidentiality Agreements and Restrictive Covenants shall survive and
remain in full force and effect for the periods therein provided, and Employee's
agreements, covenants and representations under Sections 1.2(b) and 3 of this
Agreement, the provisions for arbitration and equitable relief under Section 4
of this Agreement, the provisions for certain payments after the Employment Term
in Sections 5, 6 and 7 of this Agreement,
13
<PAGE>
and Sections 9, 10, 11, 12, 13 and 14 of this Agreement shall survive and
continue to remain in full force and effect.
9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED
UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT GIVING EFFECT TO ANY
CONFLICT OF LAWS PROVISIONS.
10. NOTICES. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Integrated Circuit Systems, Inc.
2435 Blvd. of the Generals
P.O. Box 968
Valley Forge, PA 19482-0968
Attention: Chief Financial Officer and Chief Operating Officer
With a copy to the Company's Legal Department.
If to Employee, to:
HENRY I. BOREEN
1182 Wrack Road
Meadowbrook, PA 19046
or to such other names or addresses as the Company or Employee, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
14
<PAGE>
11. CONTENTS OF AGREEMENT; AMENDMENT AND ASSIGNMENT.
(a) This Agreement (including the Restrictive Covenants) and the
Confidentiality Agreements supersede all prior agreements and set forth the
entire understanding among the parties hereto with respect to the subject matter
hereof or thereof and cannot be changed, modified, extended or terminated except
upon written amendment approved by the parties and executed on their behalf by a
duly authorized officer in the case of the Company and Employee in the case of
Employee. Without limitation of the foregoing, Employee acknowledges that the
effect of this provision is that no oral modifications of any nature whatsoever
to this Agreement or the Confidentiality Agreements shall be permitted. In
addition, nothing in this Agreement or in the Confidentiality Agreements shall
be construed as giving Employee any right to be retained in the employ of the
Company beyond the expiration of the Employment Term, and Employee specifically
acknowledges that if Employee's employment by the Company continues beyond the
expiration of the Employment Term, Employee shall be an employee-at-will of the
Company, and thus subject to discharge at any time by the Company with or
without cause and without compensation of any nature hereunder.
(b) Employee acknowledges that from time to time, the Company may
establish, maintain and distribute employee manuals or handbooks or personnel
policy manuals, and officers or other representatives of the Company may make
written or oral statements relating to personnel policies and procedures. Such
manuals, handbooks and statements are intended only for general guidance. No
policies, procedures or statements of any nature by or on behalf of the Company
(whether written or oral, and whether or not contained in any employee manual or
handbook or personnel policy manual), and no acts or practices of any nature,
shall be construed to modify this Agreement or the Confidentiality Agreements or
to create express or implied obligations of any nature to Employee.
15
<PAGE>
(c) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto, except that the duties and responsibilities of Employee
hereunder are of a personal nature and shall not be assignable or delegatable in
whole or in part by Employee.
12. SEVERABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances is held to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction.
13. REMEDIES CUMULATIVE; NO WAIVER. No remedy conferred upon the Company
by this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by the Company in exercising any right, remedy or power
hereunder, under the Confidentiality Agreements, or existing at law or in equity
shall be construed as a waiver thereof, and any such right, remedy or power may
be exercised by the Company from time to time and as often as may be deemed
expedient or necessary by the Company in it sole discretion.
14. MISCELLANEOUS. All section headings are for convenience only. This
Agreement may be executed in several counterparts, each of which is an original.
It shall not be necessary in marking proof of this Agreement or any counterpart
hereof to produce or account for any of the other counterparts.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement on May 6, 1998.
16
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
Attest:
(SEAL)/s/ Hock E. Tan By /s/ John L. Pickitt
----------------------- -------------------------------
Secretary Name: John L. Pickitt
-----------------------------
Title: Board of Director
---------------------------
EMPLOYEE:
/s/ Henry Boreen
----------------------------------
17
<PAGE>
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
BY AND BETWEEN
INTEGRATED CIRCUIT SYSTEMS, INC.
AND
HENRY I. BOREEN
This Amendment, which is effective September 14, 1998, modifies the
Employment Agreement dated May 6, 1998 between Integrated Circuit Systems, Inc.
and Henry I. Boreen as follows:
1. Under Section 1.1, Employment Term, the words "September 11, 1998"
appearing in the third and fourth lines shall be deleted and the words
"December 31, 1998" shall be inserted in lieu thereof.
2. Under Section 1.4, Base Compensation, subparagraph (a), the words "Ten
Thousand ($10,000.00) dollars" appearing in the second line shall be
deleted and the words "Twelve Thousand ($12,000.00) dollars" shall be
inserted in lieu thereof.
All other terms and conditions of the Employment Agreement between the parties
dated May 6, 1998 shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
be executed as of the date first written above.
Attest: INTEGRATED CIRCUIT SYSTEMS, INC.
/s/ Hock E. Tan By: /s/John L. Pickitt
- ---------------------- -----------------------------
Secretary
Name: John L. Pickitt
---------------------------
Title: Board of Director
--------------------------
EMPLOYEE: /s/Henry Boreen
-----------------------
18
<PAGE>
STOCK OPTION GRANT FOR
HENRY I. BOREEN AS CHIEF EXECUTIVE OFFICER
1. PURPOSE. The purpose of this grant is to provide compensation for
-------
Henry I. Boreen for his services as Chief Executive Officer ("CEO") as
adopted and approved by the Board of Directors (the "Board") of Integrated
Circuit Systems, Inc. (the "Company") on September 11, 1998.
2. GRANT. As approved by the Board, Mr. Boreen will be granted an option to
-----
purchase 30,000 shares of the Company's Common Stock, under the Company's
1997 Equity Compensation Plan, at the closing price as reported on the
NASDAQ interdealer quotation system on September 11, 1998, the date of this
grant. Such grant is not intended to qualify as an incentive stock option
under Section 422 of the Internal Revenue Code.
3. VESTING. Such option shall vest immediately upon the execution of this
-------
grant by the Company and Mr. Boreen.
4. EXERCISE OF OPTIONS. The period during which options shall be exercisable
-------------------
shall be five years after the date of grant. Subject to the foregoing,
options shall be exercisable at such times and be subject to such
restrictions and conditions as the Board shall in each instance determine,
which restrictions and conditions need not be the same for all options.
5. PAYMENT OF OPTION PRICE. No shares of Common Stock shall be issued upon
-----------------------
exercise of an option until full payment of the option price therefor has
been made. To the extent permitted by the Board, payment of the option
price may be made: (i) in cash; (ii) by exchange of Common Stock valued at
its fair market value on the date of exercise; (iii) by requesting that the
Company withhold from the number of shares of Common Stock otherwise
issuable upon exercise of the option that number of shares of Common Stock
having an aggregate fair market value on the date of exercise (the
difference between the exercise price and the fair market value on the date
of exercise) equal to the exercise price for all of the shares of Common
Stock as to which the option is being exercised; (iv) by means of a
brokers' cashless exercise procedure; or (v) by any combination of the
foregoing. Where payment of the option price is to be made with shares of
Common Stock acquired under any compensation plan of the Company, such
shares will not be accepted as payment unless the optionee has acquired
such shares at least six months prior to such payment.
6. RIGHTS OF SHAREHOLDERS. Neither an optionee nor his or her legal
----------------------
representatives or beneficiaries shall have any of the rights of a
shareholder with respect to any shares subject to any option until such
shares shall have been issued upon the proper exercise of such option.
7. NON-TRANSFERABILITY OF OPTIONS. No option may be sold, transferred,
------------------------------
pledged, assigned or otherwise alienated or hypothecated otherwise than by
will or by the laws of descent and distribution or, with respect to non-
qualified stock options, pursuant to a qualified domestic relations order
as defined by the Code, or Title I of the Employee Retirement Income
Security Act, or the rules thereunder. Except as otherwise specifically
provided
19
<PAGE>
herein, all Options granted to an Optionee under the Plan shall be
exercised during the lifetime of such Optionee only by such Optionee. When
an optionee dies, the personal representative or other person entitled to
succeed to the rights of the optionee (the "Successor Optionee") may
exercise such rights, subject to furnishing to the Company proof
satisfactory to the Company of his or her right to receive the option under
optionee's will or under the applicable laws of descent and distribution.
8. TERMINATION OF EMPLOYMENT OR SERVICE OF OPTIONEE. Subject to the condition
------------------------------------------------
that no option shall be exercisable after the expiration of the period
fixed by the Board in accordance with Section 4 hereof:
8.1 In the event that Mr. Boreen ceases to be an employee or director
of the Company or its subsidiaries by reason of a discharge for
cause or a voluntary separation of the optionee from the Company
without the consent of the Company or its subsidiary, the options
granted to such optionee under the Plan shall terminate
immediately, unless the Board shall otherwise determine.
8.2 In the event that the optionee shall die while employed by the
Company or while serving as a director or within three months
after (i) termination of employment or service due to disability
or (ii) retirement of an optionee who is an employee on the
employee's Retirement Date, any option granted to such optionee
under the Plan shall be exercisable to the extent then
exercisable or on such accelerated basis as the Board may
determine, by his successor in interest, within one year after
the death of the optionee, unless the Board shall otherwise
determine.
8.3 In the event that the employment or service of the optionee
terminates due to disability (within the meaning of Code Section
422(e)(3)) and, with respect to an employee, retirement on the
employee's Retirement Date (as hereinafter defined), any option
granted to such optionee under the Plan shall be exercisable to
the extent then exercisable or on such accelerated basis as the
Board may determine, within a period of three months after such
termination, unless the Board shall otherwise determine.
8.4 For purposes of this Paragraph 8, "Retirement Date" shall mean
any date an employee is otherwise entitled to retire under the
Company's retirement plans and shall include normal retirement at
age 65, early retirement at age 62, and retirement at age 60
after 30 years of service.
9. RIGHTS OF EMPLOYEES. Nothing in the Plan shall interfere with or limit in
-------------------
any way the right of the Company or any subsidiary to terminate any
employee's employment or service for the Company at any time, nor confer
upon any optionee any right to continue in the employ of the Company or any
subsidiary. No optionee shall have the right to be selected as an optionee,
or having been so selected, to be selected again as an optionee.
10. ADJUSTMENTS IN SHARES SUBJECT TO PLAN. If the Company shall at any time
-------------------------------------
change the number of issued shares of Common Stock without new
consideration to the Company (such as a stock dividend or stock split), the
total number of shares available under the Plan, hereof, and the number and
price of shares of Common Stock subject to outstanding
20
<PAGE>
options, shall be adjusted so that the aggregate consideration payable to
the company and the value of each option shall not be changed. If, during
the term of any option granted under this Plan, the Common Stock shall be
changed into another kind of stock or into securities of another
corporation, whether as a result of a reorganization, recapitalization,
sale, merger, consolidation, or other similar transaction, or if additional
rights shall be offered with respect to the Common Stock, the Board shall
cause adequate provision to be made so that the optionees shall thereafter
be entitled to receive, upon the due exercise or any outstanding options,
the securities or right that the optionees would have been entitled to
receive had they owned the Common Stock acquired on the exercise of such
options on the effective date of any such transaction.
11. ADDITIONAL RESTRICTIONS. All options shall be subject to and shall contain
-----------------------
such provisions, limitations and restrictions as may be required on the
date of grant to permit the grant of the options to comply with or qualify
for the exemptions with respect to grants of options and stock provided by
regulations under Section 16 of the Exchange Act and other applicable
provisions of federal and state securities laws, and to satisfy the
requirements of other applicable regulatory authorities.
12. COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section 16
--------------------------
of the Exchange Act, transactions under this Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the plan or action by the
Board fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Board.
13. SUBSTITUTION OF OPTIONS IN A MERGER, CONSOLIDATION OR SHARE EXCHANGE.
--------------------------------------------------------------------
In the event that the Company becomes a party to a merger, consolidation or
share exchange (a "Business Combination") and in connection therewith
substitutes options under the Plan for options of another party to such
Business Combination, notwithstanding the provisions of the Plan, the terms
of such substituted options may have the same terms and conditions
(provided that the number of shares issuable and the exercise prices are
adjusted in accordance with the terms of the Business Combination) as the
former options of such other part to the Business Combination, provided,
however, that the exercise price of the options to be granted under the
Plan shall be lawful consideration as determined by the Board.
IN WITNESS WHEREOF, the Board of Directors has granted this Option as of
the effective date set forth above.
INTEGRATED CIRCUIT SYSTEMS, INC.
By: /s/ John L. Pickitt
--------------------------
ACKNOWLEDGEMENT AND AGREEMENT:
Mr. Boreen acknowledges receipt of this Grant and agrees to all of the
terms and conditions contained herein.
/s/ Henry I. Boreen
- -----------------------------
HENRY I. BOREEN
21
<PAGE>
EXHIBIT 10.27
TO: Edward M. Esber, Jr.
SUBJECT: Contractor Agreement Dated May 11, 1998
The Contractor Agreement between Edward M. Esber, Jr. and Integrated Circuit
Systems, Inc. is amended as follows:
SCHEDULE I
1. Services to be Performed: Management consulting with respect to strategies
and plans for ICS and its affiliated companies, as from time to time may be
expressly requested by the Project Coordinator.
2. Terms of Agreement: May 11, 1998 to December 31, 1998.
3. Project Coordinator: Henry I. Boreen
4. COMPENSATION: ICS AGREES TO PAY CONTRACTOR AS FOLLOWS FOR THE SUCCESSFUL
COMPLETION OF REQUIRED SERVICES:
Two thousand dollars ($2,000.00) per day (or the prorata portion thereof
based upon an eight hour day) for the services requested by the Project
Coordinator, not to exceed ten (10) days per month.
5. Other Pertinent Information:
(a) Paragraph 4.B., reference to "sixty (60) days" is charged to "thirty
(30) days
(b) Paragraph 8.H. is amended by inserting", provided, however, that the
obligations imposed hereunder by Paragraph 8.C. shall terminate with
respect to any particular Confidential Information after a period of
three years from the date of ICS's disclosure of such Confidential
Information to Contractor" after the phrase "association with ICS".
(c) Paragraph 11.H. is hereby deleted.
IN WITNESS WHEREOF, the parties hereto acknowledge their Agreement as follows:
Integrated Circuit Systems, Inc. Contractor
By: __________________________ By: ________________________
Typed Name: Henry I. Boreen, Chairman Typed Name: Edward M. Esber, Jr.
-------------------------- ------------------------
2435 Blvd. of the Generals
Address: Norristown, PA 19403 Address: ________________________
--------------------------
Date: September 11, 1998 Date: ________________________
----------------------------
<PAGE>
EXHIBIT 10.28
TO: Rudolf Gassner
SUBJECT: Contractor Agreement Dated May 11, 1998
The Contractor Agreement between Edward M. Esber, Jr. and Integrated Circuit
Systems, Inc. is amended as follows:
SCHEDULE I
6. Services to be Performed: Management consulting with respect to strategies
and plans for ICS and its affiliated companies, as from time to time may be
expressly requested by the Project Coordinator.
7. Terms of Agreement: May 11, 1998 to December 31, 1998.
8. Project Coordinator: Henry I. Boreen
9. COMPENSATION: ICS AGREES TO PAY CONTRACTOR AS FOLLOWS FOR THE SUCCESSFUL
COMPLETION OF REQUIRED SERVICES:
Two thousand dollars ($2,000.00) per day (or the prorata portion thereof
based upon an eight hour day) for the services requested by the Project
Coordinator, not to exceed ten (10) days per month.
10. Other Pertinent Information:
(d) Paragraph 4.B., reference to "sixty (60) days" is charged to "thirty
(30) days
(e) Paragraph 8.H. is amended by inserting", provided, however, that the
obligations imposed hereunder by Paragraph 8.C. shall terminate with
respect to any particular Confidential Information after a period of
three years from the date of ICS's disclosure of such Confidential
Information to Contractor" after the phrase "association with ICS".
(f) Paragraph 11.H. is hereby deleted.
IN WITNESS WHEREOF, the parties hereto acknowledge their Agreement as follows:
Integrated Circuit Systems, Inc. Contractor
By: ______________________ By: ________________________
Typed Name: Henry I. Boreen, Chairman Typed Name: Rudolf Gassner
-------------------------- ------------------------
2435 Blvd. of the Generals
Address: Norristown, PA 19403 Address: ________________________
--------------------------
Date: September 11, 1998 Date: ________________________
--------------------------
<PAGE>
EXHIBIT 10.29
TO: John L. Pickitt
SUBJECT: Contractor Agreement Dated May 11, 1998
The Contractor Agreement between Edward M. Esber, Jr. and Integrated Circuit
Systems, Inc. is amended as follows:
SCHEDULE I
11. Services to be Performed: Management consulting with respect to strategies
and plans for ICS and its affiliated companies, as from time to time may be
expressly requested by the Project Coordinator.
12. Terms of Agreement: May 11, 1998 to December 31, 1998.
13. Project Coordinator: Henry I. Boreen
14. COMPENSATION: ICS AGREES TO PAY CONTRACTOR AS FOLLOWS FOR THE SUCCESSFUL
COMPLETION OF REQUIRED SERVICES:
Two thousand dollars ($2,000.00) per day (or the prorata portion thereof
based upon an eight hour day) for the services requested by the Project
Coordinator, not to exceed ten (10) days per month.
15. Other Pertinent Information:
(g) Paragraph 4.B., reference to "sixty (60) days" is charged to "thirty
(30) days
(h) Paragraph 8.H. is amended by inserting", provided, however, that the
obligations imposed hereunder by Paragraph 8.C. shall terminate with
respect to any particular Confidential Information after a period of
three years from the date of ICS's disclosure of such Confidential
Information to Contractor" after the phrase "association with ICS".
(i) Paragraph 11.H. is hereby deleted.
IN WITNESS WHEREOF, the parties hereto acknowledge their Agreement as follows:
Integrated Circuit Systems, Inc. Contractor
By: __________________________ By: ________________________
Typed Name: Henry I. Boreen, Chairman Typed Name: John L. Pickitt
-------------------------- ------------------------
2435 Blvd. of the Generals
Address: Norristown, PA 19403 Address: ________________________
--------------------------
Date: September 11, 1998 Date: _______________________
--------------------------
<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. 333-50939, 333-07293, 333-27113, 33-41407, 33-55902, 33-69676, 33-73208,
and 33-87086) on form S-8 and registration statements (No. 333-47103 and 33-
70202) on form S-3 of Integrated Circuit Systems, Inc. of our report dated July
30, 1998, related to the consolidated balance sheets of Integrated Circuit
Systems, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended June 27, 1998, and
related schedule which report appears in the June 27, 1998 annual report on form
10-K of Integrated Circuit Systems, Inc.
/s/KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
September 17, 1998
56
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<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> JUN-27-1998
<CASH> 25,340
<SECURITIES> 16,480
<RECEIVABLES> 22,128
<ALLOWANCES> 1,793
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<CURRENT-ASSETS> 80,763
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0
0
<COMMON> 56,604
<OTHER-SE> 33,164
<TOTAL-LIABILITY-AND-EQUITY> 108,009
<SALES> 160,634
<TOTAL-REVENUES> 160,634
<CGS> 82,792
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<OTHER-EXPENSES> 39,475
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