-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IWuYpx6PdmtevJAAEwEGAXZCeBCiVDmfrwEDDmlDpJ7u1yWVxfzv8RahFSWtw1Xh CN4ABBbZunQYhYwdOFkcUQ== 0001036050-98-001630.txt : 19980924 0001036050-98-001630.hdr.sgml : 19980924 ACCESSION NUMBER: 0001036050-98-001630 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED CIRCUIT SYSTEMS INC CENTRAL INDEX KEY: 0000874689 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 232000174 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19299 FILM NUMBER: 98713480 BUSINESS ADDRESS: STREET 1: 2435 BLVD OF THE GENERALS CITY: NORRISTOWN STATE: PA ZIP: 19403 BUSINESS PHONE: 6106305300 MAIL ADDRESS: STREET 1: 2435 BLVD OF THE GENERALS CITY: NORRISTOWN STATE: PA ZIP: 19403 10-K405 1 INTERGRATED CIRCUIT SYSTEMS, INC. FORM 10-K405 ================================================================================ 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 ----------- ----------- 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 =============================================================================== PART I ITEM 1. BUSINESS GENERAL ------- Integrated Circuit Systems, Inc. (the "Company") was incorporated in Pennsylvania in 1976, and began by designing and marketing custom application specific integrated circuits ("ASICs") for various industrial customers. In particular, the Company was noted for its unique expertise in designing ASICs which combined both analog and digital, or "mixed-signal", technology. By 1988, the Company had adopted a strategy of developing proprietary integrated circuits ("ICs") to capitalize on its complex mixed-signal design technology and pioneered the market for frequency timing generators ("FTGs") which provide the timing signals or "clocks" necessary to synchronize high performance electronic systems. FTGs replaced the multiple crystal oscillators and other peripheral circuitry previously used to generate and synchronize timing signals, thus providing savings in board space, power consumption and cost. The Company's FTG products were initially used in video graphics applications in personal computers ("PCs"), but subsequently expanded to include motherboards and PC peripheral devices such as disk drives, audio cards and laser printers. More recently, the Company has further extended the use of its mixed-signal expertise to develop products for data communication applications. The Company currently considers its various design, manufacture and marketing activities to be a single industry segment. The Company's initial public offering of Common Stock occurred in June 1991, at which time the Company's Common Stock commenced trading on the Nasdaq National Market under the symbol ICST. ACQUISITIONS/DIVESTITURES 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 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 --------------------------------- 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. 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 ------------------- 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 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 ------------- 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 ------------------------ 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. The Company expects to continue to increase its spending for research and development in absolute dollar amounts in the foreseeable future. Because design of the Company's products is extremely complex, the Company has experienced delays from time to time in completing products on a timely basis. The design of the Company's products is an extremely complex iterative process involving the development of a prototype product through computer-aided circuit design, the generation of photo masks for the manufacturing process and the fabrication of wafers. Throughout this process, the Company's engineering staff reviews preliminary performance data against the original product specifications. Resulting variances, if any, may require redesign of previously completed elements and result in the lengthening of the design, and thus the production cycle. PATENTS, LICENSES AND TRADEMARKS -------------------------------- The Company holds several patents, as well as copyrights, mask works, and trademarks with respect to its various products and expects to continue to file applications for the same in the future as a means of protecting its technology and market position. In addition, the Company seeks to protect its proprietary information and know-how through the use of trade secrets, confidentiality agreements and other security measures. There can be no assurance, however, that these measures and/or others will be adequate to safeguard the Company's interests or preserve the Company's leading edge in certain of its technology and products or protect it from allegations regarding potential patent infringement. To augment product feature sets or accelerate development schedules, the Company licenses certain technologies. 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 ----------- 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. FORWARD-LOOKING STATEMENTS -------------------------- 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 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. 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 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. 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. 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.
Name Age Position - ------------------- -------- ------------------------------------------------------------- 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
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 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. 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".
Fiscal 1998 Fiscal 1997 ------------------------------------------------------ High Low High Low ------------------------------------------------------ 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
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. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA FIVE YEAR SUMMARY (In thousands, except for per share data)
Year Ended ------------------------------------------------------------- June 27 June 28 June 29 June 30 1998 1997 1996 1995 1994 ------------------------------------------------------------- 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
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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)
Year Ended --------------------------------------------- June 27 June 28 June 29 1998 1997 1996 --------------------------------------------- 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% =============================================
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. 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. 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. 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. 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. 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. 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. 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. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- Consolidated Balance Sheets - -------------------------------------------------------------------------------- (In thousands)
June 27 June 28 Assets 1998 1997 --------------------------------- 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 =================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Consolidated Statements of Operations - -------------------------------------------------------------------------------- (In thousands, except for per share data)
Year Ended --------------------------------------------------- June 27 June 28 June 29 1998 1997 1996 --------------------------------------------------- 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 ===================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity - -------------------------------------------------------------------------------- (in thousands)
Cumulative Total Number of Common Treasury Retained Translation Shareholders' Shares Stock Stock Earnings Adjustment Equity Outstanding --------------------------------------------------------------------------- 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 ===========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 27 - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- (In thousands)
Year Ended ------------------------------------------------------- June 27 June 28 June 29 1998 1997 1996 ------------------------------------------------------- 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 =======================================================
For a description of certain non-cash investing and financing transactions, refer to footnote 2. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 28 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 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 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 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 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):
June 27 June 28 1998 1997 ---------------------------- Accounts receivable $22,128 $21,133 Less: reserves for returns and doubtful accounts (1,793) (443) ---------------------------- $20,335 $20,690 ============================
33 (8) INVENTORY The components of inventories are as follows (in thousands):
June 27 June 28 1998 1997 ---------------------------- 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 ============================
(9) PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
June 27 June 28 1998 1997 ------------------------------ 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 ==============================
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 A summary of long-term debt is as follows (in thousands):
June 27 June 28 1998 1997 --------------------------- 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 ===========================
Aggregate annual maturities of long-term debt as of June 27, 1998 (in thousands) 1999 $ 143 2000 130 2001 131 2002 133 2003 136 2004 and beyond 850 ------ $1,523 ======
(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): 1999 $ 1,331 2000 1,515 2001 1,304 2002 1,300 2003 and after 9,183 ------- $14,633 =======
(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 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):
Year Ended ------------------------------------------------- June 27 June 28 June 29 1998 1997 1996 ------------------------------------------------- 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 =================================================
36 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):
Year Ended --------------------------------------- June 27 June 28 June 29 1998 1997 1996 --------------------------------------- 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 =======================================
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 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):
Year Ended ----------------------------------------------- June 27 June 28 June 29 1998 1997 1996 ----------------------------------------------- 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 ===============================================
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 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):
Options Available For Grant Under Weighted Average The Plans Options Outstanding Exercise Price ----------------------------------------------------------------------- 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 =======================================================================
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
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 - ----------------------------------------------------------------------------------- ------------------------------ $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
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:
1998 1997 1996 ------------------------------------------ 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
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: Dividend yield 0% Expected volatility 60-81% Average expected option life 4 years Risk-free interest rate 5.34% - 6.4%
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 (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):
Fiscal Years Ended June 27, June 28, June 29, 1998 1997 1996 ---------------------------------------------- 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
(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 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 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 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 (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):
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 ------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------
45 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.
NAME AGE POSITION ========== === ================ 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
/(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 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 $100,000 for the last completed fiscal year.
==================================================================================================================================== SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM COMPENSATION ---------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS - --------------------------------------------------------------------------------------------------------------- OTHER RESTRICTED SECURITIES ALL NAME ANNUAL STOCK UNDERLYING OTHER AND COMPEN- AWARD(S) OPTIONS/ LTIP COMPEN- PRINCIPAL FISCAL SALARY BONUS SATION ($) SARS PAYOUTS SATION POSITION YEAR ($) ($)/(1)/ ($)/(2)/ (#) ($) ($)/(3)/ - ------------------------------------------------------------------------------------------------------------------------------------ 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 ---- ====================================================================================================================================
47 (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 $2.67 per share which was determined by the board of directors of Turtle Beach to be the fair market value of such stock on the date the options were granted. The options have been terminated and are unexercisable. (7) Due to Dr. Prodromou's resignation, 125,000 options were canceled. (8) Includes severance payments made to Dr. Prodromou on March 20, 1998. The following table sets forth the option grants during the fiscal year ended June 27, 1998 for the individuals named in the Summary Compensation Table.
==================================================================================================================================== OPTION GRANTS IN LAST FISCAL YEAR - ------------------------------------------------------------------------------------------------------------------------------------ Individual Grants Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term - ------------------------------------------------------------------------------------------------------------------------------------ % OF TOTAL OPTIONS EXERCISE OR GRANTED TO EMPLOYEES BASE PRICE EXPIRATION 5% ($) 10% ($) OPTIONS IN FISCAL YEAR ($/SH) DATE NAME GRANTED - ------------------------------------------------------------------------------------------------------------------------------------ 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 $122,519 ====================================================================================================================================
48 The following table sets forth aggregate option exercises during the fiscal year ended June 27, 1998 and option values for the individuals named in the Summary Compensation Table.
==================================================================================================================================== AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF VALUE OF UNEXERCISED SECURITIES IN-THE-MONEY OPTIONS UNDERLYING AT FY-END ($)/(1)/ UNEXERCISED OPTIONS NAME SHARES ACQUIRED VALUE AT FISCAL YEAR EXERCISABLE/ ON EXERCISE (#) REALIZED ($) END(#) UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
/(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 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.
Percent of Number of Shares Shares Name of Beneficial Owner Beneficially Owned/(1)/ Outstanding - -------------------------- ----------------------- ------------ 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 *
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 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 SCHEDULE II INTEGRATED CIRCUIT SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS Years ended June 27, 1998, June 28, 1997 and June 29, 1996 (in thousands)
Balance at Additions Charged Beginning of to Costs and Balance at Description Period Expenses Deductions End of Period - ------------------------------------------------------------------------------------------------------------------------------ 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
_______________ /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 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 *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 + 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 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 EX-10.25 2 AGREEMENT BETWEEN THE COMPANY AND STAVRO PRODROMOU 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. 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- (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- 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 -4- 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) -5- 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 -6- 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. -7- 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, -8- 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 -9- 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. -10- 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 -11- EX-10.26 3 AGREEMENT BETWEEN THE COMPANY AND HENRY BOREEN 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 (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 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 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 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 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 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 EX-10.27 4 AGREEMENT BETWEEN THE COMPANY AND EDWARD ESBER 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: ________________________ ---------------------------- EX-10.28 5 AGREEMENT BETWEEN THE COMPANY AND RUDOLF GASSNER 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: ________________________ -------------------------- EX-10.29 6 AGREEMENT BETWEEN THE COMPANY AND JOHN PICKITT 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: _______________________ -------------------------- EX-23.1 7 CONSENT OF INDEPENDENT AUDITORS 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-27-1998 JUN-27-1998 25,340 16,480 22,128 1,793 12,839 80,763 33,418 15,534 108,009 15,650 1,380 0 0 56,604 33,164 108,009 160,634 160,634 82,792 88,859 39,475 0 64 34,220 0 21,375 0 0 0 21,375 1.73 1.63
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