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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended June 30,
1995 or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____ to _____
Commission file number 0-15012
Chips and Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0047943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2950 ZANKER ROAD, SAN JOSE CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 434-0600
Securities registered pursuant to Section 12(B) of the Act: NONE
Securities registered pursuant to Section 12(G) of the Act:
COMMON STOCK, $.01 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent Filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $278,014,894 as of August 31, 1995.
On August 31, 1995 there were 20,219,265 shares of Common Stock of the Company
outstanding.
The Index to Exhibits is listed on pages 30 and 31 of this Annual Report on Form
10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Registrant's Annual Meeting of Stockholders to be held
on November 9, 1995, (the "Proxy Statement")
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PART I
ITEM 1. Business
General
Chips and Technologies, Inc., (the "Company" or "CHIPS") was incorporated as a
California corporation in December 1984. The Company was subsequently
reincorporated as a Delaware corporation in August 1986. The Company's initial
public offering occurred in October 1986. The Company develops and markets very
large scale integrated ("VLSI") circuit devices for the personal computing
industry. The Company's products incorporate features and technology that allow
its customers to rapidly design and introduce computing systems with compelling
combinations of performance and functionality.
The Company's strategy includes timely delivery of cost effective products for
the market leaders in the personal computing industry. The Company has continued
to target its efforts at the market leaders in the PC industry. These efforts
have resulted in adoption of the Company's products by customers such as Apple
Computer, Hewlett-Packard, IBM, NEC Technologies and Toshiba, among others.
The Company develops video controllers and core logic devices for personal
computers. The Company's video products provide functions that support major
industry display standards such as VGA & SVGA and address both portable and
desktop computing applications. Portable applications generally consist of
notebook and sub-notebook computers. Desktop applications are characterized by
the traditional CRT video display. The Company's core logic products provide the
circuitry that implements the digital pathways of a personal computer and
support industry standard bus and processor architectures such as ISA, VL, PCI
and the X86 series of microprocessors. As part of its core logic portfolio, the
Company also provides complementary devices that implement standard
communications protocols through serial and parallel ports to allow the
interface to the PC of peripheral devices such as disk drives, printers and
modems.
Industry Overview
The personal computing industry has rapidly expanded as system manufacturers
have continued to provide increasing performance and functionality at lower
prices. CHIPS was a pioneer in the development of the industry, providing many
of the technical innovations that allowed the market for IBM-compatible
computers to prosper.
CHIPS was an early supplier of VLSI solutions, now called "chipsets", which
allowed a variety of manufacturers to rapidly introduce cost effective personal
computers compatible with the then emerging IBM AT industry standard
architecture. This simplified the design of the PC and allowed manufacturers to
bring products to market without investing large amounts of internal resources
in the development of significant portions of the PC electronics.
Many changes have occurred in the industry since its genesis in the 1980's. The
majority of PC manufacturers now use independent suppliers to provide core logic
and video VLSI solutions. Widespread adoption of this business model has created
a large market opportunity which has attracted numerous competitors. The Company
faces strong competitive forces in all its product areas and believes its future
success will be based upon the following factors: delivery of products with
compelling performance and functionality, rapid development and timely
introduction of new products, maintenance of customer relationships with
market-leading PC manufacturers, obtaining sources of supply at competitive
costs and access to advanced semiconductor process technologies.
Product Lines
Overview
The Company divides its business into product families focused on two segments
of the personal computer market portable and desktop products. In the portable
product family, the company supplies graphics controllers which
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provide display capabilities for flat panel displays used in portable PC's. In
the desktop product family, the Company provides graphics controllers for CRT
displays and core logic semiconductor devices.
Portable Graphics Controllers
The market for portable graphics controllers has grown rapidly as the popularity
of portable computers has increased. The portable computing segment of the
market is the fastest growing portion of the PC industry, and most industry
projections estimate that portable computers will comprise an increasingly
larger portion of total PC shipments. The most common portable computing devices
are notebook and sub-notebook computers. The majority of these computers contain
a built-in flat panel (LCD) display. Advances in the portable market have most
recently revolved around improvements in display size and quality, power
consumption, miniaturization and performance. Advances in portable computing
technology suggest that portable PCs will eventually have performance and
functionality equivalent to the traditional desktop PC.
The Company markets a family of portable display controllers which offer
different combinations of features and performance to meet the varying
requirements of portable PCs. This product family addresses key customer
requirements with high component-level integration through the incorporation on
chip of a RAMDAC ( random access memory digital-to-analog converter) and clock
synthesizer, support of both TFT and STN flat panel displays, GUI acceleration
capabilities built into the chip hardware, and low power consumption. The
Company intends to introduce its next family of portable graphics controllers
during fiscal year 1996. This new family of products is being designed to bring
desktop levels of graphics performance and capabilities to the portable PC. The
new family will be based on a 64 bit graphics engine and will contain built in
multimedia features that will aid full motion video and MPEG playback. The
Company believes that portable computers are evolving into replacements for
traditional desktop computers and that this transition will demand desktop-level
graphics capabilities from the portable display controller.
The Company's portable graphics controller customers include major PC
manufacturers and subcontract manufacturers of notebook and sub-notebook
computers. The customer design-in process for a portable computer tends to be
more complex than that of a desktop PC. The Company supports its customers'
design process by providing a complete chip and software solution. Software BIOS
and application software drivers are a critical part of the integrated hardware
and software solution the Company provides. A customer's development investment
in software for a portable computer is becoming increasingly important,
particularly in light of industry transitions to new system software such as
Windows(TM) 95. The Company's software product offering complements its chip
product families by providing high performance, compatibility among different
chip family products and support for major operating systems and applications
such as Windows 3.1, Windows NT, OS/2 and Windows 95. The Company provides
ongoing technical applications support throughout the customer's design and
manufacturing process, as well as demonstration and development system boards.
Desktop Products
The overwhelming prevalence of Microsoft(R) Windows as a graphical user
interface ("GUI") software environment for IBM-compatible PCs has driven changes
in end user requirements for CRT display capabilities. The graphically intensive
nature of Windows software has placed additional demands on the electronic
components of the personal computer. In standard PC VGA graphics display
controller implementations, the computer's microprocessor is burdened with the
additional requirement of processing Windows functions, leading to slower video
image display and decreased user productivity. This deficiency has been
alleviated by adding hardware based video acceleration capabilities to the
graphics display controller, resulting in faster video display processing for
Windows and other GUI software applications.
The Company introduced its first single chip GUI accelerator CRT graphics
controller during fiscal 1994. The Company's desktop graphics controller
products offer customers a high performance solution at competitive system level
costs through high levels of integration by providing a GUI accelerator hardware
engine as well as RAMDAC and clock synthesizer circuitry in a single chip.
The primary functions of a personal computer are provided by a circuit board
called the motherboard, which generally contains the microprocessor, memory,
core logic and other peripheral control devices. The core logic devices control
the transfer of digital data within the personal computer by managing the
communications among
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the microprocessor, memory, system bus and peripherals. The microprocessor of an
IBM-compatible PC is based on an "X86" architecture, commonly referred to by
product family names such as 486 or Pentium(TM). The system bus management
function of the core logic device implements the protocols enabling
compatibility with industry standard bus interfaces such as Industry Standard
Architecture ("ISA") and Peripheral Component Interconnect ("PCI").
The Company's core logic products consist of devices that support a range of X86
processor families. These devices implement their core logic circuitry for the
majority of applications in one or two chips. The Company also maintains a
family of products that complement its core logic devices and implement the
peripheral functions on the motherboard, such as serial and parallel
communication protocols and disk drive interface control. The Company's core
logic products also include an innovative device that combines processor, core
logic, graphics display controller and peripheral control functions on a single
chip.
The Company's desktop product strategy includes integrated graphics and core
logic product solutions. The Company has developed a unique approach to using
computer memory called Unified Architecture(TM). The product approach integrates
the Company's graphics and core logic technologies into a single product which
performs the independent functions of both products, while potentially
eliminating the need for extra graphics memory utilized on most computers. There
are generally two types of memory on a computer system: main memory, which is
the area used for running applications software, and graphics memory, which
contains the display information presented on the video monitor. The Unified
Architecture(TM) approach melds the operations of the graphics controller and
core logic together in an innovative design such that separate graphics memory
is no longer required. This product approach offers potentially substantial
savings in system cost to the PC manufacturer. The Company anticipates offering
products utilizing this architecture during calendar year 1996.
The Company's customers for desktop products are primarily PC system
manufacturers, motherboard manufacturers and subcontract manufacturers. Its
customer base also includes, to a lesser degree, industrial and embedded control
application customers. The design-in process for desktop products is generally
much shorter than for portable PCs due to the simplicity of design and
standardization of many of the physical design factors. The Company supports the
customer's design process by providing complementary software, development and
demonstration boards and in many cases schematics and complete system board
designs. The Company assists its customers throughout the design and
manufacturing phases by providing technical applications and design support.
Sales & Marketing
CHIPS markets and distributes its products through a combination of a direct
sales organization, regional distributors and independent manufacturer
representatives. In North America, the Company maintains direct sales offices in
Georgia, Illinois and at its corporate headquarters in San Jose, California.
Additional regional technical support staff operate in Massachusetts and Texas.
International sales offices are maintained in Taiwan and the United Kingdom.
Sales to the Company's customers are usually made pursuant to specific purchase
orders, which are cancelable or reschedulable within certain time frames without
significant penalty. The Company recognizes sales to all customers except
domestic distributors upon shipment of the product. Revenue is recognized upon
the distributor resale for the Company's domestic distributors. The Company's
distributors are generally allowed to return to the Company a portion of the
products purchased by them. The Company maintains reserves for such potential
returns.
Sales efforts are focused on the customers' technical and management groups
responsible for new system designs. The Company provides direct application
engineering support to its customers during the evaluation, design and
production stages of the customer's product cycle to assist the customer in the
implementation of the Company's products.
The Company's products are utilized by a number of leading personal computer
manufacturers including Acer, Apple Computer, Digital Equipment, IBM, NEC
Technologies and Toshiba. Sales to Toshiba and Apple Computer each accounted for
11% of the Company's total revenue for fiscal 1995. No customers accounted for
greater than 10% of the Company's revenue for fiscal years 1994 and 1993. The
Company is continuing to expand its customer
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base with key PC system manufacturers. However, the loss of a significant
customer or a reduction in such customer's orders and sales could have a
material adverse effect on the Company's results of operations.
Export sales were 47%, 56% and 48% of net sales for fiscal years 1995, 1994 &
1993, respectively. The Company's export sales are currently denominated in U.S.
dollars. The proportion of export sales also reflects the strategy of certain PC
system companies to manufacture or subcontract manufacture of their products in
foreign countries. Export sales subject the Company to the exposures of
international business, including government and foreign trade policies and
local economic conditions.
Manufacturing
The majority of the Company's current products are manufactured using 0.8 and
0.6 micron CMOS process technologies. The Company expects most of its new
products to utilize 0.6 and 0.5 micron process geometries in order to achieve
high performance and lower production costs. The Company subcontracts to
independent suppliers the manufacture of its products. This strategy enables the
Company to avoid the large capital investment and overhead expense associated
with a captive semiconductor fabrication facility. Accordingly, the Company can
focus on what it believes are its core strengths, namely the design and
marketing of its products. Suppliers are not contractually bound to provide
product other than for currently outstanding purchase orders. While the Company
has been able to obtain production capacity sufficient to meet its demands,
there can be no assurance that sufficient capacity will be available at all
times in the future.
Certain of the Company's vendors deliver fully assembled and tested finished
products. In this case, CHIPS purchases finished goods meeting its predetermined
specifications. Other vendors provide only the silicon wafers, after which the
Company manages the process of assembly and testing through other independent
vendors. CHIPS maintains specific quality assurance programs for all vendors and
supplies its vendors with detailed semiconductor test programs to verify its
products during manufacture. The Company also requires its vendors to
manufacture to a detailed set of specifications and parameters prior to
accepting delivery of any products from its suppliers. The Company believes it
maintains good relationships with its subcontract vendors. The Company also
attempts to develop alternate vendor sources for its high volume products to
increase available production capacity and to reduce the exposure caused by
having a sole source for its products.
Research & Development
The Company considers the timely development and introduction of new products to
be essential to maintaining its competitive position and capitalizing on market
opportunities. Research and development efforts focus on the design of new
products and the enhancement of existing ones that will help to maintain or
increase the Company's participation in various product areas. At June 30, 1995,
the Company had approximately 78 employees engaged in research and development.
Spending for research and development during fiscal 1995, 1994 and 1993 was
$13.3 million, $11.8 million and $22.6 million, respectively. The decrease in
research and development spending from 1993 to 1994 reflects the impact of the
Company's restructuring programs that discontinued development efforts on
product lines the Company determined were not part of its future product
strategy. The Company expects its future research and development expenses to
increase in absolute dollars as the Company will continue to invest in its
product design methodology and future advanced technologies. The Company is
developing and intends to introduce a new family of portable graphics
controllers in fiscal 1996 and new products based on the Unified Architecture
approach to computer memory in calendar 1996. The development and successful
introduction of new products presents a variety of risks and there can be no
assurance that these or other product development efforts will be completed at
the time the Company expects, or that new products will be accepted in the
marketplace.
Competition
The markets for the Company's products are characterized by intense competition.
The Company expects the level of competition to increase. Competitive factors in
the Company's markets include product features, product performance, price,
timeliness of new product introductions, quality, software support and customer
support. There can be no assurance that the Company will be able to compete
effectively in these key areas and be successful
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relative to its competition. Advances by its competition in any of the areas
mentioned may have a material adverse effect on the Company's results of
operations.
The Company's competitors consist of both domestic and international companies.
Some of these companies own semiconductor fabrication, assembly and test
facilities, while others subcontract manufacturing in a manner similar to CHIPS.
Some competitors have significantly greater financial, technical, marketing,
manufacturing and distribution resources than the Company. To the extent these
competitors are able to utilize these resources effectively in competing against
the Company, there could be an impact on the future operating results of the
Company.
Licenses, Patents and Trademarks
The Company attempts to protect its proprietary technology through the filing of
patent applications and by the use of copyright, maskwork and trade secret
protection and trademarks. The Company has been granted 65 U.S. and foreign
patents covering various technical innovations. The Company also has 12 pending
patent applications. The Company intends to continue to build and protect its
intellectual property portfolio.
The semiconductor industry is characterized by frequent litigation regarding
patents and other intellectual property rights. There can be no assurance that
third parties will not assert claims against the Company related to current and
future products. In the event of such litigation, significant financial expense
and diversion of key technical and management personnel resources could occur.
Should there be an adverse result in any litigation proceeding, the Company
could be required to expend significant resources to develop non-infringing
technology, obtain licenses or provide financial compensation. The unfavorable
outcome of litigation against the Company could have a materially adverse impact
on the Company's results of operations.
Backlog
The Company participates in an industry that is subject to short order and
shipment lead times. As is common within the industry the Company participates
in, customers may change or cancel orders and shipment schedules within certain
periods with minimal penalties. In light of these factors, the Company does not
consider backlog to be a reliable or meaningful indicator of the Company's
operating results.
Employees
As of June 30, 1995 the Company had 180 employees, of whom 78 were engaged in
research and development, 61 in marketing and sales, 25 in manufacturing and 16
in administration and finance. The Company's future success will depend, in
part, on its ability to attract and retain highly qualified personnel. None of
the Company's employees is represented by collective bargaining agreements and
the Company has never experienced a work stoppage. The Company believes its
employee relations are good.
ITEM 2. Properties
The Company's corporate headquarters are located at 2950 Zanker Road in San
Jose, California. The Company owns the land and the 170,000 square foot building
on the site. The Company also owns two adjacent undeveloped lots, which it
intends to sell, located at 2833 and 2841 Zanker Road in San Jose, California.
The Company leases office space for its regional direct sales offices
domestically in Georgia and Illinois and internationally in Taiwan and the
United Kingdom.
The Company believes its facilities to be fully utilized and adequate for the
Company's current operations. However, future growth in the Company's operations
and staffing levels may affect the adequacy of the current facilities and
require the assumption of additional facilities.
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ITEM 3. Legal Proceedings
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
The executive officers of the Company and their ages are as follows:
James F. Stafford 51 President and Chief Executive Officer
Keith A. Angelo 39 Vice President, Marketing
Lee J. Barker 50 Vice President, Operations
Timothy R. Christoffersen 53 Vice President, Finance and Chief
Financial Officer
Richard E. Christopher 48 Vice President, Sales
Morris E. Jones, Jr. 43 Senior Vice President and Chief
Technical Officer
Lawrence A. Roffelsen 50 Vice President, Engineering
Jeffery Anne Tatum 45 Vice President and General Counsel
Mr. Stafford was elected to the Board of Directors on August 6, 1993 and was
named President and Chief Executive Officer on July 28, 1993. Previously he had
served as Senior Vice President and Chief Operating Officer from January 1992 to
July 1993, as Senior Vice President, Product Line Operations from February 1990
to January 1992, as Vice President, Product Line Operations from July 1989 to
February 1990, as Vice President, Operations from December 1985 to July 1989 and
as Director of Operations from January 1985 to December 1985. From February 1981
to December 1984, he served as Director of Materials at Seeq Technology, Inc.
Mr. Angelo was promoted to Vice President, Marketing in November, 1992.
Previously, Mr. Angelo had served as General Manager, Media Group, from April
1992 to November 1992, as Director of Marketing from January 1991 to April 1992,
as Marketing Manager from January 1989 to January 1991 and as Product Manager in
the Graphics group from October 1987 to January 1989. Prior to joining the
Company, Mr. Angelo spent four years at Intel Corporation in various marketing
positions in the Peripheral Component Group. Prior to joining Intel, Mr. Angelo
worked for a year at Randtronics.
Mr. Barker has served as Vice President, Operations since July 1992. Prior to
joining the Company, he was self employed for twelve years as a manufacturer of
electronic scoreboards and a supplier of raw materials to the sign industry.
From 1975 to 1979, Mr. Barker was the Corporate Director of Material for Excel
Industries.
Mr. Christoffersen has served as Chief Financial Officer since January 1994.
Prior to joining the Company, Mr. Christoffersen spent two years with Resonex
Inc., as Executive Vice President, Director, Chief Financial Officer, and later
Chief Operating Officer. Prior to joining Resonex, he spent 9 years with several
subsidiaries of Ford Motor Company in various managerial and financial
positions.
Mr. Christopher has served as Vice President, Sales, since July, 1992. Prior to
joining the Company, Mr. Christopher spent twelve years at Fujitsu
Microelectronics where he became Senior Vice President and General Manager.
Prior to joining Fujitsu Microelectronics, Mr. Christopher spent two years at
Harris Semiconductor as the Central Area Sales Manager. Prior to joining Harris
Semiconductor, Mr. Christopher served in various sales and marketing positions
at Fairchild Semiconductor.
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Mr. Jones, Jr. is a founder of the Company and has served as Senior Vice
President and Chief Technical Officer since February 1990, as Vice President,
Advanced Products and Chief Technical Officer from January 1989 to February
1990, as Chief Technical Officer from March 1987 to January 1989, as Vice
President, Computer Aided Engineering from December 1985 to March 1987, and as
Director of Computer Aided Engineering from December 1984 to December 1985. From
August 1984 to December 1984, he served as Manager of Computer Aided Engineering
at Seeq Technology, Inc. From May 1978 to August 1984, he served as Principal
Engineer at Amdahl Corporation, a mainframe computer manufacturer.
Mr. Roffelsen has served as Vice President, Engineering since November 1992.
Prior to joining the Company, he spent three years at Fujitsu Microelectronics,
Inc., where he served most recently as Vice President, ASIC Operations. Prior to
joining Fujitsu, he spent ten years with ITT Aerospace/Optical Division where he
served in several managerial positions.
Ms. Tatum has served as Vice President and General Counsel since July, 1994. She
previously served as General Counsel from August, 1993 to July 1994, and as
Assistant General Counsel from February 1992 to August 1993. Prior to joining
the Company, she was a partner of the law firms of Seyfarth, Shaw, Fairweather
and Geraldson from 1990 to 1992, and of Adams, Duque and Hazeltine from 1985 to
1989.
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PART II
Item 5. Market for Registrant's Common Equity & Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock is traded on the NASDAQ National Market System under
the symbol "CHPS". The following table sets forth high and low closing sale
prices for the Common Stock as reported by National Quotation Bureau, Inc.
Fiscal 1995 Fiscal 1994
High Low High Low
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First Quarter $ 5.375 $3.625 $6.00 $3.75
Second Quarter 7.50 4.95 6.95 4.875
Third Quarter 8.625 6.25 7.375 5.00
Fourth Quarter 14.00 7.50 5.75 3.75
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The Company's present policy is to reinvest earnings in future operations. The
Company has not paid and does not anticipate paying cash dividends in the
foreseeable future. At July 31, 1995 there were 19,884,729 shares of Common
Stock outstanding, held by approximately 1,031 stockholders of record.
Item 6. Selected Financial Data
<TABLE>
SELECTED DATA
<CAPTION>
SELECTED FINANCIAL DATA
In thousands except per share amounts Year ended June 30,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 104,731 $ 73,444 $ 97,874 $ 141,106 $ 225,088
Gross margin 39,856 26,480 24,725 16,961 82,496
Restructuring costs (1,429) (372) 23,271 9,131 --
Income (loss) from operations 9,748 (1,077) (52,654) (84,676) (19,093)
Net income (loss) 9,388 2,714 (49,055) (63,873) (9,624)
Net income (loss) per share 0.47 0.16 (3.13) (4.46) (0.71)
Total assets 85,767 51,300 62,454 115,301 154,167
Long-term capital lease and notes payable 1,725 1,019 1,009 3,835 6,841
Convertible debentures -- 7,910 7,910 -- --
Stockholders' equity 65,696 26,327 19,677 65,327 114,459
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Sales
The Company reported revenues of $104.7 million in fiscal 1995, an increase of
43% over $73.4 million in fiscal 1994 and 7% over $97.9 million in fiscal 1993.
The increase in revenues in fiscal 1995 was mainly due to significant increases
in unit shipments of portable graphics controllers. Net sales in fiscal 1994
were lower than in fiscal 1993 due to discontinuation of the Company's systems
business and a reduction in the unit sales of mature core logic and processor
products. The majority of the Company's sales are derived from portable graphics
controller products which comprised 65%, 47% and 20% of the Company's sales in
fiscal 1995, 1994 and 1993, respectively.
Export sales are sales made to foreign customers and to the overseas
manufacturing facilities of domestic customers. Export sales were 47%, 56% and
48% of net sales for fiscal years 1995, 1994 and 1993, respectively. Sales to
foreign customers are denominated in US dollars. Sales to Toshiba and Apple
Computer each accounted for 11% of the Company's sales for fiscal 1995. No
customers accounted for greater than 10% of the Company's sales for fiscal years
1994 and 1993.
Gross Margin
The gross margin percentage was 38% in fiscal 1995, compared to 36% in fiscal
1994 and 25% in fiscal 1993. The gross margin in fiscal 1995 improved compared
to fiscal 1994 and fiscal 1993 primarily from a more favorable product mix and
improved overhead absorption from higher sales volume. The Company expects the
gross margin percentage will remain at approximately the same level during the
next two quarters.
Research and Development Expenses
R&D expenses were $13.3 million, $11.8 million and $22.6 million in fiscal years
1995, 1994 and 1993, respectively. The decrease in fiscal 1994 from fiscal 1993
was primarily attributable to lower headcount and fewer and more focused product
development projects. The Company expects R & D expenditures to increase in
absolute dollars as it invests in both new hardware and software product
development. In addition, the Company intends to leverage and expand upon its
TechBlock(TM) design methodology with the addition of new graphics technologies
such as 3D & MPEG. R & D expenses as a percentage of net revenues were 13%, 16%
and 23% in fiscal years 1995, 1994 and 1993, respectively. The Company expects
the R & D expenses as a percentage of net revenues will remain stable or
increase slightly during the next two quarters.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were $18.2 million, $16.1 million
and $31.5 million in fiscal years 1995, 1994 and 1993, respectively. The
increase in absolute dollars from fiscal 1994 to fiscal 1995 was primarily due
to higher commissions paid to sales representatives as the result of higher
revenues. The reduction in expenses in fiscal 1994 compared to fiscal 1993 was
primarily due to reductions in legal services and headcount costs as a result of
the Company's restructuring plans, its strategy of targeting major PC system
manufacturers and increased focus on core product technologies. Selling, General
and Administrative expenses as a percentage of net revenues were 17%, 22% and
32% in fiscal years 1995, 1994 and 1993, respectively. The Company expects that
Selling, General and Administrative expenses as a percentage of net revenues
will decline during the next two quarters.
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Restructuring Costs
The Company recognized $1.4 million and $0.4 million as income against its
restructuring provision in fiscal years 1995 and 1994, respectively. The Company
received $1.2 million in fiscal 1995 and $0.4 million in fiscal 1994 as
principal payments against a note receivable recorded in respect of the sale of
certain of the Company's product lines which were discontinued and fully
reserved in fiscal 1993. The note was paid in full in November, 1994. Because
the restructuring plans which were reserved for in prior years were
substantially completed, the Company also recorded the remaining reserve balance
of $0.2 million as income in fiscal 1995.
The Company recorded $23.3 million to restructuring costs in fiscal 1993 mainly
related to reserves for discontinuation of certain product lines, facility
consolidations and employee severance.
Interest Income and Other, Net
Interest and other income was $0.6 million in fiscal 1995 compared to $1.7
million in fiscal 1994 and $3.6 million in fiscal 1993. Fiscal 1994 other income
included $0.9 million from the sale of investments. Fiscal 1993 other income
consisted mainly of cash received in settlement of litigation.
Income Taxes
The Company recorded $1.0 million of income tax provisions in fiscal 1995 based
upon an estimate of its annual effective tax rate. The Company utilizes its net
operating loss carryforward to offset a significant portion of its income taxes.
The estimated tax rate reflects certain alternative minimum tax and state tax
obligations.
The Company recorded $2.1 million in tax benefits in fiscal 1994. The Company
resolved a number of tax issues in fiscal 1994 and, as a result, recorded a tax
benefit of $2.2 million related to taxes which were previously provided for
these issues. Financial Accounting Standard No. 109 "Accounting for Income
Taxes," has been applied for all periods presented and a valuation allowance has
been established for any deferred tax assets for which realization is not
reasonably assured.
Liquidity and Capital Resources
During fiscal 1995, the Company generated $3.3 million of net cash and cash
equivalents from its operating activities as compared to net usage of $8.4
million during fiscal 1994 and generation of $9.3 million during fiscal 1993.
Cash was generated in fiscal 1995 primarily from increases in operating income,
partially offset by increases in accounts receivable and inventories. The usage
of cash in fiscal 1994 was primarily the result of execution of the
restructuring plans announced in early fiscal 1994, consisting of payments made
for settlement of lease obligations and employee severance. The generation of
cash in fiscal 1993 was mainly due to the receipt of a federal tax refund of
$28.3 million and proceeds of a subordinated debt offering of $10.3 million,
offset by cash consumed by operations.
Cash, cash equivalents and short term investments were $46.0 million on June 30,
1995, an increase of $23.5 million compared to $22.5 million on June 30, 1994.
During the same periods, accounts receivable, inventory and current liabilities
increased $6.3 million, $5.8 million and $2.3 million, respectively. The
increase in cash, cash equivalents and short term investments in fiscal 1995 was
mainly due to recognition of the market value of Nexgen common stock held by the
Company (see Note 1- Cash Equivalents and Short-term Investments) and cash
generated from operating income. Accounts receivable and inventory increased due
to the working capital required from the increases in revenues. Current
liabilities increased primarily due to an increase in accounts payable and other
accrued expenses; the increases were partially offset by the completion of the
Company's restructuring program. Long term debt was $1.7 million on June 30,
1995, a decrease of $7.2 million compared to $8.9 million on June 30, 1994. The
decrease was mainly due to the conversion of all outstanding subordinated
debentures into common stock in June 1995; the decrease was partially offset by
increases in capital lease financing.
Page 11
<PAGE>
The Company's capital requirements consist primarily of financing working
capital items and funding operational activities. The Company has two line of
credit agreements allowing borrowing of up to $13 million expiring in October
1995. Subsequent to June 1995, the Company has commitments from three banking
institutions for a combined total of $21 million in unsecured lines of credit.
The line of credit agreements expire at various times from August 1996 through
August 1997. There was no borrowing against line of credit agreements as of June
30, 1995. The Company's line of credit agreements contain certain covenants
related to financial performance and condition. Based on current levels of
working capital and available borrowing capacity, the Company believes that its
present capital resources are sufficient to meet its needs for the next fiscal
year.
Factors Affecting Future Operating Results
The Company anticipates its revenues will continue to increase over the next two
quarters. The largest portion of the Company's sales is comprised of portable
graphics controllers and the Company expects that the majority of its revenues
over the next two quarters will be from sales of those products. The Company's
future operating results could be adversely affected by various factors beyond
its control that could impact the portable computer market. Such factors
include: slower than anticipated growth in demand for portable computers, market
demand for features or capabilities other than those anticipated by the Company
and its OEM customers, and shortages of key components not supplied by the
Company.
The Company relies on obtaining and maintaining design wins for its products
with leading personal computer manufacturers. Many factors affect and could
adversely impact design wins, including internal scheduling delays, choices of
features, aggressive competition, changes in staffing at customers, and
intangible factors affecting customer relationships. To the extent that the
Company is unable to retain existing designs or to acquire new design wins and
the associated revenues generated from them for the Company's existing and
future products, there could be a material adverse effect on the Company's
results of operations.
The Company's revenues are directly affected by customer demand for its
products. Customer demand fluctuates, sometimes dramatically, based on the
customers' buildup of internal inventory, seasonal factors, and product
transitions, among other things. While the Company makes every effort to be
consistently informed of customers' expected demand for its products, customers
from time to time make unexpected changes in product purchasing forecasts and in
existing orders. Customer rescheduling, reduction of quantities of products
ordered and cancellations of orders could have a material adverse impact on the
Company's revenues and results of operations.
The Company believes it currently maintains a leadership position in the
portable graphics controller market and anticipates its competition may
aggressively price alternative solutions to attempt to gain or maintain market
position. To the extent that the Company must reduce prices to meet competition,
maintain market share or meet customer requirements, gross margins achieved
during fiscal 1995 may not be sustainable. The Company expects gross margin
percentages for the next two quarters will remain relatively stable compared to
the previous quarter. The Company anticipates its future operating expenses,
including sales commissions and research and development expenses, will increase
in absolute dollar amounts over the next two quarters. However, the Company
believes that operating expenses will remain relatively stable or decline
slightly as a percentage of sales over the next two quarters.
The Company uses subcontract vendors for the manufacture of its products. The
reliance on subcontract vendors presents risks including the lack of guaranteed
production capacity, delays in delivery, susceptibility to disruption in supply,
and reduced control over product costs and manufacturing yields. The Company
must place orders with its suppliers far in advance of shipment to its end
customers. Long production lead times and limited control over the manufacturing
process could adversely affect the Company to the extent it is not able to
anticipate its inventory supply requirements and as a result generates excess or
insufficient product inventories.
The majority of the Company's current products are implemented in 0.8 micron
semiconductor process fabrication technology. The Company expects most of its
new products to utilize 0.6 and 0.5 micron geometries in order to achieve high
performance and lower production costs. The semiconductor industry has
historically passed through periods of both surplus and deficits in available
fabrication capacity. The Company believes that the worldwide semiconductor
industry is currently in a period of rapid growth. Demands on available foundry
manufacturing supply have increased and thus available production capacity has
become increasingly limited, particularly at
Page 12
<PAGE>
advanced process geometries of 0.6 and 0.5 micron. In addition, advanced process
technologies and fabrication capacity are often limited until the technology
matures. Due to the Company's use of advanced process technology and subcontract
vendors, inability to obtain sufficient supplies of advanced semiconductor
fabrication processes could have a materially adverse effect on the Company's
operating results. To the extent that the Company is not able to meet its
customers' production requirements and those customers then decide to use
competitors' products, the resulting loss of business could have an adverse
effect on the Company's operating results.
Page 13
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Accountants ...................................... 15
Consolidated Statements of Operations for the three year period ending
June 30, 1995 .......................................................... 16
Consolidated Balance Sheets for the two year period ending June 30, 1995 17
Consolidated Statements of Cash Flow for the three year period ending
June 30, 1995 .......................................................... 18
Consolidated Statements of Stockholders Equity for the three year period
ending June 30, 1995 ................................................... 19
Notes to Consolidated Financial Statements ............................. 20-25
Report of Independent Accountants on Financial Statement Schedule ...... 27
Supplementary Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three months ended
--------------------------------------------
In thousands except June 30, March 31, Dec. 31, Sept. 30,
per share amounts 1995 1995 1994 1994
-------------------------------------------
Net sales $33,850 $27,231 $23,277 $20,373
Gross margin 12,994 10,365 8,859 7,638
Income from operations 3,765 2,283 2,500 1,200
Net income 3,652 2,109 2,371 1,256
Net income per share 0.18 0.11 0.13 0.07
Three months ended
--------------------------------------------
June 30, March 31, Dec. 31, Sept. 30,
1994 1994 1993 1993
--------------------------------------------
Net sales $15,393 $14,442 $22,438 $21,171
Gross margin 4,871 5,173 8,378 8,058
Income (loss) from operations (971) (909) 791 12
Net income 1,525 147 720 322
Net income per share 0.09 0.01 0.04 0.02
Page 14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Chips and Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flow
present fairly, in all material respects, the financial position of Chips and
Technologies, Inc. and its subsidiaries at June 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICE WATERHOUSE LLP
------------------------
Price Waterhouse LLP
San Jose, California
July 20, 1995
Page 15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
In thousands except per share amounts 1995 1994 1993
------------------------------------- ----------------------------------
Net sales $104,731 $73,444 $ 97,874
Cost of sales and other manufacturing
expenses 64,875 46,964 73,149
----------------------------------
Gross margin 39,856 26,480 24,725
Operating expenses
Research and development 13,344 11,793 22,633
Selling, general and administrative 18,193 16,136 31,475
Restructuring costs (1,429) (372) 23,271
----------------------------------
Total operating expenses 30,108 27,557 77,379
Income (loss) from operations 9,748 (1,077) (52,654)
Interest income and other, net 597 1,735 3,599
----------------------------------
Income (loss) before taxes 10,345 658 (49,055)
Benefit (provision) for income taxes (957) 2,056 --
----------------------------------
Net Income (loss) $ 9,388 $ 2,714 $(49,055)
==================================
Income (loss) per share $ 0.47 $ 0.16 $ (3.13)
==================================
Shares used in per share calculation 20,182 16,623 15,650
==================================
See accompanying notes to consolidated financial statements
Page 16
<PAGE>
CONSOLIDATED BALANCE SHEETS
In thousands except share amounts JUNE 30, 1995 JUNE 30, 1994
----------------------------------------------- ------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 22,385 $ 17,372
Short-term investments 23,644 5,171
Accounts receivable, net of allowance for
doubtful accounts of $1,032 and $1,269,
respectively 14,696 8,437
Inventory 11,667 5,845
Prepaid and other assets 2,549 3,100
-------- --------
Total current assets 74,941 39,925
Property and equipment, net 10,550 10,325
Other assets 276 1,050
-------- --------
$ 85,767 $ 51,300
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,072 $ 7,081
Current capital lease obligations 689 571
Other accrued liabilities 9,585 6,850
Accrued restructuring costs -- 1,542
-------- --------
Total current liabilities 18,346 16,044
Long-term capital lease obligations 849 100
Notes payable 876 919
Convertible debentures -- 7,910
-------- --------
Total liabilities 20,071 24,973
-------- --------
Commitments (Note 3)
Stockholders' equity:
Convertible preferred stock, 0 and 123,000
shares issued and outstanding -- 1
Common stock, 19,744,000 and 16,881,000
shares issued and outstanding 197 169
Capital in excess of par value 73,016 59,222
Note receivable from officer (107) --
Unrealized gain on investments 16,267 --
Retained deficit (23,677) (33,065)
-------- --------
Total stockholders' equity 65,696 26,327
-------- --------
$ 85,767 $ 51,300
======== ========
See accompanying notes to consolidated financial statements.
Page 17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended June 30,
In thousands 1995 1994 1993
----------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ 9,388 $ 2,714 ($49,055)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 2,672 3,414 8,553
Provision for losses on accounts receivable 300 676 1,079
Provision for losses on inventory 1,750 1,228 9,242
(Gain) loss on sale of fixed assets and investment (40) (956) 50
Other 164 (1) 106
Changes in operating assets and liabilities:
Accounts receivable (6,559) (1,583) 11,481
Inventory (7,572) (2,734) 481
Income taxes refundable -- -- 28,261
Accounts payable 991 139 (12,782)
Other assets and liabilities 3,050 (517) (11,368)
Accrued restructuring costs (890) (10,749) 23,271
----------------------------------------
Net cash provided by (used for) operating activities 3,254 (8,369) 9,319
----------------------------------------
Cash flows from investing activities:
Capital expenditures (3,419) (1,672) (718)
Sale (Purchase) of short-term investments (2,206) 3,265 (8,436)
Proceed from sale of investments and fixed assets 631 3,473 1,067
----------------------------------------
Net cash provided by (used for) investing activities (4,994) 5,066 (8,087)
----------------------------------------
Cash flows from financing activities:
Additions to capital lease obligations, net of 867 (3,748) (5,656)
principle
payment
Proceeds from issuance of subordinated debt -- -- 10,280
Proceeds from issuance of stock 5,986 3,646 697
Repayments (issuance) of officers' loans (100) 35 14
----------------------------------------
Net cash provided by (used for) financing activities 6,753 (67) 5,335
----------------------------------------
Net increase (decrease) in cash and cash equivalents 5,013 (3,370) 6,567
Cash and cash equivalents at beginning of year 17,372 20,742 14,175
----------------------------------------
Cash and cash equivalents at end of year $ 22,385 $ 17,372 $ 20,742
========================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 903 $ 1,002 $ 1,638
Income taxes 240 39 247
Additions under capital lease obligations 1,806 -- 781
</TABLE>
See accompanying notes to consolidated financial statements
Page 18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Convertible
Preferred Common Notes
Stock Stock Capital In Receivable Retained
In thousands Shares Par Shares Par Excess of From Unrealized Earnings
Value Value Par Value Officers Gain on (Deficit) Total
-------------- -------------- Investments
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992 -- $ -- $ 15,533 $155 $52,168 $ -- $ -- $ 13,276 $ 65,327
Shares of common issued upon exercise of:
options, plus accrued interest 12 58 (24) 34
employee stock purchase plan 141 1 506 507
Repayment of loans from officers 262 262
Common stock warrants 102 102
Conversion of convertible subordinated
debentures into series a preferred stock 511 5 2,365 2,370
Conversion of series A preferred stock into
common stock (388) (4) 388 4
Compensation related to non-qualified
stock options 130 130
Net loss for the year (49,055) (49,055)
--------------------------------------------------------------------------------------
Balance at June 30, 1993 123 1 16,074 160 55,329 238 (35,779) 19,677
Shares of common issued upon
exercise of:
options, plus accrued interest 701 7 3,426 3,433
employee stock purchase plan 56 1 211 212
shares issued for bldg. lease settlement 50 1 256 257
Repayment of loans from officers 34 34
Net income for the year 2,714 2,714
--------------------------------------------------------------------------------------
Balance at June 30, 1994 123 1 16,881 169 59,222 -- (33,065) 26,327
Shares of common issued upon exercise of:
options, plus accrued interest 1,291 12 5,735 5,747
employee stock purchase plan 61 1 237 238
Conversion of series A preferred stock into
common stock (123) (1) 123 1
Conversion of convertible subordinated
debentures into common stock 1,388 14 7,645 7,659
Note receivable from officer (107) (107)
Compensation expenses 177 177
Unrealized gain on investments 16,267 16,267
Net income for the year 9,388 9,388
--------------------------------------------------------------------------------------
Balance at June 30, 1995 -- $ -- 19,744 $197 $73,016 $(107) $16,267 $(23,677) $ 65,696
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
Page 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies:
Description of Business Chips and Technologies, Inc. (the "Company") develops
and markets very large scale integrated ("VLSI") semiconductor devices for the
personal computer industry. The Company was incorporated in California in
December 1984 and was reincorporated in Delaware in August 1986. The Company's
principal operations are conducted in the United States.
Export sales, principally to Asia, are sales made to foreign customers and to
the overseas manufacturing facilities of domestic customers. Export sales were
47%, 56% and 48% of net sales for fiscal years 1995, 1994 and 1993,
respectively. Foreign currency transaction gains and losses are included in
results of operations and were not significant in the periods presented.
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany accounts
and transactions have been eliminated.
Cash Equivalents and Short-term Investments The Company considers all highly
liquid debt instruments with maturities of three or fewer months at the time of
purchase to be cash equivalents. Cash equivalents and short-term investments
consist primarily of commercial paper and government obligations. The Company's
financial instruments are with high quality investments and institutions. This
diversification of risk is consistent with company policy to maintain liquidity
and ensure the safety of principal.
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, the Company's management determines the
appropriate classification of debt and equity securities, based on the nature of
the securities and the intent and investment goals of the Company, as of each
balance sheet date. The Company classified all investments on June 30, 1995 as
available for sale. The fair value and the amortized cost of the securities on
June 30, 1995 are presented in the table below. The investments were adjusted to
fair value and the unrealized gain was recorded as a separate component of
stockholders' equity.
Unrealized Unrealized
Amortized Holding Holding Fair
In thousands Cost Gain Losses Value
----------------------------------------------
Nexgen, Inc. Common Stock $ 0 $16,340 $ 0 $16,340
Corporate and U.S. Government
Obligations 7,377 73 7,304
-------------------------------------------
TOTAL $7,377 $16,340 $73 $23,644
============================================
The Company held a minority preferred stock investment in Nexgen, Inc. as a
result of an arrangement entered into in 1987. All the shares of Nexgen
preferred stock were automatically converted into common stock in conjunction
with Nexgen's initial public offering declared effective on May 24, 1995. The
Company currently holds 691,667 shares of Nexgen's common stock. The Company has
reflected this investment in its balance sheet in accordance with SFAS115. The
common stock is subject to contractual lock-up provisions which restrict any
sale of such shares by the Company for 180 days after the public offering.
Inventory Inventory, comprising finished goods, is stated at the lower of cost
or market. Cost is determined based on acquisition cost utilizing the first-in,
first-out method and appropriate reserves are established for slow moving and
discontinued products.
Page 20
<PAGE>
Property and Equipment Property and equipment are stated at cost. Depreciation
is computed using the straight-line method with an estimated useful life of
three to five years for furniture and equipment, and five to thirty years for
building and improvements. Equipment under capitalized leases is amortized over
its useful life.
Revenue Reserves Beginning in the first quarter of fiscal 1995, the Company
reclassified certain distributor revenue reserves to conform with general
industry practice. Previously classified as current liabilities, these reserves
are now classified as reductions to accounts receivable and prior periods have
been reclassified for comparative purposes.
Revenue Recognition Revenue from product sales to customers other than domestic
distributors is recognized upon shipment and reserves are provided for estimated
returns. Sales to distributors are generally subject to agreements allowing
certain rights of return and price protection with respect to unsold merchandise
held by the distributor. The Company defers recognition of revenue and related
gross margin on sales to domestic distributors until the product is sold by
those distributors.
Net Income (loss) per Share Shares used in the primary net income (loss) per
share computation are the weighted average number of common shares outstanding
plus dilutive common stock equivalents. The fully diluted computation also
includes other dilutive convertible securities. Common stock equivalents
consists of stock options, warrants and convertible preferred stock; other
dilutive convertible securities consist of convertible subordinated debentures.
Income Taxes Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of assets and
liabilities and the amounts reported for financial reporting purposes, for all
periods presented.
Concentration of Credit Risk The Company believes that the concentration of
credit risk in its trade receivables is substantially mitigated by the Company's
credit evaluation process, relatively short collection period, distributor
agreements, and the geographical dispersion of sales. Additionally, the Company
believes that adequate reserves have been provided for uncollectable accounts.
Note 2 Property and Equipment:
Year Ended June 30,
1995 1994
-----------------------
Computers $ 9,596 $ 8,541
Furniture and Equipment 6,300 8,173
Purchased Computer Software 10,709 9,138
Building and Improvements 5,102 5,406
Land 2,609 2,909
-----------------------
34,316 34,167
Accumulated Depreciation and Amortization (23,766) (23,842)
-----------------------
Property and Equipment Net $ 10,550 $ 10,325
=======================
At June 30, 1995 and June 30, 1994 assets under capitalized leases (Note 3) had
values of $2.3 million and $2.1 million, respectively, less accumulated
amortization of $0.9 million and $1.8 million, respectively. Amortization of
equipment under capitalized leases is included as part of depreciation and
amortization expense.
Page 21
<PAGE>
Note 3 Commitments and Contingencies:
The Company leases certain property and equipment under capital leases and
various other equipment under non-cancelable operating leases. The Company has
future minimum lease payments under capital leases of $1.7 million due through
1998 and payments under operating leases of $0.1 million due through 1999. The
present aggregate value of the capital lease obligations is $1.5 million of
which $0.7 million is due within 12 months. Rent expense for operating leases
totaled $0.3 million, $0.5 million and $2.8 million for the fiscal years 1995,
1994 and 1993, respectively.
At June 30, 1995, the Company has two line of credit agreements allowing
borrowing of up to $13.0 million expiring in October 1995. Subsequent to June
1995, the Company has commitments from three banking institutions for the
extension of a combined total of $21.0 million in unsecured lines of credit. The
line of credit agreements expire at various times from August 1996 through
August 1997. There were no borrowings outstanding against lines of credit at
June 30, 1995. The Company has outstanding standby letters of credit of $2.0
million securing inventory purchases with certain vendors and $1.7 million
securing certain capital financing arrangements.
Note 4 Subordinated Debentures:
On July 16, 1992, the Company issued $10.3 million of 8.5% Convertible
Promissory Notes (the "Notes") due June 30, 1997. In May 1993, the principal
amount of $2.4 million of the notes was converted into 510,776 shares of Series
A Convertible Preferred Stock of which 387,931 shares were immediately converted
into the same number of shares of common stock. The remaining principal amount
of $7.9 million of the Notes was converted into 8.5% Convertible Subordinated
Debentures due June 30, 2002 (the "Debentures"). During June 1995, the $7.9
million of Debentures were converted into 1,387,712 shares of common stock at
the conversion price of $5.70 per share. All shares of Convertible Preferred
Stock were converted into an equivalent number of shares of common stock during
fiscal 1995.
Note 5 Employee Benefit Plans:
The Company has reserved 1.5 million shares of common stock for issuance
pursuant to an Employee Stock Purchase Plan adopted in 1986 (the Purchase Plan).
The Purchase Plan allows qualified employees to purchase shares of Common Stock
at a price equal to the lower of the fair market value at the beginning or
ending of each 6 month purchase period for each two year offering period.
Purchases are limited to 10% of an employee's annual compensation and may not
exceed 500 shares per purchase period. Through June 30, 1995, 1,086,573 shares
had been issued under the Purchase Plan.
Note 6 Capital Stock:
Warrants
In conjunction with the issuance of the 8.5% Convertible Promissory Notes in
July 1992, the Company issued warrants for the purchase of 25,000 shares of
common stock at $7.28 per share to the placement agent and 16,216 shares of
common stock at $4.64 per share to a bank that provides the Company with a line
of credit. The warrants expire on July 16, 1997. The Company has reserved 41,216
shares of common stock for issuance upon exercise of the warrants.
Stock Option Plans
In November 1994, the Company amended and restated its 1985 Stock Option Plan
(the "85/94 Plan") which provides for the granting of incentive stock options
and non-qualified stock options to employees (including officers), directors and
consultants of the Company. Incentive stock options are granted at an amount not
less than
Page 22
<PAGE>
fair market value. Since inception, the cumulative number of shares of common
stock that have been reserved for issuance pursuant to the 85/94 Plan is
17,200,000. Options generally vest over four years. Option terms may not exceed
ten years from the date of grant and unexercised options granted under the
amended plan generally expire thirty days following termination of employment.
The 85/94 Plan activities for the three years ended June 30, 1995 are summarized
below:
Shares
available Options Outstanding
for grant Shares Price per share
-----------------------------------------
Balance at June 30, 1992 1,823,035 5,614,303 $5.50 -$16.00
Options granted (4,494,235) 4,494,235 $3.125 -$ 6.25
Options canceled 4,809,074 (4,809,074) $3.375 -$16.00
Options exercised, net of repurchases (10,564) $5.50 -$ 5.50
----------------------------------------
Balance at June 30, 1993 2,137,874 5,288,900 $3.125 -$ 9.75
Options granted (1,577,350) 1,577,350 $4.00 -$ 6.250
Options canceled 1,325,149 (1,325,149) $3.125 -$ 8.250
Options exercised, net of repurchases (700,679) $3.125 -$ 5.50
----------------------------------------
Balance at June 30, 1994 1,885,673 4,840,422 $3.125 -$ 9.75
Options granted (803,350) 803,350 $3.875 -$13.063
Options canceled 596,897 (596,897) $3.50 -$ 6.250
Options exercised, net of repurchases (1,291,803) $4.00 -$14.50
----------------------------------------
Balance at June 30, 1995 1,679,220 3,755,072 $3.125 -$13.063
========================================
In March 1988, the Company adopted the 1988 Non-qualified Stock Option Plan for
Outside Directors (the "Directors' Plan"), which provides for the granting of
non-qualified stock options to directors of the Company who are not employees of
the Company. The plan was amended in November 1993 to increase the share
reserve, extend option grant terms and modify grant provisions. Options must
have an exercise price equal to the fair market value of the common stock on the
date of grant, vest over a four year period and expire ten years after the date
of grant. The number of shares of common stock reserved for issuance pursuant to
the exercise of options is 350,000 shares. At June 30, 1995, total shares
available for grant were 138,333; total shares subject to options outstanding
were 185,000 with an exercise price per share ranging from $4.00 to $13.125.
Stockholder Rights Plan
On August 1, 1989, the Company adopted a Stockholder Rights Plan that provides
for the issuance of rights to holders of the Company's common stock, which will
entitle the holders of such rights to purchase stock of the Company or of an
acquiring entity at a discounted price in the event of certain efforts to
acquire control of the Company that have not been approved by the Company's
Board of Directors.
Note 7 Income Taxes:
The Company recorded $1.0 million of income tax provision in fiscal 1995 and
$2.1 million of income tax benefit in fiscal 1994. Fiscal 1995 tax provisions
included $521,000 of current federal tax, $395,000 current state taxes and
$41,000 current foreign taxes. The tax benefit in fiscal 1994 included $2.2
million recorded upon reversal of previously established reserves as the result
of resolving a number of the Company's tax issues.
The following is a reconciliation of the income tax benefits and provisions for
fiscal 1995 and fiscal 1994:
Page 23
<PAGE>
Year ended June 30,
(In thousands) 1995 1994
----------------------
Statutory federal income tax $ 3,517 $ 224
State income taxes, net of federal tax benefits 271 --
Utilization of net operating losses carryforward,
net of alternative minimum tax effect (2,858) --
Reduction of taxes provided in prior period -- (2,194)
Other 27 (86)
---------------------
Recorded Provision (benefit) $ 957 $ (2,056)
=====================
The significant components of deferred tax assets and liabilities are as
follows:
Year ended June 30,
(In thousands) 1995 1994
----------------------
Net operating loss carryforwards $ 22,565 $ 20,759
Non-deductible accrual and reserves 3,512 4,235
Depreciation -- 1,540
Other 2,536 2,968
---------------------
Gross deferred tax asset 28,613 29,502
Valuation allowance (26,146) (29,252)
---------------------
Net deferred tax asset 2,467 250
---------------------
Depreciation (2,192) --
Other (275) (250)
---------------------
Gross deferred tax liability (2,467) (250)
---------------------
$ -- $ --
=====================
The decrease in the valuation allowance for deferred tax assets of $3.1 million
is attributable to the reduction in gross deferred tax assets. The Company has
established valuation allowances as the realizability of net deferred assets is
uncertain.
On June 30, 1995, the Company has net loss carryforwards of approximately $54
million for federal and $44 million for state purposes expiring fiscal 2010. No
benefit for the loss carryforwards has been recognized in the financial
statements. When these net operating loss deductions are ultimately realized,
$16 million and $3 million will reduce the Company's federal and state taxes,
respectively. In addition, $2 million of federal tax benefits and $0.3 million
of state tax benefits, related to stock option deductions, will increase paid-in
capital.
Note 8 ACCRUED RESTRUCTURING COSTS:
The Company recorded restructuring charges of $23.2 million in fiscal 1993
mainly comprised of facilities consolidation, severance costs, disposal of fixed
assets and discontinuation of certain of the Company's product lines. During the
second quarter of fiscal 1995, the restructuring plans were substantially
completed. As a result, the Company recorded the remaining reserve balance of
$0.2 million as income. The Company took charges against the reserves during
fiscal 1993, 1994 and 1995 relating primarily to building lease settlements,
severance pay, costs of closure of certain foreign sales offices and litigation
costs. The following table summarizes the status of these restructuring reserves
as of June 30, 1995:
Page 24
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Consolidations of Fixed Asset Product Reduction of
Operations & Other Disposals Discontinuation Workforce Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at 6/30/92 $3,342 $ -- $ 21 $ 1,580 $ 4,943
Provision for restructuring 7,912 5,357 6,146 3,856 23,271
Charges against reserves (3,118) (5,357) (4,014) (1,950) (14,439)
------------------------------------------------------------------------------
Accrued restructuring
balance at 6/30/93 8,136 -- 2,153 3,486 13,775
Charges against reserves (6,694) -- (2,153) (3,386) (12,233)
------------------------------------------------------------------------------
Accrued restructuring
balance at 6/30/94 1,442 -- -- 100 1,542
Charges against reserves (1,258) -- -- (100) (1,358)
Reversal of provision (184) -- -- -- (184)
------------------------------------------------------------------------------
Accrued restructuring
balance at 6/30/95 $ -- $ -- $ -- $ -- $ --
==============================================================================
</TABLE>
Item 9. Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item is incorporated by reference from the section
entitled "Nomination and Election of Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" of the Proxy Statement.
Information regarding executive officers of the Company is presented in Part I
of this report.
Item 11. Executive Compensation
Information required by this item is incorporated by reference from the section
entitled "Executive Compensation and Other Matters" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference from the section
entitled "Security Ownership of Certain Beneficial Owners and Management" of the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference from the section
entitled "Certain Transactions and Other Relationships" of the Proxy Statement.
Page 25
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
a) 1. Financial Statements
The consolidated financial statements and notes thereto listed in the
index on page 14 are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedules listed below are filed as part of
this Annual Report on Form 10-K.
Page
II Valuation and Qualifying Accounts for the three year period ----
ending June 30, 1995. 28
All other schedules have been omitted since the required information is
not present or not present in material amounts to require submission of
the schedule or because the information required is included in the
consolidated financial statements or notes thereto.
b) Reports on Form 8K
The Company filed one report on Form 8K during the last quarter of
fiscal 1995. It was filed on June 5, 1995 for item 5 (other events). No
financial statements were filed with the report.
c) Exhibits
The exhibits listed in the Index to Exhibits on pages 30 to 31 of this
report are filed as part of this Annual Report on Form 10K.
Page 26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Chips and Technologies, Inc.
Our audits of the consolidated financial statements referred to in our report
dated July 20, 1995, appearing on page 15 of this document, also included an
audit of the Financial Statement Schedule listed in Item 14(a)(2), of this Form
10-K. In our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
------------------------
PRICE WATERHOUSE LLP
San Jose, California
July 20, 1995
<PAGE>
SCHEDULE II
CHIPS AND TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to
beginning costs and Accounts Balance at
of year expenses written-off end of year
---------- ---------- ----------- -----------
Allowance for doubtful accounts:
Year ended June 30, 1995 $1,269 $ 300 $ 537 $ 1,032
Year ended June 30, 1994 1,463 676 $ 870 1,269
Year ended June 30, 1993 2,377 1,079 1,993 1,463
Reserve for inventory:
Year ended June 30, 1995 $ 9,689 $1,750 $4,510(1) $ 6,929
Year ended June 30, 1994 16,270 1,228 7,809(1) $ 9,689
Year ended June 30, 1993 7,669 9,242 641(1) 16,270
(1) Represents inventories previously reserved that were scrapped or physically
disposed.
Page 28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
CHIPS AND TECHNOLOGIES, INC.
By /s/ JAMES F. STAFFORD
-----------------------------------------
James F. Stafford
President and 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.
Signature Title Date
---------------------------- ----------------------------- ------------------
/s/ GORDON A. CAMPBELL Chairman of the Board September 22, 1995
---------------------------- of Directors
Gordon A. Campbell
/s/ JAMES F. STAFFORD President and Chief Executive September 22, 1995
---------------------------- Officer and Director
James F. Stafford
/s/ TIMOTHY R. CHRISTOFFERSEN Vice President and Chief September 22, 1995
----------------------------- Financial Officer
Timothy R. Christoffersen (Principal Financial &
Accounting Officer)
/s/ GENE P. CARTER Director September 22, 1995
----------------------------
Gene P. Carter
/s/ BERNARD V. VONDERSCHMITT Director September 22, 1995
----------------------------
Bernard V. Vonderschmitt
/s/ HENRI A. JARRAT Director September 22, 1995
----------------------------
Henri A. Jarrat
Page 29
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 (2) Amended Certificate of Incorporation of Chips and Technologies,
Inc., a Delaware corporation.
3.2 (7) Restated By-laws of Chips and Technologies, Inc., a Delaware
corporation.
3.3 (4) Certificate of Designation, Preferences and Rights of the Terms
of the Series A Preferred Stock filed with the State of Delaware
on May 20, 1993.
4.1 (1) Stockholders' Rights Agreement dated August 23, 1989.
10.1 (4) Lease Termination Agreement and related exhibit between the
Company and The Equitable Life Assurance Society, dated
September 10, 1993.
10.2 (6) * First Amended 1988 Nonqualified Stock Option Plan for Outside
Directors dated October 1, 1993.
10.3 (2) * Form of Indemnity Agreement between the Company and each of its
directors and executive officers.
10.4 (4) * Confidential Termination Agreement and General Release of Claims
between the Company and Nancy S. Dusseau, dated September 1,
1993.
10.5 (4) * Confidential Termination Agreement and General Release of Claims
between the Company and Jeffrey H. Grammer, dated September 2,
1993.
10.6 (4) * Confidential Resignation and Consulting Agreement and General
Release of Claims between the Company and Gordon A. Campbell,
dated September 30,1993.
10.7 (5) Agreement for Sale and Purchase of Assets between Techfarm, Inc.
and Chips and Technologies, Inc., dated September 24, 1993.
10.8 (8) Restated Secured Promissory Note, Secured Continuing Guarantee,
and Restated Loan and Security Agreement between Techfarm, Inc.
and Chips and Technologies, Inc. dated March 31, 1994.
10.9 (8) * Promissory note to the Company from Keith Angelo dated August 1,
1994.
10.10 (8) * Independent Contractor Services Agreement between the Company
and Henri Jarrat dated August 11, 1994.
10.11 (9) * Amended and restated 1994 stock option plan dated November 10,
1994
10.12 (9) * Key employee bonus plan dated November 8, 1994
11.1 Statement re: Calculation of Earnings (Loss) per Share.
Page 30
<PAGE>
22.1 Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on November 9, 1995.
23.1 Consent of Independent Accountants
27.0 Financial Data Schedule for the year ended June 30, 1995
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1989.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1990.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1993.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1993.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1994.
(7) Incorporated by reference to Registration Statement No. 33-8005
effective October 8, 1986.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1994.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1994.
* Denotes management contracts or compensatory plans or arrangements
covering executive officers or directors of Chips and Technologies, Inc.
Page 31
Exhibit 11.1 Statement re: Calculation of Earnings (Loss) per Share
<TABLE>
<CAPTION>
Year ended June 30,
(In thousands except per share amounts) 1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Net income (loss) for calculation of earnings per share $ 9,388 $ 2,714 ($49,055)
======== ======== ========
Average number of common and common equivalent shares:
Weighted average common shares outstanding 17,419 16,500 15,650
Dilutive common stock equivalents:
Common stock options and warrant, using treasury stock method 2,763 * *
Convertible preferred stock -- 123 --
Convertible debentures -- * *
-------- -------- --------
Common and common equivalent shares used in the
calculation of net income per share: 20,182 16,623 15,650
======== ======== ========
Earnings (Loss) per share: $ 0.47 $ 0.16 ($ 3.13)
======== ======== ========
<FN>
* Antidilutive
</FN>
</TABLE>
Page 32
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-19715, No. 33-25064, No. 33-25856, No. 33-33960,
No. 33-38750, No. 33-38751, No. 33-45009, No. 33-60584, No. 33-60586, and No.
33-72652) of Chips and Technologies, Inc. of our report dated July 20, 1995
appearing on page 35 of the Annual Report to Stockholders, which is incorporated
in Chips and Technologies, Inc.'s Annual Report on Form 10-K. We also consent to
the incorporation by reference of our report on the Financial Statement
Schedule, which appears on page 27 of such Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
------------------------
Price Waterhouse LLP
San Jose, California
September 11, 1995
Page 33
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from fiscal 1995
10K financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000767965
<NAME> CHIPS AND TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 22,385
<SECURITIES> 23,644
<RECEIVABLES> 14,696
<ALLOWANCES> 1,032
<INVENTORY> 11,667
<CURRENT-ASSETS> 74,941
<PP&E> 34,316
<DEPRECIATION> 23,766
<TOTAL-ASSETS> 85,767
<CURRENT-LIABILITIES> 18,346
<BONDS> 0
<COMMON> 73,213
0
0
<OTHER-SE> (7,517)
<TOTAL-LIABILITY-AND-EQUITY> 65,696
<SALES> 104,731
<TOTAL-REVENUES> 104,731
<CGS> 64,875
<TOTAL-COSTS> 64,875
<OTHER-EXPENSES> 13,344
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,345
<INCOME-TAX> 957
<INCOME-CONTINUING> 9,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,388
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.47
</TABLE>
