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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1997
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
2950 Zanker Road, San Jose, California 95134
--------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (408)434-0600
----------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year.
If changed since last report.
Indicate by check 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 [ ]
At March 31, 1997, the registrant had 21,952,516 shares of common stock
outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Unaudited Condensed Consolidated Financial
Statements 3
Notes to Unaudited Condensed Consolidated 6
Financial Statements
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities Not applicable
Item 3. Defaults upon Senior Securities Not applicable
Item 4. Submission of Matters to a Vote of Security Not applicable
Holders
Item 5. Other Information Not applicable
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
Page 2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
In thousands, except share amounts 1997 1996
- --------------------------------------------------------- ---------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,827 $23,989
Short-term investments 47,944 35,356
Accounts receivable, net of allowance for
doubtful accounts of $1,469 and $1,203, 10,174 12,189
respectively
Inventory 10,908 10,197
Prepaid and other assets 7,230 2,574
---------------- -------------------
Total current assets 108,083 84,305
Property and equipment, net 13,352 11,223
Other assets 19,971 12,543
---------------- -------------------
TOTAL ASSETS $141,406 $108,071
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,284 $12,820
Current capital lease obligations 1,303 1,630
Other accrued liabilities 9,615 9,436
---------------- -------------------
Total current liabilities 21,202 23,886
Long-term capital lease obligations 959 796
---------------- -------------------
Total liabilities 22,161 24,682
---------------- -------------------
Stockholders' equity:
Common stock, 21,953,000 and 20,620,000 shares
issued and outstanding 219 206
Capital in excess of par value 85,523 77,769
Note receivable from officer (52) (80)
Unrealized gain on investments 4,008 3,421
Retained earnings 29,547 2,073
---------------- -------------------
Total stockholders' equity 119,245 83,389
---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $141,406 $108,071
================ ===================
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements
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CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands, MARCH 31, MARCH 31,
except per share amounts 1997 1996 1997 1996
- ----------------------------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $37,759 $36,514 $130,476 $111,992
Cost of sales 20,419 22,057 69,404 68,216
-------------- -------------- --------------- ---------------
Gross margin 17,340 14,457 61,072 43,776
-------------- -------------- --------------- ---------------
Operating expenses
Research and development 6,207 4,822 16,394 14,538
Selling, general and administrative 6,362 5,589 20,163 15,707
-------------- -------------- --------------- ---------------
Total operating expenses 12,569 10,411 36,557 30,245
-------------- -------------- --------------- ---------------
Income from operations 4,771 4,046 24,515 13,531
Interest income and other, net 4,357 6,827 6,012 8,492
-------------- -------------- --------------- ---------------
Income before taxes 9,128 10,873 30,527 22,023
Provision for income taxes 913 1,087 3,053 2,202
-------------- -------------- --------------- ---------------
Net Income $8,215 $9,786 $27,474 $19,821
============== ============== =============== ===============
Net income per share $0.35 $0.45 $1.19 $0.91
============== ============== =============== ===============
Shares used in per share calculation 23,145 21,671 23,079 21,905
============== ============== =============== ===============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements
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CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
In thousands 1997 1996
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 27,474 $ 19,821
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,311 1,955
Gain on sale of land -- (949)
Gain on sale of stock investments (3,489) (6,204)
Changes in operating assets and liabilities:
Accounts receivable 2,015 5,227
Inventory (711) 893
Accounts payable (2,536) 1,140
Other assets and liabilities (28) (2,472)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 25,036 $ 19,411
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,411) (347)
Deposits for capacity agreement (11,880) (13,880)
Purchase of short-term investments (8,512) (9,672)
Proceeds from sale of land -- 2,759
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NET CASH USED IN INVESTING ACTIVITIES (23,803) (21,140)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for capital lease obligations (1,193) (850)
Proceeds from issuance of stock 7,767 4,015
Repayment of officer's loan 31 32
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NET CASH PROVIDED BY FINANCING ACTIVITIES 6,605 3,197
------------- -------------
Net increase in cash and cash equivalents 7,838 1,468
Cash and cash equivalents at beginning of year 23,989 22,385
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,827 $ 23,853
============= =============
Supplemental cash flow information: Cash paid during the period for:
Interest $ 150 $ 178
Income taxes 792 431
Additions under capital lease obligations 1,029 2,099
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The Unaudited Condensed Consolidated Financial Statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position, operating results and cash flows for
those periods presented. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended June 30, 1996, included in the
Company's 1996 Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of
the results that may be expected for the entire year.
NOTE 2. SHORT-TERM INVESTMENTS
The Company classified all investments on March 31, 1997 and June 30, 1996 as
available-for-sale. The fair market value and the amortized cost of the
investments are presented in the tables below. The investments are adjusted to
fair market value as of the balance sheet date and any unrealized gains are
recorded as a separate component of stockholders' equity. In January 1997, the
Company sold 125,000 shares of its AMD common stock and realized a gain of $3.5
million. In February 1997, the Company entered into an agreement which is
accounted for as a hedge of its remaining 129,000 shares of AMD common stock.
This hedging transaction was consummated and all the shares were sold in April
1997. As the result of the sale, the Company will record a net gain of $4.1
million in the fourth quarter of fiscal 1997.
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------
Unrealized Fair
(In thousands) Amortized Holding Market
Cost Gain/(Loss) Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
AMD Common Stock $ -- $4,087 $4,087
U.S. Government and Corporation Obligations 43,936 (79) 43,857
- -----------------------------------------------------------------------------------------
Total $43,936 $4,008 $47,944
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------
Unrealized Fair
(In thousands) Amortized Holding Market
Cost Gain/(Loss) Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
AMD Common Stock $ -- $3,465 $3,465
U.S. Government and Corporation Obligations 31,935 (44) 31,891
- -----------------------------------------------------------------------------------------
Total $ 31,935 $3,421 $35,356
=========================================================================================
</TABLE>
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NOTE 3. INVENTORY
Inventory consists of the following:
(In thousands)
March 31, 1997 June 30, 1996
-------------- -------------
Work-in-process $7,370 $7,693
Finished goods 3,538 2,504
-------------- -------------
$10,908 $10,197
============== =============
NOTE 4. INCOME TAXES
The Company provides for income taxes during interim reporting periods based
upon an estimated annual effective tax rate of approximately 10%. This rate is
lower than the statutory income tax rate, reflecting the expected utilization of
the Company's net operating loss carryforwards and the change in valuation
allowance for the Company's deferred tax assets. The Company expects that its
effective tax rate will increase to reflect full statutory rates net of ongoing
taxable deductions in fiscal year 1998.
NOTE 5. NET INCOME PER SHARE
Net income per share is based on the weighted average common shares outstanding
and dilutive common equivalent shares (using the treasury stock or modified
treasury stock method, whichever applies). Common equivalent shares include
stock options and warrants.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". This statement is
effective for the Company's fiscal year ending June 30, 1998. The statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted this statement for the three and nine
month periods ended March 31, 1997 and 1996, the Company's income per share
would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income per share $.37 $.48 $1.29 $.99
Diluted net income per share $.35 $.45 $1.19 $.91
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including in particular those discussed below or in the Company's annual report
on Form 10-K for the fiscal year ended June 30, 1996, which could cause actual
results to differ materially from historical results or those anticipated. In
this report, the words "expect," "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements speak only as of
the date hereof. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 54.1 60.4 53.2 60.9
------ ------ ------ ------
Gross margin 45.9 39.6 46.8 39.1
------ ------ ------ ------
Operating expenses
Research and development 16.4 13.2 12.5 13.0
Selling, marketing and
administrative 16.8 15.3 15.5 14.0
------ ------ ------ ------
Total operating expenses 33.2 28.5 28.0 27.0
------ ------ ------ ------
Income from operations 12.7 11.1 18.8 12.1
Interest income and other, net 11.5 18.7 4.6 7.6
------ ------ ------ ------
Income before taxes 24.2 29.8 23.4 19.7
Provision for income taxes 2.4 3.0 2.3 2.0
------ ------ ------ ------
Net income 21.8 26.8 21.1 17.7
====== ====== ====== ======
</TABLE>
NET SALES
Net sales for the third quarter of fiscal 1997 were $37.8 million, an increase
of $1.3 million or 3.4% from $36.5 million reported for the third quarter of
fiscal 1996. Net sales for the first three quarters of fiscal 1997 were $130.5
million, an increase of $18.5 million from $112.0 million for the same period of
fiscal 1996. The increase in net sales was due to increases in unit shipments of
portable graphics accelerators. Revenue from portable graphics accelerator
products comprised 84% of the Company's net sales in the third quarter of fiscal
1997, compared to 82% of net sales in the same quarter of fiscal 1996. The
Company expects net sales for the next quarter will decrease sequentially,
primarily due to product transition issues.
GROSS MARGIN
The gross margin percentage was 45.9% in the third quarter of fiscal 1997,
compared to 39.6% for the third quarter of fiscal 1996. For the first three
quarters of fiscal 1997, the gross margin was 46.8%, compared to 39.1% for the
same period of fiscal 1996. The improvement in gross margin percentage was
primarily due to relatively stable average selling prices and declining wafer
costs. The Company expects its gross margin percentage for the next quarter will
remain at about the same level as in the quarter just ended.
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RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $6.2 million in the third quarter of fiscal
1997 were $1.4 million higher than in the third quarter of fiscal 1996. Research
and development expenses were approximately 16% of net sales in the third
quarter of fiscal 1997, compared to 13% in the third quarter of fiscal 1996. For
the first three quarters of both fiscal 1997 and 1996, research and development
expenses were approximately 13% of net sales. Research and development expenses
increased in the third quarter of fiscal 1997 mainly due to increased
engineering staffing. The Company expects to continue to increase its investment
in hardware and software engineering, particularly in the areas of 3D graphics,
integrated memory, and MPEG II technology. The Company expects its research and
development expenses to increase in both absolute dollars and as a percentage of
net sales during the next fiscal quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $6.4 million in the third
quarter of fiscal 1997 were $0.8 million higher than in the third quarter of
fiscal 1996. Selling, general and administrative expenses were approximately 17%
of net sales in the third quarter of fiscal 1997, compared to 15% in the third
quarter of fiscal 1996. For the first three quarters of fiscal 1997, selling,
general and administrative expenses were approximately 16% of net sales,
compared to 14% in the same period of fiscal 1996. Selling, general and
administrative expenses increased mainly due to higher commissions paid to sales
representatives as the result of higher sales. The Company expects these
expenses will decline slightly in absolute dollars during the next quarter as
the result of expected lower sales.
INCOME TAXES
The Company provides for income taxes during interim reporting periods based
upon an estimated annual effective tax rate of approximately 10%. This rate is
lower than the statutory income tax rate, reflecting the expected utilization of
the Company's net operating loss carryforwards and the change in valuation
allowance for the Company's deferred tax assets. The Company expects that its
effective tax rate will increase to reflect full statutory rates net of ongoing
taxable deductions in fiscal year 1998.
INTEREST INCOME AND OTHER, NET
Interest and other income was $4.4 million in the third quarter of fiscal 1997,
compared to $6.8 million during the same period of fiscal 1996. Interest and
other income for the first three quarters of fiscal 1997 was $6.0 million, as
compared to $8.5 million in the same period of fiscal 1996. Other income in the
third quarter of fiscal 1997 included a $3.5 million gain from the sale of
125,000 shares of AMD stock. Other income in the first three quarters of fiscal
1996 included a $0.9 million gain related to the sale of land in the second
fiscal quarter and a $6.2 million gain from the sale of 299,000 shares of AMD
stock in the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $79.8 million on March
31, 1997, $20.5 million higher than $59.3 million on June 30, 1996. This
increase was primarily attributable to cash generated from operating activities,
proceeds from issuance of stock due to stock option exercises and the increase
in the market value of the Company's AMD common stock. As of the filing date of
this report, all of the Company's AMD stock has been sold (see Note 2-Short-term
investments on page 6). The increase was partially offset by cash deposits to
the foundries.
During the three quarters of fiscal 1997, prepaid and other current assets
increased $4.7 million from $2.6 million on June 30, 1996; other non-current
assets increased $7.4 million from $12.5 million on June 30, 1996. The increases
were primarily attributable to the payment of cash deposits under foundry
capacity agreements. The Company has foundry agreements with Taiwan
Semiconductor Manufacturing Company and Chartered Semiconductor
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Manufacturing PTE LTD, which initially required deposits totaling $43.5 million
to be paid by the Company. To date, the Company has made deposits totaling $25.8
million under these two agreements. An additional deposit of $11.7 million under
one of the agreements has not been paid by mutual consent of the parties,
pending re-negotiation of that agreement. The Company will pay the remaining
balance of $6.0 million under the other agreement in calendar year 1998. A
portion of the deposits will be recovered over the term of the contracts as
rebates or credits against wafer purchases, and the remainder is expected to be
recovered at the expiration of the agreements.
The Company's capital requirements consist primarily of financing working
capital items and funding operational activities. The Company has agreements
with three banking institutions for a combined total of $21.0 million in
unsecured lines of credit. These line of credit agreements will expire at
various times from August 1997 through October 1998. These agreements contain
certain covenants related to financial performance and condition, and the
Company's ability to borrow is subject to compliance with such covenants. The
Company was in compliance with all covenants as of March 31, 1997, and there
were no borrowing against these line of credit. The Company expects that its
existing cash, cash equivalents, short-term investments, bank lines of credit
and funds generated from operations will be sufficient to meet the Company's
capital and operating requirements for at least the remainder of this calendar
year.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's revenues, gross margin and other operating results have been and
will continue to be affected by a wide variety of factors that could have a
material adverse effect on the Company's operations and business during any
particular period. These factors include: gain or loss of any strategic
relationships or design wins with customers, new product introductions by the
Company's competitors, market acceptance of the Company's and its customers'
products, the rescheduling or cancellation of orders by the Company's customers,
the Company's ability to predict product demand and manage its inventory,
fluctuations in manufacturing yields, the timing of its customers' qualification
of the Company's products, supply constraints and other factors affecting the
availability of other components (such as portable display screens and memory
devices) incorporated into the Company's customers' products, pressures on
selling prices, and changes in product or customer mix.
A limited number of customers account for a substantial portion of the Company's
net sales. The proportion of revenues from the Company's largest customer
increased significantly during the first three quarters of fiscal 1997 compared
to fiscal 1996. The Company's revenues from any specific customer can fluctuate
from period to period depending on conditions and factors affecting that
customer's business. Conditions and factors affecting the Company's customers'
businesses include: the rate of growth in the notebook computer market, the
customer's market share, the customer's inventory position, the acceptance of
the customer's new products in the marketplace, and competition, among other
things. The Company expects that sales to relatively few customers will account
for a high percentage of its net sales for the foreseeable future. In the event
that one or more of the Company's major customers were to reduce its level of
purchases or cancel and/or substantially reschedule orders for significant
quantities of product, the Company's results of operations could be materially
adversely affected.
The Company relies on obtaining and maintaining design wins for its products
with leading personal computer manufacturers. In the event that the Company's
competitors' products include features and/or performance that are perceived as
valuable by the market but are not in the Company's products, and/or the Company
is not able to incorporate new technologies or features into its existing and/or
future products on a timely basis, the Company could lose future business with
current customers or not achieve design wins with new customers. Some notebook
computer manufacturers are currently incorporating technologies such as embedded
memory and 3D functionality into their new systems. The Company plans to
introduce graphics controllers incorporating these technologies in 1997.
However, several of the Company's competitors have already introduced such
products and, as a result, the Company has not achieved some new design wins. To
the extent that the Company is unable to obtain new design wins with current or
new customers, there could be a material adverse effect on the Company's
business, financial condition and results of operations.
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The Company's business is dependent on strategic partnerships and licensing
arrangements for certain technologies. For example, two of the Company's planned
new product offerings during calendar 1997 include embedded memory technology
and 3D technology, respectively, provided by third parties. In each instance,
the Company does not currently have a readily available alternative source for
that technology. If any third party upon which the Company is relying does not
deliver technologies in a time frame consistent with the needs of the Company
and its customers, if unforeseen difficulties occur in integrating any third
party technology into the Company's products, or if any third party technology
does not perform as anticipated, the timing of the Company's introduction and
delivery of key new products could be adversely affected. In addition, the
Company's relationships with customers could be damaged.
The Company's products contain intellectual property owned by the Company or
licensed from third parties. The Company's products and its customers' products
are from time to time the subject of claims of infringement of third parties'
intellectual property rights. Such claims could result in substantial expense to
the Company in the form of attorneys fees, sums paid to settle claims, damages
paid pursuant to court order and/or the expenses of indemnification of claims
made against customers. In addition, a claim of infringement of third party
intellectual property rights could result in court orders prohibiting the
manufacture, importation, or sale, among other things, of the Company's and/or
its customers' products.
The personal computer industry is increasingly characterized by certification
and security standards established by third parties. In some cases, for example
in connection with the incorporation of DVD-related capabilities, meeting these
standards requires the licensing of technologies from third parties. To the
extent the Company does not comply with these standards and/or is unable to
consummate the necessary licenses in a timely fashion, the introduction and
acceptance of the Company's new products could be delayed and/or impaired.
Power consumption is a significant factor in the notebook computer market. As
consumers expect more complex technologies and features, including 3D and faster
microprocessors, to be incorporated into notebook computers, notebook
manufacturers face a growing challenge to improve battery life despite the
increased power consumption caused by added features and more advanced
technologies. If notebook computer manufacturers cannot address these needs in a
timely and satisfactory manner, the rate of growth in the portable computer
market may not occur as quickly as expected. In addition, the Company and other
suppliers to notebook computer manufacturers will be at a competitive
disadvantage if alternative providers offer products that consume less power
than the Company's products.
The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor device requirements are supplied by third party foundries. All of
the Company's semiconductor products are also currently assembled and tested by
third party vendors. The Company's reliance on subcontractors to manufacture,
assemble and test its products involves significant risks, including reduced
control over delivery schedules, quality assurance, the availability of advanced
process technologies, manufacturing yields and cost. Delays in delivery of the
Company's products, shortages of necessary substrate technology, problems with
quality or yields, cost increases and other factors beyond the Company's control
could result in the loss of customers, reductions in the Company's revenues or
margins or other material adverse effects on the Company's business, financial
condition and operating results.
The Company's manufacturing and assembly subcontractors are primarily in Asia.
Many of the Company's customers also manufacture in Asia or subcontract their
manufacturing to Asian companies. The concentration of the Company's
manufacturing, assembly and selling activities in Asia poses risks, including
foreign currency fluctuations, political unrest, labor shortages and economic
and trade policies, which could adversely affect demand for and supply of the
Company's products.
The current market for third party wafer production is characterized by ample
capacity and aggressive price reductions on 0.5u and 0.35u wafers. While the
Company has recently secured price reductions, there can be no assurance such
reductions are equivalent to those achieved by competitors. In addition, a
capacity constraint for more advanced processes, such as 0.25u, may emerge
during late 1998. The Company currently does not have any foundry agreements to
ensure guaranteed access to this capacity. Competitors who have such agreements,
including joint ventures, may be in a better position to obtain better access
and lower costs on .25u capacity. The unavailability of sufficient quantities of
competitively priced .25 micron capacity could have a material adverse effect on
the Company's business and results of operations.
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The PC semiconductor market is generally characterized by price declines over
time as new competitors enter and as new semiconductor process technologies
enable lower cost manufacturing. In addition, rapid price declines may occur
when current supply exceeds demand. As the leading supplier of graphics
controllers to the portable computer market, the Company expects to experience
increased price competition, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
expects its competitors to aggressively price alternative solutions to attempt
to gain or maintain market share. To the extent that the Company must reduce
prices to meet competition, maintain market share or meet customer requirements,
the gross margin percentages will be adversely impacted.
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PART II - OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities Not applicable
Item 3. Defaults upon Senior Securities Not applicable
Item 4. Submission of Matters to a Vote of Security Holders Not applicable
Item 5. Other Information Not applicable
Item 6. Exhibits - The exhibits listed in the Exhibit Index set 15
forth on page 15 of this report are incorporated herein by
reference.
Reports on Form 8-K Not applicable
</TABLE>
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SIGNATURES
Pursuant to the requirements 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.
(Registrant)
/s/ James F. Stafford
-----------------------------------
James F. Stafford
President & Chief Executive Officer
/s/ Timothy R. Christoffersen
-----------------------------------
Timothy R. Christoffersen
Vice President of Finance
Chief Financial Officer and
Principal Accounting Officer
Date: May 7, 1997
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C> <C>
3.1 (1) Amended Certificate of Incorporation of Chips and Technologies, Inc.
3.2 (2) Restated By-laws of Chips and Technologies, Inc.
4.1 (3) Stockholders' Rights Agreement dated August 23, 1989.
10.1 (6) * First Amended 1988 Nonqualified Stock Option Plan for Outside Directors
dated October 1, 1993 (as amended through November 9, 1995) .
10.2 (1) * Form of Indemnity Agreement between the Company and each of its directors
and executive officers.
10.3 (4) * Promissory note to the Company from Keith Angelo dated August 1, 1994.
10.4 (4) * Independent Contractor Services Agreement between the Company and Henri
Jarrat dated August 11, 1994.
10.5 (6) * Amended and Restated 1994 Stock Option Plan dated November 10, 1994 (as
amended through November 9, 1995).
10.6 (5) * Executive Bonus Plan dated September 21, 1995.
10.7 (6) Option Agreement between the Company and Taiwan Semiconductor Manufacturing
Company dated November 6, 1995. (**)
10.8 (6) Deposit Agreement between the Company and Chartered Semiconductor
Manufacturing PTE LTD dated November 16, 1995. (**)
10.9 (7) Amendment to Deposit Agreement between the Company and Chartered
Semiconductor Manufacturing PTE LTD dated October 17, 1996. (**)
27.0 Financial Data Schedule for the quarter ended March 31, 1997 17
</TABLE>
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 90.
(2) Incorporated by reference to Registration Statement No. 33-8005
effective October 8, 1986.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1989.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended June 30, 1994.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995.
Page 15
<PAGE> 16
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1996.
* Denotes management contracts or compensatory plans or arrangements
covering executive officers or directors of Chips and Technologies, Inc.
** Confidential treatment has been requested for a portion of this
document.
Page 16
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