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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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
---- ----
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 common equity held by nonaffiliates of the
registrant was approximately $372,963,926 as of September 12, 1997.
On September 12, 1997, there were 22,101,566 shares of Common Stock of the
Company outstanding.
The Index to Exhibits is listed on pages 35 and 36 of this Annual Report on Form
10-K.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
This annual 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 and in Item 7 of
this report for the year ended June 30, 1997, 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, and should not be given undue reliance.
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.
GENERAL
Chips and Technologies, Inc. ("CHIPS" or the "Company") is a leading supplier of
highly integrated semiconductor and software solutions to personal computer
manufacturers. The Company's solutions provide enhanced graphics, video and
other advanced display capabilities for both portable and desktop computers.
CHIPS is currently the world's leading supplier of graphics and video
controllers for portable computers. Some of the Company's customers are Acer,
Fujitsu, Quanta, IBM, NEC and Toshiba.
INDUSTRY OVERVIEW
The emergence of graphical user interfaces (GUIs) such as Microsoft Windows
spawned a major change in the role of the semiconductor chips that control
computer displays. Before the widespread use of GUIs, the primary function of
video chips was to display simple characters such as letters and numbers. As
full-motion video and other even more challenging graphics functions have become
standard features in personal computers, the graphics controller chip has become
a key component, requiring even more innovation and sophistication in its design
and functionality.
The portable computer market is growing at a faster rate than the desktop
computer market and has become a significant segment of the personal computer
industry. As the portability and popularity of notebook computers have grown, so
have users' expectations for performance and features that are comparable to
those of desktop computers. This poses a substantial challenge for designers of
graphics controller chips. Not only must they provide desktop-quality
performance and features such as video playback acceleration, they must also
help solve portable computer manufacturers' unique development challenges. These
include limited physical space, the need for low power consumption, support for
numerous types of flat panel displays from different manufacturers, and
constrained ability to control electrical emissions for FCC certification. In
addition, graphics controllers for portable computers must also support
traditional CRT monitors as well as built in flat panel displays and must be
able to display images on both simultaneously.
DISPLAY AND GRAPHICS TECHNOLOGY IN PORTABLE COMPUTERS
Graphics technology for portable computers has evolved around key factors such
as display size, color, resolution and a host of integrated technologies. The
main display on a portable computer is the flat panel integrated in the
computer. This display is generally based on liquid crystal display ("LCD")
technology. Portable computer display technology has advanced from 7" to 9", low
resolution monochrome displays to 12" or larger, 16.7 million simultaneous color
and 1024x768 pixel displays. Increased demand for portable computers and the
availability of additional manufacturing capacity have led to a rapid decline in
LCD display costs. The prospect of further cost declines creates new
applications for flat panel displays. Economical production of large LCD
displays, comparable in size to current mainstream desktop CRT displays, is
quickly becoming viable. LCDs have significant benefits compared to traditional
CRTs for desktop use, namely size and power consumption. In addition, LCDs can
display an image over their entire display surface, unlike most CRTs; thus a 12"
LCD displays a 12" image, whereas a 13"-14" CRT display may produce only a 12"
image.
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Flat panel graphics controllers must rapidly bring mainstream display
advancements to the portable arena. The emergence of demand for entertainment
and communication functionality on personal computers has had a significant
impact on the direction of the portable computer market during the past year.
The advent of DVD, MPEG-II, and 3D graphics technologies brings a host of new
opportunities and challenges for manufacturers of graphics accelerators,
including the need for licensing relationships with constituencies not
previously associated with the portable computer market, such as the
entertainment and music industries.
COMPANY STRATEGY
Extend Leadership Position in Portable Graphics Controllers
The Company maintains a leading position as a supplier of graphics and video
controllers to portable computer manufacturers. The Company's strategy is to
leverage its core expertise and market leadership to rapidly bring advanced
display controller technologies to portable computers. During fiscal 1997, the
Company extended its HiQVideo(TM) family of video display controllers. This
product family continues the Company's successful hardware and software-
compatible product strategy, which allows PC manufacturers to build on their
developed base of software and board designs while bringing new features and
higher performance to their products. The HiQVideo product family has been
enhanced during the past year to include proprietary technologies for improving
graphics display quality and performance as well as integration of embedded
memory.
Meet Customer Needs With Innovative and Comprehensive Solutions
The Company maintains very close relationships with leading PC manufacturers
such as Toshiba, Acer and NEC. The Company assists them in solving their product
design challenges by bringing innovative solutions to their products. The
Company also recognizes that its customers are excellent sources for product
direction and incorporates this direction into its product roadmap to create
customer-driven solutions.
Develop Advanced Technologies for Current and New Market Opportunities
Portable computers are rapidly becoming entertainment products as well as
productivity tools. The Company is addressing the need for integration of DVD,
MPEG-II, 3D and audio technologies into its products by both developing
technologies and partnering with other companies that are market leaders in
relevant areas of expertise.
In 1997 and early 1998, the Company expects to introduce products in the
HiQVideo family that offer new multimedia capabilities. These products will
exploit new capabilities provided by the MMX-enabled host processor. By sharing
the multimedia workload with the native CPU, this approach ensures a
well-balanced system that more fully utilizes inherent system resources.
In the 3D products area, Intel Corporation is developing the i740 product, a
2D/3D desktop video graphics accelerator designed and under development jointly
by Intel, the Company and Real 3D, a Lockheed Martin company. Benefiting from
these relationships, the Company expects to introduce a 2D/3D graphics
accelerator product for notebook computers. This product is designed to work in
conjunction with Intel's recently announced AGP architecture and advanced
Pentium processors to efficiently bring 3D realism to the notebook computer.
To increase functionality in the graphics area, the Company is adding embedded
memory to its new generation of graphics controllers. By integrating memory into
the graphics controller, the space in the crowded interior of notebook computers
that was previously required for a graphics chip, memory chips, and the
connecting bus is greatly reduced. Additionally, embedding memory in the
graphics controller decreases power consumption and increases performance.
In an effort to diversify and expand beyond its core graphics controller
business, the Company is undertaking new research and development projects. One
of these projects aims to leverage the Company's existing technologies to take
advantage of the possible emergence of flat panel monitors as an alternative to
CRTs for desktop computers. Another early stage project targets a business
opportunity outside of the personal computer market. Although development
expenses and technology acquisition costs are expected to increase in fiscal
1998 as a result of these projects, the Company does not anticipate resulting
revenue in the next fiscal year.
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PRODUCTS AND MARKETS
The Company is the leading supplier of flat panel graphics and video controllers
to portable computer manufacturers. During fiscal 1997 approximately 90% of the
Company's revenue was derived from flat panel controllers.
FLAT PANEL GRAPHICS CONTROLLER PRODUCTS
All of the Company's flat panel graphics controllers for portable computers are
highly integrated and incorporate a graphics accelerator (BitBLT) engine, true
color RAMDAC and a PLL clock synthesizer in a single chip. The previous
generation 6554X family of products is based on a 32-bit display graphics engine
while the newer HiQVideo(TM) family is based on a 64-bit graphics engine. Both
support a variety of flat panel LCD displays.
HIQVIDEO(TM) FAMILY
The Company's 64-bit PCI local bus HiQV64(TM) (65554) processor combines video
acceleration with a high performance graphics engine to deliver full screen
video at 30 frames per second. This product's hardware assisted video
acceleration is optimized to smoothly play back software titles with 64K color
full-motion, full screen video. Separate video and graphics pipelines further
reduce system processor overhead and minimize memory requirements for video and
graphics color depth.
The HiQVPro(TM) multimedia accelerator (65555) is an extension of the HiQVideo
graphics controller family with enhanced multimedia capabilities and
HiQColor(TM) technology for driving large panel displays at high resolutions and
referesh rates, or driving computer graphics on television sets with reduced
flicker.
The HiQVision(TM) mobile/desktop multimedia accelerator (68554) is the first
flat panel graphics controller designed specifically for both desktop and
notebook computers. It provides a solution to many of the obstacles which
prevent 12.1 inch or larger flat panels from attaining greater acceptance in
mainstream display markets.
HIQCOLOR(TM)
HiQColor is a unique process that enables the display of 16.7M colors on less
expensive supertwisted nematic (STN) flat panel displays without the visual
artifacts currently seen on STN panels. This technology enables notebook and
desktop PC makers to offer large STN flat panel displays with viewing quality
comparable to active matrix, thin-film transistor (TFT) panels at a much lower
cost.
EMBEDDED MEMORY PRODUCTS
Combining SGRAM (synchronous graphic random access memory) with high-speed
logic, the Company's new embedded memory product family utilizes several
technologies developed by Samsung. Samsung's MDL (Merged DRAM and Logic)
architecture will enable the Company's designers to embed up to 3MB of enhanced,
proprietary, high-speed SGRAM-like memory into flat panel multimedia
accelerators. The embedded memory products provide cost savings at the system
level and measurable improvements in performance and power consumption compared
to separate graphics and memory components.
OTHER PRODUCTS
The Company markets other products which include various solutions for the major
subsystems of a PC motherboard. Focused on integration and performance, the
product line consists of I/O solutions, core logic and an innovative single chip
computer called PC/CHIP. These products target a wide range of industrial and
embedded control applications utilizing 386 and 486 microprocessor technologies.
Sales of these products comprised 10% of the Company's fiscal 1997 revenues.
SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products through a combination of a
direct sales organization, regional distributors and independent
representatives. In North America, the Company maintains direct sales offices in
Georgia and Illinois, and at its corporate headquarters in San Jose, California.
Additional regional technical support staff operate in Massachusetts and Texas.
The Company has international sales offices in Taiwan and the United Kingdom. In
Asia, the Company sells the vast majority of its products through distributors.
These distributors provide inventory stocking for end customers and supplement
the Company's technical support.
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The Company usually sells product pursuant to specific purchase orders, which
are cancelable or re-scheduleable within certain time frames without significant
penalty. The Company recognizes sales to all customers except domestic
distributors upon shipment of the product. For the Company's domestic
distributors, revenue is recognized upon the distributor resale. 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.
To assist customers in the implementation of the Company's products, the Company
provides application engineering hardware and software development support
during the evaluation, design and production stages of the customer's product
cycle. The Company works very closely with its customers. The Company receives
in-depth feedback from its customers concerning new product plans and features.
This feedback helps refine the Company's product strategies and greatly enhances
new product acceptance.
The Company's products are utilized by a number of leading personal computer
manufacturers, including Acer, Fujitsu, IBM, NEC, Quanta and Toshiba. Some of
these PC OEMs subcontract manufacturing of their computer products to other
companies, while ordinarily retaining control over the selection and
specification of the semiconductor components. In fiscal 1997, sales to Inno
Micro, a distributor in Japan, comprised 53% of total sales, including sales to
Toshiba which represented approximately 38% of the Company's total sales. In
fiscal 1996, sales to Inno Micro comprised 37% of total sales, including sales
to Toshiba which represented approximately 26% of the Company's total sales. In
addition, fiscal 1996 sales to Apple Computer and Gain Tune/World Peace, a
distributor in Taiwan, comprised 16% and 10% of the Company's revenue,
respectively. In fiscal 1995, Inno Micro accounted for approximately 23% of the
Company's revenue, including sales to Toshiba accounting for 13% of the
Company's revenue. In addition, fiscal 1995 sales to Apple Computer and Gain
Tune/World Peace comprised 13% and 10% of the Company's revenue, respectively.
The Company expects a significant portion of its future sales to remain
concentrated with a limited number of strategic customers. There can be no
assurance that the Company will be able to retain its strategic customers or
that such customers' purchases will not decline or fluctuate significantly or
that such customers will not cancel or reschedule orders. Any of these
occurrences and others related to its customers, as noted in "Factors Affecting
Future Operating Results," could have a material adverse effect on the company's
business.
Export sales were 83%, 67% and 47% of net sales for fiscal years 1997,1996 and
1995, respectively. The Company's export sales are currently denominated in U.S.
dollars. The significant proportion of export sales also reflects the strategy
of certain PC system companies to manufacture or subcontract manufacture of
their products in foreign countries, as well as the strategy of certain
distributors to maintain domestic billing locations for their foreign
operations.
MANUFACTURING
The majority of the Company's current products are manufactured using 0.5 and
0.35 micron triple layer metal CMOS process technologies. The Company expects
most of its new products to utilize 0.35 micron and 0.25 micron process
geometries in order to achieve higher performance and lower production costs.
The Company subcontracts to independent suppliers the manufacturing 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 its core strengths:
the design and marketing of its products.
Some of the Company's vendors deliver fully assembled and tested products. In
this case, the Company 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. The Company maintains 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. The Company
believes it maintains good relationships with its vendors. The Company generally
manufactures its product at one supplier during its prototyping and initial
production and, as production ramps up, the Company qualifies a second supplier
to manufacture the product in high volume. Due to its strategy of utilizing
subcontract manufacturers, the Company is subject to certain risks including
those noted in "Factors Affecting Future Operating Results".
The Company has entered into two long-term wafer capacity agreements with Taiwan
Semiconductor Manufacturing Company and Chartered Semiconductor Manufacturing
PTE LTD (see Note 3 - Commitments, Long-term capacity
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agreements). Both agreements were entered to secure additional guaranteed wafer
supplies through the year 2000 in order to support the expected growth in the
Company's manufacturing requirements. The Company believes it has secured
appropriate manufacturing capacity given its current expectations. However, the
conditions of these agreements present risks, including those indicated in
"Factors Affecting Future Operating Results". In addition, the Company is
experiencing a tightening capacity market, which has the potential to cause a
shortage of capacity for manufacturing product in excess of the Company's
current expectations.
RESEARCH & DEVELOPMENT
Timely development and introduction of new products is essential to maintaining
the Company's position as a market leader in flat panel graphics controllers and
is critical to its ability to expand its market opportunities. Research and
development efforts focus on the design of new products by leveraging the
Company's proprietary intellectual property design modules. The Company plans to
continue investing in new graphics products for portable computers, including
features such as 3D, DVD and multimedia, and embedded memory. The Company plans
to continue development of high performance software drivers that will support
new hardware chip capabilities as well as new software standards such as
Microsoft Direct 3D. The Company also intends to devote increasing resources to
development of new products that target new markets beyond the Company's core
graphics controller business.
At June 30, 1997, the Company had approximately 157 employees engaged in
research and development, engineering and supporting functions. Spending for
research and development during fiscal 1997, 1996 and 1995 was $23.7 million,
$19.8 million and $13.3 million, respectively. The Company expects the trend of
increasing expenditures of research and development dollars to continue, with
some significant acceleration in fiscal 1998 due to anticipated projects
intended to expand and begin to diversify the Company's product lines.
COMPETITION
The markets for the Company's products are highly competitive, with many new
entrants into the portable graphics controller business. Competitive factors in
the Company's markets include product features, product performance, price,
timeliness of new product introductions, quality, software support and customer
support. As new competitors enter the portable market segment, the competitive
landscape is changing. The Company must constantly work to match the level of
functionality, integration and timeliness of product introductions, compared to
competitors, to remain a contender for design wins. Price competition in the
semiconductor industry is intense and increasing. The Company may face declining
average selling prices for its products as the competition for design wins
intensifies. Technical and other advances by the competition could have a
material adverse effect on the Company's results of operations.
The Company's competitors consist primarily of domestic companies. Some of these
companies own or have an equity interest in semiconductor fabrication, assembly
and test facilities, while others subcontract manufacturing as does the Company.
Some competitors have significantly greater financial, technical, marketing,
manufacturing, distribution and human resources than the Company. To the extent
these competitors are able to utilize these resources effectively in competing
against the Company, there could be material adverse 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 68 U.S. and foreign
patents covering various technical innovations. The Company also has 15 pending
patent applications and numerous applications being prepared by counsel. 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
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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 material 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, 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 future operating results.
EMPLOYEES
As of June 30, 1997, the Company had 260 employees, of whom 157 were engaged in
research and development, engineering and supporting functions, 54 in marketing
and sales, 27 in manufacturing and 22 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 69,700 square foot building
on the site. During fiscal 1996, the Company entered into a lease on a 22,500
square foot facility located in San Jose, California and moved its logistics and
warehousing operations out of its headquarters into this leased space. During
fiscal 1997, the Company entered into a one-year lease for an additional
research and development office in Fremont, California. The Company also leases
office spaces for its regional direct sales and FAE support offices domestically
in Georgia, Illinois, Texas and Massachusetts 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 will require additional Northern
California facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company and the members of its Board of Directors have been sued in
connection with the Company's recently announced proposed acquisition by Intel
Corporation. Three actions, all styled as stockholder class action suits, were
filed in early August 1997 in the court of Chancery in the State of Delaware and
have been consolidated into a single action. A fourth action, also styled as a
stockholder class action, was thereafter filed in Superior Court in Santa Clara
County, California. All of the actions contend that the directors of the Company
breached their fiduciary duties in connection with the agreement to recommend
that stockholders accept the cash tender offer and to enter into the proposed
merger, and seek injunctive and monetary relief. The Delaware complaint was
recently amended to add additional allegations that the disclosures made to
stockholders in connection with Intel's tender offer for the Company's stock
were incomplete. Plaintiffs in the Delaware action have requested that the
merger be enjoined. A hearing on that motion is currently scheduled in early
October. The Company and its directors believe the complaints are without merit
and are vigorously defending the actions in both jurisdictions.
The proposed acquisition is undergoing antitrust review under the
Hart-Scott-Rodino ("HSR") Act of 1976. On August 26, 1997, the Federal Trade
Commission ("FTC") made a request to Intel and the Company for additional
information and documents in connection with that review. It is currently
expected that the provision of documents and information in response to that
request will be completed in October. The FTC will have ten days from receipt of
Intel's completed
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response to the request to decide whether or not to take action in opposition to
the acquisition. Based on the information available to it, the Company believes
that the transaction can be effected in compliance with federal and state
antitrust laws. However, there can be no assurance that a challenge to the
acquisition on antitrust grounds will not be made or that, if made, it would not
prevail, or that certain conditions to the acquisition would not be required.
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:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James F. Stafford 53 President and Chief Executive Officer
Keith A. Angelo 41 Vice President, Marketing
Lee J. Barker 52 Vice President, Operations
Timothy R. Christoffersen 55 Vice President, Finance and Chief Financial Officer
Richard E. Christopher 51 Vice President, Sales
Morris E. Jones, Jr. 45 Senior Vice President and Chief Technical Officer
Lawrence A. Roffelsen 52 Vice President, Engineering
Jeffery Anne Tatum 47 Vice President, General Counsel, and Secretary
</TABLE>
Mr. Stafford was named President and Chief Executive Officer in July 1993 and
was elected a director in August 1993. Mr. Stafford has been employed by the
Company since its inception and has served in a variety of positions including
Acting Chief Financial Officer from April 1993 until December 31, 1993, Senior
Vice President and Chief Operating Officer from January 1992 to July 1993 and
Senior Vice President, Product Line Operations from February 1990 to January
1992.
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.
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.
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.
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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. Prior to that time,
he served in a variety of senior level management positions since the Company's
inception.
Mr. Roffelsen has served as Vice President, Engineering since November 1992.
Prior to joining the Company, he spent seven years at Fujitsu Microelectronics,
Inc., where he served most recently as Vice President, ASIC Operations.
Ms. Tatum has served as Vice President, General Counsel and secretary since July
1994. She previously served as Secretary and 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 through 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 under the
symbol "CHPS". The following table sets forth high and low closing sale prices
for the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
High Low High Low
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
First Quarter $ 14.50 $ 9.125 $ 15.62 $ 12.57
Second Quarter 25.75 13.1875 13.25 8.25
Third Quarter 21.625 10.375 9.875 8.25
Fourth Quarter 11.50 8.00 12.00 8.75
</TABLE>
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 September 12, 1997 there were 22,101,566 shares of Common
Stock outstanding, held by approximately 835 stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year ended June 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 168,334 $ 150,788 $ 104,731 $ 73,444 $ 97,874
Gross profit 79,196 60,936 39,856 26,480 24,725
Restructuring costs (recovery) -- -- (1,429) (372) 23,271
Income (loss) from operations 28,906 19,495 9,748 (1,077) (52,654)
Net income (loss) 36,216 * 25,750@ 9,388 2,714 (49,055)
Net income (loss) per share 1.58 * 1.18@ 0.47 0.16 (3.13)
Total assets 149,034 108,071 85,767 51,300 62,454
Long-term capital lease and notes payable 851 796 1,725 1,019 1,009
Convertible debentures -- -- -- 7,910 7,910
Stockholders' equity 126,847 83,389 65,696 26,327 19,677
</TABLE>
* Fiscal 1997 included, net of income tax, a gain of $6.8 million or
$0.29 per share from the sale of AMD stock. Exclusive of this gain, net
income would have been $29.4 million and net income per share would
have been $1.28.
@ Fiscal 1996 included, net of income tax, a gain of $5.6 million or
$0.26 per share from the sale of AMD stock. Exclusive of this gain, net
income would have been $20.2 million and net income per share would
have been $0.92.
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ITEM 7. 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 and in Item 1 of this report, that
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, and should not be given undue
reliance.
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.
SUBSEQUENT EVENT
On July 27, 1997, the Company entered into a definitive agreement (the "Merger
Agreement") with Intel Corporation ("Intel") and Intel Enterprise Corporation
providing for Intel to acquire the Company by means of a cash tender offer
followed by a merger. As provided in the Merger Agreement, Intel has made a
tender offer for all outstanding shares of stock of the Company for $17.50 net
per share in cash. The tender offer currently remains open, pending satisfaction
of the conditions to closing. Following completion of the tender offer, the
Merger Agreement provides for a merger of the Company with a subsidiary of Intel
in which all untendered shares of the Company's outstanding stock will be
converted into the right to receive $17.50 per share in cash. Upon completion of
both the tender offer and the subsequent merger, the Company would become a
wholly-owned subsidiary of Intel and part of Intel's Graphics Components
Division.
The acquisition transaction is subject to regulatory approval and various other
conditions. In particular, the tender offer cannot be completed until
satisfaction of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976 (the "HSR Act"). On August 26, 1997, the
Federal Trade Commission ("FTC") issued a "second request" to Intel and the
Company requiring the submission by the parties of additional information and
documents in connection with the FTC's antitrust review of the transaction under
the HSR Act. In light of that second request, Intel extended the tender offer
from its original expiration date of August 28, 1997 until October 17, 1997. The
Merger Agreement provides that the tender offer will be extended as necessary to
permit satisfaction of the conditions to closing, but does not obligate the
parties to extend the offer beyond October 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 53.0 59.6 61.9
----- ----- -----
Gross margin 47.0 40.4 38.1
Operating expenses:
Research and development 14.1 13.2 12.7
Selling, marketing and administrative 15.7 14.3 17.5
Restructuring recovery -- -- (1.4)
----- ----- -----
Income from operations 17.2 12.9 9.3
Interest income and other, net 6.7 6.1 0.6
----- ----- -----
Income before taxes 23.9 19.0 9.9
Provision for income taxes 2.4 1.9 0.9
----- ----- -----
Net income 21.5 17.1 9.0
===== ===== =====
</TABLE>
Page 11
<PAGE> 12
NET SALES
Net sales were $168.3 million, $150.8 million and $104.7 million in fiscal 1997,
1996 and 1995, respectively. Net sales for fiscal 1997 increased $17.5 million
or 11.6% from fiscal 1996. Net sales for fiscal 1996 increased $46.1 million or
44.0% from fiscal 1995. The increases of net sales in both fiscal 1997 and 1996
were primarily attributable to increases in unit volume shipments of portable
graphics controllers. The majority of the Company's sales are derived from
portable graphics controller products which comprised 90%, 84% and 65% of the
Company's net sales in fiscal 1997, 1996 and 1995, respectively. The Company
expects its net sales in the first quarter of fiscal 1998 will slightly decrease
as compared to the quarter just ended.
Export sales are sales made to foreign customers and to the overseas
manufacturing facilities of domestic customers. Export sales were 83%, 67% and
47% of net sales for fiscal 1997, 1996 and 1995, respectively. Sales to foreign
customers are denominated in US dollars. One customer, a Japanese distributor,
accounted for 53% of the Company's net sales in fiscal 1997. Three customers
accounted for 37%, 16% and 10%, respectively, of the Company's net sales in
fiscal 1996. Three customers accounted for 23%, 13% and 10%, respectively, of
the Company's net sales in fiscal 1995.
GROSS MARGIN
Gross margins were $79.2 million, $60.9 million and $39.9 million, or 47.0%,
40.4% and 38.1% of net sales, in fiscal 1997, 1996 and 1995, respectively. Gross
margin increased from fiscal 1996 to fiscal 1997 mainly due to an improved mix
of products, including higher margin portable graphics accelerators, and
declining wafer costs. The gross margin increase from fiscal 1995 to fiscal 1996
was primarily due to a more favorable product mix and improved overhead
absorption from higher sales volume. The Company expects its gross margin
percentage for the next quarter will remain about the same level as compared to
the quarter just ended, which was 47.9%. The integration of memory onto graphics
controller chips is putting downward pressure on margins. As the Company's
embedded memory products, first entering volume production in late 1997, come to
comprise a greater proportion of the Company's future sales, the Company expects
its overall gross margin percentage to decline. Increased competition in the
portable graphics controller market is also putting downward pressure on gross
margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and Development expenses were $23.7 million, $19.8 million and $13.3
million, or 14.1%, 13.2% and 12.7% of net sales, in fiscal 1997, 1996 and 1995,
respectively. Research and development expenses increased in both fiscal 1997
and 1996, mainly due to increases in engineering staffing levels and the cost of
outside services. 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 is also beginning new
research and development projects targeting markets outside the graphics
controller and personal computer businesses. These new projects may involve
significant development expenses and technology acquisition costs during the
next fiscal year but are not expected to generate meaningful revenue during this
year. The Company expects its research and development expenses to increase in
both absolute dollars and as a percentage of net sales during the first quarter
of fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expenses were $26.6 million, $21.6 million
and $18.2 million, or 15.7%, 14.3% and 17.4% of net sales, in fiscal 1997, 1996
and 1995, respectively. Selling, general and administrative expenses increased
in absolute dollars in both fiscal 1997 and fiscal 1996 primarily due to higher
commissions paid to sales representatives as the result of higher revenues.
Selling, General and Administrative expenses as a percentage of net sales
decreased from fiscal 1995 to fiscal 1996 as sales grew at a faster rate than
spending. The Company expects these expenses will increase during the first
quarter of fiscal 1998 as compared to the quarter just ended, due in part to
legal expenses associated with the Company's proposed merger with Intel and
related legal proceedings. (See Item 3: Legal Proceedings.)
Page 12
<PAGE> 13
INTEREST INCOME AND OTHER, NET
Interest and other income were $11.3 million, $9.1 million and $0.6 million in
fiscal 1997, 1996 and 1995, respectively. Other income in fiscal 1997 included a
$7.6 million gain from the sale of AMD stock. Other income in fiscal 1996
included a $0.9 million gain related to the sale of land and a $6.2 million gain
from the sale of AMD stock. The remainder of other income is derived from the
Company's investment of its cash.
INCOME TAXES
The Company recorded $4.0 million, $2.9 million and $1.0 million of income tax
provisions, reflecting annual effective tax rates of 10%, 10% and 9%, in fiscal
1997, 1996 and 1995, respectively. These rates are substantially lower than the
statutory income tax rate, reflecting the utilization of the Company's net
operating loss carryforwards and the change in valuation allowance for the
Company's deferred tax assets. The provisions for fiscal years 1997, 1996 and
1995 reflect certain federal alternative minimum tax and state tax obligations.
The Company expects its effective tax rate will increase to reflect full
statutory rates net of ongoing taxable deductions in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $88.5 million on June 30,
1997, an increase of $29.2 million compared to $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. The Company
sold all of its AMD stock holdings during fiscal 1997 and 1996 (see Note 2 of
Notes to Consolidated Financial Statements). The increase was partially offset
by cash deposits to foundries.
Accounts receivable on June 30, 1997 were $14.7 million, an increase of $2.5
million from the balance on June 30, 1996, reflecting the higher level of sales
in fiscal 1997. Inventory on June 30, 1997 was $4.7 million, a decline of $5.5
million as compared to $10.2 million on June 30, 1996. The decrease in inventory
was mainly due to higher sales of older inventory and an increase in the
inventory turnover rate during fiscal 1997.
During fiscal 1997, prepaid and other current assets increased $5.9 million from
$2.6 million at June 30, 1996. Other non-current assets increased $6.1 million
from $12.5 million at June 30, 1996. These increases were primarily attributable
to the payment of additional cash deposits under foundry capacity agreements
entered into in the second quarter of fiscal 1996. The Company has foundry
agreements with Taiwan Semiconductor Manufacturing Company and Chartered
Semiconductor Manufacturing PTE LTD. To date, the Company has made deposits
totaling $25.8 million under these two agreements. The Company will pay the
remaining balance of $6.0 million 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 an agreement
with a banking institution for a $7.0 million unsecured line of credit. This
line of credit agreement will expire in October 1998. This agreement contains
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 June 30, 1997, and there were
no borrowings against this line of credit. The Company expects that its existing
cash, cash equivalents, short-term investments, bank line of credit and funds
generated from operations will be sufficient to meet the Company's capital and
operating requirements for at least the coming fiscal year.
FACTORS AFFECTING FUTURE OPERATING RESULTS
As described under "Subsequent Event" above, there is currently pending a tender
offer by Intel Corporation pursuant to a Merger Agreement with the Company under
which Intel would acquire all outstanding shares of stock of the Company for
$17.50 per share in cash. The price of the Company's Common Stock increased
substantially following announcement of the proposed acquisition. In the event
that the proposed acquisition of the Company by Intel does not occur for any
reason, there could be a material adverse effect on the Company, its results of
operations and the market
Page 13
<PAGE> 14
price for its Common Stock. The Merger Agreement contains a number of conditions
which must be satisfied or waived by Intel or the Company prior to consummation
of the tender offer and the subsequent merger. (For additional information
concerning the conditions to consummation of these transactions, see the Offer
to Purchase transmitted by Intel to the stockholders of the Company and the
related Schedule 14D-9 filing provided by the Company, each filed with the
Securities and Exchange Commission on August 1, 1997). Among other conditions,
the tender offer cannot be consummated until the relevant HSR Act waiting period
has been satisfied, and at the time for consummation there must not be in effect
any injunction or other action by a court or governmental entity that prohibits
or materially adversely affects the transaction. The FTC has issued a "second
request" to Intel and the Company requiring the submission by the parties of
additional information and documents in connection with the FTC's antitrust
review of the transaction under the HSR Act. Based on the information available
to it, the Company believes that the tender offer and merger can be effected in
compliance with federal and state antitrust laws. However, the FTC could take
such action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the transactions or to impose
conditions on their consummation. In addition, any state and/or private parties
could take action under the antitrust laws. There can be no assurance that a
challenge to the consummation of the proposed acquisition on antitrust grounds
will not be made or, if made, that Intel and the Company would prevail. Shortly
after the announcement of the Merger Agreement, lawsuits were filed against the
Company and its Directors in both Delaware and California. In addition to
monetary damages, the plaintiffs in the Delaware action have requested the court
to enjoin the acquisition, and similar relief may be requested in the California
action. Although the Company believes such a result is unlikely, there can be no
assurance that a court will not enjoin the transaction. Intel is not required to
close the tender offer or to extend it if the conditions to completion of the
transaction are not satisfied by October 31, 1997. There can be no assurance
that all conditions to the transaction will be satisfied or will be satisfied on
a timely basis.
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. These factors
include: gain or loss of 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 fiscal 1997 as compared to fiscal 1996. This
proportion is expected to decrease in fiscal 1998. 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 volume 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 and
lose or not achieve design wins with new and current customers. Some notebook
computer manufacturers are currently incorporating graphics technologies such as
embedded memory and 3D functionality into their new systems. The Company plans
to introduce graphics controllers incorporating these technologies in fiscal
1998. 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.
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 fiscal 1998 include embedded memory technology
Page 14
<PAGE> 15
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 graphics
capability 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 foundry capacity and/or 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 market for third party wafer production has been 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 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.
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
Page 15
<PAGE> 16
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.
Page 16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 17
Consolidated Statements of Operations for the three years period ended June 30, 1997 18
Consolidated Balance Sheets at June 30, 1997 and 1996 19
Consolidated Statements of Cash Flows for the three year period ended June 30, 1997 20
Consolidated Statements of Stockholders' Equity for the three year period ended June 30, 1997 21
Notes to Consolidated Financial Statements 22-28
</TABLE>
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------
(In thousands, except per share amounts) June 30, March 31, Dec. 31, Sept. 30,
1997 1997 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $37,858 $37,759 $48,231 $44,486
Gross profit 18,124 17,340 22,449 21,283
Income from operations 4,391 4,771 9,866 9,878
Net income 8,742 * 8,215* 9,808 9,451
Net income per share 0.38 * 0.35* 0.42 0.42
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30,
1996 1996 1995 1995
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net sales $38,796 $36,514 $38,259 $37,219
Gross profit 17,160 14,457 14,958 14,361
Income from operations 5,964 4,046 4,933 4,552
Net income 5,929 9,786 @ 5,607 4,428
Net income per share 0.27 0.45 @ 0.26 0.20
</TABLE>
* Fiscal 1997 included, net of income tax, gains of $3.7 million or $0.16
per share and $3.1 million or $0.13 per share from the sale of AMD
stock in the fourth quarter and the third quarter of fiscal 1997,
respectively. Exclusive of this gain, net income would have been $5.0
million or $0.22 per share and $5.1 million or $0.22 per share for such
quarters, respectively.
@ Fiscal 1996 included, net of income tax, a gain of $5.6 million or
$0.26 per share in the third quarter of fiscal 1996 from the sale of
AMD stock. Exclusive of this gain, net income would have been $4.2
million and net income per share would have been $0.19.
Page 17
<PAGE> 18
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, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Chips and
Technologies, Inc. and its subsidiaries at June 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, 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 16, 1997, except as to Note 6 which is as of July 27, 1997
Page 18
<PAGE> 19
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
In thousands, except per share amounts 1997 1996 1995
- ---------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $168,334 $150,788 $104,731
Cost of sales 89,138 89,852 64,875
---------------- ----------------- -----------------
Gross profit 79,196 60,936 39,856
---------------- ----------------- -----------------
Operating expenses
Research and development 23,665 19,837 13,344
Selling, general and administrative 26,625 21,604 18,193
Restructuring recovery -- -- (1,429)
---------------- ----------------- -----------------
Total operating expenses 50,290 41,441 30,108
---------------- ----------------- -----------------
Income from operations 28,906 19,495 9,748
Interest income and other, net 11,334 9,116 597
---------------- ----------------- -----------------
Income before taxes 40,240 28,611 10,345
Provision for income taxes 4,024 2,861 957
---------------- ----------------- -----------------
Net Income $36,216 $25,750 $9,388
================ ================= =================
Net income per share $1.58 $1.18 $0.47
================ ================= =================
Shares used in per share calculation 22,994 21,791 20,182
================ ================= =================
</TABLE>
See notes to Consolidated Financial Statements
Page 19
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands, except share amounts JUNE 30, 1997 JUNE 30, 1996
- --------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,815 $23,989
Short-term investments 56,725 35,356
Accounts receivable, net of allowance for
doubtful accounts of $1,555 and $1,203, respectively 14,714 12,189
Inventory 4,677 10,197
Prepaid and other assets 8,505 2,574
--------------------- ---------------------
Total current assets 116,436 84,305
Property and equipment, net 14,029 11,223
Other assets 18,569 12,543
--------------------- ---------------------
TOTAL ASSETS $149,034 $108,071
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,326 $12,820
Current capital lease obligations 1,016 1,630
Accrued compensation 4,105 3,398
Other accrued liabilities 5,889 6,038
--------------------- ---------------------
Total current liabilities 21,336 23,886
Long-term capital lease obligations 851 796
--------------------- ---------------------
Total liabilities 22,187 24,682
--------------------- ---------------------
Commitments (Note 3)
Stockholders' equity:
Convertible preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
22,003,000 and 20,620,000 shares issued and outstanding 220 206
Capital in excess of par value 88,390 77,769
Note receivable from officer (53) (80)
Unrealized gain on investments 1 3,421
Retained earnings 38,289 2,073
--------------------- ---------------------
Total stockholders' equity 126,847 83,389
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $149,034 $108,071
===================== =====================
</TABLE>
See notes to Consolidated Financial Statements
Page 20
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
In thousands 1997 1996 1995
- -------------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 36,216 $ 25,750 $ 9,388
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,272 2,651 2,672
Provision for losses on accounts receivable 300 300 300
Gain on sale of capital assets -- (949) (40)
Gain on sale of equity investments (7,621) (6,204) --
Changes in operating assets and liabilities:
Accounts receivable (2,825) 2,207 (6,559)
Inventory 5,520 1,470 (5,822)
Accounts payable (2,494) 4,748 991
Other assets and liabilities 2,930 (1,252) 3,214
Accrued restructuring costs -- -- (890)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 35,298 $ 28,721 $ 3,254
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,049) (1,225) (1,613)
Deposits for capacity agreement (11,880) (13,880) --
Purchase of short-term investments (24,789) (24,558) (2,206)
Proceeds from sale of equity investments and capital assets 7,621 8,963 631
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (34,097) (30,700) (3,188)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment on capital lease obligations (1,588) (1,211) (939)
Proceeds from issuance of stock 8,182 4,762 5,986
Repayment (issuance) of officers' loans 31 32 (100)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,625 3,583 4,947
-------- -------- --------
Net increase in cash and cash equivalents 7,826 1,604 5,013
Cash and cash equivalents at beginning of year 23,989 22,385 17,372
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,815 $ 23,989 $ 22,385
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Interest $ 197 $ 232 $ 903
Income taxes 848 683 240
Additions under capital lease obligations 1,029 2,099 1,806
Tax benefit of stock option transactions 2,453 -- --
</TABLE>
See notes to Consolidated Financial Statements
Page 21
<PAGE> 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Common Notes
Stock Stock Capital In Receivable Unrealized
---------------------- -------------------- Excess of From Gain on
In thousands Shares Par Value Shares Par Value Par Value Officers Investments
- -------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 123 $ 1 16,881 $ 169 $ 59,222 $ -- $ --
Common stock issued for:
stock options 1,291 12 5,735
employee stock purchase plan 61 1 237
Conversion of series A preferred stock into
common stock (123) (1) 123 1
Conversion of convertible subordinated
debentures into common stock at
$5.70 per share 1,388 14 7,645
Note receivable from officer (107)
Compensation expenses 177
Unrealized gain on investments 16,267
Net income
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1995 -- -- 19,744 197 73,016 (107) 16,267
Common stock issued for:
stock options 821 8 4,477
employee stock purchase plan 55 1 276
Repayment of loan from officer 27
Change in unrealized gain on investments (12,846)
Net income
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1996 -- -- 20,620 206 77,769 (80) 3,421
Common stock issued for:
stock options 1,315 13 7,619
employee stock purchase plan 55 1 549
conversion of warrants 13
Repayment of loan from officer 27
Tax benefit of stock option transactions 2,453
Change in unrealized gain on investments (3,420)
Net income
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1997 -- $ -- 22,003 $ 220 $ 88,390 $ (53) $ 1
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Retained
Earnings
In thousands (Deficit) Total
- -------------------------------------------- --------- ---------
<S> <C> <C>
Balance at June 30, 1994 $ (33,065) $ 26,327
Common stock issued for:
stock options 5,747
employee stock purchase plan 238
Conversion of series A preferred stock into
common stock
Conversion of convertible subordinated
debentures into common stock at
$5.70 per share 7,659
Note receivable from officer (107)
Compensation expenses 177
Unrealized gain on investments 16,267
Net income 9,388 9,388
--------- ---------
Balance at June 30, 1995 (23,677) 65,696
Common stock issued for:
stock options 4,485
employee stock purchase plan 277
Repayment of loan from officer 27
Change in unrealized gain on investments (12,846)
Net income 25,750 25,750
--------- ---------
Balance at June 30, 1996 2,073 83,389
Common stock issued for:
stock options 7,632
employee stock purchase plan 550
conversion of warrants 0
Repayment of loan from officer 27
Tax benefit of stock option transactions 2,453
Change in unrealized gain on investments (3,420)
Net income 36,216 36,216
--------- ---------
Balance at June 30, 1997 $ 38,289 $ 126,847
========= =========
</TABLE>
See notes to consolidated financial statements
Page 22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Chips and Technologies, Inc. (the "Company") develops
and markets highly integrated semiconductor and software solutions 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, which
are generally denominated in U.S. dollars, were 83%, 67% and 47% of net sales
for fiscal 1997, 1996 and 1995, respectively. Foreign currency transaction gains
and losses are included in results of operations and were not significant in the
periods presented. During fiscal 1997, one customer accounted for 53% of the
Company's net sales. Three customers accounted for 37%, 16% and 10%,
respectively, of the Company's net sales in fiscal 1996. Three customers
accounted for 23%, 13% and 10%, respectively, of the Company's net sales in
fiscal 1995.
ESTIMATES The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
RECLASSIFICATION Certain prior year disclosures related to the Consolidated
Statements of Cash Flow were reclassified in order to conform with current
year's presentation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly
liquid debt instruments with original 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 institutions. The
diversification of risk is consistent with Company policy to maintain liquidity
and ensure the safety of principal. The Company classified all its short-term
investments as available-for-sale. Such investments are adjusted to fair market
value as of the balance sheet date and any unrealized gains or losses are
recorded as a separate component of stockholders' equity.
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.
During fiscal 1997, the Company recovered $51,000 of receivable which was
previously written off. The Company wrote off $129,000 and $537,000 of accounts
receivable during fiscal 1996 and 1995, respectively.
INVENTORY Inventory is stated at the lower of cost or market. Cost is determined
based on acquisition cost utilizing the first-in, first-out method.
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 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
Page 23
<PAGE> 24
defers recognition of revenue and related gross margin on sales to domestic
distributors until the product is sold by these distributors. The Company
records revenue from its development contracts under the completed contract
method.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation to
employees and outside directors using the intrinsic value method, in accordance
with APB Option No. 25, "Accounting for Stock issued to Employees" and related
interpretations. In fiscal 1997, the Company adopted the disclosure requirements
of SFAS No.123, "Accounting for Stock-Based Compensation", which requires the
disclosure of pro forma net income and net income per share as if the Company
had adopted the fair value-based method in measuring compensation expense for
its stock-based compensation awards granted subsequent to June 30, 1995.
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 method). Common equivalent shares include stock options and
warrants. Dual presentation of primary and fully diluted income per share is not
shown on the face of the statements of operations as the differences are
insignificant.
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, the basic earnings per share would have been $1.68, $1.27 and $0.54
in fiscal 1997, 1996 and 1995, respectively, and diluted earnings per share
would have been $1.58, $1.18 and $0.47 in fiscal 1997, 1996 and 1995,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). This statement is effective for the Company's fiscal year ending June 30,
1999. The statement establishes presentation and disclosure requirements for
reporting comprehensive income. Comprehensive income includes charges or credits
to equity that are not the result of transactions with owners. The Company plans
to adopt the disclosure requirements and report comprehensive income as part of
the Consolidated Statements of Shareholders' Equity as required under SFAS 130,
and expects there to be no material impact on the Company's financial position
and results of operations as a result of the adoption of this new accounting
standard.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises the required
information regarding the reporting of operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company will adopt SAFS 131 beginning in fiscal 1999
and does not expect such adoption to have a material effect on the consolidated
financial statements.
NOTE 2 BALANCE SHEET COMPONENTS
SHORT-TERM INVESTMENTS The Company classified all investments in fiscal 1997 and
1996 as available-for-sale. The investments at June 30, 1997 and June 30, 1996
are presented in the table below. The Company's U.S. Government obligations
investments included $8.0 million and $3.9 million of securities with maturities
beyond 12 months at June 30, 1997 and June 30, 1996, respectively. In February
1996, the Company held 553,333 shares of Advance Micro Devices, Inc. ("AMD")
common stock which was converted from the Company's Nexgen stock holding. The
Company sold 299,000 shares of such stock and realized a gain of $6.2 million in
fiscal 1996. The Company sold the remainder of the AMD stock in fiscal 1997 and
realized gains of $3.5 million and $4.1 million in the third and fourth quarter
of fiscal 1997, respectively.
Page 24
<PAGE> 25
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-----------------------------------------------------------
Unrealized Unrealized
Amortized Holding Fair Amortized Holding Fair
(In thousands) Cost Gain/(Loss) Value Cost Gain/(Loss) Value
- ----------------------------- ------- ----------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
AMD Common Stock $ -- $ -- $ -- $ -- $ 3,465 $ 3,465
Corporate and U.S. Government
Obligations 56,724 1 56,725 31,935 (44) 31,891
------- ------- ------- ------- ------- -------
Total $56,724 $ 1 $56,725 $31,935 $ 3,421 $35,356
======= ======= ======= ======= ======= =======
</TABLE>
INVENTORY
<TABLE>
<CAPTION>
June 30,
(In thousands) 1997 1996
- ----------------- ------- -------
<S> <C> <C>
Work-in-process $ 4,196 $ 7,693
Finished goods 481 2,504
------- -------
Total $ 4,677 $10,197
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
(In thousands) 1997 1996
- ------------------------------------------------- -------- ---------
<S> <C> <C>
Furniture, office equipment and computer software $ 34,963 $ 29,232
Building and improvements 5,448 5,147
Land 2,609 2,609
-------- --------
43,020 36,988
Accumulated depreciation and amortization (28,991) (25,765)
-------- --------
Property and equipment, net $ 14,029 $ 11,223
======== ========
</TABLE>
At June 30, 1997 and June 30, 1996 assets under capitalized leases (Note 3) had
aggregated values of $4.9 million and $3.9 million, respectively, less
accumulated amortization of $2.9 million and $1.6 million, respectively.
Amortization of equipment under capitalized leases is included as part of
depreciation and amortization expense.
NOTE 3 COMMITMENTS
LEASES The Company leases property and equipment under capital leases and
non-cancelable operating leases. The Company owes minimum future payments of
$2.0 million through 2000 under capital leases and $0.7 million through 2002
under operating leases. The present aggregate value of the capital lease
obligations is $1.9 million of which $1.0 million is due within 12 months. Rent
expense for operating leases totaled $0.4 million, $0.2 million and $0.3 million
for the fiscal years 1997, 1996 and 1995, respectively.
LINE OF CREDIT The Company had agreements with three banking institutions for a
combined total of $21.0 million in unsecured lines of credit. Two of these
agreements expired in August 1997. There were no borrowings against these lines
of credit at June 30, 1997. The Company has a line of credit with a bank for
$7.0 million which will expire in October 1998. The Company's ability to borrow
under this line of credit is subject to compliance with convenants related to
financial performance and condition.
LONG-TERM CAPACITY AGREEMENTS During the second quarter of fiscal 1996, the
Company entered into wafer capacity agreements with Taiwan Semiconductor
Manufacturing Company and Chartered Semiconductor Manufacturing PTE LTD to
secure additional guaranteed wafer supplies through the year 2000. These
agreements, as subsequently amended, required total deposits of $31.8 million to
be paid by the Company. To date, the Company has made deposits totaling $25.8
million under these two agreements. The Company will pay the remaining balance
of $6.0 million during 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. During fiscal 1997, the Company made $11.9 million of deposits
under these agreements which were recorded as part of other assets at June 30,
1997.
Page 25
<PAGE> 26
NOTE 4 STOCKHOLDERS' EQUITY
WARRANTS In conjunction with the issuance of 8.5% Convertible Promissory Notes
in July 1992, which were converted into common stock in June, 1995, the Company
issued to the placement agent warrants for the purchase of 25,000 shares of
common stock at $7.28 per share and issued to a bank warrants for the purchase
of 16,216 shares of common stock at $4.64 per share. The warrant issued to the
bank was exercised and 12,545 shares of common stock were issued in December
1996. The placement agent exercised its warrants to purchase 25,000 shares of
common stock at $7.28 per share in July 1997.
STOCK OPTION PLANS In November 1994, the Company amended and restated its 1985
Stock Option Plan (the "85/94 Plan") which provides for the grant of incentive
stock options and non-qualified stock options to employees (including officers),
directors and consultants of the Company. Stock options are granted at an
exercise price not less than fair market value at the date of grant. In each of
November 1995 and November 1996, the plan was amended to increase the share
reserve by 1,000,000 shares. Since inception, the cumulative number of shares of
common stock that have been reserved for issuance pursuant to the 85/94 Plan is
19,200,000. 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 expire thirty days following termination of employment.
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. In November 1995, the plan was amended to increase the share reserve.
The number of shares of common stock reserved for issuance pursuant to the
exercise of options is 550,000 shares.
The 85/94 Plan and the Directors Plan activities for the three years ended June
30, 1997 are summarized below:
<TABLE>
<CAPTION>
Option Weighted-
available Options Price Average
for grant Outstanding per share Exercise Price
---------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 2,079,006 4,970,422 $3.13 - $21.75 $ 4.81
Options granted (868,350) 868,350 $3.88 - $13.06 $ 9.38
Options canceled 606,897 (606,897) $3.50 - $21.75 $ 5.26
Options exercised (1,291,803) $4.00 - $14.50 $ 8.46
---------- ---------- -------------- ------
Balance at June 30, 1995 1,817,553 3,940,072 $3.13 - $13.13 $ 5.87
Share reserve increased 1,200,000
Options granted (1,849,450) 1,849,450 $8.63 - $14.50 $10.89
Options canceled 320,576 (320,576) $4.00 - $14.50 $ 8.97
Options exercised (820,300) $8.57 - $15.75 $12.69
---------- ---------- -------------- ------
Balance at June 30, 1996 1,488,679 4,648,646 $3.13 - $14.38 $ 7.75
Share reserve increased 1,000,000
Options granted (1,102,900) 1,102,900 $8.13 - $23.63 $11.50
Options canceled 477,352 (477,352) $3.88 - $23.63 $12.38
Options exercised (1,314,773) $9.75 - $26.00 $19.68
---------- ---------- -------------- ------
Balance at June 30, 1997 1,863,131 3,959,421 $3.13 - $15.13 $ 8.85
========== ========== ============== ======
</TABLE>
Page 26
<PAGE> 27
The following table summarizes the significant range of outstanding and vested
exercisable options at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Vested Options Exercisable
------------------------------------ --------------------------
Number Weighted-Average Weighted- Number Vested Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price
- ----------------- ----------- -------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.13 - $ 5.00 918,737 6.05 years $ 4.37 701,677 $ 4.40
$ 5.13 - $ 8.63 541,111 6.07 $ 6.81 346,335 $ 6.29
$ 8.95 - $10.00 1,060,191 8.67 $ 9.16 260,209 $ 9.16
$10.13 - $12.75 897,160 9.15 $11.32 169,929 $12.04
$13.06 - $15.13 542,222 8.13 $13.80 214,095 $13.83
- --------------- --------- ---- ------ --------- ------
$ 3.13 - $15.13 3,959,421 7.75 $ 8.85 1,692,245 $ 7.50
=============== ========= ==== ====== ========= ======
</TABLE>
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, and 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.
EMPLOYEE STOCK PURCHASE PLAN The Company has reserved 1,500,000 shares of common
stock for issuance pursuant to an Employee Stock Purchase Plan adopted in 1986
and amended in 1996 (the "Purchase Plan"). The 1996 amendment permits the
granting of options under 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, 1997, 1,197,401 shares had been issued under the Purchase Plan, of
which 600 shares were issued upon the exercise of stock options which were
granted under this plan.
STOCK-BASED COMPENSATION The Company has elected to follow APB No. 25,
"Accounting for Stock issued to Employees" and related interpretations in
accounting for its employees and outside directors stock plans. Accordingly, no
compensation expense has been recognized for its stock plans. Under SFAS 123,
"Accounting for Stock-Based Compensation," the Company is required to disclose
the pro forma information regarding net income and net income per share as if
the Company had accounted for its stock-based awards to employees under the fair
value method as required in SFAS 123 for stock options granted after June 30,
1995. All options in fiscal 1997 and fiscal 1996 were granted at an exercise
price equal to the fair market value of the Company's Common Stock at the date
of grant. The weighted average fair value at date of grant for options granted
during 1997 and 1996 were $8.33 and $8.11 per option share, respectively. The
fair value of the Company's stock-based awards to employees was estimated using
the Black-Scholes model with the following weighted-average assumptions:
Page 27
<PAGE> 28
<TABLE>
<CAPTION>
STOCK OPTION PLANS STOCK PURCHASE PLAN
----------------------------- ----------------------------
June 30, June 30,
1997 1996 1997 1996
------------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
Expected Volatility 69% 74% 74% 67%
Risk-free interest rate 6.4% 5.8% 5.3% 5.7%
Expected life 4.9 years 5.1 years 0.5 years 0.5 years
Expected dividends 0% 0% 0% 0%
</TABLE>
For Pro forma purposes, the estimated fair value of the Company's stock-based
awards are amortized over the vesting period for stock options and over the six
month purchase period for the stock purchase plan, respectively. If the Company
had elected to recognize compensation expense based on the fair value of the
options granted at grant date as prescribed by SFAS 123, net income and net
income per share would have been as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
------- -------
<S> <C> <C>
Net income (in thousands):
As reported $36,216 $25,750
Pro forma $29,629 $21,467
Net income per share:
As reported $1.58 $1.18
Pro forma $1.29 $0.99
</TABLE>
As additional stock options and stock purchase plans are expected to be granted
or made each year and these only included the effect of options granted and
stock purchased subsequent to June 30, 1995, the above pro forma disclosures are
not representative of pro forma effects on reported financial results for future
years.
NOTE 5 INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
(In thousands) 1997 1996 1995
- --------------------------- ------ ------ -------
<S> <C> <C> <C>
Current:
Federal $2,780 $2,000 $ 521
State 1,209 830 395
Foreign 35 31 41
------ ------ ------
Subtotal 4,024 2,861 957
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- --
------ ------ ------
Provision for income taxes $4,024 $2,861 $ 957
====== ====== ======
</TABLE>
The following is a reconciliation of the income tax provisions for fiscal 1997,
1996 and 1995:
<TABLE>
<CAPTION>
Year ended June 30,
(In thousands) 1997 1996 1995
- ------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax $ 14,084 $ 10,014 $ 3,517
State income taxes, net of federal tax benefits 759 540 271
Utilization of net operating losses carryforward, (11,647) (8,058) (2,858)
net of alternative minimum tax effect
Other 828 365 27
-------- -------- --------
Provision for income taxes $ 4,024 $ 2,861 $ 957
======== ======== ========
</TABLE>
Page 28
<PAGE> 29
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
June 30,
(In thousands) 1997 1996 1995
- ------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net operating loss carryforwards $ -- $ 11,552 $ 22,565
Non-deductible reserves and allowances 6,498 5,699 3,512
Capitalized research and development expenses and other 2,042 2,014 2,536
-------- -------- --------
Gross deferred tax asset 8,540 19,265 28,613
Valuation allowance (4,462) (16,109) (26,146)
-------- -------- --------
Net deferred tax asset 4,078 3,156 2,467
-------- -------- --------
Depreciation (3,130) (2,769) (2,192)
Other (948) (387) (275)
-------- -------- --------
Gross deferred tax liability (4,078) (3,156) (2,467)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
During fiscal years 1997 and 1996, the valuation allowance decreased by $11.6
million and $10.0 million, respectively. The decrease in both years is primarily
attributable to the decrease in gross deferred tax assets from the utilization
of net operating loss carryforwards. The Company has established valuation
allowances as the realizability of net deferred tax assets is uncertain.
NOTE 6 SUBSEQUENT EVENT
On July 27, 1997, the Company, Intel Enterprise Corporation and Intel
Corporation ("Intel") entered into a definitive agreement whereby Intel will
acquire the Company through a cash tender offer at a price of $17.50 per share
in cash. The Agreement further provides for a merger of the Company with a
subsidiary of Intel in which all remaining outstanding shares of the Company
will be converted into the right to receive $17.50 per share in cash. Upon the
completion of the tender offer and the consummation of the subsequent merger,
the Company would become a wholly owned subsidiary of Intel and part of Intel's
Graphics Components Division. The transaction is subject to regulatory approval
and other conditions.
Page 29
<PAGE> 30
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
Certain information concerning the current directors is set forth below.
<TABLE>
<CAPTION>
Director Position with the Company Age Term
- -------- ------------------------- --- ----
<S> <C> <C> <C>
Gene P. Carter Director 63 Director since 1988; term ends 1998
Henri A. Jarrat Director 59 Director since 1994; term ends 1999
James F. Stafford President, Chief Executive 53 Director since 1993; term ends 1999
Officer, and Director
Bernard V. Vonderschmitt Director 74 Director since 1992; term ends 1997
</TABLE>
Mr. Carter has served as a director of the Company since March 1988. From August
1977 to September 1984, Mr. Carter served as Vice President of Sales for Apple
Computer, Inc. He has been self-employed as a private investor since 1984. Mr.
Carter also serves as a director of Adobe Systems, Inc. and of Portable Energy
Products.
Mr. Jarrat was appointed to the Board of Directors in August 1994. He is
currently President of Jarrat Global Enterprises, Inc. From 1983 to 1987, he
served as President and Chief Operating Officer of VLSI Technology, Inc., and
for seven years prior to 1983, he served at Motorola, inc. as a Corporate Vice
President and General Manager.
Mr. Stafford was appointed to the Board of Directors in August 1993 and was
named President and Chief Executive Officer in July 1993. Mr. Stafford served as
Acting Chief Financial Officer from April 1993 until December 31, 1993. He
previously served as Senior Vice President and Chief Operating Officer from
January 1992 to July 1993, as Senior 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.
Mr. Vonderschmitt has served as a director of the company since August 1992. He
is a co-founder of Xilinx, he spent two and one-half years at Zilog, Inc., then
a subsidiary of Exxon, as Vice President and General Manager of the
Microprocessor Division. Prior to joining Zilog, he was with RCA for more than
twenty years in mostly technical management positions. During his last seven
years at RCA, Mr. Vonderschmitt served as Vice president and General Manager of
the Solid State Division. Mr. Vonderschmitt also serves as a director on the
boards of Xilinx, Inc., IMP, Inc., Sanmina, Inc., and Credence Systems
Corporation.
Information regarding executive officers of the Company is presented at the end
of Part I of this report.
Section 16(a) of the Securities Exchange Act 1934, as amended (the "Exchange
Act"), requires the Company's executive officers and directors and persons who
own more that ten percent of a registered class of the Company's equity
securities to file reports of ownership on Form 3 and changes in ownership on
Form 4 or Form 5 with the Securities and Exchange
Page 30
<PAGE> 31
Commission (the "SEC"). Such officers, directors and ten percent stockholders
are also required by SEC rules to finish the Company with copies of all Section
16 (a) reports they file.
Based solely on its review of the copies of such forms received by it to date,
or written representations from certain reporting persons that Form 5 have been
filed for such persons as required, the Company believes that, during the year
ended June 30, 1997, all reporting persons complied with Section 16 (a) filing
requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information
concerning the compensation of the Chief Executive Officer and the four other
most highly compensated executive officers of the Company as of June 30, 1997,
during the fiscal years ended June 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Name and Principal Position Fiscal Year Salary Bonus Awards Options/Shares
--------------------------- ----------- ------ ----- ---------------------
<S> <C> <C> <C> <C>
James F. Stafford 1997 $288,761 $175,000 -
President, Chief Executive 1996 $277,510 $200,000 100,000
Officer 1995 $236,259 $118,797 125,000
Keith A. Angelo 1997 $172,364 $89,010 -
Vice President, Marketing 1996 $164,821 $100,149 50,000
1995 $155,297 $74,750 25,000
Richard E. Christopher 1997 $175,994 $89,010 -
Vice President, Sales 1996 $171,981 $104,121 50,000
1995 $164,306 $78,232 25,000
Morris E. Jones, Jr. 1997 $193,719 $115,000 -
Senior Vice President 1996 $187,432 $112,578 50,000
Advanced Products and Chief 1995 $180,566 $84,448 25,000
Technical Officer
Lawrence A. Roffelsen 1997 $172,956 $89,010 -
Vice President, Engineering 1996 $165,906 $100,797 50,000
1995 $155,297 $74,750 25,000
</TABLE>
STOCK OPTIONS GRANTED IN FISCAL 1997 The following table provides the specified
information concerning grants of options to purchase the Company's Common Stock
made during the fiscal year ended June 30, 1997, to the persons named in the
Summary Compensation Table.
Page 31
<PAGE> 32
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants in Fiscal 1997 Option Term(1)
---------------------------------------------------------------------------------
% of Total
Options Exercise
Granted to or Base
Options Employees Price Expira-
Name Granted in Fiscal ($/Sh) tion Date 5% ($) 10% ($)
------ ------- -------- --------- ------ -------
Year
-----
<S> <C> <C> <C> <C> <C> <C>
James F. Stafford - 0 - --- --- --- --- ---
Keith A. Angelo - 0 - --- --- --- --- ---
Richard E. Christopher - 0 - --- --- --- --- ---
Morris E. Jones, Jr. - 0 - --- --- --- --- ---
Lawrence A. Roffelsen - 0 - --- --- --- --- ---
</TABLE>
(1) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on the Securities and Exchange Commission's
rules. Actual gains, if any, on stock option exercises are dependent on
the future performance of the Company, overall market conditions and
the optionholders' continued employment through the vesting period. The
amounts reflected in this table may not necessarily be achieved.
OPTION EXERCISES AND FISCAL 1997 YEAR-END VALUES The following table provides
the specified information concerning exercises of options to purchase the
Company's Common Stock in the fiscal year ended June 30, 1997, and unexercised
options held as of June 30, 1997, by the persons named in the Summary
Compensation Table:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at 6/30/97 at 6/30/97(1)(2)
------------------ ----------------
Shares
Acquired on
Name Exercise Value Realized Exercisable(1) Unexercisable Exercisable Unexercisable
- ------------ ----------- ---------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James F.
Stafford 278,500 $4,049,545.00 58,997 162,504 $159,416.96 $297,639.14
Keith A.
Angelo 80,000 $1,304,750.00 56,164 58,336 $142,264.14 $115,048.36
Richard E.
Christopher 71,000 $1,056,170.28 19,102 54,898 $45,461.69 $95,279.86
Morris E.
Jones, Jr. 40,0000 $637,500.00 215,102 54,899 $1,027,470.14 $95,283.46
Lawrence A.
Roffelsen 100,000 $1,768,523.13 71,664 58,336 $268,300.64 $115,048.36
</TABLE>
(1) Generally, for executive officers and newly hired employees of the
Company, stock options granted are immediately exercisable at the date
of grant, but vest over a four year period commencing six months after
the date of grant. At the end of six months, 6/48ths of the option
shares vest; thereafter they vest at the rate of 1/48th per month for
each full month of the optionee's continuous employment with the
Company. For non-executive officer employees who receive discretionary
option grants during their employment, stock options are immediately
exercisable at the date of grant and vest over a four year
Page 32
<PAGE> 33
period commencing one month after the date of grant at the rate of
1/48th per month for each full month of the optionee's continuous
employment with the Company. Unvested options are listed in the above
table under the heading "Unexercisable."
(2) Based on a value of $10.375 per share which was the closing price of
the Company's Common Stock on June 30, 1997. The value shown is for all
outstanding options which have an exercise price below the closing
price on June 30, 1997 of the Company's Common Stock regardless of
vesting restrictions.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS Options granted under
the Company's Amended and Restated 1994 Stock Option Plan and the Company's 1988
Nonqualified Stock Option Plan for Outside Directors (the "Outside Directors
Plan") contain provisions pursuant to which, under certain circumstances, all
outstanding options granted under such plans shall become fully vested and
immediately exercisable upon a "transfer of control" as defined in such plans.
COMPENSATION OF DIRECTORS The Company's outside directors each receive $1,500
for each Board of Directors meeting which the director attends. In addition,
each receives $1,000 for each committee meeting of the Board of Directors he
attends that is held separately from a Board meeting and $500 for each committee
meeting he attends that is held consecutively with a Board meeting (excluding
Compensation Committee meetings held solely for the purpose of approving routine
stock option grants). For other compensation arrangements with certain
directors, see "Certain Transactions and Other Relationships". The Company's
Outside Directors Plan currently provides that upon his or her initial election
to the Board of Directors, each non-employee director (an "Outside Director")
will receive a one-time grant of an option to purchase 20,000 shares of the
Company's Common Stock and an additional grant of an option to purchase 10,000
shares of the Company's Common Stock on each anniversary of his or her tenure as
an Outside Director. In addition, an Outside Director who serves as the Chairman
of the Board receives a stock option to purchase 5,000 shares of the Company's
Common Stock upon appointment and on each anniversary of his tenure as Chairman,
and each director receives a stock option to purchase 2,500 shares of the
Company's Common Stock each year for each committee of the Board of Directors on
which a director serves.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation
Committee during fiscal 1997 was composed of two independent, non-employee
directors of the Company, Gene P. Carter and Bernard V. Vonderschmitt.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership as of June 30, 1997 of the Company's Common Stock as to (i) each
director, (ii) each of the executive officers listed in the Summary Compensation
Table above, (iii) all executive officers and directors as a group and (iv) each
person known by the Company to be the beneficial owner of five percent or more
of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
SHARES OWNED (1)
-------------------------
NUMBER PERCENTAGE
NAME BENEFICIAL OWNERS OF SHARES OF CLASS
- ---------------------- ------------- ----------
<S> <C> <C>
Gene P. Carter 100,179 (2) *
Henri A. Jarrat 85,000 (3) *
James F. Stafford 221,501 (4) *
Bernard V. Vonderschmitt 84,300 (5) *
Keith A. Angelo 119,003 (6) *
Richard E. Christopher 74,000 (7) *
Morris E. Jones, Jr. 490,637 (8) 2.20
Lawrence A. Roffelsen 130,000 (9) *
All directors and executive officers
as a group (12 persons) 1,544,807 (10) 6.6401
</TABLE>
- -------------
* Represents less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
above table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable.
Page 33
<PAGE> 34
(2) Includes 60,000 shares subject to immediately exercisable options.
Includes 35,213 unvested shares. Includes 40,179 shares held by the
Carter Family Trust, of which Mr. Carter is a Trustee.
(3) Includes 65,000 shares subject to immediately exercisable options.
Includes 24,442 unvested shares.
(4) Includes 221,500 shares subject to immediately exercisable options.
Includes 162,504 unvested shares.
(5) Includes 80,000 shares subject to immediately exercisable options.
Includes 25,839 unvested shares.
(6) Includes 118,000 shares subject to immediately exercisable options.
Includes 58,336 unvested shares.
(7) All shares are subject to an immediately exercisable option. Includes
54,899 unvested shares.
(8) Includes 270,000 shares subject to immediately exercisable options.
Includes 54,899 unvested shares
(9) All shares are subject to an immediately exercisable option. Includes
58,336 unvested shares.
(10) Includes 1,261,586 shares subject to immediately exercisable options.
Includes 615,202 unvested shares.
As of June 30, 1997, the per share market value of the Company's Common Stock
was $10.375, based on the closing price on that date on the Nasdaq National
Market.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1994, the Company loaned $100,000 at an interest rate of 7% per annum
to Keith A. Angelo, an executive officer of the Company. The outstanding balance
of the loan is forgiven at a rate of 25% per year as Mr. Angelo continues his
employment with the company. If he voluntarily leaves his employment with the
company or if Mr. Angelo's employment is terminated for cause before August 1,
1998, the outstanding balance must be repaid in full at that time.
In August 1994, the Company entered into an independent contractor agreement
with Jarrat Global Enterprises, Inc. ("JGE"), a corporation whose principal
shareholder is Henri A. Jarrat, a director of the Company. Pursuant to the
agreement, Henri Jarrat received options to purchase 125,000 shares of Company
stock and JGE receives $8,000 per month as compensation for providing the
Company with requested business advice, including management consulting in
specific areas, until November 1996.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
a) 1. Financial Statements
Page 34
<PAGE> 35
The consolidated financial statements and notes thereto listed in the
index on page 15 are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules
All financial statement 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
None
c) Exhibits
The exhibits listed in the Index to Exhibits on pages 35 and 36 of this
report are filed as part of this Annual Report on Form 10K.
Page 35
<PAGE> 36
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.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------ ------------------------------------------ ------------------
<S> <C> <C>
/s/ JAMES F. STAFFORD President and Chief Executive Officer September 24, 1997
- ------------------------------------ and Director
James F. Stafford
/s/ TIMOTHY R. CHRISTOFFERSEN Vice President and Chief Financial Officer September 24, 1997
- ------------------------------------ (Principal Financial & Accounting Officer)
Timothy R. Christoffersen
/s/ GENE P. CARTER Director September 24, 1997
- ------------------------------------
Gene P. Carter
</TABLE>
<PAGE> 37
<TABLE>
<S> <C> <C>
/s/ BERNARD V. VONDERSCHMITT Director September 24, 1997
- ------------------------------------
Bernard V. Vonderschmitt
/s/ HENRI A. JARRAT Director September 24, 1997
- ------------------------------------
Henri A. Jarrat
</TABLE>
Page 36
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1 (8) Agreement and Plan of Merger, dated as of July 27, 1997, among Intel Corporation, Intel
Enterprise Corporation and the Company.
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. (**)
23.1 Consent of Independent Accountants 37
27.0 Financial Data Schedule for the year ended June 30, 1997. 38
</TABLE>
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1990.
(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.
Page 37
<PAGE> 39
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1995.
(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.
(8) Incorporated by reference to the Company's Schedule 14D-9, exhibit (c )
(1).
* Denotes management contracts or compensatory plans or arrangements
covering executive officers or directors of Chips and Technologies,
Inc.
** Confidential treatment has been granted for a portion of this document.
Page 38
<PAGE> 1
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, No. 33-
72652 and No. 333-17589) of Chips and Technologies, Inc. of our report dated
July 16, 1997, except as to Note 6 which is as of July 27, 1997, appearing on
page 17 of this Annual Report.
/s/ Price Waterhouse LLP
- --------------------------------
Price Waterhouse LLP
San Jose, California
September 25, 1997
Page 39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FISCAL
1997 10K FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 31,815
<SECURITIES> 56,725
<RECEIVABLES> 14,714
<ALLOWANCES> 1,555
<INVENTORY> 4,677
<CURRENT-ASSETS> 116,436
<PP&E> 43,020
<DEPRECIATION> 28,991
<TOTAL-ASSETS> 149,034
<CURRENT-LIABILITIES> 22,187
<BONDS> 0
0
0
<COMMON> 88,610
<OTHER-SE> 38,237
<TOTAL-LIABILITY-AND-EQUITY> 149,034
<SALES> 168,334
<TOTAL-REVENUES> 168,334
<CGS> 89,138
<TOTAL-COSTS> 89,138
<OTHER-EXPENSES> 50,290
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 40,240
<INCOME-TAX> 4,024
<INCOME-CONTINUING> 36,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,216
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
</TABLE>
