SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
(Mark One)
| X | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For quarter period ended September 30, 1994
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15012
CHIPS AND TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0047943
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(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
2950 Zanker Road, San Jose, California 95134
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (408)434-0600
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Former name, former address and former fiscal year.
If changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
At September 30, 1994, the registrant had 16,915,476 shares of common
stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements 3
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities Not applicable
Item 3. Defaults upon Senior Not applicable
Securities
Item 4. Submission of Matters to a Vote of Security Holders Not applicable
Item 5. Other Information Not applicable
Item 6. Exhibits and Reports on Form 8-K 15
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CHIPS AND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts) SEPTEMBER, 1994 JUNE 30, 1994
--------------- -------------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 17,923 $ 17,372
Short-term investments 5,173 5,171
Accounts receivable, net of allowances for doubtful accounts of $1,016 10,302 8,437*
and $1,269, respectively
Inventory 8,410 5,845
Prepaid and other assets 2,814 3,100
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Total current assets 44,622 39,925
Property, plant and equipment, net 10,835 10,325
Other assets 688 1,050
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$ 56,145 $ 51,300
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,737 $ 7,081
Current portion of capitalized lease obligations 720 571
Accrued compensation 1,693 1,567
Accrued liabilities to manufacturers representatives 511 372*
Other accrued liabilities 4,207 4,221*
Deferred gross profit 643 690*
Accrued restructuring costs 1,346 1,542
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Total current liabilities 18,857 16,044
Long-term capitalized lease obligations, less current portion 868 100
Noncurrent notes payable 900 919
Convertible debentures 7,910 7,910
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Total liabilities 28,535 24,973
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Stockholders' Equity:
Convertible preferred stock, $.01 par value; 5,000,000 shares 1 1
authorized; 123,000 shares issued and outstanding
Common stock $.01 par value, 100,000,000 shares authorized; 16,916,000 169 169
and 16,881,000 shares issued
Capital in excess of par value 59,348 59,222
Notes receivable from officer (101) --
Unrealized gain on investments 2 --
Retained deficit (31,809) (33,065)
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Total stockholders' equity 27,610 26,327
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$ 56,145 $ 51,300
========== ==========
<FN>
* Accounts have been reclassified for comparative purposes (see Note 5)
See notes to Unaudited Condensed Consolidated Financial Statements
</FN>
CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30,
(In thousands except per share amounts) 1994 1993
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NET REVENUE $ 20,373 $ 21,171
Cost of sales and other manufacturing expenses 12,735 13,113
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Gross margin 7,638 8,058
Operating expenses
Research and development 3,008 3,258
Marketing and selling 2,805 3,117
General and administrative 997 1,671
Restructuring recovery (372) 0
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Total operating expenses 6,438 8,046
Income from operations 1,200 12
Interest income and other, net 110 344
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Income before taxes 1,310 356
Provision for income taxes (54) (34)
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NET INCOME $ 1,256 $ 322
========= =========
NET INCOME PER SHARE $ 0.07 $ 0.02
========= =========
Weighted average common shares
and dilutive share equivalents
outstanding 17,020 16,403
========= =========
See notes to Unaudited Condensed Consolidated Financial Statements
CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30,
(In thousands) 1994 1993
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,256 $ 322
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 645 1,018
Provision for losses on accounts receivable 75 225
Provision for losses on inventory 206 --
Other (1) 9
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (1940) (2,477)
Inventory (2,771) (506)
Accounts payable 2,656 2,010
Other assets and liabilities 820 (575)
Accrued restructuring costs (331) (8,858)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 615 (8,832)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,146) (519)
Sale of short-term investment -- 7,436
Proceeds from sale of fixed assets 163 653
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (983) 7,570
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to capital lease obligations, net of principle payment 917 (1,133)
Proceeds from (repayment of) note payable principle (19) 942
Proceeds from issuance of stock 121 1,052
Loan issued to officer (100) (5)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 919 856
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Net increase (decrease) in cash and cash equivalents 551 (406)
Cash and cash equivalents at beginning of period 17,372 20,742
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CASH AND CASH EQUIVALENTS AT PERIOD-END $ 17,923 $ 20,336
=========== ===========
Supplemental disclosure cash flow information: Cash paid during the period for:
Interest $ 82 $ 119
Income taxes 145 37
Additions to capital lease obligations 1229 --
<FN>
See notes to Unaudited Condensed Consolidated Financial Statements
</FN>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
statement of the financial position, operating results and cash flows for those
periods presented. These consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements, and notes
thereto for the year ended June 30, 1994, included in the Company's 1994 Annual
Report on Form 10-K.
The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the entire year.
NOTE 2. PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
NOTE 3. SHORT-TERM INVESTMENTS
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS 115, the Company's management determines
the appropriate classification of debt and equity securities, based on the
nature of the securities and the intent and investment goals of the Company, as
of each balance sheet date.
The Company classified all investments at September 30, 1994 as
available-for-sale. The Company has the intent and ability to hold the
securities until maturity; however, the sale of such securities may be required
prior to the maturity date. The fair value and the amortized cost of the
securities at September 30, 1994 are presented in the table below. The
investments were adjusted to fair value and the unrealized gain was recorded as
a separate component of stockholders' equity.
Unrealized Unrealized
(In thousands) Amortized Holding Holding Fair
Cost Gain Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury Bills $ 675 13 -- $ 688
Corporate Obligations 1,000 -- -- 1,000
U.S. Government Obligations 2,496 -- (11) 2,485
Money Market Preferred 1,000 -- -- 1,000
- -------------------------------------------------------------------------------
Total $ 5,171 13 (11) $5,173
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NOTE 4. NET INCOME PER SHARE
Shares used in the primary net income per share computation are the
weighted average number of common shares outstanding plus dilutive common stock
equivalents. The fully diluted computation also includes other dilutive
convertible securities. Common stock equivalents consist of stock options,
warrants and convertible preferred stock; other dilutive convertible securities
consist of convertible subordinated debentures. Dual presentation of primary and
fully diluted earnings per share is not shown on the face of the income
statement because the differences are insignificant.
NOTE 5. REVENUE RESERVES
During the first quarter fiscal 1995, the Company reclassified certain
distributor revenue reserves to conform with general industry practice.
Previously classified as current liabilities, these reserves are now classified
as reductions to accounts receivable and prior periods have been reclassified
for comparative purposes.
NOTE 6. ACCRUED RESTRUCTURING COSTS
During the quarter ended September 30, 1994, $0.2 million was charged
against the reserve mainly related to the Company's consolidations of
operations, which consisted of payments for costs related to the closure of
foreign sales offices and legal fees. The following table summarizes the status
of the restructuring reserves at September 30, 1994:
(In thousands) Consolidations of Reduction of
Operations & other Workforce Total
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Balance at 6/30/94 $ 1,442 $ 100 $ 1,542
Charges against reserves (143) (53) (196)
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Balance at 9/30/94 $ 1,299 $ 47 $ 1,346
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Net Revenues and Gross Margins for the first quarter of fiscal 1995 have
improved compared to the prior quarter and are substantially the same as for the
same quarter a year ago. Revenues from graphics controllers continue to
represent the majority of the Company's revenues. Operating expenses in the
first quarter of fiscal 1995 have decreased compared to the same quarter a year
ago largely as a result of the Company's restructuring programs.
NET REVENUE
Net revenues were $20.4 million for the first quarter of fiscal 1995 compared to
$15.4 million in the prior quarter and $21.2 million in the first quarter a year
ago. Approximately 60% of the Company's revenues are derived from graphics
controller products. Unit sales volume of graphics controllers in the first
quarter of fiscal 1995 have increased compared to the previous quarter and the
first quarter of fiscal 1994. Sales of older discrete system logic peripheral
products have declined from a year ago as the Company continues to transition
its core logic product strategy towards high integration solutions.
Approximately 40% of the Company's revenues are generated from core logic and
I/O products.
GROSS MARGIN
The gross margin percentage for the first quarter of fiscal 1995 was 37%,
compared to 32% in the prior quarter and 38% in the first quarter a year ago.
The gross margin percentage is substantially the same compared to the first
quarter a year ago while improving over the prior quarter. Although the
proportion of revenues from the Company's lower margin desktop graphics products
has grown over prior quarters, increased overall revenues and strong sales of
higher margin portable graphics controllers caused the improvement in margins
over the previous quarter.
RESEARCH AND DEVELOPMENT EXPENSES
R&D expenses were $3.0 million in the first quarter of fiscal 1995 compared to
$3.3 million in the first quarter of fiscal 1994. R&D spending can fluctuate
from period to period due to the timing of spending on prototype fabrication.
The Company intends to continue investing in new product development and high
level design methodologies at substantially the same rate.
SALES AND MARKETING EXPENSES
Sales and marketing costs were $2.8 million in the first quarter of fiscal 1995
compared to $3.1 million in the first quarter of fiscal 1994. The decline in
expenses is attributable to further consolidation of the Company's foreign sales
offices resulting in reductions in labor and facility costs.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expenses were $1.0 million in the first quarter of fiscal 1995 compared to
$1.7 million in the first quarter of fiscal 1994. The reduced expense level was
attributable to lower labor costs arising from reductions in headcount
associated with the Company's restructuring programs, decreases in depreciation
costs and reductions in bad debt provisions.
RESTRUCTURING COSTS
During the first quarter of fiscal 1995, the Company received the second of four
scheduled payments of $0.4 million against a note receivable recorded in respect
of the sale of certain of the Company's product lines which were discontinued
and fully reserved in fiscal 1993. The Company records income as cash is
collected on the note and $0.4 million was recognized as income in the first
quarter of fiscal 1995. Subsequent to the end of the first quarter of fiscal
1995, the Company received the remaining principal payment of $0.9 million for
the note receivable. The Company will recognize this payment to income for the
second quarter of fiscal 1995.
During the first quarter of fiscal 1995, charges to the restructuring reserve
were made primarily in respect of the Company's consolidation of operations
activities, consisting of the closure of certain foreign sales offices. The
majority of these charges consisted of cash payments made for office closures
and professional service fees.
OTHER INCOME (EXPENSE)
Other income for the first quarter of fiscal 1995 is lower than first quarter
fiscal 1994 because the prior year included the receipt of $0.4 million related
to a settlement and technology license.
LIQUIDITY AND CAPITAL RESOURCES
Due to the completion of a significant portion of the Company's restructuring
during fiscal 1994, usage of cash for restructuring programs was not significant
for the first quarter of fiscal 1995. The Company does expect to make additional
cash payments in respect of its restructuring activities during the second
quarter of fiscal 1995; however, the Company believes these payments will not be
material to liquidity or financial condition. The Company intends to fund
payments for its restructuring programs through existing working capital
resources.
During the first quarter of fiscal 1995, accounts receivable increased $1.9
million, inventory increased $2.6 million and current liabilities increased $2.8
million. Accounts receivable increased because of higher sales during the
quarter. Inventories have increased to support higher sales of the Company's
flat panel graphics controller products. The increase in current liabilities is
largely due to the higher level of trade accounts payable required to support
the increases in inventories. Long term debt increased $0.8M during the first
quarter of fiscal 1995 mainly due to additional capitalized lease obligations in
respect of the financing of certain capital equipment expenditures. The Company
has $1.1 million in standby letters of credit outstanding to secure the lease
financing arrangement.
The Company has two revolving line of credit agreements allowing borrowings of
up to $13.0 million at the banks' reference rates. There were no borrowings
outstanding against these lines at September 30, 1994 and both agreements expire
in October 1995. Based on the current levels of working capital and available
borrowing capacity, the Company believes that its present capital resources are
sufficient to meet its needs for the remainder of the fiscal year.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company anticipates its revenues increasing sequentially during the next two
quarters; however it is expected that the rate of increase will be lower than
that achieved in the first quarter of fiscal 1995. The largest portion of the
Company's sales are comprised of portable graphics controllers and the Company
expects that the majority of its revenues over the next two quarters will be
made up of portable graphics controllers. However, the Company's revenues are
directly affected by customer demand for its products. Customer demand
fluctuates, sometimes dramatically, based on the customers' buildup of internal
inventory, seasonal factors, and product transitions, among other things. While
the Company makes every effort to be consistently informed of customers'
expected demand for its products, customers from time to time make unexpected
changes in product purchasing forecasts and in existing orders. Customer
rescheduling, reduction in quantities and cancellations of orders could have a
material adverse impact on the Company's revenues and results of operations. The
Company also relies on obtaining and maintaining design wins for its products
with leading personal computer manufacturers. To the extent that the Company is
unable to retain existing designs or to acquire new design wins and the
associated revenues generated from them, for the Company's existing and future
products, there could be a material adverse effect on the Company's results of
operations.
The Company believes it currently maintains a leadership position in the
portable graphics market and anticipates its competition will aggressively price
alternative solutions to attempt to gain or maintain market position. To the
extent that the Company must reduce prices to meet competition, maintain market
share or meet customer requirements, gross margins achieved during the first
quarter may not be sustainable. The Company expects gross margin percentages for
the next two quarters to remain between the level of those achieved in the
fourth quarter of fiscal 1994 and the first quarter of fiscal 1995. The Company
anticipates its future operating expenses, including research and development
expenses, will increase in absolute dollar amounts over the next two quarters.
However, the Company believes that operating expenses will decline as a
percentage of sales over the next two quarters.
Because the Company uses subcontract vendors for the manufacture of its product,
the Company must place orders with its suppliers far in advance of shipment to
its end customers. The reliance on subcontract vendors presents risks including
the lack of guaranteed production capacity, delays in delivery, susceptibility
to disruption in supply and reduced control over product costs and manufacturing
yields. Long production lead times and limited control over the manufacturing
process could adversely affect the Company to the extent it is not able to
anticipate its inventory supply requirements and as a result generates excess or
insufficient product inventories. The Company intends to implement certain of
its future product designs in 0.6u semiconductor fabrication geometries to
achieve lower production costs and greater product availability. Inability to
obtain sufficient supply or restrictions on access to 0.6u semiconductor
fabrication technology could have a materially adverse effect on the Company's
operating results.
The personal computer industry is subject to certain seasonal fluctuations. It
is acknowledged within both the computer and semiconductor industries that sales
and purchases may vary significantly within a particular period. The Company
attempts to anticipate the impact of seasonal aspects on its business. However,
if unexpected seasonal fluctuations occur, they may cause volatility in customer
order patterns and have a material effect on future operating results.
The market price of the Company's common stock has been volatile in the past,
and may be volatile in the future. Factors affecting volatility include
variations in the Company's quarterly operating results, announcements by the
Company or its competitors concerning products and/or design wins, financial
market perceptions of conditions in the personal computer marketplace, and
actual conditions in the personal computer marketplace. The market price of the
Company's stock may also be affected by factors influencing the stock market in
general or the market for stocks of high technology companies. Any of these
factors could cause the price of the Company's stock to fluctuate substantially.
The statements asserted in this section do not contain all the conditions which
may affect the Company's future operating results. For simplicity of
presentation the Company has not repeated in its Quarterly Report all factors
affecting future operating results that were contained in its Annual Report on
Form 10-K. Therefore, the Company's Quarterly Report on Form 10-Q should be read
in combination with the Company's Annual Report on Form 10-K for fiscal year
1994.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities Not applicable
Item 3. Defaults upon Senior Securities Not applicable
Item 4. Submission of Matters to a Vote of Security Holders Not applicable
Item 5. Other Information Not applicable
Item 6. Exhibits 15
Reports on Form 8-K Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHIPS AND TECHNOLOGIES, INC.
(Registrant)
/s/ James F. Stafford
-----------------------------------
James F. Stafford
President & Chief Executive Officer
/s/ Timothy R. Christoffersen
-----------------------------------
Timothy R. Christoffersen
Vice President of Finance
Chief Financial Officer and
Principal Accounting Officer
Date: November 8, 1994
INDEX TO EXHIBITS
Exhibit
Number Description Page
- -------- ------------- ----
4.1 (1) Stockholders' Rights Agreement dated August 23, 1989.
4.2 (7) Registration Rights Agreement dated October 10, 1985 and amendment thereto dated
January 24, 1986.
10.1 (3) * Amended and Restated 1985 Stock Option Plan, as amended November 5, 1991.
10.2 (4) * Amended and Restated Employee Stock Purchase Plan, as amended July 27, 1992.
10.3 (4) Lease Termination Agreement and related exhibit between the Company and The Equitable Life
Assurance Society dated September 10, 1993.
10.4 (2) * Amended and Restated Qualified Investment Plan dated January 1, 1989.
10.5 (6) * First Amended 1988 Nonqualified Stock Option Plan for Outside Directors dated October 1,
1993.
10.6 (4) * Promissory Note to the Company from Marc E. Jones dated February 3, 1993.
10.7 (2) Form of Indemnity Agreement between the Company and each of its directors and executive
officers.
10.8 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Ravi Bhatnagar dated December 18, 1992.
10.9 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Nancy S. Dusseau, dated September 1, 1993.
10.10 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Jeffrey H. Grammer, dated September 2, 1993.
10.11 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Gary P. Martin, dated April 19, 1993.
10.12 (5) * Confidential Resignation and Consulting Agreement and General Release of Claims between the
Company and Gordon A. Campbell dated September 30, 1993.
10.13 (4) Convertible Promissory Notes and Preferred Stock Purchase Agreement dated as of July 16,
1992.
10.14 (4) Amendment to Convertible Promissory Notes and Preferred Stock Purchase Agreement.
10.15 (4) Form of Convertible Subordinated Debentures Due June 30, 2002.
10.16 (4) Amendment to 8 1/2% Convertible Subordinated Debentures Due, June 30, 2002
INDEX TO EXHIBITS
Exhibit
Number Description Page
- -------- ------------- ----
10.17 (5) Agreement for Sale and Purchase of Assets between Techfarm, Inc. and Chips and
Technologies, Inc., dated September 24, 1993.
10.18 (8) Restated Secured Promissory Note, Secured Continuing Guarantee, and Restated Loan and
Security Agreement between Techfarm, Inc. and Chips and Technologies, Inc. dated March 31,
1994.
10.19 (8) * Promissory note to the Company from Keith Angelo dated August 1, 1994.
10.20 (8) * Independent Contractor Services Agreement between the Company and Henri Jarrat dated August
11, 1994.
10.21 Equipment financing agreement between the Company and New England Capital Corporation dated 17
July 29, 1994.
11.1 Statement re: Calculation of Earnings Per Share. 29
27.0 Financial Data Schedule for the year ended September 30, 1994. 30
<FN>
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1989.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1990.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1993.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1993.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March
31, 1994.
(7) Incorporated by reference to Registration Statement No. 33-8005 effective October 8, 1986.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1994.
* Denotes management contracts or compensatory plans or arrangements
covering executive officers or directors of Chips and Technologies,
Inc.
</FN>