CHIPS and Technologies, Inc.

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CHIPS and Technologies, Inc.

2950 Zanker Rd.
San Jose, California 95134
U.S.A.
(408) 434-0600
Fax: (408) 434-9315

Public Company
Incorporated: 1985
Employees: 281
Sales: $97.9 million
Stock Exchanges: OTC NASDAQ Midwest SE
SICs: 3674 Semiconductors and Related Services; 7372 Prepackaged Software; 7373 Computer Integrated Systems Design

Founded in 1985, CHIPS and Technologies, Inc., supplies advanced semiconductor devices to the worldwide personal computer industry. The company pioneered the concept of implementing discrete system functions in highly integrated chipsets. CHIPS’ product portfolio includes CRT and flat-panel graphic controllers, graphics accelerators, desktop video devices, integrated communications ICs and system logic CHIPsets. CHIPS’ products are found in a wide range of systems from compact portables to high-performance desktop computers.

CHIPS operates its sales activities out of its corporate headquarters in San Jose, California, and out of regional and district offices located in Norcross, Georgia, and Schaumburg, Illinois. The company or its subsidiaries maintain branch offices in Paris, France; Munich, Germany; Taipei, Taiwan; and Berkshire, England. In addition, CHIPS has appointed 23 independent manufacturer’s representative organizations, 10 domestic distributors, and 27 international representative/distributors.

The company’s product portfolio includes a family of circuits and chipsets integrating the system logic of microcomputer systems compatible with IBM PCs; a family of graphics controller circuits and chipsets for CRTs and flat panel displays that provide compatibility with industry standards for computer graphics display, including IBM’s Video Graphics Array (VGA); a family of interface circuits for serial and parallel port communications, PC-to-mainframe communications controllers, and bus interface protocol control for various add-in cards; and a family of circuits for various forms of mass storage control. In the early 1990s, the company began focusing on single-chip systems in order to exploit anticipated growth in hand-held and sub-notebook computers.

When Gordon Campbell founded CHIPS in 1985, his main objective was to develop more cost-effective methods of designing and producing microcomputer systems components for a rapidly growing market. Campbell was already well versed in the industry. Before embarking on the CHIPS venture, he served as president and CEO of SEEQ Technology, Inc., a publicly held company that he and four other Intel Corp. employees founded to address growing needs for high density circuits. He also held marketing experience as a major accounts manager for Intel’s non-volatile and bipolar memories, as well as sales, management, and engineering positions at major semiconductor manufacturers. With this expertise and a well-chosen staff, Campbell entered the highly competitive semiconductor industry of the mid-1980s.

CHIPS introduced innovative products that provided systems designers with higher levels of circuit integration and the ability to produce marketable products more quickly. The company pioneered the use of Large Scale Integration (LSI) and Very Large Scale Integration (VLSI) semiconductor chips to integrate PC sub-systems based on Small Scale Integration (SSI) and Medium Scale Integration (MSI) semiconductors. VLSI design and engineering techniques figured into the company’s first successful products. In 1985 CHIPS introduced the first integrated system logic chipset for computers compatible with IBM PC/AT system architecture. The five-chip AT CHIPSet integrated 63 of the 94 logic circuits in the AT system board into a compact and cost-effective chipset. PC makers could depend on the chipset to make smaller system boards with faster 80286 microprocessors using significantly fewer chips than previously possible, at a lower cost.

The early success of CHIPS was also secured by its products for graphics capabilities. The company designed an integrated chipset for enhanced graphics that replaced over 20 SSI and MSI circuits on the AT-compatible Enhanced Graphics Adapter (EGA) with only four chips. With the EGA CHIPSet, leading add-in board manufacturers were able to design, produce, and rapidly bring to market EGA-compatible graphics cards that outperformed IBM’s EGA at less than half the price, according to CHIPS 1987 annual report. When IBM introduced its PS/2 family of computers with “VGA” graphics, an extension of the EGA architecture with slightly higher resolutions, more colors, and more extensive display modes, CHIPS followed suit with its VGA-compatible chip and bus interface circuit that enabled PC AT-compatibles to upgrade from EGA to VGA.

CHIPS also tapped a growing market for increasingly complex communications and mass storage controls. The company identified the need for easier access to large data bases and the importance of connectivity between shared laser printers, file servers, electronic mail, and other forms of on-line communications. Demand virtually exploded for communications interface products such as modems, devices linking mainframes to terminals, and local area networks (LANs). In late 1986, CHIPS introduced two StarLAN circuits that consolidated many of the primary functions of the StarLAN serial interface board and StarLAN Bug controller board. Following this initial encoder/decoder, the company developed other communications products, including a single chip permitting PC-to-mainframe compatibility.

From the beginning, CHIPS applied many of its technological advances toward the development of still more advanced products. The company developed a powerful array of mainframe-based design tools to assist in the system integration, compaction, and physical layout of its microcomputer-specific circuit designs. Using a proprietary computer aided engineering (CAE) system, designers were able to apply macrofunctional partitioning, a procedure in which systems designs were subdivided into large functional blocks that could be manipulated or combined with other macrofunctions to form highly integrated components. Formatted in an extensive mainframe library, the functional blocks could be interconnected according to designer’s specifications. With these CAE tools, CHIPS was able to achieve a quicker design-to-market cycle for its components, as well as lower costs for better-tailored designs.

By 1987, the company drew on its advanced CAE system to offer system design services to customers desiring complete systems solutions. With CHIPS’ Design Services Operation, major customers could count on the company’s support in integrating its VLSI chipsets and other components into entire, customized systems.

In addition to innovative chip design, CHIPS initiated new manufacturing strategies. The company led the industry in the general move away from private foundry facilities and toward the use of high-volume, contract semiconductor foundries around the world. In addition to cost leverage, the practice helped pair specific projects with specific foundry specialties and capacities. In 1990 the company also commenced “die-buy” programs in which semiconductor die were purchased from strategic suppliers of bulk silicon and packaged by specialist packaging vendors. Costs were saved over the conventional route of purchasing fully tested, finished products from outside suppliers.

With solid footing in design and manufacturing established from the start, CHIPS experienced healthy growth into the late 1980s. In 1987, net sales exceeded $80.2 million, up from $12.7 million the year before; and net income grew to $12.9 million, up from $1.5 million. Such financial growth fueled advances on various fronts. The company introduced the industry’s first AT/386 CHIPSets, attracting major corporate accounts, including Hewlett-Packard Co., NEC Corporation, and Tandy Corporation. In addition, CHIPS introduced the first IBM PS/2 Model 30-compatible single chip after negotiating license agreements with the computer giant. For a company that had traditionally reverse-engineered chips without patent licenses, licensing with IBM marked a new tack. “Because of the number of patents for the PS/2, it may be difficult to design chips without a license,” explained Ron Yara, a vice president for CHIPS, in an October 1987 article for PC Week.

Placing a shining cap on the 1980s, the company reported record growth for fiscal 1989. Net sales for the year reached $217.6 million, an increase of 54 percent over the $141.5 million posted for 1988. Net income for the year rose to $33.0 million, up from $22.1 million the previous year. Stockholders received a 38 percent return in equity totaled $105.4 million on June 30, 1989, up from $66.6 million at the end of 1988. Reflecting its outstanding financial management within the semiconductor industry, CHIPS received INSTAT’s 1988 “Kachina” Award.

In the early 1990s the PC market became an extremely volatile and competitive arena characterized by price slashing, consolidation, turmoil in distribution sectors, and general malaise linked to a sluggish world economy. CHIPS suffered intense pricing pressure across its entire product line, including new products. Price erosion in the company’s core logic chipset business was particularly severe. According to the market research firm In-Stat, Inc., prices for core 16-bit and 32-bit system logic declined 19.4 percent in 1991. Such a decline contrasted sharply with the tremendous surge in business that CHIPS experienced when its PC/CHIP business took off in 1989. A key factor contributing to CHIPS’ market decline was the rapid ascent of Advanced Micro Devices, Inc., (AMD) as a viable second-place supplier of microprocessors after Intel Corp. By 1992, with $150 million in assets, CHIPS would have a hard fight against the $4.7 billion Intel and $1.2 billion AMD.

The growing profits that CHIPS had enjoyed in the late 1980s diminished into losses in the early 1990s. In 1990, the company reported record net sales of $293.4 million, a 35 percent increase over the $217.6 million in net sales for fiscal 1989. Net income, however, declined 11 percent to $29.3 million. By 1991, figures looked even less promising: the company reported a net loss of $9.6 million, or 71 cents a share, on sales of $225.1 million. By 1992, net sales declined 37 percent to $141.1 million. Gross margins eroded from $82.5 million or 36.7 percent in fiscal 1991 to $17.0 million or 12.0 percent in fiscal 1992.

Reflecting its declining sales, CHIPS’ cash position fell from $37.6 million at June 30, 1991, to $14.2 million a year later. On July 16, 1992, CHIPS announced a $23 million financing package that included a private placement of over $10 million in convertible promissory notes and reconfirmed bank lines of $13 million. The company also expected a tax refund of over $25 million from carrying back its operating losses over the preceding years.

In addition to increased competition over market share, the early 1990s saw rising tension over intellectual property. The industry leader, Intel Corp., increasingly turned to lawsuits to protect its products from competitors like AMD and CHIPS. According to Drew Peck, analyst for Donaldson, Lufkin & Jenrette Securities Corp., a New York investment bank, firms wishing to compete against Intel in the microprocessor business would have to contend with a complex mixture of legal and technical issues in order to position their products in a standards-oriented market. On one hand, a company might try to exactly duplicate a standard chip, thereby risking lawsuits defending patent design. On the other hand, a company might design an altogether new solution, incompatible with the existing standard, but capable of performing the same tasks. Most competitors, including CHIPS, tried to compromise between these two options to introduce products that conformed to industry standards but depended on unique design features to perform additional tasks.

CHIPS’ new products released in 1992—such as its Itel pin-compatible 38600SX and 386DXZ chips and a line of SX and DX chips requiring a modified socket—followed this formula. They were designed to be both “fully compatible” yet “innovative and improved” at the same time. With a unique feature called Superstate, CHIPS also tried to maximize compatibility between different hardware and software combinations, thus attracting systems designers to the convenience of CHIPS components.

Despite CHIPS’ efforts to avoid accusations of imitation by including innovative features, Intel engaged the company in a drawn-out legal suit. When Texas Instruments, Inc., considered licensing a PC core processor from CHIPS in 1992, Intel tried to prevent the move by asking the court to stop CHIPS from transferring its technology. In a letter to stockholders from CHIPS 1992 annual report, Gordon A. Campbell, president and CEO, summarized the Intel situation: “CHIPS continues to vehemently reject Intel’s lawsuit claiming CHIPS’ processor products violate Intel’s patents. Intel’s litigation has so far met with failure in the face of CHIPS’ defense.”

On other fronts, CHIPS’ found itself defending its own patents against competitors. In September 1991 the company asked the International Trade Commission to ban the sale and import of IBM-compatible chipsets made by OPTi Computer, Eteq Microsystems, Elite Microelectronics, and Sun Electronics because they allegedly infringed on patents held by CHIPS. In August 1992 CHIPS and OPTi reached a settlement wherein OPTi acknowledged its infringement on page interleave patents and certain memory controller products and agreed to pay an undisclosed sum to CHIPS. CHIPS agreed that OPTi could continue to sell key controller products without further claims of past infringement. The other companies reached similar agreements.

With slipping sales profits and legal complications regarding intellectual property in the early 1990s, CHIPS emphasized development of new and truly innovative products to restore growth. From 1990 to 1991, the company increased its research and development spending by 16 percent. Select new products reflected the company’s dedication to innovative change. In 1990 the company introduced Single Chip AT Controller (SCAT) technology, by which the functionality previously found in chipsets could be integrated into one chip. In turn, integrating several SCAT chips, the company introduced the Entry-Level Enhanced AT (ELEAT) CHIPSet, a platform incorporating systems logic, graphics, data communications, mass storage, and BIOS. Also in 1990, CHIPS developed the Multi-Processor Architecture Extension (M/PAX) product line, providing hardware that supported multiple micro-processors working together for symmetrical multiprocessing (SMP). SMP reduced processor wait time and increased the capabilities of advanced systems.

In 1992 CHIPS introduced several additional products and made new strategic alliances. In June 1992 Trion computers—a joint design and engineering effort between CHIPS and ComputerLand, Inc.—unveiled a new module incorporating CHIPS’ Super38605DX microprocessor. The module permitted users to upgrade 386-based computers to 486-based performance at an extremely competitive cost. That same month, CHIPS introduced its 82C481 True Color Graphics Accelerator, a single chip solution to increase graphics performance in Windows, OS/2, and CAD environments. The company also introduced its WinCHIPS CHIPSet, a system solution combining logic and graphics improvement for most popular PC systems. When Epson American Inc. introduced a PC using the accelerator, the firm noted a tenfold improvement in Windows performance over comparable Super VGA PCs, according to a June 1992 PC Week article.

Also in 1992, CHIPS completed several joint ventures to exploit growing demand for smaller, portable computer systems. In November the company collaborated with Logitech, Inc., to create a low-cost pen-based computer hardware design for a new class of mass-market, pen-based computers. Also in November, CHIPS announced an agreement with Lexmark International, Inc., to design, manufacture, and market a new class of low-cost, sub-notebook computers featuring significantly improved panel quality, keyboard technology, and battery life.

In 1993, CHIPS continued to offer money-saving performance boosters for the PC market. In June of that year, the company introduced a new system-logic chipset that greatly reduced the design and manufacturing costs of 486-based PC/AT compatible systems. “We are providing a price-performance value that let OEMs put 486 systems on retailer shelves for the same selling price as today’s entry-level 386 systems,” said S.S. Chao, product manager for systems logic at CHIPS, in a company news release. The company also introduced a new graphic user interface (GUI) accelerator to deliver high-end performance at a mainstream market price. The Wingine DGX overcame the limitations of existing GUI systems depending on dynamic random access memory (DRAM) by introducing a proprietary caching scheme called XRAM.

These and other products helped distinguish CHIPS as a viable player in the increasingly cutthroat computer market of the 1990s. In a May 1992 article for PC Week, securities analyst Drew Peck gave CHIPS a 50-50 chance of resuscitating its expiring business growth with its new products. “The products are very strong,” he said.

Beginning in 1992, the company also began a vigorous program of cutting costs and focusing on specific, profitable products. From June 30 to November of 1992, the company reduced its head count by 20 percent, with plans to further reduce the number by 20 percent through staff reductions and attrition. Marketing and design efforts were also directed at single chip systems for emerging computers and embedded control markets, placing high hopes on the emergence of hand-held computers.

CHIPS also responded to growing world markets by expanding international offices. After recording 67 percent of net sales to foreign customers in 1992 (70 percent in fiscal 1991), such measures were in order. European headquarters were established in Neuchatel, Switzerland, and overseas design centers were opened in Munich and Taipei. In addition to seven direct sales offices in the United States, CHIPS operated branch offices in Taipei, Taiwan; Seoul, Korea; and Munich, Germany. Markets were also serviced throughout Japan, Korea, Taiwan, Hong Kong, Singapore, China, India, Israel, Great Britain, France, Germany, Italy, Scandinavia, and North America.

In 1993, CHIPS showed preliminary signs of recovering financial stability. Net loss narrowed to $4.09 million for the quarter ending March 31, compared to a loss of $10.3 million the previous year. Paired with the company’s restructuring plan, hopes for worldwide economic stimulus, and the truly innovative nature of CHIPS’ products, the future looked “possibly comfortable,” or PC in the industry lingo.

Principal Subsidiaries

Chips and Technologies Taiwan, Inc.; Chips and Technologies Korea, Inc.; Chips and Technologies, GmbH; Chips and Technologies Japan K.K.; Chips and Technologies Texas, Inc.; Chips and Technologies, S.A.; Chips and Technologies J.V. (Cyprus) Ltd.