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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A AMENDMENT NO. 1
(Mark One)
[XX] Amendment to Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended June 29, 1996 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to _____
Commission file number: 000-19053
BROOKTREE CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3646367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9868 Scranton Road, San Diego, CA 92121
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (619) 452-7580
Page 1 of 20
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BROOKTREE CORPORATION
FORM 10-Q/A AMENDMENT NO. 1
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 20
Page 2 of 20 pages
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROOKTREE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 29, September 30,
1996 1995
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,632 $ 13,509
Short-term investments 18,476 29,949
Receivables 15,585 23,757
Inventories 20,997 20,805
Deferred income tax assets 4,752 4,752
Prepaids and other current assets 22,260 9,464
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Total current assets 94,702 102,236
PROPERTY AND EQUIPMENT 49,973 49,137
OTHER ASSETS 45,954 36,669
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$ 190,629 $ 188,042
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 13,428 $ 3,602
Accounts payable 6,613 16,245
Accrued payroll and benefits 4,816 5,029
Accrued expenses 4,271 5,223
Deferred revenue 6,832 5,099
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Total current liabilities 35,960 35,198
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LONG-TERM OBLIGATIONS 9,671 8,870
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SHAREHOLDERS' EQUITY:
Preferred stock, authorized 12,680,555
shares, issued and outstanding - none
Common stock, authorized 45,000,000 shares,
no par value, issued and outstanding -
16,948,561 and 16,654,722 76,670 74,249
Gain on available-for-sale securities - 4,174
Retained earnings 68,328 65,551
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Total shareholders' equity 144,998 143,974
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$ 190,629 $ 188,042
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 20 pages
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BROOKTREE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
JUNE 29, JUNE 24, JUNE 29, JUNE 24,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 30,701 $ 32,213 $ 104,496 $ 95,209
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 18,862 16,106 56,501 48,442
Research and development 7,134 7,375 21,998 20,695
Sales and marketing 5,203 5,393 17,016 15,110
General and administrative 2,173 2,021 6,910 6,187
Patent litigation 224 - 1,017 -
Inventory valuation write-down 8,355 - 8,355 -
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TOTAL 41,951 30,895 111,797 90,434
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OPERATING INCOME (LOSS) (11,250) 1,318 (7,301) 4,775
LITIGATION SETTLEMENT - - - (3,050)
GAIN ON SALE OF INVESTMENT 3,965 2,860 11,080 10,013
INTEREST INCOME (EXPENSE) - NET (93) 537 428 1,419
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (7,378) 4,715 4,207 13,157
PROVISION (BENEFIT) FOR INCOME TAXES (2,509) 1,745 1,430 4,868
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (4,869) $ 2,970 $ 2,777 $ 8,289
---------- ---------- ---------- ----------
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EARNINGS (LOSS) PER SHARE:
PRIMARY $ (0.29) $ 0.16 $ 0.16 $ 0.48
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED $ (0.29) $ 0.16 $ 0.16 $ 0.46
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES:
PRIMARY 16,833 18,038 17,576 17,116
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED 16,833 18,118 17,598 18,017
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
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BROOKTREE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JUNE 29, JUNE 24,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,777 $ 8,289
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,125 10,097
Gain on sale of investment (11,080) (10,013)
Inventory valuation write-down 8,355 -
Changes in operating assets and liabilities:
Accounts receivables 7,687 (3,793)
Inventories (2,611) 161
Accounts payable and accrued expenses (14,487) 5,686
Other assets and liabilities 1,608 1,693
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Net cash provided by operating activities 3,374 12,120
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INVESTING ACTIVITIES:
Capital and property expenditures (9,847) (11,565)
Purchases of short-term investments (32,500) (27,172)
Sales of short-term investments 44,118 33,646
Advanced wafer purchase payments (24,400) (9,000)
Investment in Base(2) (1,524) (1,447)
Proceeds from sale of investment 11,396 10,937
Other investments (3,399) (4,171)
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Net cash used by investing activities (16,156) (8,772)
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FINANCING ACTIVITIES:
Issuance of common stock, net of repurchases 2,397 1,936
Employee notes receivable issued, net of repayments (4) 271
Issuance of debt obligations 11,100 3,732
Repayment of debt obligations (1,588) -
------------ ------------
Net cash provided by financing activities 11,905 5,939
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (877) 9,287
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,509 11,288
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,632 $ 20,575
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 853 $ 54
Income taxes paid, net of refund 6,292 3,193
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 20 pages
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BROOKTREE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Consolidated Financial Statements have been prepared by Brooktree
Corporation (the "Company"), without audit, 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 consolidated 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 financial statements and
notes thereto should be read in conjunction with the audited consolidated
financial statements and notes thereto in the Company's Form 10-K/A
Amendment No. 1 for the year ended September 30, 1995.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the entire year.
2. Earnings (Loss) Per Share
Earnings (loss) per share on a primary and fully diluted basis are computed
based on the weighted average number of common and dilutive common
equivalent shares outstanding during each period. Stock options and
warrants (computed using the treasury stock method in fiscal 1996 and the
modified treasury stock method in fiscal 1995) are considered to be common
stock equivalents. Common stock equivalents were excluded from the third
quarter of fiscal 1996 because of their antidilutive effect on the loss per
share.
3. Inventories and Valuation Write-down
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories consisted of the following:
June 29, September 30,
(In thousands) 1996 1995
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(Unaudited)
Raw Materials $ - $ 48
Work-in-Process 10,200 11,381
Finished Goods 10,797 9,376
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$20,997 $20,805
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------- -------
In the third quarter of fiscal 1996, the Company recognized a write-down of
a portion of its multimedia product inventory of approximately $8,355,000.
The write-down was comprised of a reserve of $7,055,000 for excess
multimedia product inventory over estimated requirements to meet projected
multimedia product sales for the next twelve months and a lower of cost or
market adjustment of $1,300,000 to revalue a portion of the remaining
multimedia inventory due to a decline in forecasted selling prices. The
Company took
Page 6 of 20 pages
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this action because it determined during the third quarter that
product design wins for its current generation of multimedia products and
the volume of customers' orders will not be sufficient to liquidate current
levels of multimedia inventory and continued competitive pressures will
cause selling prices to decline from current levels.
It is the practice of the Company to identify and reserve as excess
inventory that portion of inventory that exceeds the forecasted sales demand
of product over the next twelve months. Unless mitigating or special
circumstances exist, the Company reserves for the excess portion. In
addition, it is the policy of the Company to establish reserves for
inventory deemed to be obsolete due to the length of time since the product
was manufactured.
4. Investment Sales
On several occasions during the first nine months of fiscal 1996 and 1995,
the Company sold portions of its minority interest investment in a
telecommunications company for approximately $11,396,000 and $10,937,000,
respectively. These sales resulted in an after-tax gain of approximately
$2,617,000 ($0.16 per fully diluted share) in the third quarter of fiscal
1996 and $7,313,000 ($0.42 per fully diluted share) in the first nine months
of fiscal 1996. During fiscal 1995, these sales resulted in an after-tax
gain of approximately $1,802,000 ($0.10 per fully diluted share) in the
third quarter and $6,308,000 ($0.35 per fully diluted share) in the first
nine months. The shares sold during the third quarter of fiscal 1996
represented all the remaining shares held by the Company.
5. Debt and Equity Securities
The Company accounts for certain debt and equity security investments in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Statement No. 115 requires companies to record certain debt and equity
security investments at fair value. The Company has classified its short-
term investment portfolio and certain cash equivalent investments as
available-for-sale securities. Available-for-sale securities are stated at
fair value, with unrealized gains and losses, net of deferred taxes,
reported as a separate component of shareholders' equity.
At June 29, 1996, the cost of each of the Company's short-term and cash
equivalent investments was approximately equal to their estimated fair
value. Accordingly, no adjustment to fair value was required.
6. Legal Proceedings
On October 2, 1995, the Company filed a lawsuit against S3 Incorporated
("S3") alleging infringement of a patent related to its multimedia
technology. The suit was filed in the United States District Court for the
Southern District of California. The Company filed a motion for a
preliminary injunction to prevent S3 from continuing to sell the products
which the Company alleges use its patented technology. In response to the
Company's suit, S3 filed a counterclaim asserting that S3 is not infringing
the Company's patent and that this patent is invalid and unenforceable. In
March 1996, the court denied the Company's motion for a preliminary
injunction. The case was set for trial in August 1996 to decide the
Company's request for a permanent injunction and damages. On August 7,
1996, the Company reached an out-of-court settlement with S3 regarding this
lawsuit. Under the terms of the settlement and license
Page 7 of 20 pages
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agreement, both parties agreed to settle all claims and counterclaims between
them. In addition, S3 will pay the Company an initial license fee, plus
royalties on sales of video graphics controller products over the next five
years.
On May 6, 1996, a complaint requesting class action treatment was filed
against the Company and certain of its current officers in the Superior
Court of the State of California, County of San Diego. The complaint
alleges that the Company violated certain California corporation and civil
code provisions by issuing false and misleading statements about the
Company's business and multimedia product line. The suit is purportedly
brought on behalf of a class of all purchasers of the Company's securities
during the period February 13, 1995 to February 7, 1996. Relief sought in
the action is unspecified. The Company has reviewed the allegations and the
complaint, believes them to be without merit, and intends to defend itself
vigorously. The Company believes that the resolution of the suit will not
have a material adverse effect on its financial position.
7. Subsequent Event
On July 1, 1996, the Company announced that it had signed an agreement with
Rockwell International Corporation ("Rockwell") which provides for the
Company to be acquired by Rockwell at a price of $15.00 cash per share.
Under the terms of the agreement, the Company will become a wholly-owned
subsidiary of Rockwell and be operated as a division of Rockwell. The total
value of the transaction is approximately $275,000,000.
The transaction, which is expected to close during the fourth quarter of
fiscal 1996, is subject to normal government and regulatory approvals and
approval by the Company's shareholders. There can be no assurance that this
transaction will close by the expected date or at all.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended September 30, 1995 included in the Company's Form 10-K/A Amendment
No. 1 for the year ended September 30, 1995.
When used in this discussion, the words "believes", "expects", "anticipates",
"will", "may", "could", and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected for the reasons set forth under the section "Trends, Risks and
Uncertainties". Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date of this filing. The
Company undertakes no obligation to republish revised forward-looking statements
to reflect events or circumstances after the date of this filing or to reflect
the occurrence of unanticipated events. Readers are also urged to carefully
review and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business, in
this report, as well as the Company's periodic reports on Forms 10-K and 8-K
filed with the Securities and Exchange Commission.
On July 1, 1996, the Company announced that it had signed an agreement with
Rockwell International Corporation ("Rockwell") which provides for the Company
to be acquired by Rockwell at a price of $15.00 cash per share. Under the terms
of the agreement, the Company will become a wholly-owned subsidiary of Rockwell
and be operated as a division of Rockwell. The total value of the transaction
is approximately $275 million. The transaction, which is expected to close
during the fourth quarter of fiscal 1996, is subject to normal government and
regulatory approvals and subject to approval by the Company's shareholders.
There can be no assurance that this transaction will close by the expected date
or at all.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items in the Company's consolidated statements
of operations. This data has been derived from the unaudited consolidated
statements of operations and includes, in the opinion of management, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
statement of the results for such periods.
The results for the interim periods are not necessarily indicative of the
results to be expected for the entire year.
Page 9 of 20 pages
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -------------------
JUNE 29, JUNE 24, JUNE 29, JUNE 24,
1996 1995 1996 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES 100.0% 100.0% 100.0% 100.0%
COST AND EXPENSES:
Cost of sales 61.4 50.0 54.1 50.9
Research & development 23.2 22.9 21.0 21.7
Sales & marketing 17.0 16.7 16.3 15.9
General & administrative 7.1 6.3 6.6 6.5
Patent litigation 0.7 - 1.0 -
Inventory valuation write-down 27.2 - 8.0 -
--------- --------- -------- --------
TOTAL 136.6 95.9 107.0 95.0
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OPERATING INCOME (LOSS) (36.6) 4.1 (7.0) 5.0
LITIGATION SETTLEMENT - - - (3.2)
GAIN ON SALE OF INVESTMENT 12.9 8.9 10.6 10.5
INTEREST INCOME (EXPENSE) - NET (0.3) 1.6 0.4 1.5
--------- --------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (24.0) 14.6 4.0 13.8
PROVISION (BENEFIT) FOR INCOME TAXES (8.2) 5.4 1.4 5.1
--------- --------- -------- --------
NET INCOME (LOSS) (15.8)% 9.2% 2.6% 8.7%
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
REVENUES
Revenues decreased 4.7% to $30.7 million in the third quarter of fiscal 1996
compared to revenues of $32.2 million in the third quarter of fiscal 1995.
For the first nine months of fiscal 1996, revenues increased 9.8% to $104.5
million from $95.2 million for the first nine months of fiscal 1995. The
decrease in the third quarter of fiscal 1996 reflected a decline in graphics
product revenues and to a lesser extent, a decline in automated test
equipment (ATE) product revenues, which more than offset increases in the
remaining product lines of the Company. The increase in revenues in the first
nine months of fiscal 1996 was primarily due to sales of its multimedia
products, of which there were essentially none in the first nine months of
fiscal 1995 and increased sales of imaging, communications and ATE products,
partially offset by a decrease in graphics product revenues. The Company
believes the greater than expected decrease in graphics product revenues is
related to the current, overall slowdown in the PC and workstation market
places. ATE revenues increased in the first nine months of fiscal 1996
primarily due to increased shipment volumes in the first and second quarters
of parts the Company has placed under a last-time-buy status.
Revenues from the Company's non-graphics product lines amounted to $24.9
million, or 81% of revenues in the third quarter of fiscal 1996, up from
approximately $20.0 million, or 62% of revenues, in the third quarter of
fiscal 1995. Non-graphics product revenues were $78.1 million, or 75% of
revenues, for the first nine months of fiscal 1996, up from $58.7 million, or
62% of revenues, in the first nine months of fiscal 1995. Sales of the
Company's multimedia products contributed to the increase in non-graphics
revenues during both the third quarter and first nine months of fiscal 1996;
there were practically no sales of these products in the respective periods
of fiscal 1995. A significant portion of the increase in the Company's
imaging product lines in the third quarter and first nine months of fiscal
1996 was attributable to increased unit volumes from shipments of products
which were introduced during the past year, partially offset by lower average
selling prices as compared to the same respective periods of fiscal 1995.
The decrease in ATE product revenues in the third quarter of fiscal 1996 was
due to a
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decline in shipment volumes for parts that the Company has placed under a
last-time-buy status.
Communications product revenues increased in both the third quarter and
first nine months of fiscal 1996 as compared to the same periods in fiscal
1995, primarily due to increases in average selling prices, which more than
offset slightly lower unit volumes. Unit volumes decreased due to a decrease
in shipments of two of the Company's older generation High Bit-Rate
Subscriber Line (HDSL) products which are being replaced with a second
generation of HDSL products.
During both the third quarter and first nine months of fiscal 1996, the
decrease in graphics product revenues was primarily attributable to a
decrease in unit volumes of several personal computer and workstation
graphics products. Average selling prices of the Company's graphics products
in the third quarter of fiscal 1996 declined approximately 5% as compared to
the same period in fiscal 1995. Average selling prices increased in the first
nine months of fiscal 1996 as compared to fiscal 1995 primarily due to a
shift in the mix of products sold to a higher percentage of higher price
products.
COST OF SALES
The Company's cost of sales includes the cost of wafer fabrication and
packaging and assembly performed by third party vendors, and direct and
indirect costs associated with the procurement, scheduling, testing and
quality assurance functions performed by the Company. Cost of sales in the
third quarter of fiscal 1996 increased to $18.9 million, or 61.4% of
revenues, as compared to $16.1 million, or 50.0% of revenues, in the third
quarter of fiscal 1995. In the first nine months of fiscal 1996, cost of
sales were $56.5 million, or 54.1% of revenues, as compared to $48.4 million,
or 50.9% of revenues, in the first nine months of fiscal 1995. Gross margin
as a percentage of revenues in the third quarter of fiscal 1996, exclusive of
the inventory valuation write-down, decreased to 38.6% from 50.0% in the
third quarter of fiscal 1995 and decreased to 45.9% in the first nine months
of fiscal 1996 from 49.1% in fiscal 1995.
During the third quarter of fiscal 1996, cost of sales as a percentage of
revenues increased primarily due to underutilized capacity, sales of the
Company's multimedia products which realize relatively lower gross margins, a
shift in the mix of products sold to a higher percentage of lower margin
products and additional expense associated with a write-off of specific
product that did not meet performance specifications. During fiscal 1996,
the Company's Singapore test facility had substantially increased the
Company's production capacity. However, units produced in the third quarter
of fiscal 1996 were less than the number of units produced in the third
quarter of fiscal 1995, resulting in the allocation of higher fixed costs
over proportionally fewer units and the recognition of costs related to idle
capacity that are expensed in the period incurred.
In the third quarter of fiscal 1996, the Company recognized a write-down of a
portion of its multimedia inventory of approximately $8.4 million. The write-
down was comprised of a reserve of approximately $7.1 million for excess
multimedia product inventory over estimated requirements to meet projected
multimedia product sales for the next twelve months and a lower of cost or
market adjustment of $1.3 million to revalue a portion of the remaining
multimedia inventory due to a decline in forecasted selling prices. The Company
took this action because it determined during the third quarter that product
design wins for its current generation of multimedia products and the volume of
customers' orders will not be sufficient to liquidate current levels of
inventory and continued competitive pressures will
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cause selling prices to decline from current levels. See also further
discussion regarding this matter under "Trends, Risks and Uncertainties".
OPERATING EXPENSES
Research and development expense in the third quarter of fiscal 1996
decreased by $0.2 million, but increased as a percentage of revenue to 23.2%
from 22.9% in the third quarter of 1995; and increased $1.3 million, but
decreased as a percentage of revenue to 21.0% from 21.7%, between the two
nine-month periods. The increase in expenses in the first nine months of
fiscal 1996 was primarily to support the ongoing development of the Company's
products and new technologies in the form of increased engineering salaries
and related costs.
Sales and marketing expenses in the third quarter of fiscal 1996 decreased
$0.2 million, but increased as a percentage of revenue to 17.0% from 16.7% in
the third quarter of fiscal 1995; and increased $1.9 million, and as a
percentage of revenue to 16.3% from 15.9%, between the two nine-month
periods. The expense increase in the first nine months of fiscal 1996 was
primarily to support marketing of the Company's products in the form of
increased salaries and employment costs, travel and costs related to
increased attendance at trade shows and expositions.
Net interest expense in the third quarter and net interest income in the
first nine months of fiscal 1996 were unfavorable when compared to the
respective periods in fiscal 1995 as a result of higher interest expense in
connection with additional bank borrowings.
General and administrative expenses in the third quarter of fiscal 1996
increased approximately $0.2 million, and as a percentage of revenue to 7.1%
from 6.3% in the third quarter of fiscal 1995; and increased $0.7 million,
and as a percentage of revenue to 6.6% from 6.5%, between the two nine-month
periods. The increase in expenses during the third quarter and first nine
months of fiscal 1996 was primarily due to increased salaries and employment
costs in support of the Company's Singapore operations.
Patent litigation costs increased in the third quarter and first nine months
to $0.2 million and $1.0 million, respectively. These costs were incurred
to support the patent infringement litigation with S3 Incorporated ("S3").
See Note 6 of Notes to Consolidated Financial Statements included in Part I
of this report.
On several occasions during the first nine months of fiscal 1996 and fiscal
1995, the Company sold portions of its minority interest equity investment in
a telecommunications company for approximately $11.4 million and $10.9
million, respectively. These sales resulted in an after-tax gain of
approximately $2.6 million ($0.16 per fully diluted share) in the third
quarter of fiscal 1996 and $7.3 million ($0.42 per fully diluted share) in
the first nine months of fiscal 1996. During fiscal 1995, these sales
resulted in an after-tax gain of approximately $1.8 million ($0.10 per fully
diluted share) in the third quarter and $6.3 million ($0.35 per fully diluted
share) in the first nine months. The shares sold during the third quarter of
fiscal 1996 represented all the remaining shares held by the Company.
PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes is computed based on the Company's
pretax income (loss), adjusted for tax credits and other permanent differences.
The effective tax rate for the first nine months of fiscal 1996 was
approximately 34%,
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as compared to 37% in fiscal 1995. The rate decreased primarily as a result
of the Company's profitable operations in Singapore.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 1996, the Company had $12.6 million in cash and cash equivalents,
and $18.5 million in short-term investments. The Company's operating
activities generated cash of $3.4 million in the first nine months of fiscal
1996 and $12.1 million in the first nine months of fiscal 1995. Its
financing activities generated $11.9 million and $5.9 million for the same
periods, primarily from borrowing against a bank line of credit during the
first nine months of fiscal 1996. Investing activities used $16.2 million
during the first nine months of fiscal 1996 and $8.8 million in the first
nine months of fiscal 1995. The Company's working capital decreased from
$67.0 million at September 30, 1995 to $58.7 million at June 29, 1996 for the
reasons discussed below.
The primary source of cash from operating activities during the first nine
months of fiscal 1996, aside from net income and non-cash adjustments
thereto, was a $7.7 million decrease in accounts receivables primarily due to
lower sales in the latter part of the third quarter of fiscal 1996 as
compared to the fourth quarter of fiscal 1995. The principal uses of cash
for operating activities were (a) a $2.6 million increase in inventory,
primarily in the Company's multimedia products, and (b) a decrease in
accounts payable and other accrued expenses ($14.5 million) during the first
nine months of fiscal 1996. Accounts payable and accrued expenses decreased
primarily due to payments for inventory and equipment purchases and income
taxes. During fiscal 1996, the Company began receiving wafers that had been
prepaid pursuant to the terms of one of the advanced wafer purchase
agreements. Accordingly, the level of payables for wafer purchases at June
29, 1996 had declined as compared to September 30, 1995.
The Company's principal investment activity during the first nine months of
fiscal 1996 was the net divestiture of short-term investments ($11.6 million)
and the sale of the remaining portion ($11.4 million) of the Company's
minority equity investment in a telecommunications company. Funds from these
activities were primarily used to finance advanced wafer purchase payments to
Seiko Epson Corporation of $19.5 million and Taiwan Semiconductor
Manufacturing Co., Ltd. of $4.9 million, an investment in Chartered
Semiconductor Manufacturing of $3.3 million, the final cash payment for the
Company's purchase of the net assets of Base2 Systems of $1.5 million, and
expenditures of $9.8 million for capital equipment.
The Company has budgeted approximately $3 million for equipment expenditures
in the fourth quarter of fiscal 1996. In addition, the Company is obligated
to make the two remaining advance wafer purchase payments to Seiko Epson
Corporation, totaling $16.5 million, in the fourth quarter of fiscal 1996 and
the second quarter of fiscal 1997.
During the first quarter of fiscal 1996, the Company entered into two
agreements with Taiwan Semiconductor Manufacturing Co., Ltd., each of which
grant the Company an option to obtain an additional supply of wafers.
Subsequently, the Company renegotiated one of these agreements. Pursuant to
the renegotiated agreement, the Company is required to make two installment
payments in 1996. The Company paid the first installment of $4.9 million in
February 1996. The second installment of $4.9 million was paid in July 1996.
If the Company chooses to exercise the option granted by the second
agreement, two installments totaling approximately $39 million will be due in
1997.
Page 13 of 20 pages
<PAGE>
At the end of fiscal 1995, the Company finalized an agreement with its bank
to provide a $5.0 million revolving line of credit facility to finance
short-term working capital requirements and a $6.0 million
non-revolving-to-term loan for equipment purchases to support expansion of
its operations in Singapore. As of the end of the third quarter of fiscal
1996, $10.9 million in borrowings have been drawn against these facilities.
The terms of the $5.0 million revolving line of credit require that the
Company maintain a zero balance of borrowings against this line for a period
of at least 30 consecutive days during each twelve month period.
TRENDS, RISKS AND UNCERTAINTIES
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk and
uncertainties set forth throughout this section of the report.
RECENT DEVELOPMENTS
On July 1, 1996, the Company announced that it had signed an agreement with
Rockwell which provides for the Company to be acquired by Rockwell at a price
of $15.00 cash per share. Under the terms of the agreement, the Company will
become a wholly-owned subsidiary of Rockwell and will be operated as a
division of Rockwell. The total value of the transaction is approximately
$275 million. The transaction, which is expected to close during the fourth
quarter of fiscal 1996 is subject to normal government and regulatory
approvals and subject to approval by the Company's shareholders. There can
be no assurance that this transaction will close by the expected date or at
all.
OPERATING RESULTS
The Company's operating results are subject to quarterly fluctuations as a
result of a number of factors, including, but not limited to, market
acceptance of its products, particularly of its multimedia and other
non-graphics products, on which it is becoming increasingly dependent, as
well as competitive pressures on selling prices, adequate availability of
wafers, integrated circuit packages and finish-tested packaged parts,
fluctuation in test yields, designing to and meeting proper product
specifications, delays in production of mask sets, changes in the mix of
products sold, the timing and success of new product introductions, foreign
currency fluctuations that impact wafer costs and the scheduling or
cancellation of orders by its customers. Furthermore, the semiconductor
industry has historically been characterized by business cycles, with
economic downturns resulting in diminished product demand and erosion of
average selling prices. The Company believes that the cyclical nature of the
semiconductor business could have an impact on its business and operating
results in the future. Additionally, the semiconductor industry is intensely
competitive and is generally characterized by rapid technological change and
rapid rates of product obsolescence. The Company believes that its ability
to compete depends upon elements both within and beyond its control,
including, but not limited to, the success and timing of new product
development and introduction by the Company and its competitors, customer
order patterns, customer support, product performance and selling prices.
There can be no assurance that the Company will compete successfully as to
these or other elements.
Page 14 of 20 pages
<PAGE>
REVENUE
The Company believes that future revenue growth will be substantially
dependent on its recently introduced multimedia, imaging and communications
products. If the Company's customers select its products, these products
would typically be incorporated in customers' products during the customers'
design phase. Consequently, these "design wins" may precede significant sales
volumes by a year or more. There can be no assurance that these products will
achieve significant market acceptance and that any design win will result in
future revenues which depend in part on the success of customers' products.
In the event markets for the Company's products do not develop at an
acceptable rate, demand for its new products does not materialize, and/or the
Company is not rewarded with substantial design wins that result in product
orders, the Company will not achieve growth in future revenues. In addition,
the Company's quarterly revenues are subject to fluctuations as a result of
occasional rescheduling of orders by its customers to take delivery of
product in subsequent quarters or the cancellation of a portion or all of a
customer's order.
To date, multimedia product sales have not met the Company's expectations.
During the third quarter of fiscal 1996, the Company recognized a write-down
of excess multimedia product inventory in the amount of approximately $7.1
million. This write-down was primarily due to an absence of significant new
customer design wins and sufficient product orders to liquidate the Company's
current generation of multimedia product inventory. In order to achieve an
increase in revenues in the fourth quarter of fiscal 1996, and in subsequent
quarters thereafter, the Company will be dependent on increased market
acceptance of, and obtaining design wins and orders for, its new generation
of multimedia, imaging and communications products. Furthermore, the Company
believes that ATE revenues for the fourth quarter of fiscal 1996 and beyond
will not exceed ATE revenues achieved during the third quarter of fiscal 1996
as the Company's customers are expected to phase-out their purchases of ATE
products.
Average selling prices for most of the Company's products generally decline
over a period of time. In general, the Company expects average selling
prices for its mature products to continue to decline in future periods.
However, competitive pressures and uncertain or diminished acceptance of its
new products in the market place could cause average selling prices to
decline for the Company's newer products. The Company attempts to offset
this reduction in average selling prices, and the related negative impact on
gross margin, by a combination of the following factors: increasing unit
sales volumes, reducing material costs, improving manufacturing yields and
introducing new products of superior performance and capabilities with higher
prices and margins. There can be no assurances that the Company will be
successful in these efforts or that these efforts, if successful, will fully
offset price declines in future periods. During the third quarter of fiscal
1996, the Company recognized a lower of cost or market adjustment of $1.3
million to revalue a portion of its remaining multimedia inventory due to a
decline in forecasted selling prices. If significant market acceptance is not
achieved and/or competitive pressures intensify, the Company may be forced to
lower prices further than expected which would adversely affect its sales and
gross margin.
The ongoing integration of the functionality of RAMDACs into graphical user
interface (GUI) products by competitors, a general decline in average selling
prices due to continued pricing pressures from the Company's OEM customers as
well as competition from other suppliers and a current slowdown in the PC
industry are primary causes for the decline in personal computer graphics
revenues. The Company believes this decline in revenue will continue in the
fourth quarter of fiscal 1996. During the first nine months of fiscal 1996, a
greater percentage of the
Page 15 of 20 pages
<PAGE>
Company's personal computer graphics revenues was concentrated among fewer
key customers as compared to the first nine months of fiscal 1995. The loss
of one or more of these customers or a decrease in their demand for these
products could adversely affect future personal computer graphics revenues.
SUPPLIERS AND MANUFACTURING PROCESSES
The Company does not directly manufacture the finished silicon wafers used
for its products. Finished wafers for the Company's products are currently
manufactured by several qualified wafer suppliers, two of which currently
supply the substantial majority of the Company's wafers. The Company is
dependent on these suppliers to obtain an adequate supply of raw materials
and to provide it with an adequate supply of wafers to meet customer demand
for products. There can be no assurance that such suppliers will have
adequate sources of supply. If the Company were unable to obtain a sufficient
supply of wafers to meet sales demand, its financial position and results of
operations could be adversely affected.
Until recently, wafer capacity in the semiconductor industry had been limited
and caused some concern, within the industry, that such capacity would
continue to be limited over the next several years, thus potentially
increasing wafer prices and order lead times. In an effort to mitigate this
risk, the Company entered into long-term supply arrangements with three
vendors to secure wafer capacity. If demand for the Company's products does
not increase as anticipated, the Company may be unable to use the full amount
of its purchased capacity, potentially resulting in impairment of one or more
of its supply arrangements, which could adversely impact future results of
operations.
Since a significant percentage of the Company's products are manufactured
utilizing sub-micron wafers, the Company routinely seeks the qualification of
new processes at its current wafer suppliers in addition to other wafer
suppliers that can provide sub-micron wafers. Additional qualified sources
of supply could reduce the Company's dependence on a few manufacturers to
fulfill its needs for wafer capacity. However, there can be no assurance
that the Company will be successful in identifying and qualifying new
processes and/or suppliers, or reduce the Company's dependence on a few
suppliers.
A majority of the Company's mask sets, used in the manufacture of wafers, are
currently produced by one mask set supplier. The Company has, from time to
time, experienced delays in the receipt of mask sets necessary for the
manufacture of new products or revisions of current products, either as a result
of capacity constraints at the supplier or delays on the part of the Company in
providing the supplier with designs. Such delays have, in turn, caused some
delays in the production and shipment of products to customers. The Company is
currently investigating other vendors as alternate sources of mask sets. There
can be no assurances, however, that the Company will be successful in
identifying and selecting new suppliers or avoiding delays in providing accurate
designs to the supplier. If the Company were unable to prevent such delays,
future introductions and shipments of new products would be delayed, potentially
compromising the Company's competitive advantages associated with these
products, which could adversely affect sales and results of operations. In
addition, it is critical that the Company provide to its mask set supplier
product designs that have been accurately developed and laid out to assure
proper functioning of the new product. Errors in product design layout may go
undetected and result in the production of mask sets which, in turn, would be
used to manufacture wafers that are subsequently determined to not meet product
specifications and possibly be nonfunctioning, thus resulting in the write-off
of the wafers and mask set. If the Company were unable
Page 16 of 20 pages
<PAGE>
to prevent such errors in product design, future introduction and shipments
of new products would be delayed and adversely affect sales and results of
operations.
The assembly and packaging of all the Company's products is performed by
several vendors. The Company is dependent upon these vendors to provide the
Company adequate capacity and related raw materials to meet its customer
demand. In some cases, the Company's vendors, in turn, are dependent upon a
few suppliers for certain of their packaging and material supplies. A
restriction on the capacity or materials provided by one or more of its
assembly and packaging vendors could adversely affect the Company's ability
to meet customer demand for certain products and adversely impact revenues.
In addition, some of the Company's vendors, including its wafer suppliers,
could be affected by political instability in their countries or countries
neighboring those in which they operate. To the extent that any of the
Company's vendors are affected by unforeseen political turmoil, the Company
may experience constraints on the capacity and materials provided by those
vendors. The Company also purchases the majority of its communications
products from three manufacturers. If delays or interruptions are
encountered, shipments of communications products and revenues could be
adversely affected.
COST OF SALES AND OTHER EXPENSES
The future overall gross margin percentage may be lower than the gross margin
percentage realized in the first nine months of fiscal 1996 as a result of a
potential shift in product mix to a greater proportion of multimedia products
which realize somewhat lower gross margins than the Company's other products.
Moreover, the potential for lower than expected average selling prices and
underutilized production capacity could exert additional pressure on gross
margins. There can be no assurance that the Company can compensate for these
impacts to gross margins by sufficiently increasing unit volume.
With the addition of the Company's test facility in Singapore in the first
quarter of fiscal 1995, the Company's total production capacity was
increased. If this capacity and its associated overhead costs cannot be fully
absorbed, future gross margin will continue to be negatively impacted. In
addition, if forecasted sales of certain products are not realized, inventory
reserves or write-downs for excess product or product obsolescence may be
necessary which would adversely affect future gross margin and operating
income. The Company has recognized a write-down of its excess multimedia
product inventory ($7.1 million) and a lower of cost or market adjustment
($1.3 million), together totaling approximately $8.4 million, in the third
quarter of fiscal 1996. In the event that future sales of the multimedia
products, and for the Company's imaging, communications and graphics products
do not materialize as forecasted, additional reserves or inventory
write-downs for excess product inventory will be necessary. Furthermore, if
average selling prices decline below the cost of products in inventory, it
will be necessary to recognize additional lower of cost or market reserves to
write inventory down to a cost that would yield normal margins on sales in
future periods. If one or more of these events occur in future quarters, the
Company's gross margin and operating income could be materially adversely
affected.
During the first quarter of fiscal 1996, the Company filed a lawsuit against
S3 alleging infringement of a patent related to the Company's multimedia
technology. The Company filed a motion for a preliminary injunction to
prevent S3 from continuing to sell the products which the Company alleges
use its patented technology. In March 1996, based on preliminary findings,
the court denied the motion for a preliminary injunction. A trial date was
set in August 1996 to hear the Company's request for a permanent injunction
and damages. On August 7, 1996, the Company reached an out-of-court
settlement with S3 regarding this lawsuit.
Page 17 of 20 pages
<PAGE>
Under the terms of the settlement and license agreement, both parties agreed
to settle all claims and counterclaims between them. In addition, S3 will
pay the Company an initial license fee, plus royalties on sales of video
graphics controller products over the next five years. In addition, a
complaint was filed on May 6, 1996 against the Company and certain of its
current officers in the Superior Court of the State of California, County of
San Diego. The complaint alleges that the Company violated certain
California corporation and civil code provisions by issuing false and
misleading statements about its business and multimedia product line. The
Company has reviewed the allegations of the complaint and believes them to be
without merit and intends to defend itself vigorously. As a consequence of
these lawsuits, the Company is expecting to incur significant legal costs in
the last quarter of fiscal 1996 and possibly beyond, regardless of the
outcomes. As additional future events warrant, the Company intends to
vigorously defend its intellectual property rights. However, there can be no
assurance that the Company will be successful in defending these rights.
The Company's effective tax rate is highly dependent on the profitability of
its Singapore operations. Accordingly, if forecasted sales and operating
profits from this operation are not realized, the Company's effective tax
rate will increase.
LIQUIDITY
The Company believes its existing capital resources will be adequate to fund
the Company's cash needs for the next twelve months. However, the Company
may require additional funds from debt and/or equity financing in the near
and/or future periods for product acquisition, product development, securing
future wafer capacity, and other corporate needs not presently contemplated
by the Company or if results of operations do not meet the Company's
expectations. There can be no assurance that such potential sources of
financing will be available on reasonable terms, or at all. If the Company
is unable to obtain sufficient capital from these potential sources of funds
in future periods, it may be required to curtail its capital equipment,
product development and/or wafer capacity expenditures and investments, which
could adversely affect the Company's future operations and competitive
position.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 6 of Notes to Consolidated Financial Statements included in
Part I, Item 1 of this Quarterly Report.
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<PAGE>
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 on the 15th of August, 1996
BROOKTREE CORPORATION
/s/David H. Russian
---------------------------------------
David H. Russian
Vice President, Finance,
Chief Financial Officer
/s/Jerry E. Canning
---------------------------------------
Jerry E. Canning
Corporate Controller,
Chief Accounting Officer
Page 20 of 20
