<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
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 No. 0-27232
BENCHMARQ MICROELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2532442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17919 WATERVIEW PARKWAY
DALLAS, TEXAS 75252
(Address of principal executive offices) (Zip code)
(972) 437-9195
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------- ----------
As of May 11, 1998, there were 7,118,253 shares of the registrant's common stock
outstanding.
<PAGE>
CAUTIONARY STATEMENT
The Company wishes to caution readers that the following important factors,
in addition to others noted throughout this Form 10-Q, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual results for the second quarter of 1998, and beyond,
to differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company, including, without limitation, statements made
regarding the Company's dependence on TSMC (as defined herein) for future supply
of wafers in Note 5 of the "Notes to Financial Statements", future product
sales, marketing plans, market opportunities and industry conditions contained
in Part I, Item 2, in the section entitled "Overview", average selling prices
and gross margins contained in Part I, Item 2, in the section entitled "Results
of Operations-Gross Margin", research and development expenses contained in Part
I, Item 2, in the section entitled "Results of Operations-Research and
Development", selling, general and administrative expenses contained in Part I,
Item 2, in the section entitled "Results of Operations-Selling, General and
Administrative", merger related costs contained in Part I, Item 2, in the
section entitled "Merger-Related Costs", capital expenditures and cash
requirements contained in Part I, Item 2, in the section entitled "Liquidity and
Capital Resources", and comments regarding litigation contained in Part II, Item
1, in the section entitled "Litigation" and Note 6 to "Notes to Financial
Statements":
-- an accelerated decline in the average selling prices for the Company's
Battery Management Products (as defined herein), NVSRAM (as defined herein)
products and RTC (as defined herein) products;
-- insufficient expansion of the Company's production capacity to meet the
sales demand for Battery Management Products;
-- slower or declining acceptance of Battery Management Products, NVSRAM
products or RTC products by customers;
-- competitive disadvantage resulting from technical unfeasibility of the
Company's new product designs;
-- an accelerated growth of inventory leading to excess inventory and
salability and/or obsolescence write-downs;
-- inability to utilize option wafers as specified under the terms of the
Company's Option Agreement with TSMC;
-- increases in the prices of materials and components, especially wafers,
SRAMs (as defined herein) and batteries used for NVSRAM Products or RTC
Products;
-- timing or delay of new product introductions by the Company or its
competitors;
-- loss of key personnel;
-- excess production capacity;
-- decline in demand due to industry factors;
-- inability to achieve acceptable margins on the non-proprietary components
included in Battery Management Products;
-- product defects resulting in significant returns for credit or
replacement;
-- timing and size of significant orders;
-- competitive pricing pressures;
-- changes in product mix;
-- advances in technologies;
-- growth of selling, general and administrative expense at a rate faster
than that of sales and revenues;
2
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-- patent infringement and product liability litigation;
-- labor disputes;
-- failure to comply with government regulations;
-- the effects of foreign currency rate fluctuation on expenses, average
selling prices and market share;
-- with respect to the "Year 2000" issue, the availability and cost of
personnel trained in the area, the ability to locate and correct all
relevant computer code, and similar uncertainties;
-- the inability to realize the anticipated benefits of the proposed Merger
(as defined herein) or the disruption of the Company's business resulting
from the proposed Merger; and
-- the inability to accurately forecast demand for the Company's products and
inability to successfully negotiate orders with customers.
In addition, the Company refers readers to the discussion of certain risk
factors pertaining to the Company contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and in the Company's
prospectus, dated December 1, 1995, as supplemented on December 21, 1995.
3
<PAGE>
BENCHMARQ MICROELECTRONICS, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 (unaudited) and
December 31, 1997................................................. 5
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 (unaudited)......................... 6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 (unaudited).................. 7
Notes to Consolidated Financial Statements (unaudited).............. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................18
Signatures....................................................................19
4
<PAGE>
PART I. FINANCIAL INFORMATION
BENCHMARQ MICROELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 4,091,144 $ 2,882,608
Short-term investments........................................................ 16,290,412 17,061,044
Receivables, net of allowance for doubtful accounts and estimated returns of
$857,261 and $863,785 at March 31, 1998 and December 31, 1997............... 4,049,970 4,601,796
Inventories................................................................... 5,454,178 4,692,050
Prepayment for product purchases.............................................. 1,680,000 1,680,000
Deferred income tax assets.................................................... 857,619 857,619
Prepaid expenses and other assets............................................. 485,881 148,014
--------------------------
Total current assets...................................................... 32,909,204 31,923,131
Property and equipment, at cost:
Furniture and fixtures........................................................ 1,320,254 1,166,054
Equipment..................................................................... 5,752,284 5,246,351
Computer software............................................................. 680,223 536,925
--------------------------
7,752,761 6,949,330
Accumulated depreciation...................................................... 4,714,119 4,257,801
--------------------------
3,038,642 2,691,529
Equipment under capital lease obligations...................................... 3,961,979 4,154,061
Accumulated amortization...................................................... 1,443,517 1,358,815
--------------------------
2,518,462 2,795,246
Prepayment for product purchases............................................... 3,360,000 3,360,000
Noncurrent deferred income tax and other assets................................ 49,355 78,569
--------------------------
Total assets.............................................................. $41,875,663 $40,848,475
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 2,450,091 $ 1,665,008
Payroll and related benefits.................................................. - 239,022
Income taxes payable.......................................................... 496,072 337,347
Other accrued liabilities..................................................... 935,911 670,603
Deferred income on shipments to distributors.................................. 1,160,491 1,250,291
Current obligations under capital leases...................................... 1,078,553 1,229,053
--------------------------
Total current liabilities................................................. 6,121,118 5,391,324
Obligations under capital leases, less current obligations..................... 510,108 701,658
Deferred income taxes.......................................................... 405,481 531,773
Stockholders' equity...........................................................
Common stock, $ .001 par value, 50,000,000 shares authorized;
7,179,419 and 7,005,417 shares issued at March 31, 1998 and
December 31, 1997, respectively............................................. 7,179 7,005
Additional paid-in capital.................................................... 26,496,178 26,154,437
Retained earnings............................................................. 8,345,178 8,062,822
Net unrealized gain on short-term investments,................................ 3,221 12,256
Treasury stock, 64,000 common shares, at cost................................. (12,800) (12,800)
--------------------------
Total stockholders' equity................................................ 34,838,956 34,223,720
--------------------------
Total liabilities and stockholders' equity................................ $41,875,663 $40,848,475
==========================
</TABLE>
See accompanying notes
5
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BENCHMARQ MICROELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------------------------
Net revenues.................................... $9,309,536 $11,712,148
Cost of sales................................... 4,770,180 5,813,580
------------------------
Gross margin.................................... 4,539,356 5,898,568
Operating expenses:
Research and development..................... 890,341 815,514
Selling, general, and administrative......... 2,675,794 2,645,636
Merger-related costs......................... 575,326 -
------------------------
Total operating expenses..................... 4,141,461 3,461,150
------------------------
Income from operations.......................... 397,895 2,437,418
Other income (expense):
Interest income.............................. 194,991 187,364
Interest expense............................. (36,752) (52,368)
Other........................................ 1,422 (5,226)
------------------------
Income before provision for income taxes........ 557,556 2,567,188
Income tax provision............................ 275,200 924,000
------------------------
Net income...................................... $ 282,356 $ 1,643,188
========================
Net income per common share..................... $ 0.04 $ 0.24
========================
Net income per common share assuming dilution.. $ 0.04 $ 0.21
========================
SEE ACCOMPANYING NOTES.
6
<PAGE>
BENCHMARQ MICROELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------------------------
<S> <C> <C>
Operating Activities:
Net income....................................................... $ 282,356 $ 1,643,188
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 543,127 494,741
Loss on disposition of fixed assets........................... 518 5,226
Deferred income taxes......................................... (126,292) 649,821
Changes in operating assets and liabilities:
Receivables................................................ 551,826 (1,115,118)
Inventories................................................ (762,128) (52,455)
Prepaid expenses and other assets.......................... (308,653) 101,460
Accounts payable........................................... 785,083 117,601
Income taxes payable....................................... 158,725 144,729
Deferred income on shipments to distributors............... (89,800) 756
Accrued liabilities........................................ 26,287 (104,019)
--------------------------
Net cash provided by operating activities........................ 1,061,049 1,885,930
Investing Activities:
Prepayment for product purchases................................. - (2,000,000)
Investment in short-term investments............................. (8,462,804) (15,662,324)
Maturities of short-term investments............................. 9,224,401 16,218,785
Capital expenditures............................................. (613,974) (439,205)
--------------------------
Net cash provided (used) by investing activities................. 147,623 (1,882,744)
Financing Activities:
Proceeds from issuance of common stock upon exercise of options.. 341,914 35,628
Principal payments under capital lease obligations............... (342,050) (356,037)
--------------------------
Net cash used by financing activities............................ (136) (320,409)
--------------------------
Net change in cash and cash equivalents.......................... 1,208,536 (317,223)
Cash and cash equivalents at beginning of period................. 2,882,608 2,575,350
--------------------------
Cash and cash equivalents at end of period....................... $ 4,091,144 $ 2,258,127
==========================
Supplemental Cash Flows Information:
Cash paid for interest........................................ $ 36,572 $ 52,368
==========================
Cash paid for income taxes......................................... $ 242,768 $ 129,450
==========================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
BENCHMARQ MICROELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
1. INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared by BENCHMARQ Microelectronics, Inc. (the "Company" or "BENCHMARQ") in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair statement of the
results for the interim periods presented have been included. Operating results
for the three month period ended March 31, 1998, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998. For
further information, refer to the financial statements and the footnotes thereto
included in the BENCHMARQ Microelectronics, Inc. annual report on Form 10-K for
the year ended December 31, 1997.
On March 2, 1998, the Company signed a definitive Agreement and Plan of Merger
(the "Merger Agreement") with Unitrode Corporation, a Maryland corporation
("Unitrode") and Merrimack Corporation, a Delaware corporation and wholly owned
subsidiary of Unitrode ("Merrimack"). Under the Merger Agreement, Merrimack will
merge (the "Merger") with and into the Company, and the Company will survive as
a wholly owned subsidiary of Unitrode. If the Merger is consummated, each
outstanding share of common stock of the Company will be converted into the
right to receive shares of common stock of Unitrode. The initial exchange ratio
is one share of Unitrode common stock for one share of BENCHMARQ common stock.
However, if the average of the mean high and low per share trading prices on the
New York Stock Exchange for a share of Unitrode common stock for the twenty
trading days ending on the tenth day prior to the special meeting of the
stockholders of the Company to consider the Merger is less than $16 or more than
$24, the exchange ratio will be adjusted proportionally but in no event will the
exchange ratio be greater than 1.33 to 1.
2. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (FAS 128). FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform with FAS 128.
8
<PAGE>
BENCHMARQ MICROELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
----------------------
<S> <C> <C>
Numerator:
Net income for basic and diluted earnings per share....... $ 282,356 $1,643,188
Denominator:
Denominator for basic earnings per share -
weighted average shares.................................. 7,071,548 6,788,521
Effect of dilutive securities:
Employee stock options................................... 595,390 884,071
----------------------
Denominator for diluted earnings per share
Adjusted weighted-average shares and assumed conversion.. 7,666,938 7,672,592
======================
Net income per common share................................ $ 0.04 $ 0.24
======================
Net income per common share assuming dilution............. $ 0.04 $ 0.21
======================
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost determined on a first-in, first-out basis, or market.
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------------
<S> <C> <C>
Finished goods............................... $2,764,267 $2,090,256
Work-in-process.............................. 1,527,343 1,223,743
Raw materials................................ 1,162,568 1,378,051
------------------------
$5,454,178 $4,692,050
========================
</TABLE>
4. INCOME TAXES
For the three-month period ended March 31, 1998, the Company employed an
effective tax rate of 49%, which is higher than the statutory rate of 34%, due
to a portion of the Company's merger-related costs not being tax deductible.
9
<PAGE>
BENCHMARQ MICROELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
5. COMMITMENTS
The Company currently obtains substantially all of its semiconductor wafers
for use in its products from Taiwan Semiconductor Manufacturing Company
("TSMC"). The Company expects to remain dependent on TSMC for substantially all
of its wafer capacity for the foreseeable future. In May 1996, the Company
entered into an Option Agreement with TSMC (the "Option Agreement"). Pursuant to
the Option Agreement, the Company committed to purchase and TSMC committed to
provide specified quantities of wafers at prevailing market prices during the
years 1997 through 2000. Additionally, the Company has an option to purchase
and TSMC committed to provide certain additional wafers (the "Option Wafers") to
be purchased during the years 1997 through 2000. The Company agreed to pay
$5,880,000 as an advance payment for the Option Wafers TSMC committed to provide
during the term of the Option agreement, of which $2,500,000 was paid in May
1996. The Company issued a promissory note due March 31, 1997, for the
remaining $3,380,000. Effective March 31, 1997, the Company and TSMC amended
the Option Agreement to incorporate the use by the Company of a proposed new
TSMC manufacturing process and to reschedule until December 31, 1997, $1,380,000
of the note payable. The Company paid $2,000,000 as scheduled on March 31, 1997
and $1,380,000 on December 31, 1997. The advanced payment, which is being
credited at specified amounts upon purchase of the Option Wafers, will be
forfeited if such wafers are not purchased in a given year. During 1997, the
Company utilized $840,000 of the advanced payment for the purchase of Option
Wafers. Additionally, at December 31, 1997, the Company reclassified to current
assets the portion of the advanced payment for Option Wafers from which it
believes it will benefit in 1998. At March 31, 1998, none of the advance had
been forfeited, and none was expected to be forfeited in the future.
6. CONTINGENCY
The Company filed a declaratory judgment action against Dallas Semiconductor
Corporation ("DSC") in January 1997 to resolve certain allegations of patent
infringement asserted against the Company by DSC. The Company filed its action
against DSC in the United States District Court for the Eastern District of
Texas, Sherman Division. The Company had previously sought declaratory relief
in a similar action filed in December 1995 which was dismissed on June 25, 1996,
based on DSC's assurance to the court that it had not charged the Company with
patent infringement. The parties failed to reach agreement in subsequent
negotiations. Since the filing of the suit by the Company in January 1997 in
Sherman, Texas, DSC filed a lawsuit against the Company in February 1997 in the
United States District Court for the Northern District of Texas, Dallas
Division, alleging infringement of some of the same patents at issue in the
Sherman litigation filed in December 1995 and January 1997 by the Company. In
its lawsuit, DSC is seeking injunction against patent infringement, damages for
lost profit (which may under certain circumstances be trebled), pre and post
judgment interest and attorney's fees. To date DSC has not specified an amount
of monetary damages to which it alleges it is entitled. Subsequently, the
courts determined that the two cases will be combined into one case in the
United States District Court for the Eastern District of Texas. At present, 11
DSC patents are included in this case. The Company is confident that it has not
violated any of the patents asserted by DSC and intends to vigorously
10
<PAGE>
BENCHMARQ MICROELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
6. CONTINGENCY
pursue its case. However, due to the uncertainties associated with any
litigation, the ultimate outcome cannot presently be determined.
Pursuant to the Merger Agreement, if the Merger Agreement is terminated for
certain reasons provided for in the Merger Agreement, the Company is obligated
to pay Unitrode a termination fee of $4,528,000 (the "Termination Fee"). These
reasons include, but are not limited to, (i) the Company's Board of Directors
failing to recommend approval and adoption of the Merger Agreement by the
stockholders of the Company, taking certain actions to facilitate or encourage
an Acquisition Proposal (as defined in the Merger Agreement) or making any
recommendations or taking action with respect to any Acquisition Proposal other
than a recommendation to reject such Acquisition Proposal (except under
circumstances where the Pre-Closing Average of the Unitrode common stock is less
than $12.00 per share); (ii) the stockholders of the Company fail to approve the
Merger Agreement and an Acquisition Proposal had been made prior to the
stockholders meeting; or (iii) the Company materially breaches certain
provisions related to obtaining stockholder approval.
In addition, the Company granted Unitrode an option (the "Option") to purchase
955,158 shares of Common Stock at an exercise price of $17.53 per share pursuant
to the terms of a Stock Option Agreement, dated March 2, 1998 (the "Option
Agreement"). Upon the occurrence of certain events set forth in the Option
Agreement, the Company may be required to repurchase the Option. The Total
Profit (as defined in the Option Agreement) that Unitrode may receive under the
Option is $7,278,000 less the amount of any Termination Fee received by
Unitrode.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
BENCHMARQ was incorporated in 1989 and is engaged in the design,
development and marketing of mixed-signal integrated circuits ("ICs") and
electronic modules for portable and power-sensitive electronic systems. The
Company introduced its first products in October 1990, and made its first
shipments, principally of nonvolatile static random access memory ("NVSRAM")
modules, in December 1990. In August 1991, the Company shipped its initial
battery management product and in December 1991 shipped its first real-time-
clock ("RTC") product. (The NVSRAM and RTC Products are collectively,
"Integrated Battery Products.")
BENCHMARQ currently is directing the majority of its research and
development expenditures to the development of battery management products.
BENCHMARQ's battery management integrated circuits and modules (collectively,
"Battery Management Products") control charging, conditioning and monitoring of
rechargeable batteries, principally for portable electronic systems, including
personal computers, cellular telephones, camcorders, power tools, personal care
devices, electronic games and audio devices. The Company believes that its
revenues from Integrated Battery Products will not increase materially over the
long-term and may decline. Accordingly, the Company expects that favorable
future operating results will be substantially dependent upon its ability to
expand sales of Battery Management Products. The Company experienced significant
sales of Battery Management Products in 1997 and believes that battery
management market opportunities will grow over time. However, much of this
anticipated growth is expected to result from certain technological advances
currently underway in the personal computer and portable communications markets.
As a result, the Company's most significant challenges are the timely
introduction of its next generation of capacity monitoring devices ("Gas
Gauges") that are compatible with and take advantage of these technological
advances and acceptance of its newly introduced Gas Gauge for the communications
market. Although the Company's management is optimistic about the prospects for
its next generation of Gas Gauges, there can be no assurance that the Company
will be able to successfully develop and market these new products.
A general softness in the industry began in late 1997 which has continued
into 1998, and may continue in the future. This market condition has resulted in
reduced longer term scheduled orders; therefore, the Company's visibility, as to
future revenues, has been reduced for all of its product lines. As a result, the
Company entered 1998 with a backlog of orders which was reduced from the
beginning of the fourth quarter of 1997. The Company's products are sold on a
U.S. dollar basis; therefore, the recent devaluation of the Asian currencies has
caused the Company's products to become more expensive on a relative basis.
Customers are taking a cautious approach to placing long term orders to control
costs in the face of uncertainty with regard to future currency exchange rates
and the Asian economic situation in general. The Company must rely on its
forecasts to build certain products in quantities it believes will represent the
future demand. Due primarily to the shorter lead times which the Company expects
to receive from its customers, the Company has increased its inventory balance
by approximately $762,000, or 16%, as compared to December 31, 1997, which will
allow the Company to respond to these shorter lead times. The Company's
management believes that it has adequately reserved for any inventories or
receivables that could be affected by the softer market conditions. If forecasts
are not accurate the Company's ability to
12
<PAGE>
successfully negotiate orders with customers may be adversely affected or the
Company may manufacture excessive quantities of one or more of its products.
The Company has entered into a definitive Merger Agreement, dated March 2,
1998, by and among Unitrode, Merrimack, and the Company. Under the Merger
Agreement, Merrimack will merge (the "Merger") with and into the Company, and
the Company will survive as a wholly owned subsidiary of Unitrode. If the
Merger is consummated, each outstanding share of common stock of the Company
will be converted into the right to receive shares of common stock of Unitrode.
The initial exchange ratio is one share of Unitrode common stock for one share
of BENCHMARQ common stock. However, if the average of the mean high and low per
share trading prices on the New York Stock Exchange for a share of Unitrode
common stock for the twenty trading days ending on the tenth day prior to the
special meeting of the stockholders of the Company to consider the Merger is
less than $16 or more than $24, the exchange ratio will be adjusted
proportionally but in no event will the exchange ratio be greater than 1.33 to
1.
The combined company plans to concentrate efforts in BENCHMARQ's battery
management business in addition to Unitrode's power management and power
conversion businesses to create a more complete portable power product line.
The Company believes that the combination of the two companies should expand the
market opportunities in portable power products faster and further than those
which would have been accessible independently. The combined company plans to
continue to pursue its other currently established businesses. The combined
resources of the two companies will offer an opportunity to pursue new markets
to be targeted by the combined companies. An effect of the Merger will be a
reduction in the percent of net revenue contribution to the combined company
from the Integrated Battery Products of BENCHMARQ. Unitrode has a substantially
larger and more established customer base and sales organization. However,
there can be no assurance that these facts will have a positive effect on the
sales of existing BENCHMARQ products. Significant administrative expense will
be realized in the Merger effort. The Merger requires the approval of the
stockholders of BENCHMARQ, and the issuance of the shares of Unitrode common
stock contemplated by the Merger requires the approval of the stockholders of
Unitrode. There can be no assurances that the Merger will be completed.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998, Compared with Three Months Ended March 31,
1997 and December 31, 1997
Net Revenues. Total net revenues in first quarter 1998 were approximately
$9.3 million, a 21% decrease over the same period in 1997. This decrease was
due to revenue decreases in Integrated Battery Products, both NVSRAMs and RTCs,
more than offsetting the strong growth in Battery Management Products since the
first quarter of 1997. Battery management revenue was approximately $6.1
million in the first quarter of 1998, representing 65% of total revenues and a
28% increase over the same period in 1997. This strong battery management
growth year over year is attributed to the increased attach rate of Gas Gauges
in notebook PC's and in particular the rapid acceptance of BENCHMARQ's fully
compliant SMBus Gas Gauge, the bq2040. This growth reflects the success of
BENCHMARQ's strategy to focus on its battery management business.
13
<PAGE>
The Company's total net revenues for the first quarter of 1998 declined 11%
from the fourth quarter of 1997 primarily due to the general softness in the
market caused by the Asian economic crisis. Battery management revenues
decreased 15% from fourth quarter 1997, which was only slightly greater than the
seasonal fourth quarter to first quarter decrease reported a year ago. In
addition, Integrated Battery Product revenue decreased 4% as compared to the
fourth quarter of 1997.
Revenue generated from royalties and other miscellaneous sources was 0.9%
of total revenue in the first quarter of 1998, compared with 1.0% in the first
quarter of 1997.
The following table sets forth (for the periods indicated) the amount (in
thousands) and percentage of total net revenues by type of product:
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
-------------- ---------------
Battery Management Products $6,075 65.3% $ 4,731 40.4%
Integrated Battery Products 3,147 33.8 6,869 58.6
Royalties/Other 88 0.9 112 1.0
-------------- ---------------
Total Net Revenue $9,310 100.0% $11,712 100.0%
============== ===============
The Company's revenues from international customers accounted for
approximately $6.1 million, or 66% of total net revenues, for the quarter ended
March 31, 1998, compared to $7.4 million, or 63% of total net revenues, for the
comparable period in 1997. During the first quarter of 1998, approximately 60%
of the Company's total net revenues was derived from customers in the Asia-
Pacific region. The Company's distributor in Taiwan accounted for approximately
$2.6 million, or 28%, of the Company's total net revenues in the first quarter
of 1998. The Company's distributor in Japan accounted for approximately $1.9
million, or 20%, of the Company's total net revenues in the first quarter of
1998. No other customer directly accounted for greater than 10% of the total
net revenues in the first quarter of 1998.
Export sales are subject to a variety of risks, including those arising
from fluctuations in currency exchange rates, tariffs, import restrictions and
other trade barriers, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles, potentially adverse tax consequences and
export license requirements. Because the Company's international sales have to
date been denominated in U.S. dollars, increases in the value of the U.S. dollar
could increase the price in local currencies of the Company's products in
foreign markets and make the Company's products relatively more expensive than
competitors' products that are denominated in local currencies.
Gross Margin. The Company's gross margin represented 48.8% of total net
revenues for the three months ended March 31, 1998 compared to 53.6 and 50.4%
for the three-month periods ended December 31, 1997 and March 31, 1997,
respectively. The decrease in gross margin as a percentage of sales sequentially
and year over year resulted from the combination of increases in certain
inventory reserves, reduced factory utilization, and average selling price
decreases due to price pressure mostly from the Asian markets which were
reacting to the impact of fluctuations in currency exchange rates.
14
<PAGE>
The Company expects that average selling prices, primarily with respect to
its RTC and NVSRAM products will continue to decline. The Company believes that
its ability to increase gross margins and maintain or increase its gross margins
as a percentage of revenues over the long-term will primarily require it to
increase its sales of and to introduce new more advanced Battery Management
Products. There can be no assurance, however, that the Company will be able to
achieve these objectives.
Research and Development. The Company's research and development expense
increased slightly in the first quarter of 1998 to $890,000 compared to $816,000
in the first quarter of 1997. As a percentage of total net revenues, research
and development expense increased to approximately 9.6% in the first quarter of
1998 from 7.0% in the first quarter of 1997.
The Company intends to continue to make a significant investment in
research and development, particularly with respect to Battery Management
Product opportunities, and believes that research and development expense will
therefore increase in absolute dollars.
Selling, General and Administrative. Selling, general and administrative
expense was essentially flat in the first quarter of 1998 at approximately $2.7
million compared to $2.6 million in the first quarter of 1997. Selling, general
and administrative expense represented approximately 28.7% and 22.6% of total
net revenues in the first quarter of 1998 and 1997, respectively. Selling,
general and administrative expense in absolute dollars is expected to continue
to increase as the Company expands its business.
Merger-Related Costs. Merger related costs were approximately $575,000 in
the first quarter of 1998. The Company anticipates that these costs will
represent a majority of total expenses required to complete the Merger.
Other Income (Expense). Other income (expense), consists primarily of
interest earned on short-term investments, net of interest expense on capital
lease obligations. In the first quarter of 1998, the Company realized net other
income of approximately $160,000, compared to $130,000 in the first quarter of
1997. This increase is primarily due to higher average balances of invested
funds.
Provision for Income Taxes. The Company generated pre-tax income during
the first quarter of 1998 and 1997. The Company employed an effective tax rate
of 49% and recorded a provision for income tax of $275,200 in the first quarter
of 1998. This rate was substantially higher than the effective tax rate of 36%
used during the three-month period ended March 31, 1997. The rate increase was
primarily due to a portion of the Company's merger related costs not being tax
deductible.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs are to finance accounts receivable,
inventories and additions of capital assets. Approximately $1.1 million of cash
was generated by operating activities during the three months ended March 31,
1998 as compared to $1.9 million in the comparable period in 1997.
15
<PAGE>
Investing activities provided cash during the three-month period ended
March 31, 1998 of approximately $148,000, which consisted of proceeds from net
maturities of marketable securities of $762,000 and capital expenditures of
approximately $614,000 consisting in large part of test and engineering
equipment. Comparatively, investing activities used cash during the three
months ended March 31, 1997 of approximately $1.9 million and was attributable
primarily to the $2.0 million prepayment for certain quantities of wafers
pursuant to the Option Agreement with TSMC; in addition, approximately $439,000
was used for capital expenditures and approximately $556,000 was provided by net
maturities of marketable securities.
Financing activities have consisted primarily of the issuance of common
stock upon the exercise of employee stock options and payments made pursuant to
capital lease obligations. Financing activities used cash during the three
months ended March 31, 1998 of less than $1,000, which consisted of proceeds of
approximately $342,000 from issuances of stock and payments of approximately
$342,000 under capital lease obligations. During the comparable three months
ended March 31, 1997, financing activities used net cash of approximately
$320,000, consisting of payments under capital lease obligations and proceeds
from issuances of stock.
The Company's principal sources of liquidity are cash generated from
operations as well as cash and cash equivalents and short-term investments of
approximately $20.4 million at March 31, 1998. The Company's short-term
investments are primarily in municipal and tax free bonds. In addition, the
Company has a lease line of credit with BancBoston Leasing, Inc. As of April
30, 1998, approximately $888,000 was available under the lease line for
additional acquisitions of equipment.
The Company anticipates capital asset additions to range between $3.5
million and $8.5 million for the remainder of 1998, a large part of which will
be used to expand product test capacity for certain of its Battery Management
Products and the possible acquisition of real estate.
The Company believes that existing cash balances and other capital
resources will be sufficient to meet the Company's cash requirements for normal
operations at least through 1998. However, the Company may also seek to
establish additional lines of credit to augment its funding of operating
activities during 1998. There can be no assurance that such additional
financing, if required, will be available or will be available on terms
acceptable to the Company.
In addition, the Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products or
technologies. The Company, over the longer term, may seek additional equity or
debt financings to fund such activities. The sale of additional equity or
convertible debt securities could result in dilution to the Company's
stockholders. There can be no assurance that such additional financing, if
required, will be available or will be available on terms acceptable to the
Company.
SEASONALITY
Certain of the Company's product revenues and related profits may be
subject to traditional semiconductor industry seasonality factors that may act
to soften sales demand in the three-month period ending March 31.
16
<PAGE>
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four digits to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This feature could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed a preliminary assessment and will have to modify
or replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total "Year
2000" project cost, however, is not expected to be material to the Company's
consolidated results of operations, financial position, or cash flows.
The project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed a declaratory judgment action against DSC in January 1997
to resolve certain allegations of patent infringement asserted against the
Company by DSC. The Company filed its action against DSC in the United States
District Court for the Eastern District of Texas, Sherman Division. The Company
had previously sought declaratory relief in a similar action filed in December
1995 which was dismissed on June 25, 1996, based on DSC's assurance to the court
that it had not charged the Company with patent infringement. The parties failed
to reach agreement in subsequent negotiations. Since the filing of the suit by
the Company in January 1997 in Sherman, Texas, DSC filed a lawsuit against the
Company in February 1997 in the United States District Court for the Northern
District of Texas, Dallas Division, alleging infringement of some of the same
patents at issue in the Sherman litigation filed in December 1995 and January
1997 by the Company. In its lawsuit, DSC is seeking injunction against patent
infringement, damages for lost profit (which may under certain circumstances be
trebled), pre and post judgment interest and attorney's fees. To date DSC has
not specified an amount of monetary damages to which it alleges it is entitled.
Subsequently, the courts determined that the two cases will be combined into one
case in the United States District Court for the Eastern District of Texas. At
present, 11 DSC patents are included in this case. The Company is confident that
it has not violated any of the patents asserted by DSC and intends to vigorously
pursue its case. However, due to the uncertainties associated with any
litigation, the ultimate outcome cannot presently be determined.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
The exhibits filed as a part of this report are listed below.
Exhibit No. Description
----------- ------------------------------------------------------
2 Agreement and Plan of Merger by and among Unitrode,
Merrimack and the Company, dated as of March 2, 1998
(Previously filed with the Company's Current Report on
Form 8-K filed with the Commission on March 3, 1998)
10 Form of Employment Agreement entered into with certain
officers and key employees (Previously filed with the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997)
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K dated March 2, 1998, was filed with the
Securities and Exchange Commission on March 3, 1998 and reported entering into
the Merger Agreement with Unitrode and Merrimack.
18
<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.
BENCHMARQ MICROELECTRONICS, INC.
MAY 14, 1998 /S/ ALAN R. SCHUELE
---------------------------------
ALAN R. SCHUELE
PRESIDENT AND
CHIEF EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
MAY 14, 1998 /S/ R. SCOTT SCHAEFER
---------------------------------
R. Scott Schaefer
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
19
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<SECURITIES> 16,290,412
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