-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SIsj1oaPgsIbUg/A/XyiVoZhSjbxtrH+KTvRmY+YLD3Nr/0dKP8uo0xNTM93FAW8 KBbdA1lFytog6ndrNVyz4g== 0000891618-99-001245.txt : 19990331 0000891618-99-001245.hdr.sgml : 19990331 ACCESSION NUMBER: 0000891618-99-001245 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATMEL CORP CENTRAL INDEX KEY: 0000872448 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770051991 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-19032 FILM NUMBER: 99577775 BUSINESS ADDRESS: STREET 1: 2325 ORCHARD PKWY CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084410311 MAIL ADDRESS: STREET 1: 2325 ORCHARD PKWY CITY: SAN JOSE STATE: CA ZIP: 95131 10-K405/A 1 FORM 10-K405/A 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number: 0-19032 ATMEL CORPORATION (Exact name of registrant as specified in its charter)
California 77-0051991 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2325 Orchard Parkway, San Jose, California 95131 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 441-0311 --------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value --------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES [X] NO [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 6, 1998 as reported on the Nasdaq National Market, was approximately $1,140,587,000. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 6, 1998, Registrant had outstanding 99,160,463 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated by reference in Parts II and IV of this Form 10-K to the extent stated herein. The Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 29, 1998 is incorporated by reference in Part III of this Form 10-K to the extent stated herein. - -------------------------------------------------------------------------------- 2 ITEM 1. BUSINESS GENERAL Atmel Corporation (Atmel or the Company) designs, develops, manufactures and markets a broad range of high performance non-volatile memory and logic integrated circuits using its proprietary complementary metal-oxide semiconductor (CMOS) technologies. A MOS (metal-oxide silicon) structure is created by superimposing several layers of conducting, insulating and transistor forming materials. After a series of processing steps, a typical structure might consist of levels called diffusion, polysilicon and metal that are separated by insulating layers. CMOS technology provides two types of transistors, an "n-type" transistor (nMOS) and a "p-type" transistor (pMOS). These transistors serve as the fundamental building blocks of digital electronics. By connecting them in various ways, integrated circuit designers can construct devices that either perform logic operations or act as storage media (memory). CMOS offers higher performance at a lower power and scales extremely well to small feature size. Atmel's strategy is to offer products that provide the enabling technology and features that allow the Company's customers to develop and bring to market new, high value-added systems and products. The Company's non-volatile memory products consist primarily of erasable programmable read-only memories (EPROMs), electrically erasable programmable read-only memories (EEPROMs) and Flash memories; and its logic products consist of programmable logic devices (EPLDs and FPGAs), application-specific integrated circuits (ASICs) and Flash-based microcontrollers. The Company's products are differentiated by speed, density, power usage and specialty packaging. These products are used in a range of applications in the computing, telecommunications, industrial control and instrumentation, consumer electronics, automotive and avionics markets. PRODUCTS The Company's products consist primarily of EPROMs, parallel-interface and serial-interface EEPROMs, Flash memories, EPLDs, Flash-based microcontrollers and ASICs. Substantially all of the Company's products are based on its proprietary CMOS process technology. Within each product family, the Company offers its customers products with a range of speed, density, power usage, specialty packaging and other features. EPROMs. The Company shipped its first EPROM in early 1986. The worldwide EPROM market is intensely competitive and characterized by commodity pricing. The Company's strategy is to target the high performance end of this market by offering faster speed, higher density and lower power usage devices. The Company currently offers EPROMs with access speeds of 150 nanoseconds to 45 nanoseconds and densities of 256 kilobits to 8 megabits. These products are generally used to contain the operating programs of embedded microcontroller or Digital Signal Processing-based systems(DSP), such as hard disk drives, CD-ROM drives and modems. Parallel-Interface EEPROMs. The Company is the leading supplier of high performance parallel-interface EEPROMs. The Company introduced its first parallel-interface EEPROM product, a 64K-bit EEPROM, in February 1986. The Company believes that its parallel-interface EEPROM products, all of which are full featured, represent the most complete parallel-interface EEPROM product family in the industry. The Company has maintained this leadership role through early introduction of high speed and low power consumption CMOS devices. The Company was the industry's first supplier of a sub-100 nanoseconds 256K parallel-interface EEPROM and the first volume producer of a 1- 2 3 megabit and 4-megabit devices. The Company is the sole-source supplier for several customers for certain parallel-interface EEPROM devices. In the design of its product family, the Company has emphasized device reliability, achieved partly through the incorporation of on-chip error detection and correction features. The Company currently offers parallel-interface EEPROMs with access speeds of 250 nanoseconds to 55 nanoseconds and densities of 16 kilobits to 4 megabits. These products are generally used to contain frequently updated data in cellular telephones, communications infrastructure equipment and avionics navigation systems. Serial-Interface EEPROMs. Atmel used its parallel-interface EEPROM technology leadership and 6-inch sub-micron fabrication capability by entering the serial-interface EEPROM market in 1991. This move allowed the Company to substantially broaden its EEPROM product offerings to include most package and temperature configurations required by customers in certain segments of the serial-interface EEPROM market (i.e., the 2-wire, 3-wire, 4-wire and SPI market segments). The serial-interface EEPROM product line incorporates many of the reliability, speed and other features of the Company's parallel-interface EEPROM products. The Company currently offers serial-interface EEPROMs with access speeds of 20 to 4 milliseconds and densities of 1 kilobit to 1 megabit. These products are generally used to contain user-preference data in cellular and cordless telephones, home appliances, automotive applications and computer peripherals. Flash Memories. Flash memories represent the latest technology in non-volatile devices that can be reprogrammed in-system. Flash memories offer a middle ground in price and features between EPROMs, which can be reprogrammed only a few times and only if removed from a system, and relatively more expensive parallel-interface EEPROMs, in which any individual byte of data can be reprogrammed on the device in-system tens to hundreds of thousands of times. The Company believes that many of its competitors in the Flash memory market offer devices based on EPROM technology. The Company's use of EEPROM technology as the basis for its Flash memories affords the Company's Flash memory products a number of technical advantages that the Company believes currently are not offered by its competitors' products. The Company's EEPROM-based Flash memories can be written using a much lower power, use a simple self-timed write sequence and avoid the additional system complexity and time required to reprogram Flash memories that are designed based on EPROM technology. These features offer system designers considerable improvements in convenience, system cost and reliability over other Flash memories. Introduced in late 1989, Atmel's Flash memories, based on its EEPROM technology, were the industry's first Flash memories that could be reprogrammed using only a single 5-volt power source, a single 3-volt power source or a single 2.7-volt power source as opposed to the heavier, larger and more expensive 12-volt power source typically utilized by many EPROM-based Flash memories. These lower power requirements are particularly important in portable telecommunications and consumer electronic products and other systems where small size and weight and longer battery life are critical customer requirements. In early 1997, the Company expanded its Flash product offerings by introducing a range of products based on its EPROM technology. These new products are being introduced into the marketplace. The Company currently offers Flash memories with densities of 256 kilobits to 8 megabits. The flexibility and ease of use of the Company's Flash memories make them an attractive alternative to EPROMs in systems where program information stored in memory must be rewritten after the system leaves its manufacturing environment. In addition, many customers use Flash memories within the system manufacturing cycle, affording the customer in-system diagnostic and test programming prior to reprogramming for final shipment configuration. The reprogrammability of Flash memories also serves to support later system upgrades, field diagnostic routines and in-system reconfiguration, as well as capturing voice and data messages for later review. 3 4 DataFlash(TM). The DataFlash product line represents one of the newest innovations in non-volatile memory from the Company. Arising out of a need for memory devices that fit between the requirements of serial-interface EEPROMs and standard Flash memories, the Company began shipping DataFlash products in April 1997 and is already establishing market leadership. DataFlash products were designed to easily and efficiently handle large amounts of frequently changing data, ideally addressing the needs of digital voice storage, digital image storage, and text/data storage applications such as digital answering machines, cellular phones, fax machines, digital cameras and computer peripherals. To minimize cost, DataFlash products utilize the Company's latest EPROM-based Flash technology for the core memory array combined with the simple SPI interface from the serial-interface EEPROMs. Other architectural features include dual on-chip SRAM buffers and error detection logic, as well as additional command and device status logic. Available in both 5.0-volt only and 2.7-volt only versions, the Company offers densities from 1 megabit to 8 megabits. The Company's memory products are used to provide non-volatile program and data storage in digital systems for a variety of applications and markets, including computing, telecommunications, data communications, consumer electronics, automotive, industrial/instrumentation and military/avionics. EPLDs. Atmel shipped its first erasable programmable logic device (EPLD) product in November 1987. Atmel has developed a line of EPLDs, ranging from 500 to 5,000 gates, that are reprogrammable and that incorporate non-volatile elements from its CMOS EEPROM technology. These devices are often used as prototyping and pre-production devices, and allow for later conversion to gate array products for volume production. Atmel offers customers the ability to migrate from EPLDs (either its own or competitors') to Atmel gate arrays with minimal conversion effort. The Company offers CMOS EPLDs with high performance and low power consumption. Atmel's EPLDs have device speeds as fast as 5 nanoseconds and can support high speed microprocessor-based applications. Atmel has adopted the use of industry standard computer-aided engineering (CAE) design tools for customer programming of its EPLDs. The Company's EPLD product architecture facilitates support from a variety of design tool vendors, affording the customer greater flexibility and lower cost than competing architectures, which typically incorporate proprietary programming requirements. The Company has cultivated close working relationships with leading independent CAE tool vendors to supply low cost, industry-standard design and programming equipment for the Company's customers. Currently, the Company's EPLDs are supported with software tools from vendors including Viewlogic, Data I/O Corporation, IS Data, Logical Devices and MINC. Atmel's EPLD products are used in a broad range of markets and applications including telecommunications, computers, industrial and military/avionics. FPGAs. In March 1993, Atmel acquired the technology and certain technical personnel of Concurrent Logic, Inc., a designer of field programmable gate arrays (FPGAs), to expand the breadth of the Company's user-configurable logic device product offerings. The Company believes that its FPGA designs are well suited for data and computation intensive applications and will also afford its customers a migration path among logic solutions as their volume and cost requirements change. Atmel's AT6000 FPGAs were first shipped by the Company in the first quarter of 1994 and are being used in graphics, image processing, networking and telecommunications applications, often as a co-processor to a digital signal processor (DSP) to speed-up certain software routines by implementing them in hardware. In October 1997, the Company introduced the new AT40K family of FPGAs with FreeRAM and Cache 4 5 Logic. These FPGAs are the first to offer distributed RAM without loss of logic resources as well as a reconfigurable solution for adaptive DSP and other compute intensive applications. The devices range in density from 2,000 to 50,000 usable gates. ASICs. The Company manufactures and markets semicustom gate arrays and cell-based integrated circuits (CBICs), as well as full custom application-specific integrated circuits (ASICs), to meet customer requirements for high performance logic devices in a broad variety of customer-specific applications. These logic devices are designed to achieve highly integrated solutions for particular applications by combining a variety of logic functions on a single chip rather than using a multi-chip solution. In mid-1990, the Company introduced its CMOS gate array product family to satisfy high gate count and high performance requirements, primarily in computer, avionics and military applications. The Company's gate array family consists of devices ranging from 35,000 gates to more than 3,000,000 gates. Each of these gate arrays utilizes logic elements from the Company's 1.0 and 0.5-micron cell libraries and minimizes gate delays to as little as 256 picoseconds. In 1995, through the acquisition of European Silicon Structures (now, Atmel ES2), the Company entered the cell based integrated circuit (CBIC) business, with a range of products that may include standard digital and analog functions, as well as non-volatile memory elements and large pre-designed macro functions all mixed on a single chip. The Company's ASIC products are targeted primarily at customers whose high-end applications require high-speed, high-density or low or mixed-voltage devices. However, Atmel offers special versions of its devices to serve as upgrade and consolidation paths for users of one or more of the Company's EPLDs or competing vendors' complex PLDs or FPGAs. To develop gate arrays and CBICs, system designers require sophisticated development aids. These CAE tools include logic synthesizers, logic circuit simulators, timing analysis and verification tools, test pattern generators and testability graders, automated circuit placement and interconnection programs and mask tooling generators. As with its EPLDs and FPGAs, the Company has chosen to rely on industry-standard CAE design tools to provide its customers access to reliable, state-of-the-art development tools. Currently, the Company's ASICs are supported with software tools from vendors including Cadence Design Systems, Viewlogic, Mentor Graphics, Synopsys, High Level Design Systems and Very Test. The Company is working closely with certain customers to develop and manufacture custom ASIC products for the Company to sell on a sole-source basis. The Company also has agreements to produce custom products including radio-frequency powered identification chips targeted at smart card devices. Microcontrollers. Atmel offers 3 embedded microcontroller architectures targeted at the high volume embedded controller market. The portfolio includes the industry standard 8 bit 80C31 licensed from Intel. The 80C31 family is the highest volume 8 bit microcontroller in the marketplace. The second is the ARM - -Thumb 16/32 bit RISC architecture licensed from Advanced Risc Machines. The ARM-Thumb is the defacto standard 16/32 bit embedded microcontroller with over 22 licensees supporting the architecture. The third is the AVR 8 bit RISC microcontroller which is the highest performance machine in its class. The AVR offers 16 bit performance at 8 bit price enabling an entirely new class of consumer devices. Atmel makes these microcontroller architectures available to customers in one of 3 ways. They can be purchased as standard products, as application specific products or as a core in the ASIC library. The Company's key differentiator is to make standard product devices available within system programmable Flash program and EEPROM data memory with a variety of peripheral functions like 5 6 analog to digital converters. The company is targeting these devices for use in high volume consumer electronics, computer peripheral, telecommunications and industrial markets. These microcontroller products are developed using the Company's cell based design methodology. This provides the ability to quickly modify existing devices and create application specific derivatives. For example, the AVR product family was announced in June 1997 and today there are seven standard parts shipping in volume production. These devices are fully supported with evaluation and development tools, in circuit emulators and third party high level language compilers. The AVR has excellent market acceptance. There are over 6000 designers who are using the Flash Microcontroller Starter Kit and are evaluating the AVR architecture. TECHNOLOGY Since its formation, Atmel has focused its efforts on developing advanced CMOS processes that can be used to manufacture reliable non-volatile elements for memory and logic integrated circuits. The Company believes that it is a leader in single and multiple-layer metal, non-volatile CMOS processing, which enables it to produce its high-density, high-speed and low-power memory and logic products. Increasing the number of layers of a CMOS device raises a number of technological issues. First, each additional layer requires an additional photomask, adding complexity to the manufacturing process. Also, because non-volatile circuit elements typically generate higher internal voltages, the layers of isolation material are required to be thicker and more effective than other devices. Adding more and thicker layers increases surface irregularities in the device, further complicating the manufacturing process. These surface irregularities can cause brittle metal layers to break, which result in device failure. The Company believes that by virtue of its expertise in manufacturing CMOS and non-volatile integrated circuits, it is able to produce multiple-layer metal devices that are as fast as or faster than comparable single-layer devices manufactured by its competitors. The Company's current integrated circuits incorporate effective feature sizes as small as 0.5 microns and, on its memory products, oxide tunnels within the silicon semiconductor layers of less than 80 angstroms. To enable it to continue to serve the high performance requirements of its customers, the Company is developing CMOS processes which support effective feature sizes as small as 0.35 microns. MANUFACTURING The Company processes wafers for its integrated circuits primarily at its manufacturing facility located in Colorado Springs, Colorado. This facility, which consists of a Class 10 wafer fabrication line and a Class 1 wafer fabrication line and additional buildings for engineering and test operations, enables the Company to process in volume 6-inch wafers, with effective feature sizes as small as 0.35 microns. a wafer fabrication line is considered a Class 10 line if the air contains no more than 10 particles of a 0.5-micron width per cubic meter. Similarly, a wafer fabrication line is considered a Class 1 line if the air contains no more than 1 particle of a 0.35-micron width per cubic meter. The Company also has two semiconductor fabrication facilities located in Rousset, France - a lower volume 6-inch plant and a newly constructed 8-inch facility. In an effort to improve productivity and efficiency of the Company's French manufacturing operations, the Company plans to convert the 6-inch plant to a test facility and to concentrate its wafer manufacturing in the 8-inch facility. This new 388,000-square-foot facility will produce 8-inch silicon wafers using a new 0.35-micron process. Since the technology used in the 8-inch plant is different than that used in the 6-inch plant, many fixed assets (machinery and equipment in particular) in the 6-inch plant cannot be used in the new 8-inch facility. As a result, the Company made 6 7 a one-time charge of $43 million, in the fourth quarter of 1997, in connection with the impairment of these fixed assets in the 6-inch plant. Because the Company relies on its Colorado Springs and Rousset facilities for wafer fabrication, its business and operating results would be adversely affected if wafer fabrication at these facilities were interrupted for any reason, including factors beyond the Company's control. The Company plans to increase its wafer fabrication capacity at its existing facilities during 1998 and also for installation of equipment at its new facility in Rousset. The fabrication of semiconductor products such as those sold by the Company is highly complex and sensitive to dust and other contaminants, thus requiring production in a highly controlled and clean environment. Minute impurities, difficulties in the fabrication process or defects in the masks used to print circuits on the wafers or other factors can cause a substantial percentage of the wafers to be rejected or numerous die on each wafer to be nonfunctional. The Company has, from time to time, experienced delays in product shipments due to yield problems and may experience problems in achieving acceptable yields in the manufacture of wafers, particularly in connection with the planned expansion of its capacity. To optimize wafer yield and minimize quality problems, the Company tests its products at various stages in the fabrication process, performs high-temperature burn-in qualification and continuous reliability monitoring on all products, and conducts numerous quality control inspections throughout the entire production flow using analytical manufacturing controls. While the Company's personnel have substantial experience in the fabrication process, the Company may experience production delays or difficulties in achieving or maintaining acceptable yields of functional devices. Any such prolonged delays or difficulties would adversely affect the Company's operating results. Average selling prices typically decrease over the life of a product as volumes increase and competitors enter the market. The Company relies primarily on obtaining cost reductions in the manufacture of products, increased unit demand to absorb fixed costs and introducing new, higher-priced products which incorporate advanced features in order to offset such selling price declines. However, due in part to overcapacity in the semiconductor industry in 1997, average selling prices of commodity memory products, such as EPROM and Flash, declined at an accelerated pace. The Company was unable to match this rapid erosion of average selling prices with a corresponding reduction in manufacturing cost. Manufacturing cost reductions may be achieved through using advanced process technologies to reduce the line-widths in circuit designs which would enable more die to be etched onto a silicon wafer, increasing unit production volume to lower the fixed costs allocated to each die and negotiating volume discounts on assembly and packaging costs. To the extent that such cost reductions, increased unit demand and new product introductions do not occur in a timely manner or prices decline more rapidly than costs, operating results will be adversely affected. In addition, due in part to overcapacity in the semiconductor industry, the Company's quarterly revenues and operating results have become increasingly dependent upon orders booked and shipped within a given quarter. To the extent this trend continues, the Company's quarterly results will be less predictable and subject to greater variability. In general, the raw materials and equipment used in the production of the Company's integrated circuits are available from several suppliers and the Company is not dependent upon any single source of supply. Although shortages have occurred and lead times have been extended in the industry on occasion, the Company has not experienced any material difficulties in obtaining raw materials or equipment to date. 7 8 Federal, state and local regulations impose various environmental controls on the discharge or disposal of toxic, volatile or otherwise hazardous chemicals and gases used in the manufacturing process. While the Company believes it has all environmental permits necessary to conduct its business and that its activities conform to present environmental regulations, increasing public attention has been focused on the environmental impact of semiconductor operations. While the Company has not experienced any material adverse effect on its operations from governmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements. Any failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations, could subject the Company to substantial liability or could cause its manufacturing operations to be suspended. The Company manufactures wafers for its products in its Colorado Springs and Rousset facilities. The wafers are then sorted and probed at the Company's facilities. After wafer probing, the wafers are shipped to one or more of the Company's independent assembly contractors, located in China, Hong Kong, Malaysia, The Philippines, South Korea, Taiwan and Thailand where the wafers are separated into die, packaged and, in some cases, tested. Once packaged, most of the integrated circuits are shipped back to Atmel's facilities, where the Company performs final testing before shipment to its customers. The Company's reliance on independent contractors to assemble and package its products involves significant risks, including reduced control over quality and delivery schedules, the potential lack of adequate capacity and discontinuance or phase-out of such contractors' assembly processes. There can be no assurance that such contractors will continue to assemble, package and test products for the Company. In addition, because the Company's assembly contractors are located in foreign countries, the Company is subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions and changes in tariff and freight rates. The Company offers its customers numerous packaging options for its standard products. The Company believes that by providing multiple packaging options, it can target its products to niche markets, which are less susceptible to competitive pricing pressures than commodity markets. MARKETING AND SALES The Company markets its products worldwide to a diverse base of original equipment manufacturers (OEMs) serving primarily commercial markets. In the United States and Canada, the Company sells its products to large OEM accounts primarily through manufacturers' representatives and through national and regional distributors. The Company supports this sales network from the Company's headquarters in San Jose, California and through regional offices in Southern California, Colorado, Illinois, Massachusetts, Minnesota, New Jersey, North Carolina and Texas. Sales to domestic OEMs and to domestic distributors, as a percentage of worldwide net revenues were 26 percent and 13 percent in 1997, 25 percent and 11 percent in 1996, and 27 percent and 13 percent in 1994, respectively. The Company recognizes revenues on products shipped to domestic distributors only after the product has been shipped by the distributor to its end customer. Consistent with industry practice, the Company provides its distributors with stock balancing and price protection rights, which permit distributors to return slow-moving products for credit and allow price adjustments on product inventories if the Company lowers the price of those products. Generally, distributors may return products every six months for up to a maximum of 5.0 percent of the net value of all products purchased by distributors during the immediately preceding six-month period. 8 9 Sales to foreign customers are made primarily through international distributors, who are managed from the Company's headquarters in San Jose and from its foreign sales offices in: Kanata, Canada; Camberley, England; Glostrup, Denmark; Frankfurt and Raubling, Germany; Espoo, Finland; Hong Kong; Paris, France; Agrate Brianza, Italy; Tokyo, Japan; Seoul, South Korea; Singapore; Stockholm, Sweden and Taipei, Taiwan. Foreign product sales were approximately 61 percent, 64 percent and 60 percent of total revenues in 1997, 1996 and 1995, respectively. Although foreign sales are subject to certain government export restrictions, to date the Company has not experienced any material difficulties because of these restrictions. Atmel expects that revenues derived from international sales will continue to represent a significant portion of net revenues. International sales are subject to a variety of risks, including those arising from currency fluctuations, tariffs, trade barriers, taxes and export license requirements. Because the majority of the Company's foreign sales are denominated in United States dollars, the Company's products may become less price competitive in countries with currencies declining in value against the dollar. In 1997, the business condition in Asia was severely affected by the banking and currency issues which adversely affected the Company's operating results. The continuance or worsening of the business and financial situations in Asia, where more than 40 percent of the Company's revenues are generated, would likely have a material adverse effect on the Company's operating results in the future. A significant portion of the Company's sales are made from inventory on a current basis. Sales are made primarily pursuant to purchase orders for current delivery, or agreements covering purchases over a period of time, which are frequently subject to revision and cancellation without penalty. Generally, in light of current industry practice and experience, the Company does not believe that such agreements provide meaningful backlog figures or are necessarily indicative of actual sales for any succeeding period. The Company believes that its network of manufacturers' representatives and distributors provides effective coverage of existing and potential OEM customers while minimizing the costs associated with a large direct sales force. The Company's agreements with its manufacturers' representatives and domestic and international distributors are generally terminable by either party on short notice, subject to local laws. The Company's marketing, sales and support organization at December 31, 1997 consisted of 308 persons. In 1997, 1996 and 1995, Motorola, Inc. accounted for 12.6 percent, 12.0 percent and 16.9 percent of the Company's net revenues, respectively. The Company typically has agreements with its customers, including Motorola, Inc., that allow the customers to cancel their orders on short notice and without penalty, and therefore these agreements may not be a meaningful indicator of future revenues. RESEARCH AND DEVELOPMENT The Company believes that significant investment in research and development is critical to its continued success, growth and profitability, and therefore intends to continue to devote substantial resources, including management time, to achieve its objectives. These objectives include increasing the performance of its existing product lines, developing new product lines drawing on its expertise in CMOS non-volatile process and design technologies, and developing new process and design technologies. The Company focuses its efforts on improving the speed, density, power usage and reliability of its existing product families. The Company continues to develop new products and revise 9 10 some of its current products with smaller effective feature sizes, the fabrication of which will be substantially more complex than fabrication of the Company's current products. No assurance can be given that the Company's product and process development efforts will be successful or that its new products will achieve market acceptance. At December 31, 1997, approximately 216 employees were engaged in research and development at the Company. During 1997, 1996 and 1995 the Company spent $137.9 million, $110.2 million and $69.8 million, respectively, on research and development. Included in the 1997 research and development expense was the $15.0 million expense related to qualifying the newly completed 8-inch fabrication facility in France. Research and development expenses are charged to operations as incurred. The Company expects that these expenditures will continue to increase in the future. COMPETITION The semiconductor industry is intensely competitive and is characterized by rapid technological change, rapid product obsolescence and price erosion. The semiconductor industry has historically been characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with or in anticipation of maturing product cycles and declines in general economic conditions. These downturns, which occurred in 1997, have been characterized by diminished product demand, production overcapacity and subsequent accelerated erosion of average selling prices, and in some cases have lasted for more than a year. The Company's business could be materially and adversely affected by an industry-wide downturn. The Company's competitors include many large domestic and foreign companies which have substantially greater financial, technical, marketing and management resources than the Company, as well as emerging companies attempting to sell products to specialized markets, including those addressed by the Company. The Company believes that no single competitor offers products that compete across the Company's entire product line. The Company competes principally on the basis of the technical innovation and performance of its CMOS products, including their speed, density, power usage, reliability and specialty packaging alternatives as well as on price and product availability. The Company believes that it competes favorably with respect to each of these factors. While the Company's strategy is to target niche markets, which the Company believes are typically less susceptible to competitive pricing pressure than commodity markets, the Company experiences significant price competition, particularly in connection with the sale of non-volatile memory products, and may experience increased price competition in other niche markets in the future, which would adversely affect its operating margins. The ability of the Company to compete successfully depends on a number of factors, including its success in designing and manufacturing new products that implement new technologies, the rate at which customers incorporate the Company's products into their systems, product introductions by the Company's competitors, the number and nature of its competitors in a given market, and general market and economic conditions. Many of these factors are outside of the Company's control. The Company is continually in the process of designing and commercializing new and improved products to maintain its competitive position. The success of new product introductions depends upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. The development of new products by the Company and their design-in to customers' systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and 10 11 customer needs, and the successful introduction of the Company's products may be adversely affected by competing products or technologies serving markets addressed by the Company's products. There can be no assurance that the Company will be able to compete successfully in all areas in the future. PATENTS AND LICENSES The Company currently maintains a portfolio of United States patents and has patent applications on file with the U.S. Patent and Trademark Office. In addition, the Company has adopted an internal patenting program and expects to continue to file patent applications where appropriate to protect its proprietary technologies. However, the Company believes that its continued success depends primarily on factors such as the technological skills and innovative abilities of its personnel rather than on its patents. In addition, no assurance can be given that patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. As is typical in the semiconductor industry, the Company has from time to time received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering the Company's products or processes. In the past, the Company has been involved in such litigation, which adversely affected its operating results. There can be no assurance that intellectual property claims will not be made against the Company in the future, or that the Company will not be prohibited from using the technologies subject to such claims by third parties or be required to obtain licenses and make related royalty payments. In addition, the necessary management attention to and legal costs associated with technology litigation can have a significant adverse affect on operating results. EMPLOYEES At December 31, 1997, the Company had 4,589 full-time equivalent employees, including 308 in sales, marketing and customer support, 3,882 in manufacturing, maintenance and support, 216 in research and product development and 183 in finance and administration. The Company's future success depends in large part on the continued service of its key technical and management personnel and on its ability to continue to attract and retain qualified employees, particularly those highly-skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees, none of whom is subject to an employment agreement for a specified term or post-employment non-competition agreement, could have a material adverse effect on the Company. The Company has never had a work stoppage, no employees are represented by a labor organization in the United States and the Company considers its employee relations to be good. 11 12 Executive Officers of the Registrant The executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, and their ages are as follows:
Name Age Position ---- --- -------- George Perlegos 48 Chairman, President and Chief Executive Officer Gust Perlegos 50 Executive Vice President, General Manager Tsung-Ching Wu 47 Executive Vice President, Technology Kris Chellam 47 Vice President, Finance and Administration, and Chief Financial Officer B. Jeffrey Katz 54 Vice President, Marketing Mikes N. Sisois 52 Vice President, Planning and Information Systems
George Perlegos has served as the Company's President and Chief Executive Officer and a director from its inception in 1984. George Perlegos holds degrees in electrical engineering from San Jose State University (B.S.) and Stanford University (M.S.). Gust Perlegos has served as Vice President, General Manager and a director of the Company since January 1985, and as Executive Vice President since January 1996. Gust Perlegos holds degrees in electrical engineering from San Jose State University (B.S.), Stanford University (M.S.) and the University of Santa Clara (Ph.D.). Gust Perlegos is a brother of George Perlegos. Tsung-Ching Wu has served as a director of the Company since January 1985, and as Vice President, Technology since January 1986, and as Executive Vice President since January 1996. Mr. Wu holds degrees in electrical engineering from the National Taiwan University (B.S.), the State University of New York at Stony Brook (M.S.) and the University of Pennsylvania (Ph.D.). B. Jeffrey Katz has served the Company as Vice President, Marketing since November 1988. From 1987 to 1988 Mr. Katz was Vice President of Marketing and Sales at Mosaic Systems, Inc., a multi-chip module supplier. Mr. Katz was employed by Intel from 1977 to 1987 where he held various marketing positions, including Director of Marketing. Mr. Katz holds a B.S. in computer engineering from Case Western University. Kris Chellam has served the Company as its Vice President, Finance and Administration and Chief Financial Officer since September 1991. From 1979 until joining the Company, Mr. Chellam held various financial management positions with Intel Corporation in Europe and the United States. He is a member of the Institute of Chartered Accountants in England and Wales. Mr. Chellam completed his Cambridge Certificate of Education in Malaysia and obtained his chartered accountancy certification in London. Mikes N. Sisois joined the Company in February 1985 as Director of Information Systems and has served as Vice President, Planning and Information Systems since January 1986. Mr. Sisois holds a B.S. in engineering from San Jose State University, and an M.B.A. and Ph.D. from the University of Santa Clara. ITEM 2. PROPERTIES The Company's headquarters are located in San Jose, California. This 291,000-square-foot building is owned by the Company and is occupied by product design, engineering, final product testing, 12 13 research and development, sales, marketing and administrative personnel. The Company owns a semiconductor wafer fabrication plant and test facilities, occupying 450,000 square feet, located in Colorado Springs, Colorado. The Company also has two semiconductor fabrication facilities located in Rousset, France - an original plant and a newly constructed facility. The Company plans to convert the original plant to a test facility and to concentrate its wafer manufacturing in the newly constructed facility. This new 388,000-square-foot facility will produce 8-inch silicon wafers using a new 0.35-micron process. Semiconductor manufacturing capacity is affected by a number of factors including absolute level of utilization, manufacturing yields, product mix and manufacturing efficiencies in terms of wafer through-put and productivity. For example, a high level of utilization for a product experiencing rapid price erosion results in under-utilization of manufacturing capacity. Based upon the Company's rapid growth in sales from 1994-96, as well as its expectation of continued growth in the semiconductor industry, the Company invested heavily in new plant and equipment during 1996 and 1997 to increase manufacturing capacity. The Company's capital expenditures in 1996 and 1997 were $511 million and $312.1 million, respectively, which resulted in significantly increased manufacturing capacity by mid-1997. However, the expected growth did not materialize in the second half of 1997. The Company responded to this downturn in the industry by writing off inventory and reducing excess manufacturing capacity. As a result, in 1997 the Company's gross margin declined significantly, decreasing to 37.2% in 1997 from approximately 49% in 1996 and 1995. The decrease in gross margin was primarily due to the write-down of inventories in the fourth quarter of 1997, lower product margins on many of the Company's memory products resulting from the rapid erosion of average selling prices that were not matched with a corresponding decrease in manufacturing cost, and manufacturing overcapacity resulting from increases in fixed costs associated with the expansion of the Company's wafer fabrication facilities. The Company also leases a research and development facility in Berkeley, California, Espoo, Finland, Columbia, Maryland, Bloomington, Minnesota, Trondheim, Norway and sales offices in: Anaheim Hills, California; Denver, Colorado; Hoffman Estates, Illinois; Braintree, Massachusetts; Bloomington, Minnesota; Princeton, New Jersey; New York, New York; Raleigh, North Carolina; Austin and Dallas, Texas, as well as in Kanata, Canada; Glostrup, Denmark; Camberley, England; Frankfurt and Raubling, Germany; Espoo, Finland; Paris, France; Hong Kong; Agrate Brianza, Italy; Tokyo, Japan; Seoul, South Korea; Singapore; Stockholm, Sweden and Taipei, Taiwan. The Company's 1997 aggregate average monthly rental payments for its facilities are approximately $197,000. The Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms to meet its current and foreseeable requirements. ITEM 3. LEGAL PROCEEDINGS. The Company has been named as a defendant in a patent infringement suit that was filed on January 21, 1998. The plaintiff contends that certain of the Company's devices infringe seven patents it allegedly owns and is seeking a judgment of infringement for each of these asserted patents and other costs. The Company is reviewing the suit and believes that the complaints are without merit. No assurance can be given, however, that this matter will be resolved in the Company's favor. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information required by this Item is incorporated by reference to the sections entitled "Selected Quarterly Financial Data" and "Common Stock Data" of the Registrant's 1997 Annual Report to Shareholders. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information required by this Item is incorporated by reference to the section entitled "Financial Highlights" of the Registrant's 1997 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Registrant's 1997 Annual Report to Shareholders. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is incorporated by reference to the section entitled "Financial Risk Management " of the Registrant's 1997 Annual Report to Shareholders. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to the Consolidated Financial Statements, related notes thereto and Report of Independent Accountants and to the section entitled "Selected Quarterly Financial Data" which appear in the Registrant's 1997 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. With the exception of the information incorporated by reference from the 1997 Annual Report to Shareholders in Parts II and IV of this Form 10-K, the Registrant's Annual Report to Shareholders is not to be deemed filed as part of this Report. 14 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this Item regarding directors and executive officers set forth under the captions "Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" in Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 29, 1998 (the "1998 Proxy Statement"), is incorporated herein by reference. Information regarding identification of Registrant's executive officers is set forth in Part I, Item 1 of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information required by this Item regarding compensation of Registrant's directors and executive officers set forth under the captions "Director Compensation" and "Executive Compensation" in the 1998 Proxy Statement is incorporated herein by reference (except to the extent allowed by Item 402 (a)(8) of Regulation S-K). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item regarding beneficial ownership of Registrant's Common Stock by certain beneficial owners and management of Registrant set forth under the caption "Security Ownership" in the 1998 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item regarding certain relationships and related transactions with management set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the 1998 Proxy Statement is incorporated herein by reference. 15 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report on Form 10-K: 1. Financial Statements. The following Consolidated Financial Statements of Atmel Corporation and Report of Independent Accountants are incorporated by reference to the Registrant's 1997 Annual Report to Shareholders: Consolidated Statements of Income for the Three Years Ended December 31, 1997 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the Three Years Ended December 31, 1997 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997 Notes to Consolidated Financial Statements Report of Independent Accountants 2. Financial Statement Schedules. The following financial statement schedules of Atmel Corporation for the years ended December 31, 1997, 1996 and 1995 are filed as part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of Atmel Corporation.
Schedule Page -------- ---- Report of Independent Accountants on Financial Statement Schedule S-1 II Valuation and Qualifying Accounts S-2
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. 3. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: 3.1 (3) Articles of Incorporation of Registrant, as amended to date. 16 17 3.2(1) Bylaws of Registrant. 10.1(1)+ 1986 Incentive Stock Option Plan, as amended, and forms of stock option agreements thereunder. 10.2(1)+ 1991 Employee Stock Purchase Plan, as amended. 10.3(3) Credit Agreement dated April 20, 1995, between Wells Fargo Bank and Registrant. 10.4(1) Form of Indemnification Agreement between Registrant and its officers and directors. 10.5(2) Consulting Agreement by and between Norman Hall and Registrant dated March 1, 1990. 10.6(4) 1996 Stock Plan, as amended and forms of agreements thereunder. 10.7(5) Indenture, dated as of May 17, 1997, by and among Atmel S.A., Atmel Corporation and State Street Bank and Trust Company of California, N.A., as trustee thereunder. 10.8(5) Registration Rights Agreement, dated as of May 15, 1997, by and among Atmel Corporation and Deutsche Morgan Grenfell Inc., Alex. Brown & Sons, Incorporated, BNP plc, Credit Lyonnais Securities, Smith Barney Inc. and Societe Generale Securities Corp. 13.1 Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 (except for the portions of the 1997 Annual Report to the Shareholders expressly incorporated by reference in the Report on Form 10-K, the 1997 Annual Report to Shareholders is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed"). 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Accountants 24.1 Power of Attorney (included on the signature pages hereof) 27.1 Financial Data Schedule (1) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (File No. 33-38882) declared effective on March 19, 1991. (2) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (3) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 17 18 (4) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (File No. 333-15823) filed on November 8, 1996. (5) Incorporated by reference to exhibits to the Company's Report on Form 8-K (File No. 000-19032) filed on June 4, 1997. + The item listed is a compensatory plan. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1997. 18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ATMEL CORPORATION November 9, 1998 By: /s/ George Perlegos --------------------------------- George Perlegos President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George Perlegos and Kris Chellam, and each of them, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on 10-K has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ George Perlegos President, Chief Executive November 9, 1998 - ---------------------------------- Officer (Principal Executive Officer) (George Perlegos) and Director /s/ Kris Chellam Vice President, Finance and November 9, 1998 - ---------------------------------- Administration and Chief Financial (Kris Chellam) Officer (Principal Financial and Accounting Officer) /s/ Norm Hall Director November 9, 1998 - ---------------------------------- (Norm Hall) /s/ Gust Perlegos Director November 9, 1998 - ---------------------------------- (Gust Perlegos) /s/ T. Peter Thomas Director November 9, 1998 - ---------------------------------- (T. Peter Thomas) /s/ Tsung-Ching Wu Director November 9, 1998 - ---------------------------------- (Tsung-Ching Wu)
19 20 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Our report on the consolidated financial statements of Atmel Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 19 of the 1997 Annual Report to Shareholders of Atmel Corporation. In connection with our audit of such financial statements, we have also audited the related financial statement schedule listed in the index on page 16 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly the information required to be included therein. /s/ Coopers & Lybrand L.L.P. San Jose, California January 15, 1998 S-1 21 SCHEDULE II ATMEL CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING CHARGED CREDITED END OF DESCRIPTION OF PERIOD TO EXPENSES TO EXPENSES DEDUCTIONS PERIOD - ----------- --------- ----------- ----------- ---------- ------ ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE: Fiscal year ended 1995 $ 5,613 $ 8,267 $ (1,180) $ -- $ 12,700 Fiscal year ended 1996 12,700 19,425 (1,211) (2,641)(1) 28,273 Fiscal year ended 1997 $ 28,273 $ 52,387 $ -- $(56,037)(1) $ 24,623
BALANCE AT BALANCE AT BEGINNING CHARGED CREDITED END OF DESCRIPTION OF PERIOD TO EXPENSES TO EXPENSES DEDUCTIONS PERIOD - ----------- --------- ----------- ----------- ---------- ------ SALES RETURN AND ALLOWANCES: Fiscal year ended 1995 $ 13,305 $ 2,314 $ (1,784) $ -- $ 13,835 Fiscal year ended 1996 13,835 9,190 (12,423) (51)(1) 10,551 Fiscal year ended 1997 $ 10,551 $ 8,509 $(14,541) $ (95)(1) $ 4,424
BALANCE AT BALANCE AT BEGINNING CHARGED CREDITED END OF DESCRIPTION OF PERIOD TO EXPENSES TO EXPENSES DEDUCTIONS PERIOD - ----------- --------- ----------- ----------- ---------- ------ ALLOWANCE FOR INVENTORY OBSOLESCENCE: Fiscal year ended 1995 $ 3,338 $ 908 $ -- $ -- $ 4,246 Fiscal year ended 1996 4,246 1,177 -- -- 5,423 Fiscal year ended 1997 $ 5,423 $ 54,552 $ -- $(54,490) $ 5,485
(1) Represents write-off of specific accounts receivable balances. S-2 22 INDEX TO EXHIBITS
Exhibit Number Description ------ ----------- 3.1(3) Articles of Incorporation of Registrant, as amended to date. 3.2(1) Bylaws of Registrant. 10.1(1)+ 1986 Incentive Stock Option Plan, as amended, and forms of stock option agreements thereunder. 10.2(1)+ 1991 Employee Stock Purchase Plan, as amended. 10.3(3) Credit Agreement dated April 20, 1995, between Wells Fargo Bank and Registrant. 10.4(1) Form of Indemnification Agreement between Registrant and its officers and directors. 10.5(2) Consulting Agreement by and between Norman Hall and Registrant dated March 1, 1990. 10.6(4) 1996 Stock Plan, as amended and forms of agreements thereunder. 10.7(5) Indenture, dated as of May 17, 1997, by and among Atmel S.A., Atmel Corporation and State Street Bank and Trust Company of California, N.A., as trustee thereunder. 10.8(5) Registration Rights Agreement, dated as of May 15, 1997, by and among Atmel Corporation and Deutsche Morgan Grenfell Inc., Alex. Brown & Sons, Incorporated, BNP plc, Credit Lyonnais Securities, Smith Barney Inc. and Societe Generale Securities Corp. 13.1 Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 (except for the portions of the 1997 Annual Report to the Shareholders expressly incorporated by reference in the Report on Form 10-K, the 1997 Annual Report to Shareholders is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed"). 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Accountants 24.1 Power of Attorney (included on the signature pages hereof) 27.1 Financial Data Schedule
(1) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (File No. 33-38882) declared effective on March 19, 1991. (2) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (3) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (File No. 333-15823) filed on November 8, 1996. (5) Incorporated by reference to exhibits to the Company's Report on Form 8-K (File No. 000-19032) filed on June 4, 1997. + The item listed is a compensatory plan. EX-13.1 2 REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 Atmel Corporation FINANCIAL HIGHLIGHTS
Years Ended December 31, (In thousands, except per-share data) 1997 1996 1995 1994 1993 - ------------------------------------- ---- ---- ---- ---- ---- NET REVENUES $ 958,282 $1,070,288 $ 634,241 $ 375,093 $ 221,724 INCOME Before taxes 6,001 309,153 172,262 90,076 44,789 Net 1,801 201,722 113,693 59,450 30,017 Basic net income per share 0.02 2.06 1.20 0.69 0.39 Diluted net income per share 0.02 2.00 1.16 0.66 0.37 RETURN ON REVENUES Before taxes 0.6% 28.9% 27.2% 24.0% 20.2% Net 0.2% 18.8% 17.9% 15.8% 13.5% RETURN ON AVERAGE SHAREHOLDERS' EQUITY 0.2% 29.3% 24.0% 20.6% 17.1% REVENUES PER EMPLOYEE 228 298 260 235 195 FIXED ASSETS, NET 985,949 867,423 472,285 264,800 90,207 TOTAL ASSETS 1,822,040 1,455,914 919,621 540,946 300,882 LONG-TERM DEBT, NET OF CURRENT PORTION 571,389 278,576 88,455 46,514 23,957 LONG-TERM DEBT AS A PERCENTAGE OF SHAREHOLDERS' EQUITY 72.7% 35.3% 15.0% 13.0% 11.0% SHAREHOLDERS' EQUITY 786,434 789,751 588,768 358,088 218,202
2 Atmel Corporation CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, (In thousands, except per-share data) 1997 1996 1995 ----------- ----------- ----------- NET REVENUES $ 958,282 $ 1,070,288 $ 634,241 EXPENSES Cost of sales 602,239 539,215 323,530 Research and development 137,896 110,239 69,795 Selling, general and administrative 150,098 115,362 73,474 Non-recurring charge 43,000 -- -- ----------- ----------- ----------- TOTAL EXPENSES 933,233 764,816 466,799 ----------- ----------- ----------- OPERATING INCOME 25,049 305,472 167,442 Interest and other income 12,107 16,532 13,100 Interest expense (31,155) (12,851) (8,280) ----------- ----------- ----------- Income before taxes 6,001 309,153 172,262 Taxes on income 4,200 107,431 58,569 ----------- ----------- ----------- NET INCOME $ 1,801 $ 201,722 $ 113,693 =========== =========== =========== BASIC NET INCOME PER SHARE $ 0.02 $ 2.06 $ 1.20 ----------- ----------- ----------- DILUTED NET INCOME PER SHARE $ 0.02 $ 2.00 $ 1.16 ----------- ----------- ----------- SHARES USED IN BASIC NET INCOME PER-SHARE CALCULATIONS 99,438 98,070 94,819 ----------- ----------- ----------- SHARES USED IN DILUTED NET INCOME PER-SHARE CALCULATIONS 101,601 100,680 97,854 ----------- ----------- ----------- The accompanying notes are an integral part of these statements
3 Atmel Corporation CONSOLIDATED BALANCE SHEET
December 31, (In thousands) 1997 1996 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 174,310 $ 104,113 Short-term investments 63,222 53,165 Accounts receivable, net of allowance for doubtful accounts of $24,623 in 1997 and $28,273 in 1996 216,991 174,515 Inventories 124,336 70,320 Other current assets 119,358 57,910 ----------- ----------- TOTAL CURRENT ASSETS 698,217 460,023 Fixed assets, net 985,949 867,423 Long-term investments 95,536 104,619 Other assets 42,338 23,849 ----------- ----------- TOTAL ASSETS $ 1,822,040 $ 1,455,914 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 67,522 $ 71,615 Trade accounts payable 197,070 137,535 Accrued liabilities and other 93,820 99,317 Deferred income on shipments to distributors 25,256 27,935 ----------- ----------- TOTAL CURRENT LIABILITIES 383,668 336,402 Long-term debt 571,389 278,576 Deferred income taxes 34,499 22,935 ----------- ----------- TOTAL LIABILITIES 989,556 637,913 ----------- ----------- Put warrants 46,050 28,250 ----------- ----------- Commitments and contingencies (Note 7) Shareholders' equity Preferred stock; Authorized: 5,000 shares; None issued and outstanding -- -- Common stock, no par value; Authorized: 240,000 shares; Shares issued: 99,723 at December 31, 1997, and 98,752 at December 31, 1996 351,584 346,756 Unrealized loss on investments (1,003) (2,866) Cumulative translation adjustment (16,278) (4,469) Retained earnings 452,131 450,330 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 786,434 789,751 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,822,040 $ 1,455,914 =========== ===========
The accompanying notes are an integral part of these statements. 4 Atmel Corporation CONSOLIDATED STATEMENTS OF CASHFLOWS
Years Ended December 31, (In thousands) 1997 1996 1995 --------- --------- --------- CASH FROM OPERATING ACTIVITIES Net income $ 1,801 $ 201,722 $ 113,693 Items not requiring the use of cash Depreciation and amortization 158,382 110,988 58,918 Other 16,439 (1,600) (15,441) Non-recurring charge 43,000 -- -- Accounts receivable write-off 41,300 -- -- Inventories write-down 53,100 -- -- Provision for doubtful accounts receivable 11,105 19,425 8,267 Provision for excess and obsolete inventory 1,452 1,117 908 Changes in operating assets and liabilities Accounts receivable (92,862) (93,787) (34,722) Inventories (108,631) (22,896) (10,681) Other assets (61,448) (7,935) (4,064) Trade accounts payable and other accrued liabilities 17,915 94,545 33,420 Income taxes payable -- (9,766) 9,406 Deferred income on shipments to distributors (2,679) 5,987 9,633 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 78,874 297,800 169,337 --------- --------- --------- CASH FROM INVESTING ACTIVITIES Acquisition of fixed assets (312,066) (511,019) (229,097) Acquisition of other assets (25,483) (9,756) (9,446) Purchase of investments (129,642) (101,417) (77,674) Sale or maturity of investments 128,668 89,678 59,406 --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (338,523) (532,514) (256,811) --------- --------- --------- CASH FROM FINANCING ACTIVITIES Issuance of notes payable 56,815 39,241 16,198 Principal payments on notes (10,853) (2,152) (1,580) Proceeds from capital leases 190,705 234,239 69,843 Principal payments on capital leases (78,528) (54,784) (40,439) Proceeds from issuance of convertible notes 150,000 -- -- Tax benefit from exercise of options 5,033 2,535 3,025 Proceeds from settlement of warrants 4,425 8,133 -- Issuance of common stock 13,170 10,079 110,876 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 330,767 237,291 157,923 --------- --------- --------- EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT (921) (3,998) (471) --------- --------- --------- NET INCREASE (DECREASE) IN CASH 70,197 (1,421) 69,978 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 104,113 105,534 35,556 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 174,310 $ 104,113 $ 105,534 ========= ========= ========= INTEREST PAID $ 29,039 $ 12,015 $ 8,009 INCOME TAXES PAID $ 42,507 $ 103,912 $ 32,265 ISSUANCE OF STOCK FOR TECHNOLOGY AND ASSET ACQUISITIONS $ -- $ 12,625 $ 3,083 OTHER NON-CASH ACQUISITIONS $ -- $ 2,320 $ -- FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 54,326 $ 5,706 $ 15,413 PURCHASE OF CALL WARRANTS FROM PROCEEDS OF PUT WARRANTS $ 5,238 $ 9,233 $ -- The accompanying notes are an integral part of these statements
5 Atmel Corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Cumulative Common Stock Retained Gain (loss) on Translation (In thousands) Shares Amount Earnings Investments Adjustments Total --------- --------- --------- --------- --------- --------- BALANCES, DECEMBER 31, 1994 90,762 $ 224,650 $ 134,915 $ (1,477) $ 0 $ 358,088 Sales of stock Secondary public offering 4,600 104,278 -- -- -- 104,278 Exercise of options 1,394 2,729 -- -- -- 2,729 Employee stock purchase plan 314 3,869 -- -- -- 3,869 Issuance for asset acquisition 137 3,083 -- -- -- 3,083 Unrealized gain on investments and other assets -- -- -- 474 -- 474 Foreign currency translation adjustment -- -- -- -- (471) (471) Tax benefit from exercise of options -- 3,025 -- -- -- 3,025 Net income -- -- 113,693 -- -- 113,693 --------- --------- --------- --------- --------- --------- BALANCES, DECEMBER 31, 1995 97,207 341,634 248,608 (1,003) (471) 588,768 Sales of stock Exercise of options 874 4,606 -- -- -- 4,606 Employee stock purchase plan 236 5,473 -- -- -- 5,473 Issuance for asset acquisition 435 12,625 -- -- -- 12,625 Unrealized loss on investments and other assets -- -- -- (1,863) -- (1,863) Foreign currency translation adjustment -- -- -- -- (3,998) (3,998) Tax benefit from exercise of options -- 2,535 -- -- -- 2,535 Proceeds from settlement of warrants -- 8,133 -- -- -- 8,133 Put warrants reclassification -- (28,250) -- -- -- (28,250) Net income -- -- 201,722 -- -- 201,722 --------- --------- --------- --------- --------- --------- BALANCES, DECEMBER 31, 1996 98,752 346,756 450,330 (2,866) (4,469) 789,751 Sales of stock Exercise of options 733 6,522 -- -- -- 6,522 Employee stock purchase plan 238 6,648 -- -- -- 6,648 Unrealized gain on investments and other assets -- -- -- 1,863 -- 1,863 Foreign currency translation adjustment -- -- -- -- (11,809) (11,809) Tax benefit from exercise of options -- 5,033 -- -- -- 5,033 Proceeds from settlement of warrants -- 4,425 -- -- -- 4,425 Put warrants reclassification, net -- (17,800) -- -- -- (17,800) Net income -- -- 1,801 -- -- 1,801 --------- --------- --------- --------- --------- --------- BALANCES, DECEMBER 31, 1997 99,723 $ 351,584 $ 452,131 $ (1,003) $ (16,278) $ 786,434 ========= ========= ========= ========= ========= =========
6 Atmel Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per-share data) Note 1 - -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Atmel Corporation (the Company) designs, develops, manufactures and markets a broad range of high-performance non-volatile memory and logic integrated circuits using its proprietary complementary metal-oxide semiconductor (CMOS) technologies. The Company's products are used in a range of applications in the telecommunications, computing, networking, consumer and automotive electronics and other markets. The Company's customers comprise a diverse group of domestic and foreign original equipment manufacturers (OEMs) and distributors. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. For purposes of presentation, the Company has indicated that its year ends on December 31, although the Company operates on a 52-week or 53-week year ending on the Monday closest to December 31. Fiscal 1997, 1996 and 1995 were 52-week years. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTS RECEIVABLE Allowance for doubtful accounts is calculated based on the aging of the Company's accounts receivable, historical experience, current and future short-term business conditions and management judgment. The Company writes off a accounts receivable against the allowance when the Company determines it is uncollectible and no longer actively pursues collection of the receivable. CASH AND INVESTMENTS Investments with an original or remaining maturity of 90 days or less, as of the date of purchase, are considered cash equivalents, which consist of highly liquid money market instruments. The carrying amount of these instruments approximates fair value. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out for materials and purchased parts and average cost for work in progress) or market and comprise the following:
December 31, 1997 1996 -------- -------- Materials and purchased parts $ 10,527 $ 11,123 Work in progress 113,809 59,197 -------- -------- TOTAL $124,336 $ 70,320 ======== ========
FIXED ASSETS Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings and improvements 10 to 20 years Machinery and equipment 2 to 5 years Furniture and fixtures 5 years
DEFERRED INCOME ON SHIPMENTS TO DISTRIBUTORS Sales to distributors are subject to price protection and right of return. Generally, distributors may return products every six months for up to a maximum of 5.0 percent of the net value of all products purchased by distributors during the immediately preceding six-month period. Accordingly, recognition of such sales is deferred until shipments are made by the distributors to their customers. Other sales, principally to OEMs, are recorded at the time products are shipped, net of allowances for estimated returns. FOREIGN CURRENCY TRANSLATION 7 The functional currency of foreign subsidiaries is considered to be the United States dollar, except for Atmel ES2 whose functional currency is the French franc. Foreign translation gains and losses from remeasurement are included in the consolidated statements of income. The effect of the translation of the accounts of Atmel ES2 has been included in the shareholders' equity as a cumulative foreign currency translation adjustment. Foreign exchange gain (loss) included in interest and other income for the years ended December 31, 1997, 1996 and 1995 was $(2,438), $(2,444) and $3,642, respectively. DERIVATIVES The Company conducts business on a global basis in several major international currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. The Company enters into forward foreign exchange contracts to hedge certain of its foreign currency exposures. These financial instruments are designed to minimize exposure and reduce risk from foreign currency exchange rate fluctuations in the regular course of business. The Company does not enter into forward exchange contracts for trading purposes. Realized gains and losses on the contracts are included in other income and offset foreign exchange gains and losses from the revaluation of intercompany balances or other current assets and liabilities denominated in currencies other than the functional currency of the reporting entity. The foreign exchange contracts generally have maturities that do not exceed three months. Foreign exchange contracts outstanding, all of which were in Japanese currency, amounted to $9,478 and $5,407 at December 31, 1997, and 1996, respectively. At December 31, 1997, net unrealized gain from these contracts was $136. The Company's forward exchange contracts contain credit risk in that its counterparties may be unable to meet the terms of the agreements. The Company minimizes such risk by limiting its counterparties to a limited number of major financial institutions. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored. The Company does not expect any material losses as a result of default by the other parties. CERTAIN RISKS AND CONCENTRATIONS The Company sells its products primarily to OEMs and distributors in North America, Europe and Asia, generally without requiring any collateral. The Company maintains adequate allowances for potential credit losses and performs ongoing credit evaluations. The Company's products are concentrated in the semiconductor industry, which is highly competitive and rapidly changing. Significant technological changes in the industry could affect operating results adversely. The Company's inventories include high-technology parts and components that may be specialized in nature or subject to rapid technological obsolescence. While the Company has programs to minimize the required inventories on hand and considers technological obsolescence in estimating required allowances to reduce recorded amounts to market values, such estimates could change in the future. NET INCOME PER SHARE The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128), effective with the year ended December 31, 1997. SFAS 128 requires the presentation of basic and diluted net income per share. Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options, warrants and convertible securities for all periods. All prior period net income per-share amounts have been restated to comply with SFAS 128 as well as the two-for-one stock splits paid on April 11, 1994, and August 8, 1995. In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted net income per share is provided as follows:
Years Ended December 31, 1997 1996 1995 -------- -------- -------- Basic and diluted net income(numerator) $ 1,801 $201,722 $113,693 Shares used in basic net income per-share calculations (denominator) Weighted average shares of common stock outstanding 99,438 98,070 94,819 Shares used in diluted net income per-share calculations (denominator)
8 Weighted average shares of common stock outstanding 99,438 98,070 94,819 Dilutive effect of stock options 2,163 2,610 3,035 -------- -------- -------- 101,601 100,680 97,854 -------- -------- -------- Basic net income per share $ 0.02 $ 2.06 $ 1.20 -------- -------- -------- Diluted net income per share $ 0.02 $ 2.00 $ 1.16 -------- -------- --------
PUT WARRANTS In January 1996, the Board of Directors of the Company approved a stock repurchase program that allows the Company to repurchase up to 5,000 shares of its common stock. The Board of Directors approved the repurchase of an additional 5,000 shares in January 1998. The primary purpose of this stock repurchase program is to increase shareholder value. In connection with this program, the Company has entered into certain cash-less warrant transactions which provide the Company with the flexibility to implement its repurchase plan, under which the Company could repurchase its stock when favorable market conditions existed and without immediately impacting the Company's cash resources. In connection with the Company's stock repurchase program, put warrants were sold to an independent third party during fiscal years 1997 and 1996. The put warrants entitle the holder to sell shares of the Company's common stock to the Company at specified prices. The outstanding warrants expire on May 1 and October 26, 1998, are exercisable at any time before maturity and may be settled in cash, at the Company's option. The maximum potential repurchase obligations of $46,050 and $28,250 have been reclassified from shareholders' equity to put warrants as of December 31, 1997, and 1996, respectively. There was no impact on basic and diluted net income per share in 1997 and 1996. Additionally, during the same period the Company used the proceeds from the sale of the put warrants to purchase call warrants. These warrants entitle the Company to buy from the same independent third party shares of the Company's common stock. The call warrants have similar expiry dates as the put warrants, are exercisable at any time before maturity and may be settled in cash, at the Company's option. During the years ended December 31, 1997, and 1996, the Company received $4,425 and $8,133, respectively, from settlement of warrants. There was no impact on basic and diluted net income per share in 1997 and 1996. At December 31, 1997, the Company had 2,000 shares of put warrants outstanding at the weighted average price of $23.03 per share and 1,000 shares of call warrants outstanding at the weighted average price of $26.07 per share. At December 31, 1996, the Company had 1,000 shares of put warrants outstanding at $28.25 per share and 500 shares of call warrants outstanding at $32.31 per share. LONG-LIVED ASSETS The Company periodically evaluates the recoverability of a long-lived asset based upon the estimated cash flows from the related asset. ACCOUNTING FOR START-UP COSTS Expenditures directly related to and incurred during the start-up phase of the Company's new manufacturing facilities are deferred and amortized over future periods. Upon conclusion of the start-up period, these costs are amortized on a straight-line basis over periods of no more than five years. Recoverability of these costs is assessed on an ongoing basis and write-downs to net realizable values are recorded as necessary. At December 31, 1997, and 1996, $18,473 and $4,630 were reported as other assets. RECENT PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 130 (SFAS 130), Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components (net revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company will adopt SFAS 130 in its fiscal year 1998. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report elected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenues. The Company has not yet evaluated the effects of this change on its reporting of segment information. The Company will adopt SFAS No. 131 in its fiscal year 1998. The American Institute of Certified Public Accountants has proposed a Statement of Position (SOP), Reporting on the Costs of Start-Up Activities. This proposed SOP provides guidance on the financial reporting of start-up costs and requires costs of start-up activities to be expensed as incurred and any start-up costs capitalized prior to the effective date of the SOP to be reported in the income statement as a cumulative effect of a change in accounting principle. If this SOP is adopted as an accounting standard, it is expected that it will become effective with the Company's fiscal year 1999. 9 RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1996 amounts to conform to the 1997 presentation. These reclassifications did not change the previously reported net income nor the total assets of the Company. Note 2 - -------------------------------------------------------------------------------- OTHER CURRENT ASSETS Other current assets consist of the following:
December 31, 1997 1996 - --------------------------------------------------- Income tax receivable $48,000 $ -- Deferred income taxes 53,051 38,859 Other 18,307 19,051 ------------------- $119,358 $57,910 ===================
Note 3 - -------------------------------------------------------------------------------- FIXED ASSETS
December 31, 1997 1996 - --------------------------------------------------- Land $14,591 $ 14,591 Buildings and improvements 372,976 180,680 Machinery and equipment 918,315 806,187 Furniture and fixtures 9,991 7,467 Construction in progress 24,688 72,103 -------------------- 1,340,561 1,081,028 Less accumulated depreciation and amortization (354,612) (213,605) --------------------- TOTAL $985,949 $867,423 ====================
Fixed assets include machinery and equipment acquired under capital leases of $444,747 and $334,613 at December 31, 1997, and 1996; related accumulated amortization amounted to $160,732 and $81,684, respectively. Depreciation expense was $153,873, $102,752 and $56,417, in 1997, 1996 and 1995, respectively. At December 31, 1997, the Company provided a reserve of $43,000 relating to the impairment of machinery and equipment from its old manufacturing facility (Fab 6) located in Rousset, France. The impairment reserve was necessary due to the inability of this old fabrication plant to produce product at costs acceptable in today's market and the need to consolidate manufacturing in one location in France to take advantage of new technologies in its new manufacturing facility (Fab 7). The Company recognized the impairment charge when the future undiscounted cash flows of each asset were estimated to be insufficient to recover its related carrying value. As such time, the carrying values of these assets were written down to the Company's estimates of fair value. Fair value was based on sales of similar assets or other estimates of fair value, such as estimated future cash flows. The Company does not anticipate significant proceeds from disposal. None of the assets affected by this action are currently held for sale. The expense was reported as a non-recurring charge in the income statement. Note 4 - -------------------------------------------------------------------------------- SHORT- AND LONG-TERM INVESTMENTS All marketable securities are deemed by management to be available for sale and are reported at fair value with net unrealized gains or losses reported within shareholders' equity. Realized gains and losses are recorded based on the specific identification method. For fiscal years 1997, 1996 and 1995, gross realized gains and losses were immaterial. The carrying amount of the Company's investments is shown in the table below:
1997 1996 Market Market December 31, Cost Value Cost Value - -------------------------------------------------------------------------------------------- Investments U.S. Government obligations $ 123,516 $ 122,741 $ 99,378 $ 98,750 State and municipal securities 30,962 30,768 55,669 55,317 Other 5,283 5,249 5,603 3,717 ----------------------- ------------------------ 159,761 158,758 160,650 157,784 Allowance for unrealized losses (1,003) -- (2,866) -- ----------------------- ------------------------ $ 158,758 $ 158,758 $157,784 $ 157,784 ======================= ========================
10 At December 31, 1997, scheduled maturities of investments within one year were $63,222 and for one year to three years were $95,536. At December 31, 1996, scheduled maturities of investments within one year were $53,165 and for one year to five years were $104,619. Note 5 - -------------------------------------------------------------------------------- BORROWING ARRANGEMENTS Information with respect to the Company's debt obligations is shown below:
December 31, 1997 1996 - ---------------------------------------------------------- Various non-interest-bearing notes $ 6,078 $ 9,464 Various interest-bearing notes 89,398 46,703 Convertible notes 150,000 -- Capital lease obligations 393,435 294,024 ---------------------- 638,911 350,191 Less amount due within one year (67,522) (71,615) ----------------------- Long-term debt due after one year $ 571,389 $278,576 ======================
The non-interest-bearing notes are due in varying amounts through the year 2015 and have been discounted between 7.0 percent and 8.0 percent. The interest-bearing notes bear interest at rates between 2.6 percent and 6.4 percent and include loans where interest rates are based on the London Inter-Bank Official Rate and the short-term French PIBOR. A loan, which is payable in Japanese currency, has been recorded net of foreign currency translation adjustment of $4,349 and $2,009 at December 31, 1997 and 1996, respectively. Another loan, which is payable in French currency, has been recorded net of foreign currency translation adjustment of $2,117 at December 31, 1997. The $150,000 convertible notes bear interest at the rate of 3.25 percent per annum to June 1, 2000, and thereafter, at the rate of 8.25 percent per annum. Interest on the notes is payable on June 1 and December 1 of each year, commencing December 1, 1997. The notes will mature on June 1, 2002. The notes are convertible into common stock of the Company at the conversion price of $35.50 per share. The Company accrues interest based on the effective rate of 5.75 percent. The Company leases certain manufacturing equipment under capital leases with an average annual interest rate of 6.0 percent and 6.7 percent for 1997 and 1996, respectively. The obligations are recorded net of $107,120, which represents future interest at December 31, 1997. Payments required for long-term debt and capital leases are as follows:
1998 1999 2000 2001 2002 Thereafter - ----------------------------------------------------------------------------------------------------------------- Notes payable and convertible notes $ 17,387 $ 38,910 $ 28,966 $ 11,915 $156,432 $ 8,466 Capital leases 71,024 61,852 55,971 46,727 43,492 114,369
The carrying amount of the Company's long-term debt instruments (excluding capital leases) approximates the fair value of such instruments based upon management's best estimate of interest rates that would be available to the Company for similar debt obligations at December 31, 1997. Note 6 - -------------------------------------------------------------------------------- ACCRUED LIABILITIES AND OTHER Accrued liabilities and other comprise the following:
December 31, 1997 1996 - --------------------------------------------------------------- Accrued returns, royalties and licenses $35,707 $49,170 Accrued salaries, benefits and other 21,549 23,499 Federal, state, local and foreign taxes 36,564 26,648 ------- ------- TOTAL $93,820 $99,317 ======= =======
The Company has entered into a number of technology license agreements with unrelated third parties. Generally, the agreements require a one-time or annual license fee. In addition, the Company may be required to pay a royalty on sales of certain products that are derived under these licensing arrangements. The royalty expense is accrued in the same period in which the revenues incorporating the technology are recognized. Note 7 - -------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES 11 The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options of two to four years. The Company also leases certain manufacturing equipment under operating leases expiring at various dates through 2002. Rental expense for 1997, 1996 and 1995 was $7,586, $7,402 and $2,896, respectively. Rental payments over the term of these leases are as follows:
1998 1999 2000 2001 2002 - ---------------------------------------------------------- $6,728 $6,697 $10,632 $1,433 $510
The Company is involved in certain patent related legal matters, in the ordinary course of business. No provision for any liability that may result upon the resolution of these matters has been made in the accompanying financial statements nor is the amount or range of possible loss, if any, reasonably estimable. Note 8 - -------------------------------------------------------------------------------- TAXES ON INCOME The provision (benefit) for income taxes consists of the following:
Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------- Federal Current $ 2,196 $ 92,632 $45,886 Deferred 6,900 (6,618) 2,529 State Current 628 10,458 7,619 Deferred (7,524) (161) 417 Foreign Current 2,000 2,209 883 Deferred -- 8,911 1,235 ----------------------------------- TOTAL INCOME TAXES $ 4,200 $107,431 $58,569 ===================================
The components of the net deferred income tax assets are set forth below:
December 31, 1997 1996 - -------------------------------------------------------------- DEFERRED INCOME TAX ASSETS Allowance for doubtful accounts $ 6,633 $ 10,048 Allowance for sales returns 1,490 3,917 Capital loss carryforward 1,733 -- Deferred income on shipments to distributors 5,474 6,717 Inventory valuation 2,999 1,273 Net operating losses 15,410 -- Research and development and other tax credits 4,237 -- Reserve for employee benefits 1,517 1,354 Reserve for non-recurring charges 18,877 -- Reserve for recurring charges 3,831 3,811 Reserve for royalty 6,240 8,164 State income tax -- 3,450 Other 150 125 ---------------------- Total deferred income tax assets 68,591 38,859 Less valuation allowance (15,540) -- ---------------------- Net deferred income tax assets 53,051 38,859 ---------------------- DEFERRED INCOME TAX LIABILITIES Depreciation (31,065) (22,935) State income tax (1,819) -- Deferred income (1,615) -- ---------------------- Total deferred income tax liabilities (34,499) (22,935) ----------------------- TOTAL NET DEFERRED INCOME TAX ASSETS $ 18,552 $ 15,924 ======================
For the year ended December 31, 1997, the Company provided a valuation allowance of $15,540 on its deferred income tax assets. The valuation allowance was provided for deferred income tax assets from the French operations, the realization of which is uncertain. 12 The Company's effective tax rate differs from the United States federal statutory income tax rate as follows:
Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- U.S. federal statutory income tax rate 35.0% 35.0% 35.0% Foreign operations (85.1) 0.2 0.1 State taxes, net of federal income tax benefit (35.2) 2.2 2.8 Research and development tax credits (61.8) (0.5) (0.3) Benefit of foreign sales corporation -- (2.9) (2.2) Change in valuation allowance 240.0 -- -- Tax exempt income (24.5) (0.7) (1.2) Other, net 1.6 1.5 (0.2) --------------------------------- 70.0% 34.8% 34.0% =================================
At December 31, 1997, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $28,000 and $15,000, respectively. The federal net operating loss expires in year 2012 and the state net operating losses expire in different years between years 2002 and 2012. Income before income taxes included income (loss) from foreign subsidiaries of $(13,899), $22,724 and $12,465 in 1997, 1996 and 1995, respectively. The Company's U.S. income tax returns for the years 1993 through 1995 are presently under examination by the Internal Revenue Service. Final proposed adjustments have not yet been received for these years. The Company believes that adequate amounts of tax and related interest and penalties, if any, have been provided for any adjustments that may result for the years under examination. Note 9 - -------------------------------------------------------------------------------- EMPLOYEE OPTION AND STOCK PURCHASE PLANS The Company has two stock option plans--the 1986 Incentive Stock Option Plan (1986 Plan) and the 1996 Stock Plan (1996 Plan). The 1986 Plan expired in April 1996. The 1996 Plan, which has reserved 4,000 shares of Common Stock for issuance thereunder, was approved by the shareholders on April 26, 1996. Under the Company's 1996 Plan, the Company may issue common stock directly or grant options to purchase common stock to employees, consultants and directors of the Company. Options, which generally vest over four years, are granted at fair market value on the date of the grant and generally expire ten years from that date. Under the 1991 Employee Stock Purchase Plan, qualified employees are entitled to purchase shares of the Company's common stock at 85.0 percent of the fair market value at certain specified dates. Of the 3,000 shares authorized to be issued under this plan, 699 shares were available for issuance at December 31, 1997. Activity under the Company's 1986 Plan and 1996 Plan is set forth below:
Outstanding Options ------------------------------------------------------------------------- Aggregate Weighted Average Available Number Exercise Price Exercise Exercise Price For Grant of Options Per Share Price Per Share --------- ---------- --------- ----- --------- BALANCES, DECEMBER 31, 1994 1,994 4,711 $ 0.75 - 17.31 $ 22,055 $ 4.68 Options granted (1,896) 1,896 15.41 - 33.63 37,474 19.76 Options canceled 101 (101) 1.75 - 33.31 (1,075) 10.64 Options exercised -- (1,394) 0.75 - 21.38 (2,729) 1.95 ------ ------ ------ ----- -------- ------ BALANCES, DECEMBER 31, 1995 199 5,112 0.75 - 33.63 55,725 10.90 Options authorized 4,000 -- -- -- -- Options granted (576) 576 20.15 - 36.88 14,555 25.27 Options canceled 122 (122) 2.16 - 36.88 (2,134) 17.49 Options expired (142) -- -- -- -- Options exercised -- (874) 0.75 - 33.63 (4,606) 5.27 ------ ------ ------ ----- -------- ------ BALANCES, DECEMBER 31, 1996 3,603 1,385 20.1 - 42.75 36,204 26.14 Options canceled 184 (184) 0.75 - 33.63 (4,790) 26.03 Options exercised -- (733) 4.25 - 42.75 (6,522) 8.90 ------ ------ ------ ----- -------- ------ BALANCES, DECEMBER 31, 1997 2,402 5,160 0.75 - 42.75 $ 88,432 $17.14 ====== ====== ====== ===== ======== ======
13 The weighted average fair value of options granted during 1997, 1996 and 1995 was $26.14, $25.27 and $19.76 per share, respectively. The number of shares exercisable under the Company's stock option plans at December 31, 1997, 1996 and 1995 were 2,734, 2,463 and 2,045, respectively. The Company's Board of Directors approved an option repricing program effective January 14, 1998. Under the repricing program, current employees (other than officers and other designated members of senior management) holding outstanding options with exercise prices above $17.00 per share could elect to amend such options to change the exercise price to $17.00 per share, the fair market value on the effective date. Accordingly, outstanding options held by employees electing to participate in the program were amended to change the exercise price to $17.00 per share. All other terms of such options remained unchanged, except that the repriced options are not exercisable for a period of one year after the effective date of the repricing. If an employee voluntarily terminates his or her employment prior to the end of the one-year non-exercise period, the amended options will be forfeited and the unexercised shares returned to the 1996 Plan. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation. Accordingly, no compensation cost has been recognized for the 1986 Plan and 1996 Plan. Had compensation cost for the 1986 Plan and 1996 Plan been determined based on the fair value at the grant date for options granted in 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income (loss) and net income (loss) per share for 1997, 1996 and 1995 would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 - ------------------------------------------------------------------------------------ Net income--as reported $ 1,801 $ 201,722 $ 113,693 ------------------------------------------ Net income (loss) --pro forma $ (1,197) $ 196,641 $ 110,058 ------------------------------------------ Basic net income per share-- as reported $ 0.02 $ 2.06 $ 1.20 ------------------------------------------ Basic net income (loss) per share-- pro forma $ (0.01) $ 2.01 $ 1.16 ------------------------------------------ Diluted net income per share-- as reported $ 0.02 $ 2.00 $ 1.16 ------------------------------------------ Diluted net income (loss) per share-- pro forma $ (0.01) $ 1.95 $ 1.12 ------------------------------------------
The fair value of each option grant for both 1986 Plan and 1996 Plan is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1997 1996 1995 - ----------------------------------------------------------------- Risk-free interest 5.7%-6.9% 5.1%-6.8% 5.5%-7.6% Expected life (years) 0.38-1.12 0.95-1.56 0.95-1.56 Expected volatility 51.0%-55.0% 38.0%-40.0% 38.0%-40.0% Expected dividend $0 $0 $0
The weighted average expected life was calculated based on the period from the vesting date to the exercise date and the exercise behavior of the employees. The following table summarizes the stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable -------------------------------------------------- ----------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------- $ 0.75- 9.16 1,480 5.2 years $ 4.81 1,433 $ 4.67 9.22-20.19 1,337 7.3 15.81 684 15.21 20.34-25.25 1,392 8.4 23.18 411 21.98 25.75-37.81 951 9.0 29.35 206 30.25 ----- ----- 0.75-37.81 5,160 7.3 17.14 2,734 11.83 ===== =====
Note 10 - -------------------------------------------------------------------------------- RETIREMENT PLAN The Company has a 401(k) Tax Deferred Savings Plan (Plan) for the benefit of qualified employees. In fiscal year 1996, the Company began matching each eligible employee's contribution with up to a maximum of five hundred dollars. The matching contribution made by the Company was $713 and $581 for 1997 and 1996, respectively. The Company did not make any contribution to the Plan in 1995. 14 Note 11 - -------------------------------------------------------------------------------- GEOGRAPHIC INFORMATION, EXPORT SALES AND MAJOR CUSTOMERS The Company's foreign operations include both manufacturing and sales. The manufacturing subsidiary is located in France and the sales subsidiaries are located in Europe and Asia. All of their sales are made to unaffiliated customers. The following is a summary of operations by entities within geographic areas:
Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------- NET REVENUES North America $ 876,610 $ 979,809 $ 580,758 Europe 166,555 171,829 116,949 Asia 53,847 3,506 0 Eliminations (138,730) (84,856) (63,466) --------------------------------------------- $ 958,282 $ 1,070,288 $ 634,241 ============================================= OPERATING INCOME (LOSS) North America $ 27,606 $ 285,070 $ 154,381 Europe (10,263) 19,481 12,849 Asia 7,706 921 212 --------------------------------------------- $ 25,049 $ 305,472 $ 167,442 =============================================
Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------- TOTAL ASSETS North America $ 1,418,284 $ 1,228,560 $ 850,804 Europe 413,092 237,306 74,624 Asia 9,706 2,227 1,064 Eliminations (19,042) (12,179) (6,871) --------------------------------------------- $ 1,822,040 $ 1,455,914 $ 919,621 ============================================= EXPORT REVENUES Europe $ 140,959 $ 175,582 $ 120,565 Asia 364,407 419,848 207,795 --------------------------------------------- $ 505,366 $ 595,430 $ 328,360 =============================================
One customer accounted for 12.6 percent, 12.0 percent and 16.9 percent of net revenues in 1997, 1996 and 1995, respectively. Note 12 - -------------------------------------------------------------------------------- SUBSEQUENT EVENTS (UNAUDITED) In January 1998, the Board of Directors of the Company approved a stock repurchase program that allows the Company to purchase up to 5,000 shares of its common stock. In connection with this program, the Company purchased 1,000 shares of its common stock in January 1998. The average purchase price of the shares repurchased was $16.62 per share. The Company was been named as a defendant in a patent infringement suit that was filed on January 21, 1998. The plaintiff contended that certain of the Company's devices infringe seven patents it allegedly owns and was seeking a judgment of infringement for each of these asserted patents and other costs. The amount of judgment sought by the plaintiff was not specified in the lawsuit. The Company settled the patent disputes and entered into a cross-license agreement with the plaintiff in August 1998. On March 2, 1998, the Company acquired from Vishay Intertechnology, Inc. the integrated circuit (IC) business of Temic Telefunken Microelectronic GmbH (Temic), a wholly owned subsidiary of Daimler-Benz A. G. Temic's IC business had revenues of approximately $260,000 in 1997 from sales of application- specific integrated circuits for the automotive, communications and consumer industries. The purchase price for the IC business was approximately $99,250. 15 Atmel Corporation REPORT OF INDEPENDENT ACCOUNTANTS BOARD OF DIRECTORS AND SHAREHOLDERS ATMEL CORPORATION We have audited the accompanying consolidated balance sheets of Atmel Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atmel Corporation and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. San Jose, California January 15, 1998 SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands, except per-share data) First Quarter Second Quarter Third Quarter Fourth Quarter - ------------------------------------------------ ------------- -------------- ------------- -------------- YEAR ENDED DECEMBER 31, 1997 Net revenues $ 252,946 $ 224,936 $ 240,050 $ 240,350 Gross margin 116,569 99,036 104,478 35,960 Net income (loss) 38,738 27,408 30,349 (94,694) Basic net income (loss) per share 0.39 0.28 0.30 (0.95) Diluted net income (loss) per share 0.38 0.27 0.29 (0.95) Price range of common stock per share High 46.88 29.63 39.06 37.50 Low 23.75 22.50 26.50 18.06 YEAR ENDED DECEMBER 31, 1996 Net revenues $ 240,096 $ 268,748 $ 280,332 $ 281,112 Gross margin 119,453 133,789 138,821 139,010 Net income 44,909 50,291 52,878 53,644 Basic net income per share 0.46 0.51 0.54 0.54 Diluted net income per share 0.45 0.50 0.53 0.53 Price range of common stock per share High 33.50 42.38 33.75 38.00 Low 18.13 23.88 21.88 25.13
COMMON STOCK DATA As of December 31, 1997, there were approximately 1,950 record holders of the Company's common stock. The last reported sales price on that date was $18.56. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein. OVERVIEW The Company's operating results in 1997 declined significantly compared to 1996. The decrease was primarily due to a $112.0 million decrease in net revenues and pre-tax charges in the fourth quarter of approximately $160.0 million relating to write-downs of accounts receivable and inventories of approximately $90.0 million, and $58.0 million in connection with consolidation of the Company's manufacturing operations in France. The Company incurred a pre-tax charge of $41.3 million relating to the write-down of accounts receivable during the fourth quarter of 1997. The pre-tax charge was a result of the Company's reassessment of the probability of collection of certain receivables following the rapid down-turn of the semiconductor industry and the difficult collection environment resulting from the financial turmoil in Asia, where more than 40.0 percent of the Company's revenues are generated. Although the Company's accounts receivable balance began to increase during 1997, the Company attributed this increase to the depressed state of the semiconductor industry and the weakened business conditions in Asia. The Company believed that business conditions would improve in the second half of 1997. Based on this expectation, the Company was prepared to accept slower payment on outstanding receivables. The Company believed that it was probable that the Company would receive all amounts due when the business conditions improved. In addition, the credit history of the Company's customers had been good and the Company had no substantial write-offs of accounts receivable in the past. Accordingly, the Company anticipated that it would be able to collect these outstanding receivables. However, by late in the fourth quarter of 1997, it became apparent that the expected growth in the semiconductor market would not materialize. In fact, the business conditions had deteriorated further during the fourth quarter of 1997. Customers increasingly began to seek reasons to return products and became more aggressive on payment terms. Revenues and margins began to reflect this much tougher business environment. Based on these subsequent factors, the Company determined in the fourth quarter that it would not be able to collect these receivables. As a result, $41.3 million were written off during the fourth quarter of 1997. Four customers accounted for 65.6 percent of the $41.3 million accounts receivable write-off and the majority of the write-off was attributable to the deterioration of the economic environment and the resulting liquidity pressures experienced by the customers. One of the customers from Hong Kong, with which the Company had conducted business since 1996, refused to respond to the Company's demand for payment. This customer was initially under a "letter of credit" payment term. As the business between the customer and the Company grew during the third quarter of 1996, the customer negotiated an "open account" term with the Company. Payments were prompt during the first few months after the open account term was established. When the customer became late with its payments and the account balance began to accumulate, the Company stopped shipment to the customer in September 1997. When this customer did not respond to the Company's written demand for payment in November 1997, the Company decided to write off $8.4 million of outstanding accounts receivable in December 1997. The Company stopped doing business with this customer in September 1997. Two major Japanese customers accounted for $10.6 million of the accounts receivable written-off. These two customers contended that the Company's products did not meet their specifications and that replacement products delayed their delivery schedule to their ultimate customers. The Company has been doing business with these two Japanese customers for more than five years and valued its long-term relationship with them because they are the primary channel for the Company to sell to the Japanese market. Moreover, the Company had not had any major collection issues with these two customers in the past. In fact, the Company has had some success with its accounts receivable collections by extending the payment terms in the past with these customers as well as other customers. The further deterioration of the business situation in Asia in the fourth quarter of 1997 resulted in an over supply of products and intense competition between suppliers such as the Company. In this environment, both customers had other sources of supply available to them and the Company had little leverage with which to force payment on the disputed balances. The weakening of the Company's bargaining position led the Company to reassess the probability of collection of the disputed balances. The Company concluded that collection would not be possible without severely harming the Company's relationship with these customers. The Company valued its long standing relationship with these customers who are strategically important and considered that it would be in the Company's best interest to maintain good 17 relationships with them. As the financial turmoil in Asia heightened in the fourth quarter of 1997, the Company felt a much stronger resistance from these two customers to fulfill their obligations. As a result, the Company compromised with the customers by accepting partial payments on the disputed invoices and wrote off the remaining balances. The fourth customer is the Company's largest customer and has operations worldwide. The $8.1 million write-off in accounts receivable was attributable to 30 different divisions of this customer. The write-offs from these accounts were due to unresolved disputes over the quantity shipped, quantity returned and/or unit price. This customer continues to be the largest customer of the Company and the Company values its long-term business relationship. Given this important business relationship, the rapid down-turn of the semiconductor industry and the difficult collection environment in the fourth quarter of 1997, the Company considered that it would be in its best interest to stop pursuing the collection of these disputed invoices in the fourth quarter of 1997. The Company incurred a pre-tax charge of $53.1 million relating to the write-down of inventory during the fourth quarter of 1997. During the first half of 1997, demand for the Company's products was increasing, as demonstrated by encouraging new orders and business opportunities, particularly in the emerging Asian markets, being received by the Company's sales force. Based on these early indications, the Company was anticipating substantial revenue and margin improvements for the second half of 1997 and was building its parts inventory in mid-1997 in anticipation of demand for, and expected industry shortage of, semiconductor products in the second half of 1997. However, late in the fourth quarter of 1997, it became apparent that the expected growth would not materialize. Revenues and margins began to reflect this more difficult business environment. The Company responded to this more difficult business environment and rapid down-turn of the semiconductor industry by writing off its inventory. The inventory write-off consisted of $42.5 million of slow-moving inventory and $10.6 million of inventory that was marked to the lower market value. NET REVENUES The Company's net revenues by geographic destinations for the three years ended December 31, 1997, 1996 and 1995 are summarized as follows:
1997 1996 1995 ---- ---- ---- North America $371,244 $ 384,379 $ 252,397 Europe 307,514 347,411 237,514 Asia 418,254 423,354 207,795 Eliminations (138,730) (84,856) (63,465) ----------------------------------- $958,282 $1,070,288 $ 634,241 ===================================
The decreases in 1997 revenues in all regions compared to 1996 were primarily due to abnormal price erosion in the Company's memory businesses. In addition, the weaker business conditions in Europe and Japan in 1997 also contributed to the revenue decline for Europe and Asia regions in 1997. The Company's application-specific integrated circuits (ASIC) and logic businesses represented approximately 45 percent of its 1997 net revenues and 1997 net revenues for these two groups increased approximately 75 percent compared to 1996. The Company's memory business represented approximately 55 percent of its 1997 net revenues. Although the Company shipped more units in 1997 than 1996, the net revenues for memory products decreased approximately 29 percent compared to 1996. As noted above, the decline was primarily due to abnormal price erosion in the memory product markets. The increases in sales in all regions in 1996 compared to 1995 were primarily due to increased unit shipments sold to the telecommunications, computer and consumer markets. The increase of approximately $57 million in European sales in 1996 was attributable to sales from the Company's subsidiary, Atmel ES2 B.V., which was acquired in April 1995. During 1996, the ASIC and logic businesses represented 26 percent of the Company's net revenues and increased approximately 43 percent compared to 1995. The increase in ASIC and logic net revenues was a result of increased sales of the Company's microcontrollers (114 percent), EPLD (29 percent) and ASIC (68 percent) products. The Company's memory business represented 74 percent of its 1996 net revenues and increased approximately 48 percent compared to 1995. The increase in sales of the Company's Flash (76 percent) and EPROM (60 percent) products were the primary contributors to the Company's memory revenue increase in 1996. Net revenues decreased 10.5 percent to $958.3 million in 1997 from $1,070.3 million in 1996. The decrease was primarily due to abnormal price erosion in the Company's non-volatile memory businesses, weaker business conditions in Europe and Japan and the strengthening of the United States dollar. Foreign sales accounted for 61.3 percent of revenues in 1997 compared to 64.1 percent in 1996 and 60.2 percent in 1995. A portion of the Company's revenues in Japan and Europe were generated in local currency. Since the Company also has European assets and operations in local currency, no hedging program exists for the European sales. However, for Japanese sales, the Company used forward contracts to hedge 18 its currency risk relating to accounts receivable that are denominated in Japanese yen. The Company experienced a 69.0 percent growth in net revenues from $634.2 million in 1995 to $1,070.3 million in 1996 due to increases in unit shipments of products sold to the telecommunications, computer peripheral and consumer markets, and also the revenue contribution from its subsidiary, Atmel ES2 B.V., a Netherlands holding company with its principal operations and assets in Rousset, France. Net revenues also increased as a result of sales of several new logic products, such as Flash microcontrollers, Flash PLDs, integrated analog devices and application-specific integrated circuits (ASICs). The Company believes future sales growth will depend substantially on the success of new products. New products are generally incorporated into customers' products or systems at the design stage. However, design wins may precede volume sales by a year or more. No assurance can be given that any design win will result in future revenues, which depend in large part on the success of the customer's end product or system. The Company expects the average selling price of each product to decline as individual products mature, typically within two years, and competitors enter the market. To offset average selling price decreases, typically experienced over the life of any particular product, the Company relies primarily on attaining cost reductions in the manufacturing of those products and on introducing new, higher priced products, which incorporate advanced features or integrated technologies to address new or emerging markets. Manufacturing cost reductions may be achieved through using advanced process technologies to reduce the line widths in circuit designs which would enable more dice to be etched onto a silicon wafer, increasing unit production volume to lower the fixed costs allocated to each die and negotiating volume discounts on assembly and packaging costs. To the extent that such cost reductions and new product introductions do not occur in a timely manner, the Company's operating results could be adversely affected. In addition, due in part to overcapacity in the semiconductor industry, the Company's quarterly revenues and operating results have become increasingly dependent upon orders booked and shipped within a given quarter. To the extent this trend continues, the Company's quarterly results will be less predictable and subject to greater variability. The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, characterized by diminished product demand, production overcapacity and subsequent accelerated erosion of average selling prices. The commodity memory portion of the semiconductor industry, from which the Company derives more than half of its revenues, continued to suffer from excess capacity during 1997, which led to abnormal price erosion during the year. If these conditions extend through 1998, the Company's growth and results of operations would be adversely affected. The Company's continued success will depend in large part on the continued growth of various electronics industries that use semiconductors, including manufacturers of computers, telecommunications equipment, automotive electronics, industrial controls, consumer electronics equipment, military equipment and a better supply and demand balance within the industry. While the Company experienced rapid revenues and net income growth from 1994 through 1996, there can be no assurance this growth will resume in the future periods, as was evidenced in 1997. COST OF SALES AND GROSS MARGIN The Company's cost of sales represents the costs of its wafer fabrication, assembly and test operations. Cost of sales as a percentage of net revenues fluctuates, depending on product mix, manufacturing yields and the level of utilization of manufacturing capacity. Cost of sales as a percentage of net revenues in 1997 was 62.8 percent, compared with 50.4 percent in 1996 and 51.0 percent in 1995. The increase in cost of sales as a percentage of net revenues was primarily due to the write-down of inventories in the fourth quarter, manufacturing overcapacity resulting from increases in fixed costs associated with the expansion of wafer fabrication facilities and lower product margins in many of the Company's memory products. The lower product margins were attributable to the rapid erosion of average selling prices that were not matched with a corresponding decrease in manufacturing cost. The Company incurred a pre-tax charge of $53.1 million relating to the write-down of inventory during the fourth quarter of 1997. During the first half of 1997, demand for the Company's products was increasing, as demonstrated by encouraging new orders and business opportunities, particularly in the emerging Asian markets, being received by the Company's sales force. Based on these early indications, the Company was anticipating substantial revenue and margin improvements for the fourth quarter of 1997 and was building its parts inventory in mid-1997 in anticipation of demand for, and expected industry shortage of, semiconductor products in the fourth quarter of 1997. However, late in the fourth quarter of 1997, it became apparent that the expected growth would not materialize. Revenues and margins began to reflect this much tougher business environment. The Company responded to this tougher business environment and rapid down-turn of the semiconductor industry by writing off its inventory. The inventory write-off consisted of $42.5 million of slow-moving inventory and $10.6 million of inventory that was marked to the lower market value. The Company has lowered its capital expenditure plan to $200 million in 1998 and will focus on implementing chemical, mechanical planarization (CMP), 0.35-micron and 0.25-micron technologies in its wafer manufacturing facilities. Implementation of these technologies will enable the Company to achieve cost reductions through die shrinks. However, 19 production delays, difficulties in achieving acceptable yield at its Colorado Springs or its Rousset facility or overcapacity could materially and adversely affect the Company's gross margin and future operating results. RESEARCH AND DEVELOPMENT Research and development expenses increased to $137.9 million in 1997 from $110.2 million in 1996 and $69.8 million in 1995. The increase in 1997 was primarily due to the one-time charge of $15.0 million to research and development expense in connection with the qualification of the Company's new manufacturing facility in France, the Company's continued investment in the shrinking of the die size from 0.65-micron to 0.5-micron line widths, development of 0.35-micron process technology, enhancement of mature products, development of new products, advanced CMOS process technology, manufacturing improvements and costs associated with increasing production capacity in Colorado Springs and Rousset. The increase in 1996 was primarily due to the Company's continued investment in the shrinking of the die size from 0.65-micron to 0.5-micron line widths, enhancement of mature products, development of new products, advanced CMOS and BiCMOS process technology, manufacturing improvements and costs associated with expanding its fabrication facility in Rousset, France during 1996. The Company believes that continued investment in process technology and product development are essential to remain competitive in the markets it serves and is committed to high levels of expenditures for research and development. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expense increased 30.1 percent to $150.1 million in 1997 from $115.4 million in 1996. The majority of the increase in 1997 was attributable to the $43.1 million write-down of accounts receivable. This increase in 1996 expense is due to the addition of sales and administrative personnel and other expenses associated with the Company's higher sales volume. In 1995, the Company spent $73.5 million or 11.6 percent of net revenues. NON-RECURRING CHARGE In an effort to improve the productivity and efficiency of the Company's French manufacturing operations, the Company provided a reserve of $43.0 million reflecting the impairment of machinery and equipment as a result of its decision to consolidate its two manufacturing facilities (Fab 6 and Fab 7) located in Rousset. The Company plans to concentrate its wafer manufacturing in Fab 7, an eight-inch, 0.35-micron facility and to convert Fab 6 to a test facility. INTEREST AND OTHER INCOME AND INTEREST EXPENSE Interest and other income decreased to $12.1 million in 1997 from $16.5 million in 1996 and $13.1 million in 1995. Other income consists of investment gains and losses and realized and unrealized foreign currency exchange gains and losses. The decline was primarily due to the combination of the losses sustained on sale of stock investments in 1997 and the gains realized from sale of stock investments and a parcel of land in 1996. Interest expense, which includes the interest on capital lease financing, increased to $31.2 million in 1997 from $12.9 million in 1996 and $8.3 million in 1995. The increase in both years was primarily due to the increase in borrowings used to finance the expansion and construction of the Company's manufacturing facilities located in Colorado Springs and Rousset, respectively. TAXES ON INCOME The Company's effective tax rate was 70.0 percent in 1997, 34.8 percent in 1996 and 34.0 percent in 1995. The increase was primarily due to the valuation allowance provided for the net operating loss incurred by Atmel ES2, our French subsidiary and the loss of foreign sales corporation benefit. The effect was magnified by the lower level of income before taxes from the United States jurisdiction. YEAR 2000 RISKS Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years computer systems and/or software used by the Company will need to be upgraded to comply with such Year 2000 requirements. The Company has initiated a program to review its computer hardware and software systems to determine the impact of and to provide solutions for Year 2000 requirements. However, it is unable, at this time, to determine the financial impact of this program. If the Company were unable to successfully upgrade its computer information systems to be Year 2000 compliant, it could materially and adversely affect its wafer production system and business and financial information systems, which in turn could result in a material adverse effect on the Company's business, operating results and financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations and capital requirements through cash flow from operations, equipment lease financing arrangements and other borrowing arrangements. During 1997, the Company generated net cash flow from operations of $78.9 million. Accounts receivable increased by $40.5 million due to the Company extending longer payment terms to its customers and a more difficult collection environment because of the financial turmoil in Asia where more than 40.0 percent of the Company's revenues are generated. The weakened market conditions and business competition required the Company to extend its payment terms to its customers. accounts receivable increased 71.8 percent to $174.5 million in 1996 from $101.6 million in 1995. The 20 increase was due primarily to a 68.8 percent increase in 1996 revenues ($1,070 million) compared to 1995 ($634 million). The average days of accounts receivable outstanding were 47.1 and 44.1 days for 1996 and 1995, respectively. Inventory balances increased by approximately $54.1 million from 1996 to 1997, reflecting the increased manufacturing output and inventory reduction programs by our OEM customers. During periods of excess manufacturing capacity in the industry and rapidly eroding prices, OEM customers reduce inventory levels and rely on manufacturers to carry more inventory to meet just-in-time deliveries. Inventories increased 44.9 percent to $70.3 million in 1996 from $48.5 million in 1995. The increase was due to an increase in manufacturing capacity to meet the growth of the Company's sales during 1996. The inventory turnover for 1996 was 9.1 times compared to 7.8 times in 1995. The increase in inventory turnover in 1996 was due primarily to higher demand for the Company's products as compared to 1995. Trade accounts payable and other accrued liabilities increased by approximately $17.9 million from 1996 to 1997. This increase primarily reflects the acquisition of capital equipment, construction costs and the timing of payment of certain other trade payables. The Company made substantial capital investments in 1997 totaling $312.1 million to increase manufacturing capacity at all its fabrication plants and to complete construction of its 8-inch plant in Rousset. To finance this expansion, the Company incurred a number of debt obligations totaling $397.5 million. At December 31, 1997, the Company had $237.5 million in cash and short-term investments, an increase of $80.3 million from December 31, 1996, and $314.5 million in working capital, an increase of $190.9 million from December 31, 1996. At December 31, 1997, the Company also had long-term investments of $95.5 million, a decrease of $9.1 million from December 31, 1996. These investments consisted primarily of state and municipal securities and United States government obligations. The Company believes that its existing sources of liquidity, together with cash flows from operations, lease financing on equipment and other short- or medium-term bank borrowing, will be sufficient to meet the Company's liquidity and capital requirements through 1998. The Company may, however, seek additional equity or debt financing to fund further expansion of its wafer fabrication capacity, or to fund other projects or acquisitions. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for the Company's products, product mix changes, semiconductor industry conditions and competitive factors. FINANCIAL RISK MANAGEMENT The Company faces exposure to adverse movements in foreign currency exchange rates. These exposures change over time and could have a material adverse impact on the Company's financial results. Historically, the Company's primary exposures related to nondollar denominated sales in Japan and Europe. At the present time, the Company hedges only currency exposures associated with Japan. The hedging activity undertaken by the Company is intended to offset the impact of currency fluctuations on accounts receivable that are denominated in Japanese yen. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains and losses. The Company's foreign exchange contracts generally have maturities that do not exceed three months. Foreign exchange contracts outstanding, all of which were in Japanese currency, amounted to $9.5 million and $5.4 million at December 31, 1997, and 1996, respectively. The Company maintains investment portfolio holding of various issuers, types and maturities whose value is dependent upon short-term interest rates. These securities are generally classified as available for sales, and consequently are recorded on the balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders' equity. The Company does not currently hedge these interest rate exposures. Given the Company's current profile of interest rate exposures and the maturities of its investment holdings, the Company believes that a change in interest rates would not have a material adverse impact on the Company's investment portfolio or statement of operations through December 31, 1998. - -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS Investors are cautioned that certain statements in this Annual Report are forward looking statements that involve risks and uncertainties. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward looking statements. These statements are based on current expectations and projections about the semiconductor industry and assumptions made by the management and are not guarantees of future performance. Therefore, actual events and results may differ materially from those expressed or forecasted in the forward looking statements due to factors such as the effect of changing economic conditions, material changes in currency exchange rates, conditions in the overall semiconductor market (including the historic cyclicality of the industry), continued financial turmoil in the Asian markets, risks associated with product demand and market acceptance risks, the impact of competitive products and pricing, delays in new product development, fab capactity utilization, product mix and technological risks and other risk factors identified in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K Report. The Company undertakes no obligation to update any forward looking statements in this Annual Report. EX-21.1 3 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21.1 ATMEL CORPORATION SUBSIDIARIES OF REGISTRANT The following are the subsidiaries of the Registrant: Atmel Asia Limited, a Hong Kong corporation Atmel ES2, B.V., a Netherlands corporation Atmel ES2, S.A., a French corporation Atmel Finance Inc., a United States corporation Atmel (OY) Finland, a Finnish corporation Atmel Finland Development Center (OY), a Finnish corporation Atmel FSC, Inc. a Barbadian corporation Atmel GmbH, a German corporation Atmel Japan K.K., a Japanese corporation Atmel Korea Limited, a Korean corporation Atmel Research, a Cayman Islands corporation Atmel SARL, a French corporation Atmel Semiconductor Corporation, a United States corporation Atmel Singapore Pte. Limited, a Singaporean corporation Atmel Taiwan Limited, a Taiwanese corporation Atmel U.K. Limited, a United Kingdom corporation EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Atmel Corporation on Form S-8 (File Nos. 33-39925, 33-93662 and 333-15823) of our report dated January 15, 1998 on our audit of the consolidated financial statements of Atmel Corporation and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which report has been incorporated by reference from the 1997 Annual Report to Shareholders of Atmel Corporation and our report dated January 15, 1998, on our audit of the consolidated financial statement schedule which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California November 6, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 174,310 63,222 216,991 0 124,336 698,217 985,949 0 1,822,040 383,669 0 0 0 786,434 0 1,822,040 958,282 958,282 602,239 933,233 0 0 31,155 6,001 4,200 0 0 0 0 1,801 0.02 0.02
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