-----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, CXlaoDGZhgMxUGl9Qq2A3sKO7zFjaEE/5F+8/0qcg35qwMiTrrkkXoG11l/TcY/w ppC7u7zDzoo0KVsMD7qN9g== 0000891618-99-001820.txt : 19990428 0000891618-99-001820.hdr.sgml : 19990428 ACCESSION NUMBER: 0000891618-99-001820 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990427 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-Q/A SEC ACT: SEC FILE NUMBER: 000-19032 FILM NUMBER: 99602151 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-Q/A 1 AMENDMENT TO FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-19032 ATMEL CORPORATION (Registrant) CALIFORNIA 77-0051991 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number ) 2325 ORCHARD PARKWAY, SAN JOSE, CALIFORNIA 95131 (Address of principal executive offices) (408) 441-0311 Registrant's telephone number Indicate by a 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 [ ] ON JUNE 30, 1998, REGISTRANT HAD OUTSTANDING 99,239,218 SHARES OF COMMON STOCK. 2 ATMEL CORPORATION FORM 10-Q/A QUARTER ENDED JUNE 30, 1998 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 1 Condensed Consolidated Income Statements for the three and six months ended June 30, 1998 and June 30, 1997 2 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and June 30, 1997 3 Consolidated Statements of Comprehensive income for the three and six months ended June 30, 1998 and June 30, 1997 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II: OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24
-i- 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATMEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
JUNE 30, DECEMBER 31, 1998 1997 ---------- ---------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 117,026 $ 174,310 Short-term investments 66,027 63,222 Accounts receivable, net 260,281 216,991 Inventories 214,381 124,336 Other current assets 115,772 119,358 ---------- ---------- TOTAL CURRENT ASSETS 773,487 698,217 Other assets 87,775 42,338 Long-term investments 133,791 95,536 Fixed assets, net 972,347 985,949 ---------- ---------- TOTAL ASSETS $1,967,400 $1,822,040 ========== ========== CURRENT LIABILITIES: Current portion of long-term debt $ 76,212 $ 67,522 Trade accounts payable and other accrued liabilities 319,867 290,890 Income taxes payable 14,809 0 Deferred income on shipments to distributors 33,576 25,256 ---------- ---------- TOTAL CURRENT LIABILITIES 444,464 383,668 Convertible notes 266,058 150,000 Long-term debt less current portion 483,053 421,389 Other long-term liabilities 19,063 34,499 ---------- ---------- TOTAL LIABILITIES 1,212,638 989,556 ========== ========== Put warrants 69,730 46,050 ---------- ---------- SHAREHOLDERS' EQUITY: Common stock 297,517 334,303 Retained earnings 387,515 452,131 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 685,032 786,434 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,967,400 $1,822,040 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. -1- 4 ATMEL CORPORATION CONDENSED CONSOLIDATED INCOME STATEMENTS (In thousands, except per-share data) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 --------- --------- --------- --------- NET REVENUES: $ 288,205 $ 224,936 $ 548,597 $ 477,882 EXPENSES: Cost of sales 199,675 125,900 363,867 262,277 Research and development 43,394 29,357 80,053 58,528 Selling, general and administrative 39,115 24,361 66,941 50,304 In process research and development 23,425 0 23,425 0 Restructuring charges 66,300 0 66,300 0 --------- --------- --------- --------- TOTAL EXPENSES 371,909 179,618 600,586 371,109 ========= ========= ========= ========= Operating income (loss) (83,704) 45,318 (51,989) 106,773 Other expenses, net (9,338) (3,156) (13,781) (5,014) --------- --------- --------- --------- Income (loss) before taxes (93,042) 42,162 (65,770) 101,759 Income tax provision (benefit) (1,633) 14,754 (1,154) 35,613 --------- --------- --------- --------- NET INCOME (LOSS) $ (91,409) $ 27,408 $ (64,616) $ 66,146 ========= ========= ========= ========= BASIC NET INCOME (LOSS) PER SHARE $ (0.92) $ 0.28 $ (0.65) $ 0.67 ========= ========= ========= ========= DILUTED NET INCOME (LOSS) PER SHARE $ (0.92) $ 0.27 $ (0.65) $ 0.65 ========= ========= ========= ========= SHARES USED IN BASIC NET INCOME (LOSS) 99,223 99,354 99,136 99,251 PER-SHARE CALCULATION ========= ========= ========= ========= SHARES USED IN DILUTED NET INCOME (LOSS) 99,223 102,625 99,136 102,522 PER-SHARE CALCULATION ========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. -2- 5 ATMEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, 1998 1997 --------- --------- CASH FROM OPERATING ACTIVITIES Net income (loss) $ (64,616) $ 66,146 Items not requiring the use of cash Depreciation and amortization 100,697 70,660 Write-down of fixed assets 65,000 0 In process research and development expense 23,425 0 Other (2,142) 9,939 Changes in operating assets and liabilities Accounts receivable 7,434 (40,532) Inventories (58,217) (32,725) Other current assets 16,074 (12,674) Trade accounts payable and other accrued liabilities (24,210) (55,161) Income taxes payable 14,809 2,598 Deferred income on shipments to distributors 8,320 (723) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 86,574 7,528 ========= ========= CASH FROM INVESTING ACTIVITIES Acquisition of fixed assets (155,419) (181,709) Acquisition of other assets (24,946) (2,510) Acquisition of Temic Telefunken Microelectronic (99,250) 0 Purchase of investments (183,107) (34,904) Sale or maturity of investments 142,047 37,716 --------- --------- NET CASH USED BY INVESTING ACTIVITIES (320,675) (181,407) ========= ========= CASH FROM FINANCING ACTIVITIES Proceeds from issuance of convertible bonds 115,004 150,000 Proceeds from capital leases, short-term loan and notes 228,908 136,234 Principal payments on capital leases, short-term loan and (154,480) (43,697) notes Proceeds from settlement of warrants 0 4,425 Repurchase of stock (16,623) 0 Issuance of Common Stock 4,813 7,723 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 177,622 254,685 ========= ========= EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT (805) (12,309) ========= ========= NET CASH PROVIDED (USED) (57,284) 68,497 CASH AT BEGINNING OF PERIOD 174,310 104,113 --------- --------- CASH AT END OF PERIOD $ 117,026 $ 172,610 ========= ========= INTEREST PAID $ 18,693 $ 12,495 INCOME TAXES PAID $ 642 $ 29,748 FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 13,071 $ 30,548 PURCHASE OF CALL WARRANTS FROM PROCEEDS OF PUT WARRANTS $ 4,450 $ 2,088
The accompanying notes are an integral part of these condensed consolidated financial statements. -3- 6 ATMEL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) $(91,409) $ 27,408 $(64,616) $ 66,146 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 2,783 (3,574) (842) (8,001) Unrealized gains (losses) on securities (71) (129) (27) (217) -------- -------- -------- -------- Total other comprehensive income (loss) 2,712 (3,703) (869) (8,218) -------- -------- -------- -------- Comprehensive income (loss) $(88,697) $ 23,705 $(65,485) $ 57,928 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 7 ATMEL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (In thousands) (Unaudited) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES These unaudited interim financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly, in all material respects, the financial position of Atmel Corporation (Company or Atmel) and its subsidiaries as of June 30, 1998 and the results of operations and cash flows for the three month and six month periods ended June 30, 1998 and 1997. Because all of the disclosures required by generally accepted accounting principles are not included, these interim statements should be read in conjunction with the audited financial statements and notes thereto in the Company's Annual Report to Shareholders for the year ended December 31, 1997. The year-end condensed balance sheet data was derived from the audited financial statements and does not include all of the disclosures required by generally accepted accounting principles. The income statements for the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year. 2. 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.
JUNE 30, DEC. 31, 1998 1997 -------- -------- Materials and purchased parts $ 19,605 $ 10,527 Finished Goods 31,465 25,590 Work in progress 163,311 88,219 -------- -------- TOTAL $214,381 $124,336 ======== ========
3. NET INCOME (LOSS) 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. 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: -5- 8
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 --------- --------- --------- --------- Numerator: Basic and diluted net income (loss) $ (91,409) $ 27,408 $ (64,616) $ 66,146 ========= ========= ========= ========= Denominator: Shares used in basic net income per share calculations Weighted average shares of common stock outstanding 99,223 99,354 99,136 99,251 ========= ========= ========= ========= Shares used in diluted net income per share calculations Weighted average shares of common stock outstanding 99,223 99,354 99,136 99,251 Dilutive effect of stock options 0 3,271 0 3,271 --------- --------- --------- --------- 99,223 102,625 99,136 102,522 ========= ========= ========= ========= Basic net income (loss) per share $ (0.92) $ 0.28 $ (0.65) $ 0.67 ========= ========= ========= ========= Diluted net income (loss) per share $ (0.92) $ 0.27 $ (0.65) $ 0.65 ========= ========= ========= =========
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 without immediately impacting the Company's cash resources needed for planned capital expenditures. In addition, the Company paid approximately $16,600 in cash to repurchase 1,000 shares of its common stock in January 1998. 4. PUT WARRANTS The Company has sold put warrants to an independent third party during the six months ended June 30, 1998 and used the proceeds from the sale of the put warrants to purchase call warrants in a cash-less transaction. The put warrants entitle the holder to sell shares of the Company's common stock to the Company at contractual prices. The call warrants entitle the Company to buy, at contractual prices, from the same independent third party shares of the Company's common stock. The outstanding put and call warrants, which expire between October 26, 1998 and May 4, 1999, are exercisable at any time before maturity and may be settled in cash, at the Company's option. The maximum contractual repurchase obligation of $69,730 has been reclassified from shareholders' equity to put warrants as of June 30, 1998. There was no impact on basic and diluted net income per share in the six months ended June 30, 1998. 5. TEMIC ACQUISITION On March 1, 1998 the Company acquired the integrated circuit business of Temic Telefunken Microelectronic (Temic) of Heilbronn, Germany, a wholly owned subsidiary of Vishay Intertechnology, Inc. for $99,250 cash. The acquisition of Temic included its wholly-owned subsidiary, MHS based in Nantes, France. Temic designs, manufactures and sells analog, microcontroller and ASIC products that service the automotive, telecommunications, consumer and industrial markets. -6- 9 The fair value of the assets acquired exceeded the purchase price by approximately $131,000. As a result the fair value of the long term assets acquired were reduced. The following is a summary of the allocation of the purchase price.
As Originally Reported As Restated ------------- ----------- Purchase price $99,250 $99,250 ======= ======= Purchased technology $12,734 $19,661 Workforce in place 2,384 3,681 In-process technology 32,241 23,425 Other assets, net of assumed liabilities 51,891 52,483 ======= ======= $99,250 $99,250 ======= =======
The Company is amortizing purchased technology and workforce in place over five years. In-process technology was charged to operations upon acquisition. The amount allocated to in-process technology represents purchased in-process technology for three projects that have not yet reached technological feasibility and have no alternative future use. For all in-process projects, value was determined by estimating the net cash flows resulting from the completion of these projects reduced to the percentage of completion of the project. Net cash flows were tax affected using estimated income taxes consistent with the Company's anticipated tax rate for the foreseeable future and then discounted back to their present value at a discount rate of 18 percent based on the Company's required risk adjusted weighted average rate of return. The nature of the efforts to develop all purchased in-process technology into commercially viable products and processes principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products and processes can meet their design specification, including function, features and technical performance requirements. Due to the fact that these projects are in-process there is uncertainty whether they can be successfully developed and result in the net cash flows that were originally estimated at acquisition. It is reasonably possible that the development of this technology could fail because of either prohibitive cost, the Company's inability to perform the required completion efforts or other factors outside the Company's control such as a change in the market for the resulting developed products. If the development of the technology is unsuccessful, the technology may be abandoned during the development phase. Should the Company's development efforts fail or encounter significant delay then the Company's future returns may be significantly reduced. In such case, the Company may be unable to recover its investment in these projects, may be less well positioned to benefit from new product markets in these areas and the Company's future operating results could be adversely affected. The Company cannot guarantee that it will realize revenue from these products in the amounts estimated. The Company currently believes the aggregate net cash flows originally anticipated at acquisition will be realized and that there has been no material change in the expected return on investment related to these projects. The fair value allocated to each of the in-process projects was as follows: -7- 10 Product developments $ 8,784 Process developments 9,621 System level integration 5,020 ------- $23,425 =======
Product developments The ongoing product developments at the time of acquisition included development of new or significantly enhanced microcontroller, automotive and communications products. It was estimated that, on average, in-process product technology was 38 percent complete at the date of acquisition based on the cost of research development to date compared to total estimated cost. The Company expects to incur up to a total of $30,000 in development costs over the next two years to complete this project. The Company anticipates the development will be completed and net cash in-flows will begin in the 2000-2001 time frame. The estimated revenue includes average compounded annual revenue growth rates for the projects from 1998 to 2003, and declining growth rates thereafter through 2005. The Company based these projections on estimates of market size and growth, expected trends in technology and the nature and expected timing of new product introductions. Estimated cost of sales was consistent with the Company's current cost of sales and future expectations for cost of sales. Sales and marketing costs were expected to be consistent with that of the Company's average costs in these areas. Maintenance research and development costs as a percentage of estimated revenue are expected to be higher than the Company's average costs in the introduction and early phases of product sales and then decline to the Company's average costs. This research and development cost pattern is consistent with the Company's historical experience through product life cycles. Process development Process developments at the time of acquisition included Silicon Germanium (SiGe) technology and UHF process technologies, which will be incorporated in new products. If the development is successful, these technologies enable higher product performance while reducing product cost. It was estimated that the project was 51 percent complete at the date of acquisition based on the cost of research development to date compared to total estimated cost. The Company expects to incur up to a total of $10,000 in development costs over the next two years to complete these projects. The Company anticipates the development will be completed and net cash in-flows will begin in the 1999-2000 time frame. The value of process technology under development was estimated by projecting attributable future cost savings. Cost savings were estimated to begin in 1999 and grow through 2003 and decline to zero through 2006. The estimates of cost savings (reduction of cost of goods sold) were compared to the Company's historical results as well as the forecasts utilized by the Company in evaluating the Temic acquisition. A maintenance research and development charge and income taxes were then deducted from the cost savings to estimate the free cash flow attributable to the process technology under development. Maintenance research and development costs as a percentage of estimated revenue are expected to be higher than the Company's average costs in the introduction and early phases of process implementation and then decline to the Company's average costs. This research and development cost pattern is consistent with the Company's historical experience through process life cycles. -8- 11 System level integration New manufacturing processes and improved design tools have created a new market referred to as System Level Integration (SLI) or system-on-a-chip which will result in single chip solutions replacing multi-chip sets. The Company is aggressively pursuing the SLI market, which could represent a $30 billion market by 2002. Silicon germanium and RF in-process technologies obtained from Temic will be integral to the Company's SLI strategy. It was estimated that the project was 32 percent complete at the date of acquisition based on the status of the Silicon germanium and RF projects currently under development. The Company expects to incur up to a total of $17,000 in development costs over the next two years to complete this project. The Company anticipates the development will be completed and net cash in-flows will begin in the 2000-2001 time frame. The Company has identified several products that will incorporate SLI in the future and projected total revenue from these products through 2003. The Company estimated that 25 percent of this revenue was attributable to in-process technologies acquired in the Temic acquisition. An industry projected earnings before interest and tax margin of 18.7 percent, a capital charge of 1.2 percent and an estimated tax charge were applied to estimated revenues to estimate total cashflow attributable to the products that will incorporate in-process SLI technology. Net cash in-flows are expected to begin in 1999. Revenue and operating income were estimated to increase from 1999 to 2001 and decline from 2001 to 2003. These estimates were compared to the Company's historical results as well as the forecasts utilized by the Company in evaluating the Temic acquisition. Included within assets, net of assumed liabilities, is an accrual for $6,800 for the cost of terminating certain employees at Temic's MHS subsidiary. At the acquisition date, Atmel management had assessed the need to terminate employees at MHS. Subsequent to the acquisition, Atmel management finalized its plan to terminate 120 employees representing all departments except the information systems and product design departments. At June 30, 1998, no employees had been terminated. The Company believes that the accrual will be sufficient to cover the termination costs and that planned terminations will be completed and all costs incurred by March 1999. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition had occurred at the beginning of periods presented and do not purport to be indicative of what would have occurred had the acquisition been made as of the date, or of results which my occur in the future.
Six Months Ended June 30, 1998 1997 --------- --------- Net revenues $ 591,706 $ 616,983 ========= ========= Net income (loss) $ (73,126) $ 57,390 ========= ========= Diluted net income (loss) per share $ (0.74) $ 0.56 ========= =========
-9- 12 6. CONTINGENCIES 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. The Company was named as a defendant in a patent infringement lawsuit 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. 7. RECENT ACCOUNTING PRONOUNCEMENT In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. The SOP is effective for the Company's fiscal year ended December 31, 1999 and will require the effect of adoption be reported as a cumulative effect of change in accounting principle. Upon adoption of the SOP, the Company expects to record a charge against earnings. At June 30, 1998, start-up costs of $38,661 was reported as other assets. In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not yet evaluated the effects of this change on its operations. The Company will adopt SFAS 133 as required for its first quarterly filing of fiscal year 2000. 8. ZERO COUPON CONVERTIBLE DEBT In April 1998, the Company completed a zero coupon convertible debt financing, which raised approximately $115,000. The debt is convertible, at the option of the holder, into the Company's common stock at the rate of 13.983 shares per $1,000 principal amount at maturity of the debt. The effective interest rate of the debt is 5.5 percent per annum. The net proceeds were used to repay a short-term loan of approximately $110,000 with Nationsbank which was originally borrowed to finance the acquisition of Temic. The debt is not redeemable by the Company prior to April 21, 2003. Thereafter, the debt will be redeemable for cash, at the option of the Company in whole at any time or in part from time to time at redemption prices equal to the issue price plus accrued interest. At the option of the holder as of April 21, 2003, 2008 and 2013, the Company may be required to redeem the debt at prices equal to the issue price plus accrued interest. The Company may, at its option, elect to redeem the debt for cash or common stock of the Company, or any combination thereof. -10- 13 9. COMPREHENSIVE INCOME The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), effective with its 1998 fiscal year. The income tax effect of each element of comprehensive income is summarized as follows:
THREE MONTHS ENDED JUNE 30, 1998 -------------------------------------- Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Foreign currency translation adjustments $ 4,282 $(1,499) $ 2,783 Unrealized gain (loss) on securities (110) 39 (71) ------- ------- ------- Other comprehensive income $ 4,172 $(1,460) $ 2,712 ======= ======= =======
SIX MONTHS ENDED JUNE 30, 1998 ------------------------------------- Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Foreign currency translation adjustments $(1,296) $ 454 $ (842) Unrealized gain (loss) on securities (41) 14 (27) ------- ------- ------- Other comprehensive income $(1,337) $ 468 $ (869) ======= ======= =======
The accumulated balances of other comprehensive income at June 30, 1998 are summarized as follows:
Current Beginning Period Ending Balance Change Balance --------- -------- --------- Foreign currency translation adjustments $(6,449) $ (842) $(7,291) Unrealized gain (loss) on securities (654) (27) (681) ------- ------- ------- $(7,103) $ (869) $(7,972) ======= ======= =======
10. IMPAIRMENT AND RESTRUCTURING CHARGES During the second quarter of fiscal 1998, the Company announced a restructuring plan which included a 10 percent workforce reduction and the write-down of certain manufacturing equipment and machinery with older process technology. The majority of the 10 percent of employees to be terminated will be factory workers in the Company's manufacturing facilities located in the U.S. and Europe. The program is primarily aimed at focusing the Company's business processes, attaining cost efficiencies and increasing manufacturing flexibility. The impairment and restructuring charges of $66,300 included a provision of $1,300 for severance costs which are anticipated to be paid primarily in the second half of fiscal 1998. -11- 14 As the Company continued to move toward production with 0.35-micron technology, the Company recognized an impairment charge of $65,000 relating to manufacturing equipment with 0.65-micron and 0.5-micron technologies. The decision to accelerate implementation of 0.35-micron technology was prompted by the continued price erosion of the Company's Flash memory products, and weakening business conditions for its EPROM products have further negatively affected the Company's gross margin. In making its decision, the Company examined the relationship between the costs of fixed assets in its Colorado facility and the projected revenues produced from these assets during the next three years, and concluded that the gross margin of its products would decline rapidly based upon the continued price erosion and maturity of its products. Accordingly, the Company decided to move toward more advanced manufacturing processes using 0.35-micron technology in its Colorado facility, in an effort to maintain its revenues and reduce its costs. However, due to the current depressed state of the average selling prices for the semiconductor memory products, even the additional output per wafer does not provide a positive gross margin (without reducing depreciation charges from the manufacturing equipment). In measuring the impairment, the Company grouped manufacturing assets at the lowest level from which there were identifiable cash flows that were largely independent of the cash flows of other groups of assets. 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. At such time, the carrying values of these assets were written down to the Company's estimates of fair value and will continue to be depreciated over their remaining useful lives. 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 balance of $23,425 of in process research and development charges represents the allocation of purchase price of the Temic acquisition to in-process research and development expense. See Note 5 (Temic Acquisition) above. 11. RESTATEMENT After discussions with the Staff of the Securities and Exchange Commission (the "SEC"), the Company has restated the accompanying consolidated financial statements as of June 30, 1998 and for the three and six months ended June 30, 1998. The financial statements have been restated to reflect a change in the purchase price allocation using a percentage of completion methodology which resulted in an adjustment to the valuation and related amortization of intangibles arising from the acquisition of Temic in March 1998. Additionally, at the time of the original filing of Form 10-Q for the quarter ended March 31, 1998, the Company did not have sufficient information to make an allocation of the purchase price of Temic in accordance with Accounting Principles Board (APB) Opinion No. 16. Accordingly, the Company had included a preliminary purchase price allocation based on Temic's March 31, 1998 balance sheet in the absence of a valuation of assets and liabilities as required by APB Opinion No. 16. The Company, after discussions with the SEC, has treated the restatement of the purchase price allocation based on final valuations of the tangible and intangible assets and liabilities acquired, including in-process research and development, as a change in accounting estimate in the quarter ended June 30, 1998. The Company has restated the income tax provision as a result of the finalization of the purchase price allocation of Temic. The Company has also reduced the restructuring charge by $3,700 to reflect a correction of the estimated reserve for severance costs. -12- 15 The impact of the restatement for the quarter ended June 30, 1998 was as follows:
As Originally Reported As Restated ------------- ------------- In process R&D $ 0 $ 23,245 Restructuring charge $ 70,000 $ 66,300 Income (loss) before taxes $ (69,617) $ (93,042) Income tax provision (benefit) $ (25,149) $ (1,633) Net income (loss) $ (44,468) $ (91,409) Diluted net income (loss) per share $ (0.45) $ (0.92) Total assets $ 1,951,784 $ 1,967,400
-13- 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investors are cautioned that certain statements in this Form 10-Q 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, manufacturing capacity 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 Form 10-Q. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain operating data as a percentage of net revenues:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ------ ------ ------ ------ NET REVENUES 100.0% 100.0% 100.0% 100.0% EXPENSES Cost of sales 69.2 56.0 66.3 54.9 Research and development 15.1 13.1 14.6 12.2 Selling, general and administrative 13.6 10.8 12.2 10.5 In process research and development 8.1 0.0 4.3 0.0 Restructuring charges 23.0 0.0 12.1 0.0 ------ ------ ------ ------ TOTAL EXPENSES 129.0 79.9 109.5 77.7 OPERATING INCOME (LOSS) (29.0) 20.1 (9.5) 22.3 Other expense, net (3.2) (1.4) (2.5) (1.0) ------ ------ ------ ------ INCOME (LOSS) BEFORE TAXES (32.2) 18.7 (12.0) 21.3 Income tax provision (benefit) (0.6) 6.6 (0.2) 7.5 ------ ------ ------ ------ NET INCOME (LOSS) (31.6)% 12.1% (11.8)% 13.8% ====== ====== ====== ======
NET REVENUES The Company's net revenues by geographic destinations for the three-month and six-month periods ended June 30, 1998 and 1997 are summarized as follows: -14- 17
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 --------- --------- --------- --------- North America $ 76,806 $ 92,733 $ 171,121 $ 188,499 Europe 144,675 57,355 245,033 135,376 Asia 110,972 97,032 213,577 201,103 Elimination (44,248) (22,184) (81,134) (47,096) --------- --------- --------- --------- Total $ 288,205 $ 224,936 $ 548,597 $ 477,882 ========= ========= ========= =========
Net revenues increased 28.1 percent to $288.2 million in the three months ended June 30, 1998 from $224.9 million in the corresponding quarter of 1997. Net revenues for the first six months ended June 30, 1998 increased 14.8 percent to $548.6 million from $477.9 million in the same period of 1997. This increase was primarily attributable to the inclusion of revenues from the Temic's business, a recent acquisition by the Company. See Note 5 (Temic Acquisition) in Notes to Condensed Consolidated Financial Statements. The revenue decrease in the North American region was primarily due to continued price erosion of the Company's memory products. The increase in revenues in the European region was primarily due to the revenue contribution from Temic. The increase in revenues in the Asian region was largely due to an increase in intercompany sales between the Company and its wholly-owned subsidiary located in Hong Kong which are eliminated on consolidation. Excluding the $71.7 million revenue contribution from Temic, net revenues for the three months ended June 30, 1998 would have decreased by approximately 3.7 percent compared to the corresponding quarter of 1997. During the three months ended June 30, 1998, revenues from the Company's ASIC products increased 59.0 percent while revenues from its logic and memory products decreased 11.1 percent and 13.3 percent, respectively, compared to the corresponding quarter of 1997. The Company expects its ASIC revenues to continue to grow as the Company is repositioning itself in the vanguard of the system-on-a-chip movement. The decrease in logic revenues was primarily attributable to the declining prices of the Company's EPROM and EEPROM products. During the three months ended June 30, 1998, EPROM revenues decreased 47.2 percent while EEPROM revenues decreased 37.1 percent, compared to the corresponding period of 1997. The decline in memory revenues was primarily due to abnormal price erosion (caused by excess manufacturing capacity in the semiconductor industry). For the six months ended June 30, 1998, the decrease in net revenues was approximately 5.1 percent, excluding the revenue from Temic of $95.0 million. The decrease was primarily due to the reasons discussed above with respect to the three months ended June 30, 1998. 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 recent years, the Company has significantly expanded its international operations, most recently through its acquisition of Temic. International sales and operations are subject to a variety of risks, including those arising from currency fluctuations, tariffs, trade barriers, taxes, export license requirements and foreign government regulations. Because most of the Company's foreign sales are denominated in U.S. dollars, the Company's products become less price competitive in countries with currencies declining in value against the dollar. In particular, the Company's operating results for the second quarter of 1998 were adversely impacted in part by a strengthening of the U.S. dollar against local currencies in the markets in which the Company sells products. There can be no assurance that -15- 18 the Company will not experience similar adverse effects in the future. In addition, the continuance or worsening of the adverse business and financial conditions in Asia, where more than 38.0 percent of the Company's revenues are generated, would have a material adverse effect on the Company's operating results in the future. 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 exposure related to non-dollar 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 between three and nine months. Foreign exchange contracts outstanding, all of which were in Japanese currency, amounted to $12.9 million at June 30, 1998. 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, has continued to suffer from excess capacity during 1998. If these conditions continue, 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 and military equipment. The Company's success will also depend upon 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 that this growth will resume in the future periods, as was evidenced in 1997 and 1998. COST OF SALES Cost of sales as a percentage of net revenues increased to 69.2 percent in the second quarter of 1998, from 56.0 percent in the corresponding period of 1997. The increase in cost of sales as a percentage of net revenues was primarily due to excess manufacturing capacity resulting from increases in fixed costs associated with the expansion of wafer fabrication facilities in Colorado Springs, Colorado and Rousset, France, lower product margins in many of the Company's non-volatile memory products and the inclusion of $63.5 million of additional cost of sales from Temic. The lower product margins were attributable to a smaller revenue base over which to spread fixed costs and the erosion of average selling prices that were not matched with a corresponding decrease in manufacturing cost. The Company expects competitive pressures to increase in its markets from existing companies and new entrants, which among other things could further accelerate the trend of decreasing average selling prices. Accordingly, there can be no assurance that the Company will be able to sustain its recent gross margins. The Company has lowered its capital expenditure plan in 1998 and will focus on -16- 19 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, production delays, difficulties in achieving acceptable yields at its Colorado Springs or Rousset facility, overcapacity or difficulties in integrating the Temic acquisition (see discussion in Risk Associated with Temic Acquisition below) could materially and adversely affect the Company's gross margin and future operating results. RESEARCH AND DEVELOPMENT As a percentage of net revenues, research and development expense increased to 15.1 percent in the second quarter of 1998, from 13.1 percent in the corresponding quarter of 1997. Research and development expense increased 47.8 percent from $29.4 million in the second quarter of 1997 to $43.4 million in the second quarter of 1998. The increase was primarily due to the Company's continued investment in the shrinking of the die size of its integrated circuits from 0.65-micron to 0.5-micron line widths and from 0.5-micron to 0.35-micron line widths, enhancement of mature products, development of new products, advanced CMOS process technology, manufacturing improvements, the costs associated with increasing production capacity in Colorado Springs and Rousset and the inclusion of Temic's research and development expense of $16.1 million. The Company believes that continued investment in process technology and product development are essential for it to remain competitive in the markets it serves and is committed to high levels of expenditures for research and development. The primary technology which the Company acquired through the Temic acquisition is the silicon germanium manufacturing process. The Company intends to develop the acquired technology and expects to incur between $10.0 and $20.0 million per year in development costs for the next two to three years. If the development is successful, this technology will allow wireless communication devices to communicate at higher frequencies and at a lower cost than is currently available with other technologies. The Company anticipates that a CMOS like silicon germanium process will begin to be incorporated into the Company's products in the year 2000 - 2002 time frame. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by 60.6 percent to $39.1 million in the second quarter of 1998 from $24.4 million in the second quarter of 1997. The increase was largely due to headcount increases in both domestic and foreign operations, provision for bad debts expense, legal costs related to patent infringement lawsuit and the inclusion of Temic's selling, general and administrative expense of $17.9 million. As a percentage of net revenues, selling, general and administration expenses were 13.6 percent for the second quarter of 1998 and 10.8 percent for the corresponding quarter of 1997. The Company expects selling general and administrative expenses to increase due primarily to expansions in international markets, legal costs associated with intellectual property litigation and provision for doubtful accounts receivable. The provision for doubtful accounts receivable may increase as the Company continues to evaluate the status of its accounts receivable. The increase will primarily be due to the aging of accounts receivable, an anticipated increase in accounts receivable, continued weakened business conditions and less financially strong customers. -17- 20 IN PROCESS RESEARCH AND DEVELOPMENT AND RESTRUCTURING CHARGES During the second quarter of fiscal 1998, the Company announced a restructuring plan which included a 10 percent workforce reduction and the write-down of certain manufacturing equipment and machinery with older process technology. The majority of the 10 percent of employees to be terminated will be factory workers in the Company's manufacturing facilities located in the U.S. and Europe. The program is primarily aimed at focusing the Company's business processes, attaining cost efficiencies and increasing manufacturing flexibility. The effects of the restructuring programs are expected to reduce the Company's cost of sales, salary cost and depreciation and improve its profit margins in the future. The Company does not believe the restructuring programs will generate increased costs in other areas or lead to diminished revenues. The full implementation of the restructuring programs will take place over the next two quarters and the Company expects these programs to generate pre-tax savings of approximately $30.0 million per quarter during such time. However, no assurance can be given as to the eventual cost savings under these restructuring programs. The Company is converting its manufacturing process to use 0.35-micron technology and is developing 0.25-micron technology. Until these migrations are completed, the older equipment and associated manufacturing processes are still being used. The restructuring charges of $66.3 million included a provision of $1.3 million for severance costs and a reserve of $65.0 million for write-down of fixed assets. See Note 10 (In Process Research and Development Charges) in Notes to Condensed Consolidated Financial Statements. As the Company continued to move toward production with 0.35-micron technology, the Company recognized an impairment charge of 65.0 million relating to manufacturing equipment with 0.65-micron and 0.5-micron technologies. 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. At 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. Additionally, a $23.4 million purchased in-process research and development expense related to the acquisition of Temic in March 1998 has been charged against the second quarter's operating results. In addition, the Company allocated $19.7 million of the purchase price to developed technology and $3.7 million to the trained workforce acquired, both of which are being amortized over 5 years. The purchase price was less than the fair market value of the assets acquired. The resulting negative goodwill was allocated to noncurrent assets and in-process research and development pro-rata based on the fair market values of the assets. At the time of the acquisition, the technological feasibility of the acquired in-process technology had not been established and the Company believes the technology has no alternative use. The Company intends to develop the acquired technology (see Research and Development); however, it is uncertain whether the Company will be successful in this regard. If the development of the technology is unsuccessful, the technology may be abandoned during the development phase. See Note 5 (Temic Acquisition) in Notes to Condensed Consolidated Financial Statements. OTHER EXPENSES, NET The Company reported $9.3 million of net interest and other expenses for the second quarter of 1998, compared to $3.2 million of net interest and other expenses for the corresponding period of 1997. The -18- 21 increase in net interest and other expenses was primarily due to a combination of higher interest expense associated with the increase in borrowings to finance the expansion of the Company's fabrication facilities in Colorado Springs and Rousset and to finance the acquisition of Temic during the first quarter of 1998, as well as the result of a portion of interest expense being capitalized in the second quarter of 1997 (in connection with the construction of the Company's fabrication facility in Rousset). Foreign exchange gain (loss) included in Other Expenses, Net for the six months ended June 30, 1998 and 1997 was $103 and $(2,888), respectively. INCOME TAX PROVISION (BENEFIT) The Company's effective tax rate was 35.0 percent for the first six months of 1997 and 1.8 percent for the first six months of 1998. The reduction in tax rate is due to the tax effect of the Temic acquisition. NET INCOME (LOSS) The Company reported a net loss of $91.4 million for the second quarter of 1998, compared to net income of $27.4 million in the corresponding period of 1997. Net loss for the first six months of 1998 was $64.6 million, compared to net income of $66.1 million in the corresponding period of 1997. The substantial decrease in net income was primarily due to the in process research and development and restructuring charges incurred during the first six months of 1998. See In Process Research and Development and Restructuring Charges above for detail. RISKS ASSOCIATED WITH TEMIC ACQUISITION The Company acquired Temic on March 1, 1998. While the Company believes the Temic acquisition is in the best interest of the Company and its shareholders, there can be no assurance that management of the Company will be successful in its efforts to integrate the operations of Temic. There are significant risks associated with the Temic acquisition, including but not limited to difficulties in integration of product offerings, manufacturing operations and coordination of sales and marketing and research and development efforts. The difficulties of Temic integration may be increased by the necessity of coordinating geographically separated organizations, the complexity of the technologies being integrated and the necessity of integrating personnel with disparate business backgrounds and combining two corporate cultures. The integration of operations following Temic acquisition requires the dedication of management resources that may distract attention from day-to-day business and may disrupt key research and development, marketing or sales efforts. The inability of management to successfully integrate the Temic acquisition could have a material adverse effect on the business, operating results and financial condition of the Company. YEAR 2000 RISKS The Company initiated a program during 1997 to review its computer hardware and software systems to determine the impact of and to provide solutions for Year 2000 requirements. The Year 2000 program is being conducted in five phases - (i) planning, (ii) inventory/impact, (iii) remediation, (iv) testing and (v) monitoring. -19- 22 As of August 1, 1998, the Company had completed the planning phase of the Year 2000 program for both information technology (IT) and non-information technology (Non-IT) systems. The inventory/impact phase has been completed for IT systems and is substantially completed for Non-IT systems. The Company has completed the remediation phase for most of its IT systems (i.e., factory management system, order entry and tracking system, electronic data interchange (EDI) and financial information systems). The remediation phase for the remaining IT systems is approximately 35 percent completed and is expected to be fully completed by mid 1999. The Company has begun the remediation process for Non-IT systems and expects this remediation process to be completed in mid-1999. The testing phase had been completed for the EDI system and is approximately 80 percent completed for the order entry and tracking system and the financial information system. Depending upon the timing of the remediation phase, the testing phase for the remaining IT systems and Non-IT systems will begin immediately following the completion of the remediation process. The Company expects phases (i) through (iv) of the Year 2000 program to be completed during the third quarter of 1999. The Company has also begun the process of identifying its top 100 suppliers and sending these suppliers a Year 2000 compliance survey. The Company expects this process to be completed by mid-1999. The Company has not yet established a contingency plan for any Year 2000 issues that may arise, but expects to establish such a plan during its completion of phases (i) through (v) of the Year 2000 program. The Company `s cost related to identifying and addressing Year 2000 issues are not expected to be material. Thus far, the major cost associated with identifying and addressing Year 2000 issues has been in-house labor costs. The Company does not anticipate costly replacements for Non-IT equipment, since the Company expects that substantially all of this equipment can be upgraded to be Year 2000 compliant. If the Company were unable to successfully upgrade its IT and Non-IT systems to be Year 2000 compliant, its wafer productions system and business and financial information systems could be materially and adversely affected, which in turn could result in a material adverse effect on the Company's business, operating results and financial conditions. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had $183.1 million in cash and short-term investments, a decrease of $54.5 million from December 31, 1997, and $329.0 million in net working capital, an increase of $14.5 million from December 31, 1997. Accounts receivable increased 20.0 percent to $260.3 million at June 30, 1998 from $217.0 million at December 31, 1997. The increase was primarily due to the inclusion of Temic's accounts receivable of $51.7 million. The average days of accounts receivable outstanding were 89.0 and 74.8 days for the six month periods ended June 30, 1998 and 1997, respectively. The increase in average days outstanding was due primarily to the Company extending longer payment terms to its customers due to competitions and a more difficult collection environment due to weakened business conditions and less financially strong customers. Inventories increased 72.4 percent to $214.4 million at June 30, 1998 from $124.3 million at December 31, 1997. The increase in inventory was primarily due to the combination of decline in sales and the continuation of production. The inventory increase was also due, in part, to the inclusion of Temic's inventory of $31.7 million. The inventory turnover for the six months ended June 30, 1998 was 2.1 times compared to 3.0 times of the corresponding period of 1997. At June 30, 1998, the Company had long-term investments of $133.8 million, an increase of $38.3 million from December 31, 1997. These investments consisted of United States government obligations and state and municipal securities. In April 1998, the Company completed a zero coupon convertible debt financing, which raised approximately $115.0 million. See Note 8 (Zero Coupon Convertible Debt) in Notes to Condensed Consolidated Financial Statements. -20- 23 During the six months ended June 30, 1998, the Company generated net cash flows from operations of $86.6 million. Net cash used in investing activities was $320.7 million, due to acquisitions of fixed and other assets of $180.4 million, investment in Temic of $99.3 million, purchases of marketable securities of $183.1 million, offset by sale of marketable securities of $142.0 million. Net cash provided from financing activities was $177.6 million, due to funding from capital leases and bank borrowings of $228.9 million, issuance of zero coupon convertible notes of $115.0 million and proceeds from stock issuance of $4.8 million, offset by payments of capital leases and notes payable of $44.5 million, payment of $110.0 million loan with Nationsbank and payments of $16.6 million for the repurchase of one million shares of the Company's common stock. The $228.9 million of capital lease and bank borrowings included a $110.0 million of short-term loan from Nationsbank which was used to finance the acquisition of Temic. This short-term loan with Nationsbank was subsequently repaid from the net proceeds received in connection with the zero coupon convertible debt financing completed in April 1998. See Note 8 (Zero Coupon Convertible Debt) in the Notes to Condensed Consolidated Financial Statements. The Company believes that its existing sources of liquidity, together with cash flows from operations, leasing financing on equipment and other short- and 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 the expansion of its wafer fabrication capacity or other projects; the timing and amount of such capital requirements cannot be precisely determined at this time. There can be no assurance that such financing would be available in amounts or terms acceptable to the Company. -21- 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company was named as a defendant in a patent infringement lawsuit 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. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS For the six months ended June 30, 1998, the Company sold 2,500 put warrants. The entire proceeds from the sale of the put warrants were used by the Company to purchase call warrants in a cash-less transaction. Put warrants entitle the holder of each warrant to sell to the Company, by physical delivery, one share of Common Stock at a specified strike price. The Company's outstanding put warrants expire on October 26, 1998, March 5, 1999 and May 4, 1999, are exercisable only on the maturity date, and may be settled in cash at the Company's option. The maximum potential repurchase obligations of the Company are as follows: 1,200 shares with a strike price of 24.88 per share or $29,850, 1,000 shares with a strike price of $12.88 per share or $12,880 and 1,500 shares with a strike price of $18.00 or $27,000. The put warrants have been classified separately on the balance sheet to reflect the maximum potential obligation of the Company. There was no impact on basic or diluted net income (loss) per share in the six months ended June 30, 1998 and 1997, resulting from these transactions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the Company's Annual Meeting of Stockholders held on April 29, 1998, the following matters were voted upon by stockholders pursuant to proxies solicited pursuant to Regulation 14A. The following individuals were reelected to the Board of Directors (share numbers in thousands):
Votes For Votes Withheld --------- -------------- George Perlegos 85,040 2,536 Gust Perlegos 85,019 2,557 Tsung-Ching Wu 85,051 2.525 Norm Hall 85,030 2,546 T. Peter Thomas 84,786 2,790
The following proposal was approved at the Company's Annual Meeting of Stockholders:
Affirmative Negative Votes Votes Abstained ----------- -------- --------- Ratify the appointment of PricewaterhouseCoopers LLP as independent accountants for the fiscal year ending December 31, 1998 87,127 221 228
-22- 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibit: 27.1 Financial Data Schedule (B) Reports on Form 8-K: A Form 8-K was filed on April 16, 1998 in connection with the Registrant's press release dated April 9, 1998 (announcing the operating results for the first quarter ended March 31, 1998). A Form 8-K was filed on April 22, 1998 in connection with the Registrant's press release dated April 16, 1998 (announcing the pricing of zero coupon convertible subordinated debentures) -23- 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATMEL CORPORATION ---------------------------------------- (Registrant) APRIL 27, 1999 /S/ GEORGE PERLEGOS ---------------------------------------- GEORGE PERLEGOS President, Chief Executive Officer (Principal Executive Officer) APRIL 27, 1999 /S/ DONALD COLVIN ---------------------------------------- DONALD COLVIN Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer) -24- 27 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 117,026 66,027 290,764 30,483 214,381 773,487 1,516,473 544,126 1,967,400 444,464 749,111 0 0 297,517 0 1,967,400 548,597 548,597 363,867 600,586 0 4,269 21,716 (65,770) (1,154) 0 0 0 0 (64,616) (0.65) (0.65)
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