10-Q 1 f72047e10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2001 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)
DELAWARE 77-0051991 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
2325 ORCHARD PARKWAY SAN JOSE, CALIFORNIA 95131 (Address of principal executive offices) (408) 441-0311 Registrant's telephone number 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 [ ] On May 4, 2001, Registrant had outstanding 463,957,360 shares of Common Stock. 2 ATMEL CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 2001 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and March 31, 2000 2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and March 31, 2000 3 Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2001 and March 31, 2000 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II: OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities and Use of Proceeds 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25
3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATMEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
MARCH 31, 2001 December 31, 2000 -------------- ----------------- (unaudited) CURRENT ASSETS Cash and cash equivalents $ 422,432 $ 448,281 Short term investments 329,315 514,263 Accounts receivable 353,385 392,384 Inventories 300,321 289,054 Other current assets 160,804 148,212 ----------- ----------- TOTAL CURRENT ASSETS 1,566,257 1,792,194 Fixed assets, net 2,110,254 1,927,817 Other assets 52,742 53,876 Cash - restricted 51,000 51,000 ----------- ----------- TOTAL ASSETS $ 3,780,253 $ 3,824,887 =========== =========== CURRENT LIABILITIES Current portion of long-term debt $ 156,936 $ 173,866 Trade accounts payable 573,050 655,450 Accrued liabilities and other 349,713 326,352 Deferred income on shipments to distributors 36,008 33,703 ----------- ----------- TOTAL CURRENT LIABILITIES 1,115,707 1,189,371 Long-term debt less current portion 519,028 535,711 Convertible notes 134,554 132,792 Other long-term liabilities 72,717 72,156 ----------- ----------- TOTAL LIABILITIES 1,842,006 1,930,030 ----------- ----------- STOCKHOLDERS' EQUITY Common stock 464 462 Additional paid in capital 1,234,206 1,226,412 Accumulated other comprehensive loss (73,885) (53,465) Retained earnings 777,462 721,448 ----------- ----------- Total stockholders' equity 1,938,247 1,894,857 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,780,253 $ 3,824,887 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 4 ATMEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share data) (Unaudited)
Three Months Ended March 31, ------------------------------- 2001 2000 --------- --------- NET REVENUES $ 525,944 $ 429,186 EXPENSES Cost of revenues 314,750 252,722 Research and development 69,195 61,913 Selling, general and administrative 55,149 45,110 --------- --------- TOTAL OPERATING EXPENSES 439,094 359,745 --------- --------- OPERATING INCOME 86,850 69,441 Interest and other income (expenses), net 672 (4,048) --------- --------- INCOME BEFORE TAXES 87,522 65,393 Income tax provision (31,508) (23,541) --------- --------- NET INCOME $ 56,014 $ 41,852 ========= ========= BASIC NET INCOME PER SHARE: $ 0.12 $ 0.10 DILUTED NET INCOME PER SHARE: $ 0.12 $ 0.09 SHARES USED IN BASIC NET INCOME PER SHARE CALCULATIONS 463,400 426,970 ========= ========= SHARES USED IN DILUTED NET INCOME PER SHARE CALCULATIONS 494,013 478,656 ========= =========
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)
Three Months Ended March 31, ------------------------------- 2001 2000 --------- --------- CASH FROM OPERATING ACTIVITIES Net income $ 56,014 $ 41,852 Items not requiring the use of cash Depreciation and amortization 72,353 51,547 Loss (gain) on sale of fixed assets (1,086) 1,963 Other 1,601 7,074 Changes in operating assets and liabilities Accounts receivable 35,185 (24,700) Inventories (15,944) 4,017 Prepaid taxes and other assets (23,208) (5,773) Trade accounts payable and other accrued liabilities (21,597) 18,443 Income taxes payable 17,494 -- Deferred income on shipments to distributors 2,305 (1,470) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 123,117 92,953 --------- --------- CASH FROM INVESTING ACTIVITIES Acquisition of fixed assets (332,719) (168,992) Sales of fixed assets 1,180 1,280 Purchase of investments (49,114) (11,106) Sale or maturity of investments 236,839 13,945 --------- --------- NET CASH USED IN INVESTING ACTIVITIES (143,814) (164,873) --------- --------- CASH FROM FINANCING ACTIVITIES Proceeds from capital leases and notes 40,474 33,719 Principal payments on capital leases and notes (61,767) (22,756) Issuance of common stock 7,795 620,928 --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (13,498) 631,891 --------- --------- Effect of foreign currency on cash and cash equivalents 8,346 (7,438) --------- --------- Net (decrease) increase in cash and cash equivalents (25,849) 551,412 Cash and cash equivalents at beginning of period 448,281 251,272 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 422,432 $ 802,684 ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURES: INTEREST PAID $ 3,726 $ 7,856 INCOME TAXES PAID $ 14,369 $ 41 FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 318,070 $ 89,381
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 6 ATMEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Unaudited
Three Months Ended March 31, ----------------------------- 2001 2000 -------- -------- Net income $ 56,014 $ 41,852 Other comprehensive loss, net of tax: Foreign currency translation adjustments (23,396) (16,079) Unrealized gains (losses) on securities 2,976 (436) -------- -------- Other comprehensive loss (20,420) (16,515) -------- -------- Comprehensive income $ 35,594 $ 25,337 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 7 ATMEL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (In thousands, except per share data) (Unaudited) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES These unaudited interim financial statements reflect our financial position and that of our subsidiaries as of March 31, 2001. The statements also show our results of operations, comprehensive income and cash flows for the three-month periods ended March 31, 2001 and 2000. These interim statements include all normal recurring adjustments that we believe are necessary to fairly present our financial position. All material intercompany balances have been eliminated. 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 included in our Annual Report on Form 10-K for the year ended December 31, 2000. The year-end condensed balance sheet data was derived from our 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 that we expect for any future period, nor for the entire year. Prior year amounts have been reclassified to conform with current presentation. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out for raw materials and purchased parts, and average cost for work in progress) or market, and comprise the following:
March 31, 2001 December 31, 2000 -------------- ----------------- Raw materials and purchased parts $ 30,695 $ 26,671 Finished goods 85,770 78,938 Work in progress 183,856 183,445 -------- -------- Total $300,321 $289,054 ======== ========
3. SHORT TERM INVESTMENTS Short term investments at March 31, 2001 and December 31, 2000 comprise debt securities consisting primarily of US government and municipal agency securities, US and foreign corporate debt securities, commercial paper, auction rate preferred stock, certificates of deposit, and overnight deposits. 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 stockholders' equity. 4. NET INCOME PER SHARE 5 8 A reconciliation of the numerator and denominator of basic and diluted net income per share is provided in the following table. All shares have been restated to reflect the 2-for-1 stock split effected in August 2000.
Three Months Ended March 31, ---------------------------- (in thousands, except per share data) 2001 2000 -------- -------- Basic net income (numerator) $ 56,014 $ 41,852 Interest saved on convertible bonds, net of taxes 1,159 2,478 -------- -------- Diluted net income (numerator) $ 57,173 $ 44,330 ======== ======== Shares used in basic net income per share calculations (denominator): Weighted average shares of common stock outstanding (basic) 463,400 426,970 Dilutive effect of stock options 11,583 15,744 Dilutive effect of convertible bonds 19,030 35,942 -------- -------- Shares used in diluted net income per share calculations (denominator): Weighted average shares of common stock outstanding (diluted) 494,013 478,656 ======== ======== Basic net income per share $ 0.12 $ 0.10 ======== ======== Diluted net income per share $ 0.12 $ 0.09 ======== ========
5. OPERATING SEGMENTS We have four reportable segments: Application Specific Integrated Circuits (ASIC), Logic, Nonvolatile Memories (NVM), and Wireless and Microcontroller Group (WMG). Each segment requires different design, development and marketing resources to produce and sell semiconductor integrated circuits. Information about segments:
ASIC Logic NVM WMG Total -------- -------- -------- -------- -------- THREE MONTHS ENDED MARCH 31, 2001 Net revenues from external customers $142,499 $ 52,160 $252,547 $ 78,738 $525,944 Segment operating income 33,567 17,188 52,436 14,117 117,308 THREE MONTHS ENDED MARCH 31, 2000 Net revenues from external customers $101,516 $ 30,044 $227,684 $ 69,942 $429,186 Segment operating income 21,137 4,619 49,618 8,664 84,038
Reconciliations of segment information to financial statements:
Three Months Ended March 31, ------------------------ 2001 2000 --------- --------- Operating income Total income for reportable segments $ 117,308 $ 84,038 Unallocated amounts: Corporate R&D (11,701) (13,000) Startup expenses (17,816) --0-- Corporate expenses (941) (1,597) --------- --------- Consolidated operating income before interest and taxes $ 86,850 $ 69,441 ========= =========
6. RECENT PRONOUNCEMENTS 6 9 SFAS 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS No. 133 requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 pursuant to the issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date of SFAS No. 133 by one year. In June 2000, the FASB issued SFAS Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 138 amends certain terms and conditions of SFAS 133. We have adopted SFAS No. 133 and 138 in the quarter ending March 31, 2001. The adoption of the statements did not have a significant effect on our results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2000. In this report, all share numbers and per share amounts have been retroactively adjusted to reflect our 2-for-1 stock split in the form of a 100% stock dividend to stockholders of record as of August 11, 2000. Forward Looking Statements 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 which include, but are not limited to, statements in "Research and Development" regarding the importance of continued investments in process technology and product development; and in "Liquidity and Capital Resources" regarding collection of receivables, and regarding the sufficiency of our current resources to meet operating and capital requirements. 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, political instability in countries where we manufacture and/or sell our products; disruptions in production or conditions in the overall semiconductor market (including the historic cyclicality of the industry); risks associated with product demand and market acceptance risks; the impact of competitive products and pricing; 7 10 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 Annual Report on Form 10-K. The Company undertakes no obligation to update any forward looking statements in this Form 10-Q. RESULTS OF OPERATIONS The following table shows certain operating data as a percentage of net revenues:
Three Months Ended March 31, ------------------------- 2001 2000 ------ ------ Net revenues 100.00% 100.00% Expenses Cost of revenues 59.8 58.9 Research and development 13.2 14.4 Selling, general and administrative 10.5 10.5 ------ ------ Total expenses 83.5 83.8 Operating income 16.5 16.2 Interest and other income (expenses), net 0.1 -1.0 ------ ------ Income before taxes 16.6 15.2 Income tax provision -6.0 -5.5 ------ ------ Net income (loss) 10.6% 9.7% ====== ======
NET REVENUES Revenues for the first quarter of 2001 totaled $526 million, an increase of $97 million or 23% from the first quarter of 2000. Beginning late in the fourth quarter of 2000, the semiconductor industry began to experience a downturn, particularly in North America, and worldwide semiconductor sales are projected to decline by approximately 17% in 2001 from 2000. Our business has been impacted by this recent downturn, with the effect that our net revenues of $526 million in the first quarter of 2001 declined by $48 million (or 8%) from $574 million in the fourth quarter of 2000. We expect the current downturn to negatively affect revenues through the second quarter of 2001. NET REVENUES - BY SEGMENT Atmel's net revenues by segment for the three months ended March 31, 2001 and 2000 are summarized in the following table:
(in thousands) Three Months Ended March 31, ------------------------------------------------ Segment 2001 2000 Increase -------- -------- -------- ASIC $142,499 $101,516 $ 40,983 Logic 52,160 30,044 22,116 Nonvolatile Memory 252,547 227,684 24,863 WMG 78,738 69,942 8,796 -------- -------- -------- Total $525,944 $429,186 $ 96,758 ======== ======== ========
Revenue for every segment increased in the first quarter compared to one year ago, but the largest increase was in the ASIC segment. 8 11 ASIC segment revenues grew by $41 million in the first quarter of 2001 over the same period in 2000 primarily because of our acquisition of Atmel Grenoble in May 2000. Atmel Grenoble accounted for $25 million of revenues in the ASIC segment during the first quarter of 2001. Unit shipments and selling prices were also stronger in the first quarter of 2001 compared to the same quarter of 2000. Logic segment revenues increased more than $22 million in the first quarter of 2001 compared to the same quarter of 2000 because both unit shipments and selling prices increased. Nonvolatile Memory (NVM) revenues increased by almost $25 million in the first quarter of 2001 compared to the same period in 2000 because of higher selling prices offset by lower unit shipments. We normally expect a steady, predictable rate of price decline throughout a product's life cycle. However, the semiconductor industry historically has been cyclical and characterized by wide fluctuations in product supply and demand. As a result, the industry experiences significant downturns from time to time, as it did in 1998, and as it is currently experiencing. These downturns are marked by diminished product demand, production overcapacity and consequent accelerated erosion of average selling prices. Because NVM products are commodity oriented, they are subject to greater declines in average selling prices than other product areas within our company. The commodity memory portion of the semiconductor industry has suffered from excess capacity since late in the fourth quarter of 2000, and previously during all of 1998 through the first quarter of 1999, which led and may be leading to greater than normal price erosion during these and subsequent periods. NET REVENUES - BY GEOGRAPHIC AREA The Company's net revenues by geographic area for the three-month periods ended March 31, 2001 and 2000 are summarized as follows (in millions):
Three Months Ended March 31 -------------------------- Region 2001 2000 ------- ------- Europe $ 180.2 $ 118.1 Asia 180.1 151.7 North America 146.3 147.6 Other 19.3 11.8 ------- ------- $ 525.9 $ 429.2 ======= =======
Sales to Europe increased 53% or $62 million in the first quarter of 2001 compared to the same period in 2000 due to stronger selling prices. Atmel Grenoble's European sales of $15 million in the first quarter of 2001 also contributed to the increase. Sales to Asia, including Japan, increased about 19%, or $28 million, to $180 million in the first quarter of 2001, compared to sales of $152 million in the first quarter of 2000 due to significantly higher selling prices. North American sales were nearly the same in the first quarter of 2001 compared to 2000, and decreased as a percent of total sales. Unit selling prices increased in the first quarter of 2001 compared to the same quarter in 2000, but were offset by lower unit shipments. 9 12 In the first quarter of 2001, approximately 20% of sales were denominated in foreign currencies compared to 21% in the first quarter of 2000. Exchange rate changes did not significantly impact our sales that were denominated in foreign currencies. COST OF REVENUES AND GROSS MARGIN Our cost of revenues as a percentage of net revenues increased to 60% in the first quarter of 2001, compared with 59% in the first quarter of 2000, due to increased start up costs associated with our Irving, Texas and North Tyneside, UK wafer fabrication facilities and costs associated with additional manufacturing capacity that we established over the past year in anticipation of growth in demand for our products. If the current downturn in the semiconductor industry which began late in the fourth quarter of 2000 continues or worsens, our wafer fabrication capacity would continue to be underutilized, and our inability to quickly reduce fixed costs such as depreciation and other fixed operating expenses necessary to operate our wafer manufacturing facilities would further harm our operating results. If net revenues do not continue to increase sufficiently in future periods our business could be harmed. We experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity. Production delays, difficulties in achieving acceptable yields at any of our fabrication facilities or overcapacity could harm our operations. RESEARCH AND DEVELOPMENT As a percentage of net revenue, research and development cost decreased to 13% in the first quarter of 2001 from 14% in the first quarter of 2000. However, in dollar amounts spent, research and development expenses increased 12% in the first quarter of 2001, compared with the same quarter in 2000. We continue our investment in the shrinking of the die size of our integrated circuits from 0.5-micron line widths to 0.35-micron, 0.25-micron, 0.18-micron and 0.13-micron line widths; enhancement of mature products; development of new products; advancement of complementary metal-oxide semiconductor, bipolar CMOS, and silicon germanium process technologies; manufacturing improvements; and the costs associated with increasing production capacity in Colorado Springs and Rousset. We believe that continued investments in process technology and product development are essential for us to remain competitive in the markets we serve, and we are committed to high levels of expenditures for research and development. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by 22% to $55 million in the first quarter of 2001 from $45 million in the first quarter of 2000 due to higher selling expenses associated with increased sales. As a percentage of net revenue, selling, general and administrative expenses continued to be 11% in the first quarter of 2001, the same as in the first quarter of 2000. INTEREST AND OTHER INCOME (EXPENSES), NET We recorded $1 million of net interest and other income for the first quarter of 2001, compared to $4 million of net interest and other expenses for the corresponding period of 2000. Higher interest income from larger cash and investment balances, and a decrease in interest expense 10 13 contributed to the change. The decrease in interest expense is due to a combination of lower interest rates and a lower average level of debt. INCOME TAX PROVISION Atmel's effective tax rate was 36% for the three months ended March 31, 2001 and March 31, 2000. For the remainder of 2001 we expect the effective tax rate to continue at 36%. NET INCOME Net income of $56 million for the first quarter of 2001 marked a $14 million increase from the first quarter of 2000. The increase corresponds directly to the increase in net revenues and improved manufacturing efficiencies from increased wafer output and smaller integrated circuit sizes. However, net income for the first quarter of 2001 declined $30 million from $86 million in the fourth quarter of 2000, principally as the result of a decline in net revenue of $48 million and the difficulty associated with reducing fixed costs such as depreciation and other fixed operating expenses necessary to operate our wafer manufacturing facilities. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we had $422 million in cash and cash equivalents, a decrease of $26 million from December 31, 2000. Short term investments also declined by $185 million. Our working capital decreased to $451 million, compared to about $603 million at December 31, 2000. This 25% decrease in working capital is as a result of the reduction in short term investments, partially offset by decreases in trade accounts payable and current portion of long-term debt. Accounts receivable decreased 10% to $353 million at March 31, 2001 from $392 million at December 31, 2000. The average days of accounts receivable outstanding were 61 days for the first quarter of 2001 and 62 days for the fourth quarter of 2000, however average days outstanding could increase during the most recent downturn in the semiconductor industry that began late in the fourth quarter of 2000. We monitor collection risks and provide an adequate allowance for doubtful accounts related to these risks. While there can be no guarantee of collecting these receivables, we believe that substantially all net receivables will be collected, given our customer's current credit ratings. For the three months ended March 31, 2001, there were no material write-offs of accounts receivables. Inventories increased $11 million to $300 million at March 31, 2001 from $289 million at December 31, 2000, in part as a result of cyclical changes in demand. We believe that our existing sources of cash and cash equivalents, together with cash flows from operations, lease financing on equipment and other short or medium term bank borrowings, will be sufficient to meet our operating and capital cash requirements through 2001. We may, however, seek additional equity or debt financing to fund the expansion of our wafer fabrication capacity, other projects or acquisitions, or general corporate purposes. We cannot precisely determine at this time the timing and amount of such capital requirements, which will depend on a number of factors, including demand for our products, product mix changes, semiconductor industry conditions and competitive factors. CASH FLOW From Operating Activities: During the three months ended March 31, 2001, net cash provided by operations increased $30 million to $123 million, compared to $93 million in the same period of 2000. This additional cash was provided by a decrease in accounts receivable offset by cash used to reduce the balance in trade accounts payable and other accrued liabilities. Accounts receivable declined as the result of decreased revenues in the first quarter of 2001 compared to the fourth quarter of 2000. Depreciation and amortization, a source of cash from operating activities, increased $21 million compared to the same quarter of 2000. 11 14 From Investing Activities: Our investing activities used net cash of $144 million for the first quarter of 2001, compared to $165 million for the first quarter of 2000. This decrease of $21 million resulted from a combination of an increase in cash used for fixed asset purchases offset by an increase in cash provided from the sale and maturity of investments. $333 million in cash was used for the purchase of fixed assets in the first quarter of 2001, up from $169 million in the first quarter of 2000. This was offset by $237 million in cash provided from the sale and maturity of investments. From Financing Activities: In the first quarter of 2001, net cash used by financing activities was $13 million, compared to net cash provided by financing activities of $632 million in the first quarter of 2000, a relative decline of $645 million. The principal reason for the relative decline is the receipt of $612 million generated from the stock offering in the first quarter of 2000, an event not repeated in the same quarter of 2001. Also, our payments of debt principal in the first quarter of 2001 exceeded receipts from new issuances of debt compared to the first quarter of 2000 when our receipts of cash from new debt exceeded our payments of principal. OTHER FACTORS THAT MAY AFFECT OPERATIONS Investors should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2000. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur they could seriously harm our business, financial condition or results of operations. In that event, the market price for our common stock could decline and you may lose all or part of your investment. OUR REVENUE AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN OUR STOCK PRICE Our future operating results will be subject to quarterly variations based upon a wide variety of factors, many of which are not within our control. These factors include: - the cyclical nature of both the semiconductor industry and the markets addressed by our products; - fluctuations in manufacturing yields; - the timing of introduction of new products; - the timing of customer orders; - price erosion; - changes in mix of products sold; - the extent of utilization of manufacturing capacity; - product obsolescence; - availability of supplies and raw materials; - price competition and other competitive factors; and - fluctuations in currency exchange rates. Any unfavorable changes in any of these factors could harm our operating results. 12 15 In particular, we believe that our future sales growth will depend substantially on the success of our new products. Our new products are generally incorporated into our customers' products or systems at the design stage. However, design wins may precede volume sales by a year or more. We may not be successful in achieving design wins or any design win may not result in future revenues, which depend in large part on the success of the customer's end product or system. We expect the average selling price of each of our products to decline as individual products mature and competitors enter the market. To offset average selling price decreases, we rely primarily on reducing costs in the manufacturing of those products, increasing unit sales to absorb fixed costs and introducing new, higher priced products which incorporate advanced features or integrated technologies to address new or emerging markets. To the extent that such cost reductions and new product introductions do not occur in a timely manner, our operating results could be harmed. From time to time, our quarterly revenues and operating results can become more dependent upon orders booked and shipped within a given quarter and, accordingly, our quarterly results can become less predictable and subject to greater variability. In addition, our 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, data networking equipment and military equipment, and economic growth generally. Our success will also depend upon a better supply and demand balance within the semiconductor industry. In 1998 and early 1999, the semiconductor industry experienced a significant downturn, characterized by, among other things, diminished product demand, production overcapacity and decline of average selling prices of products. While sales of our ASIC and logic-related products increased during this period, continued price reduction of our commodity non-volatile memory products (caused by continued weakened business conditions and excess manufacturing capacity in the semiconductor industry) more than offset the impact of higher sales of ASIC and logic-related products in 1998. These non-volatile memory products included our commodity EPROMs and Flash memories. These business conditions in the worldwide semiconductor industry also contributed to our decision to implement a restructuring plan, which we announced in the second quarter of fiscal 1998. The restructuring plan, which resulted in a nonrecurring charge of approximately $66 million, included a ten percent work force reduction and an impairment charge to write down the value of certain manufacturing equipment and machinery with older process technology. We also recognized an in-process research and development charge of $23 million relating to the WMG acquisition during the second quarter of fiscal 1998. Beginning late in the fourth quarter of 2000, the semiconductor industry began to experience a downturn, particularly in North America, and worldwide semiconductor sales are projected to decline by approximately 17% in 2001 from 2000. Our business has been impacted by this recent downturn, with the effect that our net revenues of $526 million in the first quarter of 2001 declined by $48 million (or 8%) from $574 million in the fourth quarter of 2000. Many of the business conditions we experienced in the 1998 downturn are again present in our business. While our visibility is limited in the current environment, at present we expect the current downturn to negatively affect revenues through at least the second quarter of 2001. IF WE DO NOT SUCCESSFULLY INCREASE OUR MANUFACTURING CAPACITY, WE MAY FACE CAPACITY CONSTRAINTS THAT COULD HARM OUR BUSINESS We currently manufacture our products at our wafer fabrication facilities located in Colorado Springs, Colorado; Heilbronn, Germany; Nantes, France; and Rousset, France. We currently expect our Irving, Texas facility to be producing wafers in the third quarter of 2001 and our new facility in 13 16 North Tyneside, UK, to be operational and producing wafers by the end of 2001. We believe that we will be able to substantially meet our production needs from these facilities through the end of the fourth quarter of 2003, although this date may vary depending on, among other things, our rate of revenue growth. We will be required to hire, train and manage additional production personnel in order to increase production capacity as planned. We will also be required to successfully implement new manufacturing technologies, such as 0.25-micron, 0.18-micron, 0.13 micron and chemical and mechanical planarization in our wafer manufacturing facilities to increase our manufacturing capacity and yields. If we cannot expand our capacity on a timely basis, we could experience significant capacity constraints that would prevent us from meeting customer demand. In addition, the depreciation and other expenses that we will incur in connection with the expansion of our manufacturing capacity may reduce our gross margins in future periods. We are exploring alternatives for the further expansion of our manufacturing capacity, which would likely occur during and after 2001, including: - expanding our current wafer fabrication facilities; - purchasing or building one or more additional wafer fabrication facilities; and - entering into strategic relationships to obtain additional capacity. Any of these alternatives could require a significant investment by us, and none of the alternatives for expanding our manufacturing capacity may be available on a timely basis. The cost of expanding our manufacturing capacity at our existing facilities is expected to be funded through a combination of available cash resources, cash from operations and additional lease, debt or equity financing. We may not be able to obtain the additional financing necessary to fund the expansion of our manufacturing facilities. Expanding our wafer fabrication capacity involves significant risks, including: - shortages of materials and skilled labor; - unavailability of semiconductor manufacturing and testing equipment; - unforeseen environmental or engineering problems; - work stoppages; - approvals and requirements of governmental and regulatory agencies; and - unanticipated cost increases. Any one of these risks could delay the building, equipping and production start-up of a new facility or the expansion of an existing facility, and could involve significant additional costs or reduce our anticipated revenues. In addition, the timing of commencement of operation of our North Tyneside, UK facility will depend upon the availability, timely delivery, successful installation and testing of complex process equipment. As a result of these and other factors, any expanded or new facility may not be completed and in volume production on time or within budget. Furthermore, we may be unable to achieve adequate manufacturing yields in any expanded or new facility in a timely manner, and our revenues may not increase in proportion to the anticipated increase in manufacturing capacity associated with any expanded or new facility. IF WE ARE UNABLE TO EFFECTIVELY UTILIZE OUR WAFER MANUFACTURING CAPACITY AND FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, OUR BUSINESS WOULD BE HARMED 14 17 The fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. We may experience problems in achieving acceptable yields in the manufacture of wafers, particularly in connection with the expansion of our manufacturing capacity and related transitions. The interruption of wafer fabrication or the failure to achieve acceptable manufacturing yields at any of our wafer fabrication facilities would harm our business. In 1997 and 1998, we made substantial capital expenditures to increase our wafer fabrication capacity at our facilities in Colorado Springs, Colorado and Rousset, France, and acquired two wafer fabrication facilities in connection with our acquisition of WMG. In 1998, our gross margin declined significantly as a result of the increase in fixed costs and operating expenses related to this expansion of capacity, and lower product margins in many of our non-volatile memory products due to severe price decline. In 1999, the declining gross margin trend reversed, primarily due to a higher unit sales volume over which to spread fixed costs and operating expenses, the inclusion of WMG's positive gross margin for all of 1999 compared to only ten months in 1998, and average selling prices that stabilized in 1999. If the most recent downturn in the semiconductor industry experienced in the first quarter of 2001 continues into the second half of 2001 or worsens, we would not fully utilize our wafer fabrication capacity, and our inability to quickly reduce fixed costs such as depreciation and other fixed operating expenses necessary to operate our wafer manufacturing facilities would harm our operating results. If net revenues do not continue to increase sufficiently in future periods, our business could be harmed. We experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity. Production delays, difficulties in achieving acceptable yields at any of our fabrication facilities or overcapacity could materially and adversely affect our operating results. THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE FLUCTUATIONS IN OUR OPERATING RESULTS 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, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. A downturn of this type occurred in 1998. Such downturns have been characterized by diminished product demand, production overcapacity and accelerated decline of average selling prices, and in some cases have lasted for more than a year. Our business could be harmed by industry-wide fluctuations in the future. The commodity memory portion of the semiconductor industry, from which we derived 48% of our revenue in the first quarter of 2001, compared to 52% of our revenues in 2000, 46% of our revenues in 1999, and approximately half of our revenues through 1998, suffered from excess capacity in 1998, which led to substantial price reductions during that year. While these conditions improved in 1999 and 2000, another slowdown began late in the fourth quarter of 2000, and if these conditions continue or worsen, our growth and operating results would be harmed. In addition, in the past our operating results were harmed by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity. Our business could be harmed in the future by cyclical conditions in the semiconductor industry or by slower growth in any of the markets served by our customer products. 15 18 OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED REVENUES, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE We compete in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as AMD, Fujitsu, Hitachi, Intel, LSI Logic, Microchip, Sharp and STMicroelectronics. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we have introduced new products, we increasingly compete directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies attempting to sell products in specialized markets addressed by our products. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. Although our average selling prices increased relative to those of the prior year in 2000 and late 1999, during 1998 and early 1999 we experienced significant price competition in our non-volatile memory business and especially for EPROM and Flash products. We expect continuing competitive pressures in our markets from existing competitors and new entrants, which, among other things, could reverse the recent trend of strengthening average selling prices for our products. In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following: - our success in designing and manufacturing new products that implement new technologies and processes; - our ability to offer integrated solutions using our advanced non-volatile memory process with other technologies; - the rate at which customers incorporate our products into their systems; - product introductions by our competitors; - the number and nature of our competitors in a given market; and - general market and economic conditions. Many of these factors are outside of our control, and we may not be able to compete successfully in the future. WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE The average selling prices of our products historically have decreased over the products' lives and are expected to continue to do so. As a result, our future success depends on our ability to develop and introduce new products which compete effectively on the basis of price and performance and which address customer requirements. We are continually in the process of designing and commercializing new and improved products to maintain our competitive position. The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. Our development of new products and our customers' decision to design them into their 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 customer needs, and the successful introduction of our products may be adversely affected by competing products or technologies serving markets addressed by our products. Our qualification process involves multiple cycles of testing and improving a product's functionality to 16 19 ensure that our products operate in accordance with design specifications. If we experience delays in the introduction of new products, our future operating results could be harmed. In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our future growth will depend in part upon the successful development and market acceptance of these process technologies. Our integrated solution products will require more technically sophisticated sales and marketing personnel to market these products successfully to customers. We are developing new products with smaller feature sizes, the fabrication of which will be substantially more complex than fabrication of our current products. If we are unable to design, develop, manufacture, market and sell new products successfully, our operating results will be harmed. Our new product development, process development, or marketing and sales efforts may not be successful, our new products may not achieve market acceptance, and price expectations for our new products may not be achieved, any of which could harm our business. OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO VARIOUS POLITICAL AND ECONOMIC RISKS Sales to customers outside North America accounted for approximately 72%, 64%, and 65% of net revenues in the first quarter of 2001, and in 2000 and 1999. We expect that revenues derived from international sales will continue to represent a significant portion of net revenues. In recent years we have significantly expanded our international operations, most recently through our acquisitions of a wafer fabrication facility in North Tyneside, UK in September 2000, and Atmel Grenoble in May 2000. International sales and operations are subject to a variety of risks, including: - greater difficulty in protecting intellectual property; - greater difficulty in staffing and managing foreign operations; - greater risk of uncollectible accounts; - longer collection cycles; - potential unexpected changes in regulatory practices, including export license requirements, trade barriers, tariffs and tax laws; - sales seasonality; and - general economic and political conditions in these foreign markets. Further, we purchase a significant portion of our raw materials and equipment from foreign suppliers, and we incur labor and other operating costs in foreign currencies, particularly at our French and German manufacturing facilities. As a result, our costs will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results. Approximately 80%, 75% and 78% of our sales in the first quarter of 2001, and in 2000 and 1999 were denominated in U.S. dollars. During these periods our products became less price competitive in countries with currencies declining in value against the dollar. By way of history, in 1998 business conditions in Asia were severely affected by banking and currency issues that adversely affected our operating results. While these conditions stabilized in 1999 and 2000, the continuance or worsening of adverse business and financial conditions in Asia, where 34% of our revenues were generated in the first quarter of 2001, and in 2000 and 1999, would likely harm our operating results. 17 20 WHEN WE TAKE FOREIGN ORDERS DENOMINATED IN LOCAL CURRENCIES, WE RISK RECEIVING LESS DOLLARS WHEN THESE CURRENCIES WEAKEN AGAINST THE DOLLAR, AND MAY NOT BE ABLE TO ADEQUATELY HEDGE AGAINST THIS RISK When we take a foreign order denominated in a local currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we collect our funds. In addition to reducing revenue, this risk will negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, these negative impacts on revenue can be partially offset by positive impacts on costs. However, in Japan, while our yen denominated sales are also subject to exchange rate risk, we do not have significant operations with which to counterbalance our exposure. Sales denominated in yen were 7% of our revenue in the first quarter of 2001, as well as in the first quarter of 2000. Sales denominated in foreign currencies were 20% in the first quarter of 2001, compared to 21% in the comparable quarter of 2000. We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. IF WE FAIL TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH MOTOROLA AND OTHER KEY CUSTOMERS, OUR BUSINESS MAY BE HARMED In 2000, 1999 and 1998, 12%, 12% and 14% of our net revenues were derived from sales to Motorola. Our ability to maintain close, satisfactory relationships with Motorola and other large customers is important to our business. A reduction, delay, or cancellation of orders from Motorola or our other large customers would harm our business. For instance, sales to Motorola decreased by $26 million in the first quarter of 2001 from the fourth quarter of 2000, and this decrease was 5% of our fourth quarter 2000 net revenues. The loss of one or more of our key customers, or reduced orders by any of our key customers, could harm our business and results of operations. Moreover, our customers may vary order levels significantly from period to period, and customers may not continue to place orders with us in the future at the same levels as in prior periods. OUR FAILURE TO SUCCESSFULLY INTEGRATE BUSINESSES OR PRODUCTS WE HAVE ACQUIRED COULD DISRUPT OR HARM OUR ONGOING BUSINESS We have from time to time acquired complementary businesses, products and technologies. Achieving the anticipated benefits of an acquisition depends, in part, upon whether the integration of the acquired business, products or technology is accomplished in an efficient and effective manner. Moreover, successful acquisitions in the semiconductor industry may be more difficult to accomplish than in other industries because such acquisitions require, among other things, integration of product offerings, manufacturing operations and coordination of sales and marketing and research and development efforts. The difficulties of such integration may be increased by the need to coordinate geographically separated organizations, the complexity of the technologies being integrated, and the necessity of integrating personnel with disparate business backgrounds and combining two different corporate cultures. The integration of operations following an acquisition requires the dedication of management resources that may distract attention from the day-to-day business, and may disrupt key research and development, marketing or sales efforts. The inability of management to successfully integrate any future acquisition could harm our business. Furthermore, products acquired in connection with acquisitions may not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions. 18 21 WE MAY FACE THIRD PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND AND RESULT IN LOSS OF SIGNIFICANT RIGHTS The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. We have from time to time received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering our products or processes. In the past, we have received specific allegations from major companies alleging that certain of our products infringe patents owned by such companies. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and be required to make corresponding royalty payments, which may harm our operating results. We have in the past been involved in intellectual property infringement lawsuits which harmed our operating results. Although we intend to vigorously defend against any such lawsuits, we may not prevail given the complex technical issues and inherent uncertainties in patent and intellectual property litigation. Moreover, the cost of defending against such litigation, both in terms of management time and attention, legal fees and product delays, could be substantial, whatever the outcome. If any patent or other intellectual property claims against us are successful, we may be prohibited from using the technologies subject to these claims, and if we are unable to obtain a license on acceptable terms, license a substitute technology, or design new technology to avoid infringement, our business and operating results may be significantly harmed. We have several cross-license agreements with other companies. In the future, it may be necessary or advantageous for us to obtain additional patent licenses from existing or other parties, but these license agreements may not be available to us on acceptable terms, if at all. OUR LONG TERM DEBT COULD HARM OUR ABILITY TO OBTAIN ADDITIONAL FINANCING, AND OUR ABILITY TO MEET OUR DEBT OBLIGATIONS WILL BE DEPENDENT UPON OUR FUTURE PERFORMANCE As of March 31, 2001 our convertible notes and long term debt less current portion was $654 million compared to $669 million at December 31, 2000, and $654 million at December 31, 1999. The consistent level is the result of continued building and equipment purchases. An increase in our debt-to-equity ratio could materially and adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt obligations will depend upon our future performance, which will be subject to the financial, business and other factors affecting our operations, many of which are beyond our control. Since a substantial portion of our operations are conducted through our subsidiaries, the cash flow and the consequent ability to service debt are partially dependent upon the earnings of our subsidiaries and the distribution of those earnings, or upon loans or other payments of funds by those subsidiaries, to us. These subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to our long-term debt or to make any funds available therefor, whether by dividends, distributions, loans or other payments. In addition, the payment of dividends or distributions and the making of loans and advances to us by any of our subsidiaries could in the future be subject to statutory or contractual restrictions and other various business considerations and contingent upon the earnings of those subsidiaries. Any right held by us to receive any assets of any of our subsidiaries upon its liquidation or reorganization will be effectively subordinated to the claims of that subsidiary's creditors, including 19 22 trade creditors, except to the extent that we are recognized as a creditor of such subsidiary, in which case our claims would still be subordinate to any security interest in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by us. WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE Semiconductor companies that maintain their own fabrication facilities have substantial capital requirements. We made capital expenditures of $333 million in the first quarter of 2001, compared to $961 million in all of 2000 and $172 million in 1999. We intend to continue to make capital investments to support business growth and achieve manufacturing cost reductions and improved yields. We may seek additional equity or debt financing to fund further expansion of our wafer fabrication capacity or to fund other projects. 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 products, product mix, changes in semiconductor industry conditions and competitive factors. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS WHICH MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND WHICH MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES We manufacture wafers for our products at our fabrication facilities, and the wafers are initially tested at our facilities. After wafer testing, we ship the wafers to one of our independent assembly contractors located in China, Malaysia, the Philippines, South Korea, Taiwan and Thailand where the wafers are separated into die, packaged and, in some cases, tested. Our reliance on independent contractors to assemble, package and test our products involves significant risks, including reduced control over quality and delivery schedules, the potential lack of adequate capacity and discontinuance or phase-out of the contractors' assembly processes. These independent contractors may not continue to assemble, package and test our products for a variety of reasons. Moreover, because our assembly contractors are located in foreign countries, we are 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. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations. WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS WHICH COULD IMPOSE UNANTICIPATED REQUIREMENTS ON OUR BUSINESS IN THE FUTURE. ANY FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS MAY SUBJECT US TO LIABILITY OR SUSPENSION OF OUR MANUFACTURING OPERATIONS. We are subject to a variety of federal, state and local governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes. While we believe that we have all environmental permits necessary to conduct our business and that our activities conform to present environmental regulations, increasing public attention has been focused on the environmental impact of semiconductor operations. Although we have not experienced any material adverse effect on our operations from environmental regulations, any changes in such regulations may impose the need for additional capital equipment or other requirements. If for any reason we fail to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations, we could be subject to substantial liability or our manufacturing operations could be suspended. 20 23 WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS Our future success depends in large part on the continued service of our key technical and management personnel and on our 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 a post-employment non-competition agreement, could harm our business. FAILURE TO MANAGE OUR GROWTH MAY SERIOUSLY HARM OUR BUSINESS Our business has grown in recent years through both internal expansion and acquisitions, and continued growth may cause a significant strain on our infrastructure and internal systems. To manage our growth effectively, we must continue to improve and expand our management information systems, and we commenced an implementation of a new SAP enterprise resource planning and management system for our worldwide operations in 2000. Our success depends to a significant extent on the management skills of our executive officers. If we are unable to manage growth effectively, our results of operations will be harmed. BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. Our facilities in the State of California are currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of our affected facilities. In addition, business interruption insurance may not be enough to compensate us for losses that may occur and any losses or damages incurred by us as a result of business interruptions could significantly harm our business. OUR STOCK PRICE HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE The market price of our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price of our common stock may be significantly affected by factors such as the announcement of new products or product enhancements by us or our competitors, technological innovations by us or our competitors, quarterly variations in our results of operations, changes in earnings estimates by market analysts and general market conditions or market conditions specific to particular industries. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our stock. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many high technology companies, often unrelated to the operating performance of the specific companies. 21 24 PROVISIONS IN OUR CERTIFICATE OF INCORPORATION MAY HAVE ANTI-TAKEOVER EFFECTS Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, voting rights, preferences and privileges and restrictions of those shares without the approval of our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, by making it more difficult for a third party to acquire a majority of our stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. We have no present plans to issue shares of preferred stock. 22 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market Risk Sensitive Instruments We do not use derivative financial instruments in our operations. Interest Rate Risk We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available for sale, and consequently record them on the balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders' equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or statement of operations. In addition, some of our borrowings are at floating rates, so this would act as a natural hedge. Atmel has short term debt, long term debt and capital leases totaling $811 million at March 31, 2001. Approximately $548 million of these borrowings have fixed interest rates. Approximately $263 million of floating rate debt is based on the LIBOR rate, the Euro and EuroYen interest rates. We do not hedge any of these interest rates and could be negatively affected should any of these rates increase significantly. A hypothetical 100 basis point increase in each floating rate would have a $2 million adverse impact on income before taxes on Atmel's Consolidated Statements of Operations for 2001. While there can be no assurance that these rates will remain at current levels, we believe these rates will not increase significantly (defined as an increase of more than 100 basis points) and cause any harm to our operations and financial position. Foreign Currency Risk When we take a foreign order denominated in a local currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we collect our funds. In addition to reducing revenue, this risk will negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, these negative impacts on revenue can be partially offset by positive impacts on costs. However, in Japan, while our yen denominated sales are also subject to exchange rate risk, we do not have significant operations with which to counterbalance our exposure. Sales denominated in yen were 7% of our revenue in the first quarter of 2001, compared to 6% in all of 2000. Sales denominated in foreign currencies were 20% in the first quarter of 2001, compared to 25% in all of 2000, and 22% in 1999. We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. 23 26 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Atmel is not a party to any legal proceedings that management believes could have a material adverse effect on our operating results. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: None (B) Reports on Form 8-K: None 24 27 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) MAY 10, 2001 /s/ GEORGE PERLEGOS --------------------------------------------------- GEORGE PERLEGOS President, Chief Executive Officer (Principal Executive Officer) MAY 10, 2001 /s/ DONALD COLVIN --------------------------------------------------- DONALD COLVIN Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer) 25