-----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, Kjm2xuM3/VAwzPRPEMEiOZad22liYCs4rT1DfZqS3y1xD8wkmTTEd/6JirjKgQsF gOGOMbikTYiV1ZVbAIIVog== 0000891618-98-003882.txt : 19980817 0000891618-98-003882.hdr.sgml : 19980817 ACCESSION NUMBER: 0000891618-98-003882 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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 SEC ACT: SEC FILE NUMBER: 000-19032 FILM NUMBER: 98687361 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 1 FORM 10-Q FOR PERIOD ENDED 6/30/98 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 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 incorporation or organization) Identification 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 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 10 PART II: OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16
-i- 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATMEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 117,026 $ 174,310 Short-term investments 66,027 63,222 Accounts receivable, net 254,281 216,991 Inventories 214,381 124,336 Other current assets 115,772 119,358 ---------- ---------- TOTAL CURRENT ASSETS 767,487 698,217 Other assets 79,551 42,338 Long-term investments 133,791 95,536 Fixed assets, net 970,955 985,949 ---------- ---------- TOTAL ASSETS $1,951,784 $1,822,040 ========== ========== CURRENT LIABILITIES: Current portion of long-term debt $ 76,212 $ 67,522 Trade accounts payable and other accrued liabilities 313,067 290,890 Income taxes payable 11,891 0 Deferred income on shipments to distributors 33,576 25,256 ---------- ---------- TOTAL CURRENT LIABILITIES 434,746 383,668 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 1,202,920 989,556 ---------- ---------- Put warrants 69,730 46,050 ---------- ---------- SHAREHOLDERS' EQUITY: Common stock 297,517 334,303 Retained earnings 381,617 452,131 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 679,134 786,434 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,951,784 $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 195,975 125,900 360,167 262,277 Research and development 43,394 29,357 80,053 58,528 Selling, general and administrative 39,115 24,361 66,941 50,304 Nonrecurring charges 70,000 0 102,241 0 --------- --------- --------- --------- TOTAL EXPENSES 348,484 179,618 609,402 371,109 --------- --------- --------- --------- Operating income (loss) (60,279) 45,318 (60,805) 106,773 Other expenses, net (9,338) (3,156) (13,781) (5,014) --------- --------- --------- --------- Income (loss) before taxes (69,617) 42,162 (74,586) 101,759 Income tax provision (benefit) (25,149) 14,754 (4,072) 35,613 --------- --------- --------- --------- NET INCOME (LOSS) $ (44,468) $ 27,408 $ (70,514) $ 66,146 ========= ========= ========= ========= BASIC NET INCOME (LOSS) PER SHARE $ (0.45) $ 0.28 $ (0.71) $ 0.67 ========= ========= ========= ========= DILUTED NET INCOME (LOSS) PER SHARE $ (0.45) $ 0.27 $ (0.71) $ 0.65 ========= ========= ========= ========= SHARES USED IN BASIC NET INCOME (LOSS) PER-SHARE CALCULATION 99,223 99,354 99,136 99,251 ========= ========= ========= ========= SHARES USED IN DILUTED NET INCOME (LOSS) PER-SHARE CALCULATION 99,223 102,625 99,136 102,522 ========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. -2- 5 ATMEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, 1998 1997 --------- --------- CASH FROM OPERATING ACTIVITIES Net income (loss) $ (70,514) $ 66,146 Items not requiring the use of cash Depreciation and amortization 100,697 70,660 Write-down of fixed assets 65,000 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 11,891 2,598 Deferred income on shipments to distributors 8,320 (723) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 54,333 7,528 --------- --------- CASH FROM INVESTING ACTIVITIES Acquisition of fixed assets (123,178) (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 (288,434) (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 notes (154,480) (43,697) 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) $(44,468) $ 27,408 $(70,514) $ 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) (2,854) (3,703) (869) (8,218) -------- -------- -------- -------- Comprehensive income (loss) $(47,322) $ 23,705 $(71,383) $ 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, 1998 DEC. 31, 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) $ (44,468) $ 27,408 $ (70,514) $ 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 $ (0.45) $ 0.28 $ (0.71) $ 0.67 ========= ========= ========= ========= Diluted net income (loss) per share $ (0.45) $ 0.27 $ (0.71) $ 0.65 ========= ========= ========= =========
In connection with the Company's stock repurchase program announced in January 1998 to purchase up to 5,000 shares of its common stock, the Company has purchased 1,000 shares of its common stock during the six months ended June 30, 1998. The average purchase price of the shares repurchased was $16.62 per share. 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 Mircoelectronic (Temic) of Hielbronn, Germany, a wholly owned subsidiary of Daimler-Benz A.G., for $99,250 cash. Temic designs, manufactures and sells analog, microcontroller and ASIC products that service the automotive, telecommunications, consumer and industrial markets. The Company's operating results for the six months ended June 30, 1998 included approximately four months of the results of Temic, which included $95,002 of net revenues. The Company's consolidated balance sheet -6- 9 as of June 30, 1998 reflects the final allocation of the purchase price of Temic, which resulted in an increase in inventory, accounts receivable, fixed assets and current liabilities. The Company allocated $32,241 of the purchase price to purchased in-process research and development expense, which was charged against the earnings for the first quarter of 1998. The Company will restate its Form 10-Q for the first quarter ended March 31, 1998. As a result of this in-process research and development expense, the Company's operating results for the first quarter of 1998 was restated to reflect a net loss of $26,046. 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 may occur in the future.
Six Months Ended June 30, 1998 1997 --------- --------- Net revenues $ 591,706 $ 616,983 ========= ========= Net income $ (79,024) $ 57,390 ========= =========
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 has been named as a defendant in a patent infringement lawsuit that was filed on January 21, 1998. The plaintiff contends that certain of the Company's devices infringe seven patents it allegedly owns and is seeking a judgment of infringement for each of these asserted patents and other costs. The Company is reviewing the lawsuit and believes that the complaints are without merit. No assurance can be given, however, that this matter will be resolved in the Company's favor. 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. The Company expects to record a charge against the earnings for the first quarter of 1999. 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. -7- 10 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 $(4,392) $ 1,538 $(2,854) ======= ======= =======
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. NONRECURRING CHARGES During the second quarter of fiscal 1998, the Company announced a restructuring plan which included a 10 percent work force reduction and the write-down of certain manufacturing equipment and machinery with older process technology. The program is primarily aimed at focusing the Company's business processes, attaining cost efficiencies and increasing manufacturing flexibility. The restructuring and nonrecurring charges of $70,000 included a provision of $5,000 for severance costs which are anticipated to be paid primarily in the second half of fiscal 1998. -8- 11 As the Company moves 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 Company recognized the impairment charge when the future undiscounted cash flows of each asset are estimated to be insufficient to recover its related carrying value. As such, 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. -9- 12 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 67.9 56.0 65.7 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 Nonrecurring charges 24.3 0.0 18.6 0.0 ----- ----- ----- ----- TOTAL EXPENSES 120.9 79.9 111.1 77.7 OPERATING INCOME (LOSS) (20.9) 20.1 (11.1) 22.3 Other income (expense), net (3.2) (1.4) (2.5) (1.0) ----- ----- ----- ----- INCOME (LOSS) BEFORE TAXES (24.1) 18.7 (13.6) 21.3 Income tax provision (benefit) (8.7) 6.6 (0.7) 7.5 ----- ----- ----- ----- NET INCOME (LOSS) (15.4)% 12.1 % (12.9)% 13.8 % ===== ===== ===== =====
NET REVENUES Net revenues increased 28.1 percent to $288.2 million in the quarter 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 Temic's business, a recent acquisition by the Company. See Note 5 (Temic Acquisition) in Notes to Condensed Consolidated Financial Statements. -10- 13 Excluding the revenue contribution from Temic, net revenues for the second quarter ended June 30, 1998 would have decreased by approximately 3.7 percent compared to the corresponding quarter of 1997. For the six months ended June 30, 1998, the decrease in net revenues was approximately 5.1 percent had the revenue from Temic been excluded. The decrease was primarily due to abnormal price erosion (caused by excess manufacturing capacity in the semiconductor industry) for the Company's non-volatile memory products from which the Company derived more than half of its revenues in the first half of 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 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 40.0 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. COST OF SALES Cost of sales as a percentage of net revenues increased to 67.9 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. -11- 14 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 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. 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. NONRECURRING CHARGES During the second quarter of fiscal 1998, the Company announced a restructuring plan which included a 10 percent work force reduction and the write-down of certain manufacturing equipment and machinery with older process technology. The program is primarily aimed at focusing the Company's business processes, attaining cost efficiencies and increasing manufacturing flexibility. The nonrecurring charges of $70.0 million included a provision of $5.0 million for severance costs and a reserve of $65.0 million for write-down of fixed assets. See Note 10 (Nonrecurring Charges) in Notes to Condensed Consolidated Financial Statements. -12- 15 Additionally, as previously indicated, a $32.2 million purchased in-process research and development expense related to the acquisition of Temic in March 1998 has been charged against the first quarter's operating results. See Note 5 (Temic Acquisition) in Notes to Condensed Consolidated Financial Statements. OTHER EXPENSE, 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 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). INCOME TAX PROVISION (BENEFIT) The Company's effective tax rate was 35.0 percent for the first six months of 1997 and 5.5 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 $44.5 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 $70.5 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 Nonrecurring charges incurred during the first six months of 1998. See Nonrecurring 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. -13- 16 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 $332.7 million in net working capital, an increase of $18.2 million from December 31, 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. During the six months ended June 30, 1998, the Company generated net cash flows from operations of $54.3 million. Net cash used in investing activities was $288.4 million, due to acquisitions of fixed and other assets of $148.1 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. -14- 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has been named as a defendant in a patent infringement lawsuit that was filed on January 21, 1998. The plaintiff contends that certain of the Company's devices infringe seven patents it allegedly owns and is seeking a judgment of infringement for each of these asserted patents and other costs. The Company is reviewing the lawsuit and believes that the complaints are without merit. No assurance can be given, however, that this matter will be resolved in the Company's favor. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 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
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). -15- 18 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) AUGUST 14, 1998 /S/ GEORGE PERLEGOS --------------------------------------------- GEORGE PERLEGOS President, Chief Executive Officer (Principal Executive Officer) AUGUST 14, 1998 /S/ DONALD COLVIN --------------------------------------------- DONALD COLVIN Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer) -16- 19 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 66,027 284,764 30,483 214,381 767,487 1,515,081 544,126 1,951,784 434,746 749,111 0 0 297,517 0 1,951,784 548,597 548,597 360,167 609,402 0 4,269 21,716 (74,586) (4,072) 0 0 0 0 (70,514) (0.71) (0.71)
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