-----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, DgTpzJSb2tfAzrReVPNk1pXV4Qi2D2H0Dw8v4NgFo5VmxTFvuJbI42W2A5Sxyucb t3DoXIjfsjXc/V6FqyFSbA== 0000891618-98-004871.txt : 19981116 0000891618-98-004871.hdr.sgml : 19981116 ACCESSION NUMBER: 0000891618-98-004871 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98745738 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 THE PERIOD ENDED 09/30/98 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 SEPTEMBER 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 SEPTEMBER 30, 1998, REGISTRANT HAD OUTSTANDING 99,572,460 SHARES OF COMMON STOCK. 2 ATMEL CORPORATION FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1998 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 1 Condensed Consolidated Income Statements for the three and nine months ended September 30, 1998 and September 30, 1997 2 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and September 30, 1997 3 Consolidated Statements of Comprehensive income for the three and nine months ended September 30, 1998 and September 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 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19
-1- 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATMEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 134,970 $ 174,310 Short-term investments 53,912 63,222 Accounts receivable, net 246,954 216,991 Inventories 236,474 124,336 Other current assets 108,290 119,358 ----------- ----------- TOTAL CURRENT ASSETS 780,600 698,217 Other assets 102,285 42,338 Long-term investments 122,417 95,536 Fixed assets, net 981,225 985,949 ----------- ----------- TOTAL ASSETS $ 1,986,527 $ 1,822,040 =========== =========== CURRENT LIABILITIES: Current portion of long-term debt $ 78,520 $ 67,522 Trade accounts payable and other accrued liabilities 313,110 290,890 Income taxes payable 14,010 0 Deferred income on shipments to distributors 19,648 25,256 ----------- ----------- TOTAL CURRENT LIABILITIES 425,288 383,668 Convertible notes 267,640 150,000 Long-term debt less current portion 503,648 421,389 Other long-term liabilities 19,063 34,499 ----------- ----------- TOTAL LIABILITIES 1,215,639 989,556 ----------- ----------- Put warrants 69,730 46,050 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock 315,359 334,303 Retained earnings 385,799 452,131 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 701,158 786,434 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,986,527 $ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- NET REVENUES: $273,814 $240,050 $822,411 $717,932 EXPENSES: Cost of sales 172,583 135,572 532,750 397,849 Research and development 45,518 29,624 125,571 88,152 Selling, general and administrative 40,796 24,459 107,737 74,763 Nonrecurring charges 0 0 102,241 0 -------- -------- -------- -------- TOTAL EXPENSES 258,897 189,655 868,299 560,764 -------- -------- -------- -------- Operating income (loss) 14,917 50,395 (45,888) 157,168 Other expenses, net (9,689) (3,701) (23,470) (8,715) -------- -------- -------- -------- Income (loss) before taxes 5,228 46,694 (69,358) 148,453 Income tax provision (benefit) 1,046 16,345 (3,026) 51,958 -------- -------- -------- -------- NET INCOME (LOSS) $ 4,182 $ 30,349 $(66,332) $ 96,495 ======== ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE $ 0.04 $ 0.30 $ (0.67) $ 0.97 ======== ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE $ 0.04 $ 0.30 $ (0.67) $ 0.95 ======== ======== ======== ======== SHARES USED IN BASIC NET INCOME (LOSS) PER-SHARE CALCULATION 99,472 99,506 99,267 99,267 ======== ======== ======== ======== SHARES USED IN DILUTED NET INCOME (LOSS) PER-SHARE CALCULATION 100,053 101,926 99,267 103,507 ======== ======== ======== ========
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)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ---------- ---------- CASH FROM OPERATING ACTIVITIES Net income (loss) $ (66,332) $ 96,495 Items not requiring the use of cash Depreciation and amortization 148,550 111,093 Write-down of fixed assets 65,000 0 Other 223 13,870 Changes in operating assets and liabilities Accounts receivable 14,126 (85,550) Inventories (80,184) (53,976) Other current assets 23,556 (26,600) Trade accounts payable and other accrued liabilities (24,348) (31,202) Income taxes payable 14,010 10,444 Deferred income on shipments to distributors (5,608) 11 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 88,993 34,585 ---------- ---------- CASH FROM INVESTING ACTIVITIES Acquisition of fixed assets (144,196) (229,295) Acquisition of other assets (40,939) (4,510) Acquisition of Temic Telefunken Microelectronic (99,250) 0 Purchase of investments (211,434) (68,615) Sale or maturity of investments 193,863 61,231 ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES (301,956) (241,189) ---------- ---------- CASH FROM FINANCING ACTIVITIES Proceeds from issuance of convertible bonds 115,004 150,000 Proceeds from capital leases, short-term loan and notes 253,006 181,087 Principal payments on capital leases, short-term loan and notes (185,720) (62,935) Proceeds from settlement of warrants 0 4,425 Repurchase of stock (20,047) 0 Issuance of Common Stock 8,403 12,599 ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 170,646 285,176 ---------- ---------- EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT 2,977 (15,994) ---------- ---------- NET CASH PROVIDED (USED) (39,340) 62,578 CASH AT BEGINNING OF PERIOD 174,310 104,113 ---------- ---------- CASH AT END OF PERIOD $ 134,970 $ 166,691 ========== ========== INTEREST PAID $ 28,766 $ 19,206 INCOME TAXES PAID $ 1,090 $ 38,157 ISSUANCE OF COMMON STOCK FOR PURCHASE OF OTHER ASSETS $ 2,652 $ 0 FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 8,786 $ 37,757 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) $ 4,182 $ 30,349 $(66,332) $ 96,495 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 10,783 (2,395) 9,941 (10,396) Unrealized gains (losses) on securities (972) (368) (999) (585) -------- -------- -------- -------- Total other comprehensive income (loss) 9,811 (2,763) 8,942 (10,981) Comprehensive income (loss) $ 13,993 $ 27,586 $(57,390) $ 85,514 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -4- 7 ATMEL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 1998 and the results of operations and cash flows for the three month and nine month periods ended September 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. ACCOUNTS RECEIVABLE Allowance for doubtful accounts is calculated based on the aging of the Company's accounts receivable, historical experience, current and future short-term business conditions and management judgment. The Company writes off an account receivable against the allowance when the Company determines it is uncollectible and no longer actively pursues collection of the receivable. 3. 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.
SEPTEMBER 30, DEC. 31, 1998 1997 ------------- -------- Materials and purchased parts $ 18,746 $ 10,527 Finished Goods 36,086 25,590 Work in progress 181,642 88,219 --------- --------- TOTAL $ 236,474 $ 124,336 ========= =========
4. 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 September 30, September 30, 1998 1997 1998 1997 --------- --------- --------- --------- Numerator: Basic net income (loss) $ 4,182 $ 30,349 $ (66,332) $ 96,495 Add: Interest on convertible bonds 0 0 0 1,869 --------- --------- --------- --------- Diluted net income (loss) $ 4,182 $ 30,349 $ (66,332) $ 98,364 ========= ========= ========= ========= Denominator: Shares used in basic net income per share calculations Weighted average shares of common stock outstanding 99,472 99,506 99,267 99,349 ========= ========= ========= ========= Shares used in diluted net income per share calculations Weighted average shares of common stock outstanding 99,472 99,506 99,267 99,349 Dilutive effect of stock options 581 2,420 0 2,280 Dilutive effect of convertible bonds 0 0 0 1,878 --------- --------- --------- --------- 100,053 101,926 99,267 103,507 ========= ========= ========= ========= Basic net income (loss) per share $ 0.04 $ 0.30 $ (0.67) $ 0.97 ========= ========= ========= ========= Diluted net income (loss) per share $ 0.04 $ 0.30 $ (0.67) $ 0.95 ========= ========= ========= =========
In January 1996, the Board of Directors of the Company approved a stock repurchase program that allows the Company to repurchase up to 5,000 shares of its common stock. The Board of Directors approved the repurchase of an additional 5,000 shares in January 1998. The primary purpose of this stock repurchase program is to increase shareholder value. In connection with this program, the Company has entered into certain cash-less warrant transactions which provide the Company with the flexibility to implement its repurchase plan, under which the Company would purchase its stock when favorable market conditions existed and without immediately impacting the Company's cash resources. In addition, the Company paid $16,623 in cash to repurchase 1,000 shares of its common stock in January 1998 and another $3,424 in cash to repurchase 400 shares of its common stock in August 1998. 5. PUT WARRANTS The Company has sold put warrants to an independent third party during the nine months ended September 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 September 30, 1998. There was no impact on basic and diluted net income per share in the nine months ended September 30, 1998. In October 1998, the Company entered into an agreement with the holder of a put warrant, which consists of 1,200 underlying shares at an exercise price of $24.875, to extend the expiration date to May 14, 1999. The extension required a net cash payment of $1,750 by the Company. -6- 9 6. 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 nine months ended September 30, 1998 included approximately seven months of the results of Temic, which included $163,354 of net revenues. 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.
Nine Months Ended September 30, 1998 1997 ---- ---- Net revenues $ 865,520 $ 918,891 ========= ========= Net income (loss) $ (74,842) $ 83,203 ========= ========= Diluted net income (loss) per share $ (0.75) $ 0.80 ========= =========
7. CONTINGENCIES The Company is involved in certain patent related legal matters, in the ordinary course of business. No provision for any liability that may result upon the resolution of these matters has been made in the accompanying financial statements nor is the amount or range of possible loss, if any, reasonably estimable. The Company was named as a defendant in a patent infringement lawsuit that was filed on January 21, 1998. The plaintiff contended that certain of the Company's devices infringe seven patents it allegedly owns and was seeking a judgment of infringement for each of these asserted patents and other costs. The amount of judgment sought by the plaintiff was not specified in the lawsuit. The Company settled the patent disputes and entered into a cross-license agreement with the plaintiff in August 1998. 8. RECENT ACCOUNTING PRONOUNCEMENT In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. The SOP is effective for the Company's fiscal year ended December 31, 1999 and will require the effect of adoption be reported as a cumulative effect of change in accounting principle. Upon adoption of the SOP, the Company expects to record a charge against earnings. At September 30, 1998, start-up costs of $49,557 were reported as other assets. In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, and for hedging activities. It requires -7- 10 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. 9. ZERO COUPON CONVERTIBLE DEBT In April 1998, the Company completed a zero coupon convertible debt financing, which raised approximately $115,000. The debt is convertible, at the option of the holder, into the Company's common stock at the rate of 13.983 shares per $1,000 principal amount at maturity of the debt. The effective interest rate of the debt is 5.5 percent per annum. The net proceeds were used to repay a short-term loan of approximately $110,000 with Nationsbank which was originally borrowed to finance the acquisition of Temic. The debt is not redeemable by the Company prior to April 21, 2003. Thereafter, the debt will be redeemable for cash, at the option of the Company in whole at any time or in part from time to time at redemption prices equal to the issue price plus accrued interest. At the option of the holder as of April 21, 2003, 2008 and 2013, the Company may be required to redeem the debt at prices equal to the issue price plus accrued interest. The Company may, at its option, elect to redeem the debt for cash or common stock of the Company, or any combination thereof. 10. 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 SEPTEMBER 30, 1998 ------------------------------------- Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Foreign currency translation adjustments $ 16,590 $ (5,807) $ 10,783 -------- -------- -------- Unrealized gain (loss) on securities (1,496) 524 (972) -------- -------- -------- Other comprehensive income $ 15,094 $ (5,283) $ 9,811 ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------ Tax Before-Tax (Expense) Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Foreign currency translation adjustments $ 15,294 $ (5,353) $ 9,941 -------- -------- -------- Unrealized gain (loss) on securities (1,537) 538 (999) -------- -------- -------- Other comprehensive income $ 13,757 $ (4,815) $ 8,942 ======== ======== ========
-8- 11 The accumulated balances of other comprehensive income at September 30, 1998 are summarized as follows:
Current Beginning Period Ending Balance Change Balance -------- -------- -------- Foreign currency translation adjustments $ (6,449) $ 9,941 $ 3,492 Unrealized gain (loss) on securities (654) (999) (1,653) -------- ------- -------- $ (7,103) $ 8,942 $ 1,839 ======== ======= ========
11. 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 majority of the 10 percent of employees to be terminated will be factory workers in the Company's manufacturing facilities located in the U.S. and Europe. The program is primarily aimed at focusing the Company's business processes, attaining cost efficiencies and increasing manufacturing flexibility. The 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. AS of September 30, 1998, approximately $100 had been charged against the provision. As the Company continued to move toward production with 0.35-micron technology, the Company recognized an impairment charge of approximately $65,000 relating to manufacturing equipment with 0.65-micron and 0.5-micron technologies. The decision to accelerate implementation of 0.35-micron technology was prompted by the continued price erosion of the Company's Flash memory products, and weakening business conditions for its EPROM products have further negatively affected the Company's gross margin. In making its decision, the Company examined the relationship between the costs of fixed assets in its Colorado facility and the projected revenues produced from these assets during the next three years, and concluded that the gross margin of its products would decline rapidly based upon the continued price erosion and maturity of its products. Accordingly, the Company decided to move toward more advanced manufacturing processes using 0.35-micron technology in its Colorado facility, in an effort to maintain its revenues and reduce its costs. However, due to the current depressed state of the average selling prices for the semiconductor memory products, even the additional output per wafer does not provide a positive gross margin (without reducing depreciation charges from the manufacturing equipment). The Company recognized the impairment charge when the future undiscounted cash flows of each asset were estimated to be insufficient to recover its related carrying value. At such time, the carrying values of these assets were written down to the Company's estimates of fair value and will continue to be depreciated over their remaining useful lives. Fair value was based on sales of similar assets or other estimates of fair value such as estimated future cash flows. The Company does not anticipate significant proceeds from disposal. None of the assets affected by this action are currently held for sale. 12. SHAREHOLDER RIGHTS PLAN In September 1998, the Board of Directors approved a shareholder rights plan under which shareholders of record on September 16, 1998 received a right to purchase (a "Right") one-thousandth share of the Company's Series A Preferred Stock for each outstanding share of the Company's Common Stock at an exercise price of $75, subject to adjustment. The Rights will separate from the Common Stock, Rights certificates will be issued and the Rights will become exercisable upon the earlier of: (i) fifteen (15) days (or such later date as may be determined by a majority of the Board of Directors) following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20 percent or more of the Company's outstanding Common Stock or (ii) (fifteen (15) business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20 percent or more of the outstanding Common Stock of the Company. The Rights expire on the earliest of (i) September 4, 2008, (ii) redemption or exchange of the Rights or (iii) consummation of a merger, consolidation or asset sale resulting in expiration of the Rights. -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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---- ---- ---- ---- NET REVENUES 100.0% 100.0% 100.0% 100.0% EXPENSES Cost of sales 63.0 56.5 64.8 55.4 Research and development 16.6 12.3 15.3 12.3 Selling, general and administrative 14.9 10.2 13.1 10.4 Nonrecurring charges 0.0 0.0 12.4 0.0 ----- ----- ----- ----- TOTAL EXPENSES 94.5 79.0 105.6 78.1 OPERATING INCOME (LOSS) 5.5 21.0 (5.6) 21.9 Other income (expense), net (3.5) (1.5) (2.9) (1.2) ----- ----- ----- ----- INCOME (LOSS) BEFORE TAXES 2.0 19.5 (8.5) 20.7 Income tax provision (benefit) 0.4 6.8 (0.4) 7.2 ----- ----- ----- ----- NET INCOME (LOSS) 1.6% 12.7% (8.1)% 13.5% ===== ===== ===== =====
NET REVENUES The Company's net revenues by geographic destination for the three-month and nine-month periods ended September 30, 1998 and 1997 are summarized as follows: -10- 13
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---- ---- ---- ---- North America $ 78,270 $ 97,488 $ 249,391 $ 285,987 Europe 164,022 84,535 409,055 219,911 Asia 103,705 120,201 317,282 321,304 Elimination (72,183) (62,174) (153,317) (109,270) --------- --------- --------- --------- Total $ 273,814 $ 240,050 $ 822,411 $ 717,932 ========= ========= ========= =========
Net revenues increased 14.1 percent to $273.8 million in the three months ended September 30, 1998 from $240.1 million in the corresponding quarter of 1997. Net revenues for the first nine months ended September 30, 1998 increased 14.6 percent to $822.4 million from $717.9 million in the same period of 1997. This increase was primarily attributable to the inclusion of revenues from the Temic's business, a recent acquisition by the Company. See Note 6 (Temic Acquisition) in Notes to Condensed Consolidated Financial Statements. The revenue decrease in the North American region was primarily due to continued price erosion of the Company's memory products (caused by continued weakened business conditions and excess manufacturing capacity in the semiconductor industry). The increase in revenues in the European region was primarily due to the revenue contribution from Temic. The increase in revenues in the Asian region was largely due to continued financial turmoil and weakened business conditions in the Asia region. Excluding the $68.4 million revenue contribution from Temic, net revenues for the three months ended September 30, 1998 would have decreased by approximately 14.5 percent compared to the corresponding quarter of 1997. During the three months ended September 30, 1998, revenues from the Company's ASIC and logic products increased 36.6 percent and 23.5 percent, respectively, while revenues from its memory products decreased 44.0 percent, compared to the corresponding quarter of 1997. The Company expects its ASIC and logic revenues to continue to grow as the Company is repositioning itself to participate in the system-on-a-chip movement. The decrease in memory revenues was primarily attributable to the declining prices and decreasing unit shipments of the Company's Flash, EPROM and EEPROM products. During the three months ended September 30, 1998, Flash revenues and unit shipments decreased 40.8 percent and 16.9 percent, respectively, compared to the corresponding period of 1997. EPROM revenues and unit shipments decreased 65.6 percent and 42.2 percent, respectively, compared to the corresponding period of 1997. Similarly, EEPROM revenues and unit shipments decreased 35.3 percent and 10.2 percent, respectively, compared to the corresponding period of 1997. For the nine months ended September 30, 1998, the decrease in net revenues was approximately 8.2 percent, excluding the revenue from Temic of $163.4 million. The decrease was primarily due to the reasons discussed above with respect to the three months ended September 30, 1998. The Company's quarterly revenues and operating results have become increasingly dependent upon orders booked and shipped within a given quarter. To the extent this trend continues, the Company's quarterly results will be less predictable and subject to greater variability. In recent years, the Company has significantly expanded its international operations, most recently through its acquisition of Temic. International sales and operations are subject to a variety of risks, including those arising from currency fluctuations, tariffs, trade barriers, taxes, export license requirements and foreign government regulations. Because most of the Company's foreign sales are -11- 14 denominated in U.S. dollars, the Company's products become less price competitive in countries with currencies declining in value against the dollar. In addition, the continuance or worsening of the adverse business and financial conditions in Asia, where more than 26.0 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 $17.4 million at September 30, 1998. The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, characterized by diminished product demand, production overcapacity and subsequent accelerated erosion of average selling prices. The commodity memory portion of the semiconductor industry, from which the Company derives more than half of its revenues, has continued to suffer from excess capacity during 1998. If these conditions continue, the Company's growth and results of operations would be adversely affected. The Company's continued success will depend in large part on the continued growth of various electronics industries that use semiconductors, including manufacturers of computers, telecommunications equipment, automotive electronics, industrial controls, consumer electronics equipment and military equipment. The Company's success will also depend upon a better supply and demand balance within the industry. While the Company experienced rapid revenues and net income growth from 1994 through 1996, there can be no assurance that this growth will resume in the future periods, as was evidenced in 1997 and 1998. COST OF SALES Cost of sales as a percentage of net revenues increased to 63.0 percent during the three months ended September 30, 1998, from 56.5 percent in the corresponding quarter 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 lower margins 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. Cost of sales as a percentage of net revenues increased to 64.8 percent for the nine months ended September 30, 1998, from 55.4 percent in the corresponding period of 1997. The increase in cost of sales as a percentage of net revenues during the nine months ended September 30, 1998 was primarily due to the reasons discussed above with respect to the three months ended September 30, 1998. -12- 15 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 fabrication facilities, 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 16.6 percent during the three months ended September 30, 1998, from 12.3 percent in the corresponding quarter of 1997. Research and development expense increased 53.7 percent from $29.6 million for the three months ended September 30, 1997 to $45.5 million for the three months ended September 30, 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 $12.0 million. In addition, the primary technology which the Company acquired through the Temic acquisition is the silicon germanium manufacturing process. The Company intends to develop the acquired technology and expects to incur between $10.0 and $20.0 million per year in development costs for the next two to three years. If the development is successful, this technology will allow wireless communication devices to communicate at higher frequencies and at a lower cost than is currently available with other technologies. Accordingly, the Company expects its research and development expense will continue to increase in the future. The Company anticipates that a CMOS like silicon germanium process will begin to be incorporated into the Company's products in the year 2000 - 2002 time frame. 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. Accordingly, the Company expects its research and development expense will continue to increase in the future. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by 66.8 percent to $40.8 million in the three months ended September 30, 1998 from $24.5 million in the corresponding quarter of 1997. The increase was largely due to provision for bad debts expense, legal costs related to patent infringement lawsuit and the inclusion of Temic's selling, general and administrative expense of $11.3 million. As a percentage of net revenues, selling, general and administration expenses were 14.9 percent for the three months ended September 30, 1998 and 10.2 percent for the corresponding quarter of 1997. The -13- 16 Company expects selling general and administrative expenses to increase due primarily to expansions in international markets, legal costs associated with intellectual property litigation and provision for doubtful accounts receivable. The provision for doubtful accounts receivable may increase as the Company continues to evaluate the status of its accounts receivable. The increase will primarily be due to the aging of accounts receivable, an anticipated increase in accounts receivable, continued weakened business conditions and less financially strong customers. 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 majority of the 10 percent of employees to be terminated will be factory workers in the Company's manufacturing facilities located in the U.S. and Europe. The program is primarily aimed at focusing the Company's business processes, attaining cost efficiencies and increasing manufacturing flexibility. The effects of the restructuring programs are expected to reduce the Company's cost of sales, salary cost and depreciation and improve its profit margins in the future. The Company does not believe the restructuring programs will generate increased costs in other areas or lead to diminished revenues. The full implementation of the restructuring programs will take place over the next two quarters. The Company is converting its manufacturing process to use 0.35-micron technology and is developing 0.25-micron technology. Until these migrations are completed, the older equipment and associated manufacturing processes are still being used. The 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 11 (Nonrecurring Charges) in Notes to Condensed Consolidated Financial Statements. As the Company continued to move toward production with 0.35-micron technology, the Company recognized an impairment charge of $65.0 million relating to manufacturing equipment with 0.65-micron and 0.5-micron technologies. The Company recognized the impairment charge when the future undiscounted cash flows of each asset were estimated to be insufficient to recover its related carrying value. At such time, the carrying values of these assets were written down to the Company's estimates of fair value. Fair value was based on sales of similar assets or other estimates of fair value, such as estimated future cash flows. The Company does not anticipate significant proceeds from disposal. None of the assets affected by this action are currently held for sale. Additionally, 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. At the time of the acquisition, the technological feasibility of the acquired in-process technology had not been established and the Company believes the technology has no alternative use. The Company intends to develop the acquired technology (see Research and Development); however, it is uncertain whether the Company will be successful in this regard. If the development of the technology is unsuccessful, the technology may be abandoned during the development phase. OTHER EXPENSE, NET The Company reported $9.7 million of net interest and other expenses for the three months ended September 30, 1998, compared to $3.7 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 -14- 17 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 third quarter of 1997 (in connection with the construction of the Company's fabrication facility in Rousset). Foreign exchange loss included in Other Expenses, Net for the nine months ended September 30, 1998 and 1997 was $441 and $2,964, respectively. INCOME TAX PROVISION (BENEFIT) The Company's effective tax rate was 35.0 percent for the nine months ended September 30, 1997 and 4.4 percent for the nine months ended September 30, 1998. The reduction in tax rate was due to the tax effect of the Temic acquisition. NET INCOME (LOSS) The Company reported a net income of $4.2 million for the three months ended September 30, 1998, compared to net income of $30.3 million in the corresponding period of 1997. Net loss for the nine months ended September 30, 1998 was $66.3 million, compared to net income of $96.5 million in the corresponding period of 1997. The substantial decrease in net income was primarily due to the nonrecurring charges incurred during the nine months ended September 30, 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 the acquisition of Temic requires the dedication of management resources that may distract the attention from day-to-day business and may disrupt key research and development, marketing or sales efforts. The inability of management to successfully integrate the Temic acquisition could have a material adverse effect on the business, operating results and financial condition of the Company. YEAR 2000 RISKS The Company initiated a program during 1997 to review its computer hardware and software systems to determine the impact of and to provide solutions for Year 2000 requirements. The Year 2000 program is being conducted in five phases - (i) planning, (ii) inventory/impact, (iii) remediation, (iv) testing and (v) monitoring. The Company has completed the planning phase of the Year 2000 program for both information technology (IT) and non-information technology (Non-IT) systems. The inventory/impact phase has -15- 18 been completed for IT systems and is substantially completed for Non-IT systems. The Company has completed the remediation phase for most of its IT systems (i.e., factory management system, order entry and tracking system, electronic data interchange (EDI) and financial information systems). The remediation phase for the remaining IT systems is approximately 35 percent completed and is expected to be fully completed by mid-1999. The Company has begun the remediation process for Non-IT systems and expects this remediation process to be completed in mid-1999. The testing phase had been completed for the EDI system and is approximately 80 percent completed for the order entry and tracking system and the financial information system. Depending upon the timing of the remediation phase, the testing phase for the remaining IT systems and Non-IT systems will begin immediately following the completion of the remediation process. The Company expects phases (i) through (iv) of the Year 2000 program to be completed during the third quarter of 1999. The Company has also begun the process of identifying its top 100 suppliers and sending these suppliers a Year 2000 compliance survey. The Company expects this process to be completed by mid-1999. The Company has not yet established a contingency plan for any Year 2000 issues that may arise, but expects to establish such a plan during its completion of phases (i) through (v) of the Year 2000 program. The Company's cost related to identifying and addressing Year 2000 issues are not expected to be material. Thus far, the major cost associated with identifying and addressing Year 2000 issues has been in-house labor costs. The Company does not anticipate costly replacements for Non-IT equipment, since the Company expects that substantially all of this equipment can be upgraded to be Year 2000 compliant. If the Company were unable to successfully upgrade its IT and Non-IT systems to be Year 2000 compliant, its wafer productions system and business and financial information systems could be materially and adversely affected, which in turn could result in a material adverse effect on the Company's business, operating results and financial conditions. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had $188.9 million in cash and short-term investments, a decrease of $48.7 million from December 31, 1997, and $355.3 million in net working capital, an increase of $40.8 million from December 31, 1997. Accounts receivable increased 13.8 percent to $247.0 million at September 30, 1998 from $217.0 million at December 31, 1997. The increase was primarily due to the inclusion of Temic's accounts receivable of $47.9 million. The average days of accounts receivable outstanding were 77.1 and 83.0 days for the nine month periods ended September 30, 1998 and 1997, respectively. The improvement in average days outstanding was due primarily to the write-off of accounts receivable at the end of 1997, the collection efforts made by the Company during the third quarter of 1998 and price adjustments given to the Company's distributors and charged against distributors reserve during the third quarter of 1998 which resulted in a reduction of its accounts receivable balance at September 30, 1998. Inventories increased 90.2 percent to $236.5 million at September 30, 1998 from $124.3 million at December 31, 1997. The increase in inventory was primarily due to the combination of decline in sales, the continuation of production and the inclusion of Temic's inventory of $40.4 million. The inventory turnover for the nine months ended September 30, 1998 was 3.0 times compared to 4.1 times of the corresponding period of 1997. At September 30, 1998, the Company had long-term investments of $122.4 million, an increase of $26.9 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 9 (Zero Coupon Convertible Debt) in Notes to Condensed Consolidated Financial Statements. -16- 19 During the nine months ended September 30, 1998, the Company generated net cash flows from operations of $89.0 million. Net cash used in investing activities was $302.0 million, due to acquisitions of fixed and other assets of $185.1 million, investment in Temic of $99.3 million, purchases of marketable securities of $211.4 million, offset by sale of marketable securities of $193.9 million. Net cash provided from financing activities was $170.6 million, due to funding from capital leases and bank borrowings of $253.0 million, issuance of zero coupon convertible notes of $115.0 million and proceeds from stock issuance of $8.4 million, offset by payments of capital leases and notes payable of $75.7 million, payment of $110.0 million loan with Nationsbank and payments of $20.0 million for the repurchase of the Company's common stock. The $253.0 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 9 (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 the first half of 1999. 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. -17- 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company was named as a defendant in a patent infringement lawsuit that was filed on January 21, 1998. The plaintiff contended that certain of the Company's devices infringe seven patents it allegedly owns and was seeking a judgment of infringement for each of these asserted patents and other costs. The amount of judgment sought by the plaintiff was not specified in the lawsuit. The Company settled the patent disputes and entered into a cross-license agreement with the plaintiff in August 1998. ITEM 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 September 15, 1998 (reporting the declaration of a dividend under the Registrant's Preferred Shares Rights Agreement). -18- 21 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) NOVEMBER 12, 1998 /s/ GEORGE PERLEGOS --------------------------------------- GEORGE PERLEGOS President, Chief Executive Officer (Principal Executive Officer) NOVEMBER 12, 1998 /s/ DONALD COLVIN --------------------------------------- DONALD COLVIN Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer) -19- 22 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 134,970 53,912 280,141 33,187 236,474 780,600 1,562,368 581,143 1,986,527 425,288 267,640 0 0 315,359 0 1,986,527 822,411 822,411 532,750 868,299 0 7,966 34,027 (69,358) (3,026) 0 0 0 0 (66,332) (0.67) (0.67)
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