-----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, FXzQ0YJhIYOdPo+6gQITj4Knipb1f6tj6nZoQMLAASN+fivjYhjeStdQU8cXk/cc HfPb3B6V9/K6LsOwyWEG3w== 0001035704-99-000241.txt : 19990517 0001035704-99-000241.hdr.sgml : 19990517 ACCESSION NUMBER: 0001035704-99-000241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99621823 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 QUARTER ENDED MARCH 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999 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 MAY 5, 1999, REGISTRANT HAD OUTSTANDING 100,172,013 SHARES OF COMMON STOCK. 2 ATMEL CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 1999 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and March 31, 1998 2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and March 31, 1998 3 Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 1999 and March 31, 1998 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II: OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 23 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24
3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ATMEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, 1999 December 31, 1998 -------------- ----------------- (Unaudited) CURRENT ASSETS Cash and cash equivalents 181,631 $ 161,721 Short-term investments 153,558 161,844 Accounts receivable 259,352 252,601 Inventories 240,637 240,258 Other current assets 62,588 74,967 -------------- -------------- TOTAL CURRENT ASSETS 897,766 891,391 Other assets 65,861 107,220 Fixed assets, net 900,146 964,126 -------------- -------------- TOTAL ASSETS $ 1,863,773 $ 1,962,737 ============== ============== CURRENT LIABILITIES Current portion of long-term debt $ 79,798 $ 81,995 Trade accounts payable 169,427 200,101 Accrued liabilities and other 89,369 92,953 Deferred income on shipments to distributors 20,128 24,170 -------------- -------------- TOTAL CURRENT LIABILITIES 358,722 399,219 Long-term debt less current portion 736,794 771,069 Deferred income taxes 3,404 3,404 -------------- -------------- TOTAL LIABILITIES 1,098,920 1,173,692 -------------- -------------- Put warrants 29,850 56,850 -------------- -------------- SHAREHOLDERS' EQUITY Common stock 358,228 330,073 Accumulated other comprehensive income (12,948) 29 Retained earnings 389,723 402,093 -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 735,003 732,195 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,863,773 $ 1,962,737 ============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 4 ATMEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share data) (Unaudited)
Three Months Ended March 31, 1999 1998 ---------- ---------- NET REVENUES $ 290,037 $ 260,392 EXPENSES Cost of sales 186,165 164,192 Research and development 47,229 36,659 Selling, general and administrative 35,920 27,826 ---------- ---------- TOTAL OPERATING EXPENSES 269,314 228,677 ---------- ---------- OPERATING INCOME 20,723 31,715 Interest and other income (expenses), net 5,367 (4,443) ---------- ---------- INCOME BEFORE TAXES 26,090 27,272 Income tax provision 9,392 479 ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 16,698 26,793 Cumulative effect of accounting change, net of tax effect (29,068) -- ---------- ---------- NET (LOSS) INCOME $ (12,370) $ 26,793 ========== ========== BASIC NET (LOSS) INCOME PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.17 $ 0.27 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX EFFECT (0.29) -- ---------- ---------- NET (LOSS) INCOME $ (0.12) $ 0.27 ========== ========== DILUTED NET (LOSS) INCOME PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.17 $ 0.27 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX EFFECT (0.29) -- ---------- ---------- NET (LOSS) INCOME $ (0.12) $ 0.27 ========== ========== SHARES USED IN BASIC NET (LOSS) INCOME PER SHARE CALCULATIONS 99,988 99,127 ========== ========== SHARES USED IN DILUTED NET (LOSS) INCOME PER SHARE CALCULATIONS 99,988 100,122 ========== ==========
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)
Three Months Ended March 31, 1999 1998 ------------ ------------ CASH FROM OPERATING ACTIVITIES Net (loss) income $ (12,370) $ 26,793 Items not requiring the use of cash Depreciation and amortization 47,200 47,235 Cumulative effect of accounting change, net of taxes 29,068 -- Gain on sale of fixed assets (12,474) -- Other (2,230) 4,509 Changes in operating assets and liabilities Accounts receivable (5,434) (5,624) Inventories (379) (34,032) Prepaid taxes and other assets 26,092 35,549 Trade accounts payable and other accrued liabilities (24,844) (41,319) Income taxes payable (6,516) 703 Deferred income on shipments to distributors (4,042) 3,155 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 34,071 36,969 ------------ ------------ CASH FROM INVESTING ACTIVITIES Acquisition of fixed assets (15,570) (75,936) Sales of fixed assets 18,794 -- Acquisition of other assets (579) (12,534) Acquisition of Temic Telefunken Microelectronic -- (108,252) Purchase of investments (31,215) (147,782) Sale or maturity of investments 38,938 123,895 ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,368 (220,609) ------------ ------------ CASH FROM FINANCING ACTIVITIES Proceeds from capital leases and notes 4,817 189,426 Principal payments on capital leases and notes (24,003) (26,462) Payment from settlement of warrants (2,467) 0 Repurchase of stock -- (16,623) Issuance of common stock 3,622 4,474 ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (18,031) 150,815 ------------ ------------ EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (6,498) (1,421) ------------ ------------ NET CASH PROVIDED BY (USED IN) 19,910 (34,246) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 161,721 174,310 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 181,631 $ 140,064 ============ ============ INTEREST PAID $ 8,937 $ 8,682 INCOME TAXES PAID $ 4,560 $ 68 FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 2,683 $ 36,849 PURCHASE OF CALL WARRANTS FROM PROCEEDS OF PUT WARRANTS $ -- $ 1,450
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 March 31, 1999 1998 ------------ ------------ Net (loss) income $ (12,370) $ 26,793 Other comprehensive (loss), net of tax: Foreign currency translation adjustments (13,844) (3,625) Unrealized gains on securities 867 44 ------------ ------------ Other comprehensive (loss) (12,977) (3,581) ------------ ------------ Comprehensive (loss) income $ (25,347) $ 23,212 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 7 ATMEL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (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 March 31, 1999, and the results of operations, comprehensive income and cash flows for the three month periods ended March 31, 1999 and 1998. All material intercompany balances have been eliminated. Because all of the disclosures required by generally accepted accounting principles are not included, these interim statements should be read in conjunction with the audited financial statements and notes thereto in the Company's Annual Report to Shareholders filed on Form 10-K for the year ended December 31, 1998. 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. Prior year amounts have been reclassified to conform with current presentation. Effective January 1, 1999, the Company changed its fiscal year from a 52 or 53-week year ending on the Monday nearest the last day in December of each year to a calendar year ending December 31. The quarters have changed from a 13-week quarter to a calendar quarter. For presentation purposes, prior year quarters have not been restated as the difference due to this change on the financial results is immaterial. 13-week quarters in the prior year's condensed consolidated financial statements and notes will be referenced with calendar quarters. 2. INVENTORIES Inventories are stated at the lower of cost or market. Cost is computed using a currently adjusted standard basis (which approximates actual cost on a current average or first-in, first-out basis) for Finished Goods and Work in progress. Inventories comprise the following:
(in thousands) March 31, 1999 December 31, 1998 -------------- ----------------- Materials and purchased parts $ 12,572 $ 14,082 Finished Goods 34,898 43,913 Work in progress 193,167 182,263 ------------ ------------ Total $ 240,637 $ 240,258 ============ ============
5 8 3. SHORT-TERM INVESTMENTS Short-term investments are stated at cost plus any applicable unamortized premium or discount. Short-term investments with maturities of less than 90 days are included in the caption "Cash and cash equivalents" in the Company's Condensed Consolidated Balance Sheet. 4. NET INCOME (LOSS) PER SHARE A reconciliation of the numerator and denominator of basic and diluted net income (loss) per share is provided as follows:
Three Months Ended March 31, (in thousands, except per share data) 1999 1998 ------------ ------------ Basic and diluted net (loss) income (numerator) $ (12,370) $ 26,793 ============ ============ Shares used in basic net income per share calculations (denominator): Weighted average shares of common stock outstanding 99,988 99,127 ============ ============ Shares used in diluted net (loss) income per share calculations (denominator): Weighted average shares of common stock outstanding 99,988 99,127 Dilutive effect of stock options -- 995 ------------ ------------ 99,988 100,122 ============ ============ Basic net (loss) income per share $ (0.12) $ 0.27 ============ ============ Diluted net (loss) income per share $ (0.12) $ 0.27 ============ ============
5. PUT WARRANTS In January 1996, the Board of Directors of the Company approved a stock repurchase program that allows the Company to repurchase up to 5,000,000 shares of its common stock. The Board of Directors approved the repurchase of an additional 5,000,000 shares in January 1998. Under this program, the Company repurchased 1,400,000 shares of its common stock in 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 warrant transactions which provide the Company with the flexibility to implement its repurchase plan, under which the Company could repurchase its stock when favorable market conditions existed and without immediately impacting the Company's cash resources. In connection with the Company's stock repurchase program, put warrants were sold to an independent third party during fiscal years 1998, 1997 and 1996. The Company used the proceeds from the sale of the put warrants to purchase call warrants in a transaction not requiring any net cash outlay at the time. The 1996 and 1997 positions had either been settled in cash or expired. Activity during the quarter is summarized as follows:
Cumulative net Shares covered Potential (in thousands) premium received by warrants obligation ---------------- ----------- ---------- DECEMBER 31, 1998 $10,008 2,700 $56,850 Settlement of put warrants (3,825) (1,500) (27,000) Settlement of call warrants 1,358 0 0 ------- ------ ------- MARCH 31, 1999 $ 7,541 1,200 $29,850 ======= ====== =======
6 9 The put warrants entitle the aforementioned independent third party to sell shares of the Company's common stock to the Company at specified strike prices and exercise dates, while the call warrants entitle the Company to buy from the same third party shares of the Company's common stock at specified strike prices and exercise dates. The Company closed out 1,500,000 warrants on January 29, 1999, which resulted in a net cash outlay of $2,467,000. The outstanding put warrants and corresponding call warrants expire on May 14, 1999, are exercisable only on the maturity date, and may be settled in cash or shares of stock, at the Company's option. The Company closed out 920,000 shares of the May 14 position on April 19, 1999, which resulted in a net cash outlay of $4,002,000. The maximum potential repurchase obligations of the Company as of March 31, 1999 are as follows: 1,200,000 shares with a strike price of $24.875 or $29,850,000. The put warrants have been classified separately on the balance sheet to reflect the maximum potential obligation of the Company. There was no impact on basic and diluted net income (loss) per share resulting from these transactions in the three months ended March 31, 1999 and 1998. 6. TEMIC ACQUISITION On March 1, 1998 the Company acquired the integrated circuit business of Temic Telefunken Microelectronic (Temic) of Heilbronn, Germany, a wholly owned subsidiary of Vishay Intertechnology, Inc. for $99,250,000 in cash. The acquisition of Temic included its wholly-owned subsidiary, MHS based in Nantes, France. Temic designs, manufactures and sells analog, microcontroller and ASIC products that service the automotive, telecommunications, consumer and industrial markets. The fair value of the assets acquired exceeded the purchase price by approximately $131,000,000. As a result the fair value of the long term assets acquired were reduced. The following is a summary of the allocation of the purchase price (in thousands). Purchase price $ 99,250 ============ Purchased technology $ 19,661 Workforce in place 3,681 In-process technology 23,425 Other assets, net of assumed liabilities 52,483 ------------ $ 99,250 ============
The Company is amortizing purchased technology and workforce in place over five years. In-process technology was charged to operations upon acquisition. At March 31, 1999, purchased technology and workforce in place, net of accumulated amortization of $2,949,000 and $552,000, respectively, amounted to $16,712,000 and $3,129,000, respectively. At December 31, 1998, purchased technology and workforce in place, net of accumulated amortization of $1,966,000 and $368,000, respectively, amounted to $17,695,000 and $3,313,000, respectively. 7 10 The amount allocated to in-process technology represents purchased in-process technology for three projects that have not yet reached technological feasibility and have no alternative future use. For all in-process projects, value was determined by estimating the net cash flows resulting from the completion of these projects reduced to the percentage of completion of the project. Net cash flows were tax affected using estimated income taxes consistent with the Company's anticipated tax rate for the foreseeable future and then discounted back to their present value at a discount rate of 18 percent based on the Company's required risk adjusted weighted average rate of return. The nature of the efforts to develop all purchased in-process technology into commercially viable products and processes principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products and processes can meet their design specification, including function, features and technical performance requirements. Due to the fact that these projects are in-process there is uncertainty whether they can be successfully developed and result in the net cash flows that were originally estimated at acquisition. It is reasonably possible that the development of this technology could fail because of either prohibitive cost, the Company's inability to perform the required completion efforts or other factors outside the Company's control such as a change in the market for the resulting developed products. If the development of the technology is unsuccessful, the technology may be abandoned during the development phase. Should the Company's development efforts fail or encounter significant delay then the Company's future returns may be significantly reduced. In such case, the Company may be unable to recover its investment in these projects, may be less well positioned to benefit from new product markets in these areas and the Company's future operating results could be adversely affected. The Company cannot guarantee that it will realize revenue from these products in the amounts estimated. The Company currently believes the aggregate net cash flows originally anticipated at acquisition will be realized and that there has been no material change in the expected return on investment related to these projects. The fair value allocated to each of the in-process projects was as follows (in thousands): Product developments $ 8,784 Process developments 9,621 System level integration 5,020 --------- $ 23,425 =========
PRODUCT DEVELOPMENTS The ongoing product developments at the time of acquisition included development of new and significantly enhanced microcontroller, automotive and communications products, which utilize Radio Frequency (RF). 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. It was estimated that, on average, all in-process product technology was 38 percent complete at the date of acquisition based on the cost of research development to date compared to estimated total estimated cost expenditure to complete the project. The Company expects to incur up to a total of $20.4 million in development costs over the next year to complete this project. For the three months ended March 31, 1999, the Company spent approximately $96 million in product development 8 11 costs. The Company anticipates the development will be completed and net cash in-flows will begin in the 2000-2001 time frame. The estimated revenue includes average compounded annual revenue growth rates for the projects from 1998 to 2003, and declining growth rates thereafter through 2005. The Company based these projections on estimates of market size and growth, expected trends in technology and the nature and expected timing of new product introductions. Estimated cost of sales was consistent with the Company's current cost of sales and future expectations for cost of sales. Sales and marketing costs were expected to be consistent with that of the Company's average costs in these areas. Maintenance research and development costs as a percentage of estimated revenue are expected to be higher than the Company's average costs in the introduction and early phases of product sales and then decline to the Company's average costs. This research and development cost pattern is consistent with the Company's historical experience through product life cycles. PROCESS DEVELOPMENTS Process developments at the time of acquisition included Silicon Germanium (SiGe) technology and UHF process technologies, which will be incorporated in new products. If the development is successful, these technologies enable higher product performance while reducing product cost. It was estimated that the project was 51 percent complete at the date of acquisition based on the cost of research and development to date compared to total estimated cost. The Company expects to incur up to a total of $8.9 million in development costs over the next year to complete these projects. For the three months ended March 31, 1999, the Company spent approximately $1.1 million for process development costs. The Company anticipates the development will be completed and net cash in-flows will begin in the 1999-2000 time frame. The value of process technology under development was estimated by projecting attributable future cost savings. Cost savings were estimated to begin in 1999 and grow through 2003 and decline to zero through 2006. The estimates of cost savings (reduction of cost of goods sold) were compared to the Company's historical results as well as the forecasts utilized by the Company in evaluating the Temic acquisition. A maintenance research and development charge and income taxes were then deducted from the cost savings to estimate the free cash flow attributable to the process technology under development. Maintenance research and development costs as a percentage of estimated revenue are expected to be higher than the Company's average costs in the introduction and early phases of process implementation and then decline to the Company's average costs. This research and development cost pattern is consistent with the Company's historical experience through process life cycles. SYSTEM LEVEL INTEGRATION New manufacturing processes and improved design tools have created a new market referred to as System Level Integration (SLI) or system-on-a-chip which will result in single chip solutions replacing multi-chip sets. The Company is aggressively pursuing the SLI market, which could represent a $30 billion market by 2002. Silicon germanium and RF in-process technologies obtained from Temic will be integral to the Company's SLI strategy. It was estimated that the project was 32 percent complete at the date of acquisition based on the status of the Silicon germanium and RF projects currently under development. 9 12 The Company expects to incur up to a total of $15.3 million in development costs over the next year to complete this project. For the three months ended March 31, 1999, the Company spent approximately $1.7 million for system level integration development costs. The Company anticipates the development will be completed and net cash in-flows will begin in the 2000-2001 time frame. The Company has identified several products that will incorporate SLI in the future and projected total revenue from these products through 2003. The Company estimated that 25 percent of this revenue was attributable to in-process technologies acquired in the Temic acquisition. An industry projected earnings before interest and taxes margin of 18.7 percent, a capital charge of 1.2 percent and an estimated tax charge were applied to estimated revenues to estimate total cashflow attributable to the products that will incorporate in-process SLI technology. Net cash in-flows are expected to begin in 1999. Revenue and operating income were estimated to increase from 1999 to 2001 and decline from 2001 to 2003. These estimates were compared to the Company's historical results as well as the forecasts utilized by the Company in evaluating the Temic acquisition. Included within assets, net of assumed liabilities, is an accrual for $3.1 million at December 31, 1998, for the remaining cost of terminating certain employees at Temic's MHS subsidiary. For the three months ended March 31, 1999, the Company charged $1.8 million against the reserve and $1.3 million is remaining in the accrual. The Company believes that the remaining accrual will be sufficient to cover the remaining termination costs and that planned terminations will be completed and all costs incurred by June 1999. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition had occurred at the beginning of the periods presented and does 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.
Three Months Ended March 31, (in thousands, except per share data) 1999 1998 ----------- ----------- Net revenues $ 290,037 $ 303,123 =========== =========== Net (loss) income $ (12,370) $ 18,356 =========== =========== Diluted net (loss) income per share $ (0.12) $ 0.18 =========== ===========
7. SUBSEQUENT EVENT: MOTOROLA'S SMART CARD CHIP ACQUISITION On April 9, 1999, the Company acquired substantially all of the assets and assumed certain associated liabilities of the Smart Information Transfer (SIT) business of the Semiconductor Products Sector of Motorola, Inc. for approximately $9.4 million. The transaction will be accounted for as a purchase. The transaction is expected to be non-dilutive to the Company's earnings in 1999. 10 13 8. DISPOSITION OF ASSETS As previously announced in the Company's 1998 Report on Form 10-K, in January 1999, the Company completed the sale of certain items of plant and equipment in Rousset, France for $17.7 million in cash. The Company recorded a pre-tax gain of $14.9 million ($9.5 million after-tax), after disposal costs, which is included in the Company's Condensed Consolidated Statements of Operations under the caption "Interest and other income (expenses), net." 9. CHANGE IN ACCOUNTING PRINCIPLE 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 requires the effect of adoption to be reported as a cumulative effect of change in accounting principle. Accordingly, the Company has adopted the accounting pronouncement effective January 1, 1999. The Company had previously capitalized start-up costs for a fabrication facility at its Rousset, France site during and prior to 1998. These start-up costs (which are displayed in the caption "Other assets" in the Company's Condensed Consolidated Balance Sheet at December 31, 1998) of approximately $48.9 million were written-off in the first quarter of 1999 and presented net of tax for approximately $29.1 under the caption "Cumulative effect of accounting change" in the Company's Condensed Consolidated Statements of Operations. The start-up costs incurred to make this fabrication facility production-ready are substantially complete. Future costs at this facility will be incurred for product development and production. The following unaudited pro-forma table sets forth the impact on income before the cumulative effect of accounting change and net income (loss) from adopting SOP 98-5 in the periods presented as if SOP 98-5 had been implemented in such periods. The pro-forma results are not necessarily indicative of the results which would have occurred had SOP 98-5 been effective in the periods presented, nor are they indicative of future financial results.
Three Months Ended (in thousands, except per share data) March 31, 1999 1998 ---------- ---------- Income before cumulative effect of accounting change $ 16,698 $ 26,793 Cumulative effect of accounting change -- (18,508) ---------- ---------- Net Income $ 16,698 $ 8,285 ========== ========== Diluted earnings per share: Income before cumulative effect of accounting change $ 0.17 $ 0.27 Net income $ 0.17 $ 0.08
10. SEGMENT REPORTING The Company has four reportable segments, each of which require different design, development and marketing resources to produce and sell semiconductor integrated circuits: Non-volatile Memories, Temic, Application Specific Integrated Circuits (ASIC) and Logic. The items labeled "Unallocated Amounts" are either not allocated to business segments or are not considered by Management in its evaluation of business unit performance. 11 14 Information about segments (in thousands):
Non-volatile Memories Temic ASIC Logic Total -------- ------- -------- ------- -------- THREE MONTHS ENDED MARCH 31, 1999 Net revenues from external customers $124,083 $66,070 $ 79,624 $20,260 $290,037 Segment operating income 12,216 940 17,978 3,186 34,320 THREE MONTHS ENDED MARCH 31, 1998 Net revenues from external customers $149,012 $22,500 $ 64,642 $24,238 $260,392 Segment operating income 18,121 200 4,212 3,740 26,273
Reconciliations of segment information to financial statements (in thousands):
Three Months Ended March 31, Operating income 1999 1998 -------- -------- Total income for reportable segments $34,320 $ 26,273 Unallocated amounts: Corporate R&D (13,475) (159) Corporate expenses (122) 5,601 -------- -------- Consolidated operating income before interest, taxes, and cumulative effect of accounting change $ 20,723 $ 31,715 ======== ========
11. COMPREHENSIVE INCOME The income tax effect of each element of comprehensive income for the three months ended March 31, 1999 and 1998, respectively, is as follows (in thousands):
Three Months Ended March 31, 1999 Before- Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------------- ------------- ------------- Foreign currency translation adjustments $ (21,631) $ 7,787 $ (13,844) Unrealized gain on securities 1,354 (487) 867 ------------- ------------- ------------- Other comprehensive (loss) income $ (20,277) $ 7,300 $ (12,977) ============= ============= =============
Three Months Ended March 31, 1998 Before- Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------------- ------------- ------------- Foreign currency translation adjustments $ (5,578) $ 1,953 $ (3,625) Unrealized gain on securities 69 (25) 44 ------------- ------------- ------------- Other comprehensive (loss) income $ (5,509) $ 1,928 $ (3,581) ============= ============= =============
12 15 The accumulated balances of other comprehensive income at March 31, 1999 are summarized as follows (in thousands):
Current Beginning Period Ending Balance Change Balance ------------- ------------- ------------- Foreign currency translation adjustments $ 492 $ (13,844) $ (13,352) Unrealized gain (loss) on securities (463) 867 404 ------------- ------------- ------------- $ 29 $ (12,977) $ (12,948) ============= ============= =============
13 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, political instability - including war - in countries where the Company manufactures and/or sells its products, disruptions in production or business systems due to year 2000 issues, conditions in the overall semiconductor market (including the historic cyclicality of the industry), continued financial turmoil in the worldwide 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 Report on Form 10-K Report. The Company undertakes no obligation to update any forward looking statements in this Form 10-Q. The following table sets forth for the periods indicated certain operating data as a percentage of net revenues:
THREE MONTHS ENDED MARCH 31, 1999 1998 ---------- ---------- NET REVENUES 100.0% 100.0% EXPENSES Cost of sales 64.2 63.0 Research and development 16.3 14.1 Selling, general and administrative 12.4 10.7 ---------- ---------- TOTAL EXPENSES 92.9 87.8 OPERATING INCOME 7.1 12.2 Interest and other income (expenses), net 1.9 (1.7) ---------- ---------- INCOME BEFORE TAXES 9.0 10.5 Income tax provision 3.3 0.2 ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5.7 10.3 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (10.0) -- ---------- ---------- NET INCOME (LOSS) (4.3)% 10.3 % ========== ==========
Effective January 1, 1999, the Company changed its fiscal year from a 52 or 53-week year ending on the Monday nearest the last day in December of each year to a calendar year ending December 31. The quarters have changed 14 17 from a 13-week quarter to a calendar quarter. For presentation purposes, prior year quarters have not been restated as the difference due to this change on the financial results is immaterial. 13-week quarters in the prior year's condensed consolidated financial statements and notes will be referenced with calendar quarters. NET REVENUES The Company's net revenues by segment for the three months ended March 31, 1999 and 1998 are summarized as follows:
Three Months Ended (in thousands) March 31, Increase/ Segment 1999 1998 (decrease) ---------- ---------- ---------- Non-volatile Memory $ 124,083 $ 149,012 $ (24,929) Temic 66,070 22,500 43,570 ASIC 79,624 64,642 14,982 Logic 20,260 24,238 (3,978) ---------- ---------- ---------- Total $ 290,037 $ 260,392 $ 29,645 ========== ========== ==========
Net revenues increased 11.4 percent to $290.0 million in the quarter ended March 31, 1999 from $260.4 million in the corresponding quarter of 1998. This increase was primarily attributable to the inclusion of revenues from Temic's sales for $66.1 million for the three months ended March 31, 1999 versus $22.5 million in the corresponding quarter of 1998, which included results for only one month. See Note 6 (Temic Acquisition) of Notes to Condensed Consolidated Financial Statements for a discussion on the Temic acquisition. Excluding the revenue contribution from Temic, net revenues for the first quarter ended March 31, 1999 would have decreased by 5.9 percent compared to the corresponding quarter of 1998. The decrease was primarily due to the continued excess manufacturing capacity in the semiconductor industry which led to average selling prices (ASPs) to erode approximately 30.0 percent in the first quarter of 1999 compared to the corresponding quarter of 1998 for substantially all of the Company's business segments and products. Demand for the Company's products, however, across all business units increased in the first quarter of 1999 compared to the same period in 1998. Non-volatile Memory revenues decreased $24.9 million in the first quarter of 1999 compared to the same period in 1998 due to price erosion which was partially offset by increased unit sales. The Company derived approximately 40.0 percent of its revenues from Non-volative Memory sales in the first quarter of 1999 compared to approximately 57.0 percent of its revenues in the same period of 1998. The Company expects prices to improve in the second half of 1999 as prices have improved during the first quarter of 1999, however, prices eroded in the first quarter of 1999 compared to the same period in 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 approximately 40.0 percent of its revenues, has continued to suffer from excess capacity during 1999. If these conditions continue, the Company's growth and results of operations would be adversely affected. 15 18 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 future periods, as was evidenced in 1997 and 1998 and the first quarter of 1999. The Company's Application Specific Integrated Circuit (ASIC) and Logic businesses represented 27 percent and seven percent, respectively, of total revenues for the first quarter of 1999. Revenues for ASIC increased approximately $15.0 million in the first quarter of 1999 compared to the same period in 1998 primarily due to continued strength in certain of the Company's digital ASICs. Despite ASPs for ASIC products decreasing in the first quarter of 1999 compared to the same period in 1998, much higher unit sales more than offset eroding prices. With the Company's acquisition of the Smart Card IC division of Motorola on April 9, 1999, the Company expects the ASIC business will increase as a percent of total revenues and the amount of manufacturing capacity and Company resources allocated to this business segment will increase starting in the second quarter of 1999. The logic business decreased $4.0 million in the first quarter of 1999 compared to the corresponding period in 1998 due to price erosion in certain of the logic's microcontroller products. The Company's net revenues by geographic areas for the three-month periods ended March 31, 1999 and 1998 are summarized as follows (in thousands):
Three Months Ended March 31, Region 1999 1998 ---------- ---------- North America $ 98,786 $ 94,315 Europe 88,195 90,039 Asia 103,056 76,038 ---------- ---------- Total $ 290,037 $ 260,392 ========== ==========
Foreign sales increased two percent in the first quarter of 1999 to 66 percent of net revenues compared with 64 percent in the same period of 1998. Sales to Europe decreased approximately two percent or $1.8 million in the first quarter of 1999 compared to the same period in 1998 due to significant price erosion throughout all countries in Europe in which the Company sells to. This decrease was offset by a combination of: (1) increased unit sales and (2) the inclusion of Temic's sales. Fluctuations in the French franc and German mark had an immaterial impact on sales to Europe in the first quarter of 1999 compared to the same period in 1998. The decrease in sales to Europe was offset by increases in sales to Asia. Sales to Asia increased $27.0 million in the first quarter of 1999 to $103.0 million compared to $76.0 million in the first quarter of 1998. The increase was due to significant increases in unit sales offset slightly by price erosion. If the revenues recorded in the first quarter of 1999 had been calculated at the average yen rate for the first quarter of 1998, revenues would have been $3.3 million lower. In the first quarter of 1999, approximately 40.0 percent of foreign sales were denominated in foreign currencies compared to 27 percent in the first quarter of 1998. This was due to the inclusion of Temic's sales which were primarily denominated in foreign currencies. The Company's revenues and gross margin for the first quarter of 1999 were favorably impacted in part by a weakening of the U.S. dollar against foreign currencies in the markets in which the Company sells products; there can be no assurance that this trend will continue for the remainder of 1999 and the Company may experience similar adverse 16 19 effects such as was the case in 1998. While sales to Asia have increased in the first quarter of 1999 compared to the same period in 1998, the Company could experience - as was the case in 1998 - the adverse business and financial conditions in Asia, where approximately 35.5 percent of the Company's revenues are generated, would likely have a material adverse effect on the Company's operating results in the future. COST OF SALES Cost of sales as a percentage of net revenues increased to 64.2 percent in the first quarter of 1999, from 63.0 percent in the corresponding period of 1998. The increase in cost of sales as a percentage of net revenues was primarily due to 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 $39.6 million of additional cost of sales from Temic in the first quarter of 1999 as compared to $16.5 million for the same period in 1998. Although unit cost of sales decreased in the first quarter of 1999 compared to the same period in 1998, the lower product margins were attributable to erosion of average selling prices that were decreasing at a faster rate than the decrease in unit cost of sales. 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 such decreasing average selling price. 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 1999 and will focus on implementing chemical, mechanical polishing (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 manufacturing facilities or overcapacity 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 cost increased to 16.3 percent in the first quarter of 1999, from 14.1 percent in the corresponding quarter of 1998. Research and development expenses increased 28.8 percent from $36.7 million in the first quarter of 1998 to $47.2 million in the first quarter of 1999. 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 and 0.5-micron line widths to 0.35-micron, 0.25-micron, and 0.18-micron line widths, enhancement of mature products, development of new products, advanced CMOS, BiCMOS, and Silicon Germanium process technologies, manufacturing improvements, the costs associated with increasing production capacity in Colorado Springs and Rousset and the inclusion of Temic's research and development expense for the full quarter of 1999 compared to only one month in the corresponding quarter of 1998. The Company believes that continued investments in process technology and product development are essential for it to remain competitive in the markets it serves and is committed to high levels of expenditures for research and development. The Company spent approximately $12.4 million in the first quarter of 1999 on research & development activities necessary to realize Temic's in-process research & development activities related to product development, process development, including silicon germanium process technologies, and system level integration development. The Company believes that these projects are progressing in accordance with original estimates. 17 20 SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by 29.1 percent to $35.9 million in the first quarter of 1999 from $27.8 million in the first quarter of 1998. The increase was largely due to the inclusion of Temic's selling, general and administrative expense for the full three months ending March 31, 1999 versus only one month for the first quarter of 1998, higher selling costs due to higher revenues, offset by lower headcount. As a percentage of net revenues, selling, general and administration expenses were 12.4 percent for the first quarter of 1999 and 10.7 percent for the corresponding quarter of 1998. The Company expects selling general and administrative expenses to increase as a percent of net revenues due primarily to expansions in international markets, legal costs associated with intellectual property litigation and provision for doubtful accounts receivable. Although the Company did not experience significant provisions in the first quarter of 1999, the provision for doubtful accounts receivable may increase as the Company continues to evaluate the status of its accounts receivable. The potential increase could be due to the aging of accounts receivable, higher revenues, continued weakened business conditions, less financially strong customers, or the higher percentage of receivables in foreign countries. The Company believes it has adequate reserves in relation to these uncertainties. INTEREST AND OTHER INCOME (EXPENSES), NET The Company reported $5.4 million of net interest and other income (expenses) for the first quarter of 1999, compared to ($4.4) million of net interest and other income (expenses) for the corresponding period of 1998. The increase in net interest and other income (expenses) was primarily due to a $14.9 million pre-tax gain related to the sale of certain assets (see Note 8 of Notes to Consolidated Financial Statements) and higher interest income due to higher cash and short-term investment balances. These increases were offset by a combination of (1) higher interest expense of $1.6 million associated with the April 1998 zero coupon convertible debt financing for $115.0 million which was used 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, and (2) losses on disposals on non-essential fixed assets for $2.4 million. INCOME TAX PROVISION The Company's effective tax rate was 36.0 percent for the three months ended March 31, 1999 compared to 1.8 percent for the three months ended March 31, 1998. The increase was attributable to certain items associated with the acquisition of Temic, including the write-off of in-process research and development expenses, for which no tax benefit was recorded in the first quarter of 1998. For the remainder of 1999, the Company expects the effective tax rate to be 36.0 percent. The effective tax rate increase of 34.2 percent caused the income tax provision to increase $8.9 million in the first quarter of 1999 from $0.5 million in the first quarter of 1998 on lower income before taxes of $26.1 million in the first quarter of 1999 compared to $27.3 million in the first quarter of 1998. NET INCOME Net loss of $12.4 million for the first quarter of 1999 decreased $39.2 million from net income of $26.8 million in the corresponding period of the prior year. The decrease was primarily due to the write-off of previously capitalized start-up costs of $29.1 million (see Note 9 of Notes to Condensed Consolidated Financial Statments) and lower gross margins for non-volatile memory products. 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 18 21 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 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. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had $335.2 million in cash and short-term investments, an increase of $11.6 million from $323.6 million at December 31, 1998, and $539.0 million in net working capital, an increase of $46.9 million from $492.2 million at December 31, 1998. Accounts receivable increased 2.7 percent to $259.4 million at March 31, 1999 from $252.6 million at December 31, 1998. The average days of accounts receivable outstanding were 85 days and 88 days for the first quarter of 1999 and 1998, respectively. The decrease in average days outstanding was due primarily to an improved collection environment. The Company monitors collection risks and provides an adequate allowance for doubtful accounts related to these risks. While there can be no guarantee of collecting these receivables, the Company believes that substantially all net receivables will be collected given their customer's current credit ratings and expects that average days outstanding will decrease with improved business conditions. For the three months ended March 31, 1999, there were no material write-offs of accounts receivables. Inventories increased $0.3 million to $240.6 million at March 31, 1999 from $240.3 million at December 31, 1998. The inventory turnover for the three months ended March 31, 1999 and 1998 was 4.8 and 4.0 times, respectively. The 0.8 increase in inventory turnover is due to inventory increasing in the first quarter of 1998 with declining sales and a continuance of production. The Company believes that its existing sources of liquidity, together with cash flows from operations, lease financing on equipment and other short- and medium-term bank borrowings, will be sufficient to meet the Company's liquidity and capital requirements through 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. CASH FLOW FROM OPERATING ACTIVITIES During the three months ended March 31, 1999, net cash provided by operations decreased $2.9 million to $34.1 million compared to $37.0 million in the same period of 1998. The decrease was primarily due to: (1) cash used for net working capital purposes of $31.1 million in the first quarter of 1999 compared to $7.5 million in the same period in 1998 and (2) a decrease in net income of $39.2 million in the first quarter of 1999 compared to the same period in 1998. These decreases were offset by: (1) a $33.7 million decrease in cash used for inventory. In the first quarter of 1998, cash used for inventory activities increased due to declining sales and a continuance of production and (2) a non-cash charge of $29.1 million in the first quarter of 1999 for the cumulative effect of accounting change (see Note 9 of Notes to Condensed Consolidated Financial Statements). 19 22 CASH FLOW FROM INVESTING ACTIVITIES Net cash provided by investing activities was $10.4 million for the three months ended March 31, 1999 compared to net cash used in investing activities of $220.6 million in the first quarter of 1998, an increase of $231.0 million. This was due to: (1) capital expenditures in the first quarter of 1999 was $15.6 million compared to $75.9 million in the same period of 1998. This reduction of $60.4 million is due to the fabrication facility in Rousset, France being substantially complete and an overall reduced capital expenditure budget in 1999, (2) the acquisition of Temic in the first quarter of 1998 for $108.3 million, and (3) $31.6 million of reduced net investments in marketable securities. The Company will fund the remaining capital expediture budget in 1999 for approximately $130.0 million (which includes the acquisition of the Smart Card IC division of Motorola-see Note 7 of Notes to Condensed Consolidated Financial Statements) using a combination of existing cash, sale of short-term investments, and equipment lease financing. CASH FLOW FROM FINANCING ACTIVITIES In the first quarter of 1999, net cash used by financing activities was $18.0 million compared to net cash provided by financing activities of $150.8 million in the first quarter of 1998, a change of $168.8 million. The decrease was primarily due to: (1) the $189.4 million of capital lease and bank borrowings in the first quarter of 1998 which included a $110.0 million short-term loan from Nationsbank. The short-term loan was used to finance the acquisition of Temic and was subsequently repaid from the net proceeds received in connection with the zero coupon convertible debt financing completed in April 1998, (2) payment made for settlement of warrants amounted to $2.5 million in the first quarter of 1999. In April 1999, the Company paid an additional $4.0 million to settle 1.2 million shares of warrants. The Company's maximum potential obligation in the second quarter of 1999 is $29.9 million; because the settlement of this obligation is tied to the Company's stock price, the Company can not yet determine the amount of cash that will be required to settle the remaining warrants, and (3) the repurchase of 1.0 million shares of the Company's common stock for $16.6 million in the first quarter of 1998. The Company from time to time may repurchase its common stock under the stock repurchase program (see Note 5 to Notes to Condensed Consolidated Financial Statements) when favorable market conditions exist and funds are available. The Company is authorized to repurchase an additional 8.6 million shares. The Company can not estimate when favorable market conditions will exist, the timing, or the amount of cash that will be used, if any, to repurchase its common stock. YEAR 2000 RISKS The Company is assessing and planning for Year 2000 computer date issues at all of its design, manufacturing and sales locations. The Company initiated a program during 1997 to review its computer hardware and software systems, to prioritize and determine the impact of, and to provide solutions for Year 2000 requirements. The Year 2000 program is being conducted in five parallel phases - (i) planning, (ii) inventory/impact, (iii) remediation, (iv) testing and (v) implementation. (i) As of March 1999, the Company had completed the planning phase of the Year 2000 program for both information technology (IT) and non-information technology (non-IT) systems. IT includes computers, peripherals, software, and networks. Non-IT comprises manufacturing equipment, test equipment, and building support equipment. (ii) The inventory/impact phase has been completed for all systems. 20 23 (iii) The Company has completed the remediation phase for approximately 80 percent of all systems. The remaining systems have been analyzed and are awaiting vendor fixes. All fixes will be in place by the end of June or appropriate contingency plans will be implemented. (iv) The testing phase has been completed for the Electronic Data Interchange (EDI) system and the financial information system. The order entry systems are Year 2000 compliant in all locations except Rousset, France. Rousset will implement a compliant system during May 1999. (v) Implementation will occur through the remainder of 1999. The Company expects phases (i) through (iv) of the Year 2000 program to be completed for all internal systems by June 30, 1999. Implementation of phase (v) requires formalizing contingency plans for any non-compliant computer systems, equipment or suppliers. The Company will address all possible issues related to non-compliance and devise mitigating procedures. This process will begin in July 1999 and will be completed in the fourth quarter of 1999. The Company has surveyed all of its critical manufacturing equipment vendors and material and utility suppliers for Year 2000 compliance. All the equipment and utility vendors have responded and their progress is being monitored closely. The Company has not received surveys from all of its critical suppliers, but expects to do so by the end of May 1999. The Company will establish contingency plans to obtain the goods and services provided by any vendors determined to be non-compliant at the end of June 1999. The Company's products are not date sensitive unless they have been programmed that way by its customers. The Company's microcontroller products are not designed with specific date functions and rely on user provided programming for their operation. The Company's non-volatile memory products are also user programmable devices. There are no date related logic functions within the circuits and therefore depend on the customer for compliance with Year 2000 date compatibility. EPLDs are programmable logic devices that are designed to allow customers to perform a broad range of logic functions. The Company provides no specific date functions in its EPLDs, but a customer may configure these circuits to perform date calculations if required. Similarly, FPGAs are logic devices where any date functionality is designed by the customer after purchasing the product from the Company. There is no date related function or logic inside the Atmel FPGA unless a customer has chosen to program the FPGA logic that way. ASIC products are designed to customers' specifications and the Company has no control over date functions required by customers of such circuits. The Company's costs related to identifying and addressing Year 2000 issues world-wide are estimated to be $7.0 million. Thus far, the major costs associated with identifying and addressing Year 2000 issues have been in-house labor costs and equipment upgrades. For the first quarter of 1999, approximately $2.2 million was spent to identify and correct Year 2000 related issues. Equipment and computer systems purchased through the normal course of business have been qualified as Year 2000 compliant prior to purchase. If the Company were unable to successfully upgrade its IT and non-IT systems to be Year 2000 compliant, its wafer production systems 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 condition. 21 24 ITEM III: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE RISK The Company has short-term debt, long-term debt and capital leases totaling approximately $816.6 million at March 31, 1999. Approximately $653.6 million of these borrowings have fixed interest rates. The Company has approximately $163.0 million of floating rate debt which is based on the London Inter-Bank Official Rate (LIBOR) and short-term Paris Inter-Bank Official Rate (PIBOR). The Company does not hedge either of these rates and could be negatively affected should either of these rates increase. A hypothetical 40 basis point increase in both of these interest rates would have a $0.7 million adverse impact on income before taxes on the Company's Condensed Consolidated Statements of Operations. While there can be no assurance that both of these rates will remain at current levels, the Company believes that these rates will not increase significantly (defined as an increase of more than 40 basis points) and cause a material adverse impact on the Company's results of operations and financial position. FOREIGN EXCHANGE RISK The Company faces exposures to adverse movements in foreign currency exchange rates that could have a material adverse impact on the Company's financial results. Subsequent to the acquisition of Temic, the Company's revenues in Europe are primarily denominated in foreign currencies. For European receivables denominated in foreign currencies (the majority of which are in French franc and German mark), the Company has offsetting foreign currency liabilities to act as a natural hedge and therefore no hedging program exists for European sales. All of the Company's sales to Asia, except Japan, are denominated in U.S. dollars. The Company's revenues in Japan are hedged using a loan denominated in yen approximately equal to accounts receivable which are also denominated in yen. At December 31, 1998, the Company had forward exchange contracts with maturities of less than three months for $5.1 million to hedge foreign currency risk in Japan. At March 31, 1999, these contracts have expired as the yen-denominated accounts receivables decreased approximately $5.1 million. To the extent that accounts receivables differ from this loan, the Company will buy forward exchange contracts to hedge the additional exposure. For the three months ended March 31, 1999, approximately 25 percent of total revenues were denominated in foreign currencies versus approximately 17 percent for the corresponding period of 1998 due primarily to the inclusion of Temic's sales, the majority of which are denominated in foreign currencies. There is additional foreign currency risk associated with this higher proportion of sales denominated in foreign currencies on revenues and gross margin. The Company's revenues and gross margin were positively impacted as foreign currencies have strengthen in relation to the U.S. dollar in the first quarter of 1999 compared to the first quarter of 1998. There can be no assurance that this trend will continue for the remainder of 1999. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings that management believes could have a material adverse effect on the Company's operating results. 22 25 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS See Note 5 of Notes to Condensed Consolidated Financial Statements. These transactions were exempt from registration under Section 4 (2) of the Securities Act of 1933, as amended. The transaction was privately negotiated and each offeree and purchaser was an accredited investor/qualified institutional buyer. No public offering or public solitation was used by the Company in the placement of these securities. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibit: 27.1 Financial Data Schedule (B) Reports on Form 8-K: None 23 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATMEL CORPORATION --------------------------------------------------- (Registrant) MAY 14, 1999 /S/ GEORGE PERLEGOS --------------------------------------------------- GEORGE PERLEGOS President, Chief Executive Officer (Principal Executive Officer) MAY 14, 1999 /S/ DONALD COLVIN --------------------------------------------------- DONALD COLVIN Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer) 24 27 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 DEC-29-1998 MAR-31-1999 181,631 153,558 259,352 27,294 240,637 897,766 900,146 472,842 1,863,773 358,722 736,794 0 0 358,228 376,775 1,863,773 290,037 290,037 186,165 269,314 0 123 13,272 26,090 9,392 0 0 0 (29,068) (12,370) (0.12) (0.12)
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