1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 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 Identification Number)
incorporation or organization)
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 AUGUST 5, 1999, REGISTRANT HAD OUTSTANDING 100,233,757 SHARES OF COMMON
STOCK.
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ATMEL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999 and December 31,
1998 1
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and June 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 1998 3
Condensed Consolidated Statement of Comprehensive Income for the three
and six months ended June 30, 1999 and June 30, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Securities Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATMEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 158,113 $ 161,721
Short-term investments 162,326 161,844
Accounts receivable 269,362 252,601
Inventories 251,664 240,258
Other current assets 59,422 74,967
----------- -----------
TOTAL CURRENT ASSETS 900,887 891,391
Other assets 59,667 107,220
Fixed assets, net 898,422 964,126
----------- -----------
TOTAL ASSETS $ 1,858,976 $ 1,962,737
=========== ===========
CURRENT LIABILITIES
Current portion of long-term debt $ 82,203 $ 81,995
Trade accounts payable 177,257 200,101
Accrued liabilities and other 95,604 92,953
Deferred income on shipments to distributors 16,162 24,170
----------- -----------
TOTAL CURRENT LIABILITIES 371,226 399,219
Long-term debt less current portion 714,722 771,069
Deferred income taxes 3,404 3,404
----------- -----------
TOTAL LIABILITIES 1,089,352 1,173,692
----------- -----------
Put warrants -- 56,850
----------- -----------
SHAREHOLDERS' EQUITY
Common stock 383,337 330,073
Accumulated other comprehensive income (18,840) 29
Retained earnings 405,127 402,093
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 769,624 732,195
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,858,976 $ 1,962,737
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ATMEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
NET REVENUES $ 311,142 $ 288,205 $ 601,179 $ 548,597
EXPENSES
Cost of sales 194,210 199,675 380,375 363,867
Research and development 43,124 43,394 90,353 80,053
Selling, general and administrative 44,405 39,115 80,325 66,941
In process research and development -- 23,425 -- 23,425
Restructuring Charges -- 66,300 -- 66,300
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 281,739 371,909 551,053 600,586
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 29,403 (83,704) 50,126 (51,989)
Interest and other (expenses) income, net (5,335) (9,338) 32 (13,781)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES 24,068 (93,042) 50,158 (65,770)
Income tax provision (benefit) 8,664 (1,633) 18,056 (1,154)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 15,404 (91,409) 32,102 (64,616)
Cumulative effect of accounting change,
Net of tax effect -- -- (29,068) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 15,404 $ (91,409) $ 3,034 $ (64,616)
========= ========= ========= =========
BASIC NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT $ 0.15 $ (0.92) $ 0.32 $ (0.65)
OF ACCOUNTING CHANGE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX EFFECT -- -- (0.29) --
--------- --------- --------- ---------
NET INCOME(LOSS) $ 0.15 $ (0.92) $ 0.03 $ (0.65)
========= ========= ========= =========
DILUTED NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 0.15 $ (0.92) $ 0.31 $ (0.65)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX EFFECT -- -- (0.28) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 0.15 $ (0.92) $ 0.03 $ (0.65)
========= ========= ========= =========
SHARES USED IN BASIC NET INCOME (LOSS)
PER SHARE CALCULATIONS 100,190 99,223 100,091 99,136
========= ========= ========= =========
SHARES USED IN DILUTED NET INCOME (LOSS)
PER SHARE CALCULATIONS 102,925 99,223 102,658 99,136
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ATMEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
---------- ----------
CASH FROM OPERATING ACTIVITIES
Net income (loss) $ 3,034 $ (64,616)
Items not requiring the use of cash
Depreciation and amortization 101,983 100,697
Restructuring Charges -- 66,300
In process research and development -- 23,425
Cumulative effect of accounting change, net of taxes 29,068 --
Gain on sale of fixed assets (12,383) --
Other 1,984 (2,142)
Changes in operating assets and liabilities
Accounts receivable (19,617) 7,434
Inventories (3,575) (58,217)
Prepaid taxes and other assets 9,584 16,074
Trade accounts payable and other accrued liabilities (8,387) (25,510)
Income taxes payable (7,509) 14,809
Deferred income on shipments to distributors (8,008) 8,320
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 86,174 86,574
---------- ----------
CASH FROM INVESTING ACTIVITIES
Acquisition of fixed assets (53,334) (155,419)
Sales of fixed assets 17,600 --
Acquisition of other assets -- (24,946)
Acquisitions (9,400) (99,250)
Purchase of investments (62,780) (183,107)
Sale or maturity of investments 62,297 142,047
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (45,617) (320,675)
---------- ----------
CASH FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible bonds -- 115,004
Proceeds from capital leases and notes 25,649 228,908
Principal payments on capital leases and notes (59,231) (154,480)
Payment from settlement of put warrants (7,619) --
Repurchase of stock -- (16,623)
Issuance of common stock 4,033 4,813
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (37,168) 177,622
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (6,997) (805)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,608) (57,284)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 161,721 174,310
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 158,113 $ 117,026
========== ==========
INTEREST PAID $ 17,187 $ 18,693
INCOME TAXES PAID $ 9,153 $ 642
FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 12,055 $ 13,071
PURCHASE OF CALL WARRANTS FROM PROCEEDS OF PUT WARRANTS $ -- $ 4,450
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ATMEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $ 15,404 $(91,409) $ 3,034 $(64,616)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (3,441) 2,783 (17,286) (842)
Unrealized gains on securities (2,449) (71) (1,583) (27)
-------- -------- -------- --------
Other comprehensive (loss) income (5,890) 2,712 (18,869) (869)
-------- -------- -------- --------
Comprehensive income (loss) $ 9,514 $(88,697) $(15,835) $(65,485)
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ATMEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1999, and the results of
operations, comprehensive income and cash flows for the three and six month
periods ended June 30, 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/A 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 statements of
operations 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 are 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) June 30, 1999 December 31, 1998
------------- -----------------
Materials and purchased parts $ 11,620 $ 14,082
Finished Goods 26,689 43,913
Work in progress 213,355 182,263
---------- ----------
Total $ 251,664 $ 240,258
========== ==========
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:
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Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1999 1998 1999 1998
-------- --------- -------- --------
Basic and diluted net income (loss) (numerator) $ 15,404 $ (91,409) $ 3,034 $(64,616)
======== ========= ======== ========
Shares used in basic net income (loss) per share
Weighted average shares of common 100,190 99,223 100,091 99,136
======== ========= ======== ========
stock outstanding
Shares used in diluted net income (loss) per share
calculations (denominator):
Weighted average shares of common stock 100,190 99,223 100,091 99,136
outstanding
Dilutive effect of stock options 2,735 -- 2,567 --
-------- --------- -------- --------
102,925 99,223 102,658 99,136
======== ========= ======== ========
Basic net income (loss) per share $ 0.15 $ (0.92) $ 0.03 $ (0.65)
======== ========= ======== ========
Diluted net income (loss) per share $ 0.15 $ (0.92) $ 0.03 $ (0.65)
======== ========= ======== ========
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 was to increase shareholder value. In connection
with this program, the Company entered into certain warrant transactions which
provided 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. All
positions have either been settled in cash or expired. Activity during the
first half of 1999 is summarized as follows (in thousands):
Weighted Shares
Cumulative Average Shares covered by
net premium Exercise covered by Call Potential
received Price warrants Warrants obligation
------------ ---------- ------------ ----------- ------------
DECEMBER 31, 1998 $ 10,008 2,700 1,350 $ 56,850
Settlement of put warrants (9,024) $ 21.06 (2,700) -- (56,850)
Settlement of call warrants 1,405 23.92 -- (1,350) --
------------ ------------ ------------ ------------
JUNE 30, 1999 $ 2,389 -- -- $ --
============ ============ ============ ============
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The put warrants entitled 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 entitled 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 the following warrant transactions during the year:
1,500,000 warrants on January 29, which resulted in a net cash outlay of
$2,467,000; 920,000 warrants on April 19, which resulted in a net cash outlay of
$4,002,000; 280,000 warrants on May 13, which resulted in a net cash outlay of
$1,149,000. After the above transactions, there are no remaining put and call
warrants outstanding and the Company does not expect to enter into these
transactions in the future.
As all of the put warrants have been closed out as of June 30, 1999, no maximum
potential repurchase obligation exists as of such date; however as of December
31, 1998, this obligation was $56,850,000 and has been classified separately on
the Company's Condensed Consolidated Balance Sheet. There was no impact on basic
and diluted net income (loss) per share resulting from these transactions in the
three and six months ended June 30, 1999 and 1998.
6. TEMIC ACQUISITION
On March 1, 1998 the Company acquired the integrated circuit business of Temic
Semiconductor (Temic) of Heilbronn, Germany, a wholly owned subsidiary of Vishay
Intertechnology, Inc. for $99,250,000 in cash. The acquisition of the integrated
circuit business 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.
In connection with the acquisition, the Company accrued $3.1 million at December
31, 1998, for the cost of terminating certain employees at Temic's MHS
subsidiary. For the three months ended June 30, 1999, the Company charged $1.3
million against the reserve. The Company completed these activities in the
second quarter of 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 Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1999 1998 1999 1998
-------- --------- -------- ---------
Net revenues $311,142 $ 288,205 $601,179 $ 591,706
======== ========= ======== =========
Net income (loss) $ 15,404 $ (91,409) $ 3,034 $ (49,701)
======== ========= ======== =========
Diluted net income (loss) per share 0.15 (0.92) 0.03 (0.50)
======== ========= ======== =========
7. 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
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Motorola, Inc. for approximately $9.4 million. The transaction was accounted
for as a purchase. The transaction is expected to be non-dilutive to the
Company's earnings in 1999.
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 million 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 Six Months
(in thousands, except per share data) Ended June 30, Ended June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change $ 15,404 $ (91,409) $ 32,102 $ (64,616)
Deferred start-up costs expensed -- (6,236) -- (24,743)
---------- ---------- ---------- ----------
Net Income (loss) $ 15,404 $ (97,645) $ 32,102 $ (89,359)
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) before cumulative effect
of accounting change $ 0.15 $ (0.92) $ 0.31 $ (0.65)
========== ========== ========== ==========
Net income (loss) $ 0.15 $ (0.98) $ 0.31 $ (0.90)
========== ========== ========== ==========
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
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Amounts" are either not allocated to reportable segments or are not considered
by Management in its evaluation of business unit performance.
Information about segments (in thousands):
- ------------------------------------------
Non-volatile
Memories Temic ASIC Logic Total
-------- ----- ---- ----- -----
THREE MONTHS ENDED JUNE 30, 1999
Net revenues from external customers $136,852 $ 68,111 $ 79,373 $ 26,806 $311,142
Segment operating income 14,455 3,158 8,398 5,996 32,007
THREE MONTHS ENDED JUNE 30, 1998
Net revenues from external customers $114,628 $ 72,502 $ 69,125 $ 31,950 $288,205
Segment operating income 4,707 1,985 6,227 7,416 20,335
Information about segments (in thousands):
- ------------------------------------------
Non-volatile
Memories Temic ASIC Logic Total
-------- ----- ---- ----- -----
SIX MONTHS ENDED JUNE 30, 1999
Net revenues from external customers $260,935 $134,181 $158,997 $ 47,066 $601,179
Segment operating income 26,671 4,098 26,376 9,182 66,327
SIX MONTHS ENDED JUNE 30, 1998
Net revenues from external customers $263,640 $ 95,002 $133,767 $ 56,188 $548,597
Segment operating income 22,828 2,185 10,439 11,156 46,608
Reconciliations of segment information to financial statements (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
Operating income 1999 1998 1999 1998
- ---------------- -------- -------- -------- --------
Total income for reportable segments $ 32,007 $ 20,335 $ 66,327 $ 46,608
Unallocated amounts:
Corporate R&D 129 (1,420) (13,346) (1,261)
In process research and development -- (23,425) -- (23,425)
Restructuring charges -- (66,300) -- (66,300)
Corporate expenses (2,733) (12,894) (2,855) (7,611)
-------- -------- -------- --------
Consolidated operating income before interest, taxes,
and cumulative effect of accounting change $ 29,403 $(83,704) $ 50,126 $(51,989)
======== ======== ======== ========
11. COMPREHENSIVE INCOME
The income tax effect of each element of comprehensive income for the three and
six months ended June 30, 1999 and 1998, respectively, is as follows (in
thousands):
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Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
-------------------------------------- --------------------------------------
Before- Tax Before- Tax
Tax (Expense) Net-of-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
------- ---------- ---------- -------- ---------- ----------
Foreign currency translation
adjustments $ (5,377) $ 1,936 $ (3,441) $(27,008) $ 9,722 $(17,286)
Unrealized gain on securities (3,827) 1,378 (2,449) (2,473) 890 (1,583)
-------- -------- -------- -------- -------- --------
Other comprehensive (loss)
income $ (9,204) $ 3,314 $ (5,890) $(29,481) $ 10,612 $(18,869)
======== ======== ======== ======== ======== ========
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
-------------------------------------- --------------------------------------
Before- Tax Before- Tax
Tax (Expense) Net-of-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
------- ---------- ---------- -------- ---------- ----------
Foreign currency translation
adjustments $ 4,282 $ (1,499) $ 2,783 $ (1,296) $ 454 $ (842)
Unrealized gain on securities (110) 39 (71) (41) 14 (27)
-------- -------- -------- -------- -------- --------
Other comprehensive (loss)
income $ 4,172 $ (1,460) $ 2,712 $ (1,337) $ 468 $ (869)
======== ======== ======== ======== ======== ========
The accumulated balances of other comprehensive income at June 30, 1999 are
summarized as follows (in thousands):
Current
Beginning Period Ending
Balance Change Balance
--------- -------- --------
Foreign currency translation adjustments $ 492 $(17,286) $(16,794)
Unrealized gain (loss) on securities (463) (1,583) (2,046)
-------- -------- --------
$ 29 $(18,869) $(18,840)
======== ======== ========
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
NET REVENUES 100.0% 100.0% 100.0% 100.0%
EXPENSES
Cost of sales 62.4 69.3 63.3 66.3
Research and development 13.9 15.1 15.0 14.6
Selling, general and administrative 14.3 13.5 13.4 12.2
In process research and development -- 8.1 -- 4.3
Restructuring charges -- 23.0 -- 12.1
-------- -------- -------- --------
TOTAL EXPENSES 90.6 129.0 91.7 109.5
OPERATING INCOME 9.4 (29.0) 8.3 (9.5)
Interest and other income (expenses), net (1.7) (3.3) 0.0 (2.5)
-------- -------- -------- --------
INCOME BEFORE TAXES 7.7 (32.3) 8.3 12.0
Income tax provision 2.8 (0.6) 3.0 (0.2)
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 4.9 (31.7) 5.3 (11.8)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- (4.8) --
-------- -------- -------- --------
NET INCOME (LOSS) 4.9% (31.7)% 0.5% (11.8)%
======== ======== ======== ========
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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 are referenced with calendar
quarters.
NET REVENUES
The Company's net revenues by segment are summarized as follows (in thousands):
Three Months Ended Six Months Ended
June 30, Increase/ June 30, Increase/
Segment 1999 1998 (decrease) 1999 1998 (decrease)
- ------- -------- -------- ---------- -------- -------- ----------
Non-volatile Memory $136,852 $114,628 $ 22,224 $260,935 $263,640 $ (2,705)
Temic 68,111 72,502 (4,391) 134,181 95,002 39,179
ASIC 79,373 69,125 10,248 158,997 133,767 25,230
Logic 26,806 31,950 (5,144) 47,066 56,188 (9,122)
-------- -------- -------- -------- -------- --------
Total $311,142 $288,205 $ 22,937 $601,179 $548,597 $ 52,582
======== ======== ======== ======== ======== ========
Net revenues increased 9.6 percent to $601.2 million for the six months ended
June 30, 1999 from $548.6 million in the same period of 1998. This increase was
primarily due to (i) the inclusion of Temic's sales for $134.1 million for the
full six months ended June 30, 1999 compared to $95.0 million from March 1 to
June 30 of 1998. See Note 6 (Temic Acquisition) of Notes to Condensed
Consolidated Financial Statements for a discussion on the Temic acquisition and
(ii) higher shipments for substantially all segments and products for the six
months ended June 30, 1999 compared to the same period of 1998. Net revenues
increased 8.0 percent to $311.1 million in the quarter ended June 30, 1999 from
$288.2 million in the corresponding quarter of 1998 due to much higher shipments
for substantially all segments and products.
Excluding the revenue contribution from Temic, net revenues for the six months
ended June 30, 1999 increased by 3.0 percent compared to the corresponding
period of 1998. The increase was primarily due to a 35 percent increase in unit
shipments for the Company's products across all business segments in the first
half of 1999 compared to the same period in 1998. The increase was offset by
lower average selling prices (ASPs) for the six months ended June 30, 1999
compared to the corresponding period of 1998 for substantially all of the
Company's business segments and products.
Non-volatile memory revenues decreased $2.7 million in the first half of 1999
compared to the same period in 1998 due to severe price erosion which was
substantially offset by higher unit sales. The increase in unit sales was
primarily in the Company's electrically erasable programmable read only memory
(EEPROM)-related products; the decrease in ASPs was primarily in the Company's
lower density Flash products. The Company derived approximately 43 percent of
its revenues from non-volatile memory sales in the first half of 1999 compared
to approximately 48 percent of its revenues in the same period of 1998.
For the three months ended June 30, 1999 non-volatile memory revenues increased
$22.2 million compared to the same period of 1998 due to higher unit shipments
for substantially all products within this segment, particularly serial
interface EEPROMs. This increase was offset by substantial erosion in ASPs.
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
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erosion of ASPs. The memory portion of the semiconductor industry, from which
the Company derives approximately 43 percent of its revenues, has continued to
experience intense competition among suppliers during 1999, particularly for the
commodity portion. If this condition continues, the Company's growth and results
of operations could be adversely affected. While ASPs continued to decline in
the second quarter of 1999 from the first quarter of 1999, the rate of decline
compared to what was experienced for similar periods in 1998 has slowed. The
Company expects ASPs to stabilize in the second half of 1999 because (i) a
better balance in demand and supply will return to the industry caused by higher
demand from the markets that the industry sells to, (ii) demand for the
Company's products has continued to increase quarter to quarter and (iii) the
Company has recorded a positive book-to-bill ratio for all of the Company's
segments, especially for non-volatile memories. Based on these positive factors
and on overall improvements in business conditions within the industry, the
Company expects its revenues will continue to increase in the second half of
1999, although there can be no assurance that ASPs or that business conditions
will improve in the second half of 1999. The continued increase in the Company's
revenues and overall improvement in business conditions 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. Revenue growth will also depend upon a better
supply and demand balance within the industry. Furthermore, there can be no
assurance that the book-to-bill ratio will result in actual sales due to various
uncertainties, including but not limited to the possibility that customers are
double booking with Atmel and an alternate supplier. While the Company
experienced rapid revenue and net income growth from 1994 through 1996 and the
second quarter of 1999, 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 26 percent and eight percent, respectively, of total
revenues for the first half of 1999. Revenues for ASIC products increased
approximately $25.2 million in the first half of 1999 compared to the same
period in 1998 primarily due to continued unit volume strength in certain of the
Company's digital ASICs and cell-based ICs (CBICs). Despite ASPs for ASIC
products decreasing in the first half 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 Information Transfer business of Motorola on April 9,
1999, the Company expects the ASIC business will increase as a percent of total
revenues. The Company will continue to increase resources and manufacturing
capacity allocated to the ASIC segment in the second half of 1999. The logic
segment decreased $9.1 million in the first half of 1999 compared to the
corresponding period in 1998 due to price erosion in certain of the logic's
microcontroller and programmable logic device (PLD) products, which was not
offset by a higher volume of shipments.
For the second quarter of 1999, the ASIC segment revenues increased $10.2
million compared to the same period of 1998 due to much higher shipments of
CBIC-related products which was offset slightly by price erosion. Logic
segment revenues decreased $5.1 million in the second quarter of 1999 compared
to the same period of 1998 due to lower shipments of microcontroller-related
products.
Temic segment revenues increased $39.2 million to $134.2 million for the six
months ended June 30, 1999, compared to $95.0 million for the same period of
1998 due to much higher shipments offset slightly by price erosion. The
increase in unit shipments was due to the inclusion of Temic's products for the
full six months of 1999 compared to four months in 1998. For the three months
ended June 30, 1999, revenues decreased $4.4 million to $68.1 million compared
to $72.5 million for the same period of 1998 due to price erosion and a slight
decrease in unit shipments.
The Company's net revenues by geographic areas are summarized as follows (in
thousands):
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Three Months Ended Six Months Ended
June 30, Increase/ June 30, Increase/
Region 1999 1998 (decrease) 1999 1998 (decrease)
- ------ -------- -------- -------- -------- -------- --------
North America $104,801 $121,812 $(17,011) $203,587 $216,127 $(12,540)
Europe 107,725 73,776 33,949 195,920 163,815 32,105
Asia 98,616 92,617 5,999 201,672 168,655 33,017
-------- -------- -------- -------- -------- --------
Total $311,142 $288,205 $ 22,937 $601,179 $548,597 $ 52,582
======== ======== ======== ======== ======== ========
Foreign sales increased 8.6 percent in the first half of 1999 to 66.3 percent of
net revenues compared to 57.7 percent in the same period of 1998. Sales to
Europe increased approximately 19.5 percent or $32.1 million in the first half
of 1999 compared to the same period in 1998 with sales increases in almost all
European countries in which the Company does business, particularly Germany.
This increase was due to (i) much higher unit shipments and (ii) the inclusion
of Temic's products, which are primarily sold in Europe, for the full six
months in 1999 compared to only four months in 1998. The unit shipment increase
was offset by erosion in ASPs. Fluctuations in the French Franc, German Mark,
and the Euro had a ($3.5) million impact on sales to Europe in the first half
of 1999 compared to the same period in 1998. For the three months ended June
30, 1999, sales to Europe increased 46 percent due to much higher unit sales to
all European countries in which the Company sells to. This increase was offset
slightly by erosion in ASPs. Fluctuations in the French Franc, German Mark, and
the Euro had a ($3.4) million impact on sales to Europe in the second quarter
of 1999 compared to the same period in 1998.
Sales to Asia increased $33.0 million in the first half of 1999 to $201.7
million compared to $168.7 million in the first half of 1998. The increase was
due to significant increases in unit sales offset by erosion in ASPs. Sales to
Asia, except to Japan, are denominated in US dollars. If the revenues recorded
in the first half of 1999 had been calculated at the average yen rate for the
first half of 1998, revenues would have been $5.3 million lower.
For the three and six months ended June 30, 1999, approximately 39 percent and
38 percent, respectively, of foreign sales were denominated in foreign
currencies compared to 49 percent and 38 percent for the same periods of 1998.
The ten percent decrease in the second quarter of 1999 compared to the same
period of 1998 was due to lower sales denominated in the German Mark, French
Franc, and Japanese Yen. The Company's revenues for the first half of 1999 were
negatively impacted in part by an overall strengthening of the U.S. dollar
against foreign currencies in the markets in which the Company sells products.
There can be no assurance that the US dollar will not further strengthen
against foreign currencies and such strengthening could have an adverse effect
on the Company's revenues.
COST OF SALES
Cost of sales as a percentage of net revenues decreased to 63.3 percent in the
first half of 1999, from 66.3 percent in the corresponding period of 1998. The
decrease in cost of sales as a percentage of net revenues was primarily due to
(i) a higher unit shipment base over which to spread fixed costs associated with
the operation of wafer fabrication facilities in Colorado Springs, Colorado,
and (ii) higher product margins as the Company's reliance on non-volatile
memory products has decreased to 43 percent in 1999 from 48 percent in 1998.
Cost of sales as a percentage of net revenues decreased to 62.4 percent in the
second quarter of 1999 from 69.3 percent in the corresponding period of 1998.
The decrease in cost of sales as a percentage of net revenues was primarily due
to (i) a higher revenue base over which to spread fixed costs associated
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with the operation of wafer fabrication facilities in Colorado Springs,
Colorado, (ii) higher product margins in the ASIC and Temic segments and (iii)
the shift in product mix from non-volatile memory products which accounted for
43 percent of net revenues in 1999 compared to 48 percent in 1998. While gross
margins have improved during 1999, 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 ASPs (See
"Net Revenues" herein for a discussion of the Company's expectations on ASPs.)
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 per unit
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 15.0
percent in the first half of 1999, from 14.6 percent in the corresponding period
of 1998. Research and development expenses increased 12.9 percent to $90.4
million in the first half of 1999 from $80.0 million in the first half of 1998.
The increase was primarily due to the Company's continued investment in the
shrinking of the die size of its integrated circuits from 0.65-micron 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, CMOS, BiCMOS, and
Silicon Germanium process technologies, manufacturing improvements, and the
inclusion of Temic's research and development expense for the full six months of
1999 compared to only four months in 1998. For the three months ended June 30,
1999, research and development expenses were $43.1 million compared to $43.4
million in the same period of 1998. The Company believes that continued
strategic investments in process technology and product development are
essential for it to remain competitive in the markets it serves and is committed
to appropriate levels of expenditures for research and development.
The Company spent approximately $11.7 million and $24.1 million for the three
and six months ended June 30, 1999, on research & development activities
necessary to realize Temic's in-process research and development activities.
Related to these in-process research and development activities, the Company
spent $17.8 million for product development, $2.3 million for process
development and $4.0 million for System Level Integration (SLI) for the six
months ended June 30, 1999. For the three months ended June 30, 1999, the
Company spent $8.2 million for product development, $1.2 million for process
development and $2.3 million for SLI. The Company believes that these projects
are progressing in accordance with original estimates.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
SG&A expenses increased by 20.0 percent to $80.3 million in the first half of
1999 from $66.9 million in the same period of 1998. The increase was largely due
to (i) the inclusion of Temic's SG&A expense for the full six months of 1999
compared to only four months in 1998 and (ii) higher selling costs due to higher
revenues, primarily in the ASIC segment. As a percentage of net revenues SG&A
expenses were 13.4 percent for the first half of 1999 compared to 12.2 percent
for the corresponding period of 1998.
SG&A expenses increased by 13.5 percent to $44.4 million in the second quarter
of 1999 from $39.1 million in the same quarter of 1998. The increase was largely
due to higher selling costs due to higher revenues, particularly in the ASIC
segment. As a percentage of net revenues, SG&A expenses were 14.3 percent for
the second quarter of 1999 and 13.5 percent for the corresponding quarter of
1998.
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The Company expects SG&A expenses continue to increase as a percentage of net
revenues for the remainder of 1999 due primarily to (i) expansions in
international markets, (ii) legal costs associated with protecting the Company's
intellectual property and (iii) provision for doubtful accounts receivable.
Although the Company did not experience significant provisions or write-offs in
the first half of 1999 due primarily to an improved collection environment in
1999 compared to 1998, the provision for doubtful accounts receivable may
increase as the Company continues to evaluate the collectibility of its accounts
receivables. Any increase could be caused by a greater exposure to older
receivables arising from higher revenues, 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.
IN PROCESS RESEARCH AND DEVELOPMENT (IPR&D) AND RESTRUCTURING
During the second quarter of 1998, the Company charged $23.4 million of
purchased IPR&D related to the acquisition of Temic in March 1998. In addition,
the Company allocated $19.7 million of the purchase price to developed
technology and $3.7 million to the trained workforce acquired, both of which are
being amortized over five years. The purchase price was less than the fair
market value of the assets acquired. The resulting negative goodwill was
allocated to noncurrent assets and IPR&D pro-rata based on the fair market
values of the assets. At the time of the acquisition, the technological
feasibility of the acquired in-process technology had not been established and
the Company believed the technology had no alternative use. The Company intends
to develop the acquired technology (see Research and Development); however, it
is uncertain whether the Company will be successful in this regard. If the
development of the technology is unsuccessful, the technology may be abandoned
during the development phase. See Note 5 (Temic Acquisition) in Notes to
Condensed Consolidated Financial Statements.
During the second quarter of 1998, the Company announced a restructuring plan
which included a 10 percent workforce reduction and the write-down of certain
manufacturing equipment and machinery with older process technology. The program
was primarily aimed at focusing the Company's business processes, attaining cost
efficiencies and increasing manufacturing flexibility. The effects of the
restructuring programs were expected to reduce the Company's cost of sales,
salary cost and depreciation and improve its profit margins in the future. The
Company expected these programs to generate pre-tax savings of approximately
$30.0 million per quarter during such time. However, no assurance can be given
as to the eventual cost savings under these restructuring programs. The Company
is converting its manufacturing process to use 0.35-micron technology and is
developing 0.25-micron technology. The Company started production of wafers
using 0.35-micron technology at its Colorado Springs facility during the third
quarter of 1998. The restructuring charges of $66.3 million included a provision
of $1.3 million for severance costs and a reserve of $65.0 million for
write-down of fixed assets. The severance activities were completed at the end
of the second quarter of 1999.
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
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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.
INTEREST AND OTHER INCOME (EXPENSES), NET
The Company reported $32,000 of net interest and other income for the first half
of 1999, compared to $13.8 million of net interest and other expense for the
corresponding period of 1998. The increase in net interest and other income was
primarily due to (i) a $14.9 million pre-tax gain related to the sale of certain
assets (see Note 8 of Notes to Consolidated Financial Statements), (ii) higher
interest income due to higher cash and short-term investment balances and (iii)
gain on sale of equity investments. These increases were offset by a combination
of (i) 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 acquisition of Temic during the first quarter of 1998, and (ii)
losses on disposals on non-essential fixed assets for $2.5 million.
The Company reported $5.3 million of net interest and other expense for the
second quarter of 1999, compared to $9.3 million for the corresponding period of
1998. The decrease in net interest and other expense was primarily due to (i)
higher foreign exchange transaction gains amounting to $3.7 million and (ii)
higher interest income due to higher cash and short-term investment balances and
(iii) gain on sale of equity investments. This increase was offset by higher
interest expense.
INCOME TAX PROVISION
The Company's effective tax rate was 36.0 percent for the three and six months
ended June 30, 1999 compared to a tax benefit rate of 1.8 percent for the same
periods in 1998. The increase was attributable to certain items associated
with the acquisition of Temic, including the deduction of in-process research
and development expenses, for which no tax benefit was recorded in the first
half of 1998 and non-deductible permanent differences arising from foreign
operations. For the remainder of 1999, the Company expects the effective tax
rate will be 36.0 percent.
The increase in the tax provision for the three and six month periods ended June
30, 1999 of $10.3 million and $19.2 million, respectively, was a result of the
combination of the increase in the effective tax rate discussed above and an
increase in income before taxes in each period.
OPERATING INCOME BY SEGMENT
The Company's operating income by segments are summarized as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, Increase/ June 30, Increase/
Segment 1999 1998 (decrease) 1999 1998 (decrease)
- ------- -------- -------- -------- -------- -------- --------
Non-volatile Memory $ 14,455 $ 4,707 $ 9,748 $ 26,671 $ 22,828 $ 3,843
Temic 3,158 1,985 1,173 4,098 2,185 1,913
ASIC 8,398 6,227 2,171 26,376 10,439 15,937
Logic 5,996 7,416 (1,420) 9,182 11,156 (1,974)
-------- -------- -------- -------- -------- --------
Total $ 32,007 $ 20,335 $ 11,672 $ 66,327 $ 46,608 $ 19,719
======== ======== ======== ======== ======== ========
For a reconciliation of segment operating income to total operating income, see
Note 10 "Segment Reporting" in Notes to Condensed Consolidated Financial
Statements.
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For the six months ended June 30, 1999, operating income by segment increased
$19.7 million compared to the same period in 1998 due to an increase of $15.9
million in the ASIC segment. Higher gross margin in this segment was offset by
higher selling costs related to higher revenues and higher research and
development costs. For the three months ended June 30, 1999, operating income
by segment increased $11.7 million due to the non-volatile memory segment
accounting for $9.7 million of this increase. A combination of higher gross
margin and lower selling costs in this segment accounted for the improved
operating income.
NET INCOME
Net income of $3.0 million for the first half of 1999 increased $67.6
million from a net loss of $64.6 million in the corresponding period of the
prior year. The increase was primarily due to the 1998 charges for $66.3 million
and $23.4 million for restructuring and IPR&D, respectively, for which no
similar charge was recorded in 1999 and higher gross margins. These increases
were offset by the write-off, net of taxes, of previously capitalized start-up
costs of $29.1 million (see Note 9 of Notes to Condensed Consolidated Financial
Statements). For the second quarter of 1999, net income of $15.4 million
increased by $106.8 million from a net loss of $91.4 million in the same period
of 1998 due to the aforementioned two charges in 1998 and higher gross margins
in 1999.
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 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 June 30, 1999, the Company had $320.4 million in cash and short-term
investments, a decrease of $3.1 million from $323.6 million at December 31,
1998, and $529.7 million in net working capital, an increase of $37.5 million
from $492.2 million at December 31, 1998. Accounts receivable increased 6.6
percent to $269.4 million at June 30, 1999 from $252.6 million at December 31,
1998. The average days of accounts receivable outstanding were 82 days and 89
days for the first half 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 customers' current credit ratings and
expects that average days outstanding will decrease with improved business
conditions. For the six months ended June 30, 1999, the Company wrote-off
approximately $17.6 million ($10.4 million related to a single customer) of
accounts receivables. These write-offs were previously reserved for at December
31, 1998, and had no impact on the Company's results of operations. Inventories
increased $11.4 million to $251.7 million at June 30, 1999 from $240.3 million
at December 31, 1998 as the Company's Fab 7 in Rousset, France was brought into
production. For the six months ended June 30, 1999, there were no material
write-offs of inventory.
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
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meet the Company's short and long-term liquidity and capital requirements
through 2000. 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 six months ended June 30, 1999, net cash provided by operations was
$86.2 million compared to $86.6 million in the same period of 1998, a decrease
of $0.4 million. Net income before items not requiring the use of cash remained
flat for both periods presented at $123.7 million. Cash used for net working
capital purposes decreased $0.4 million in the first half of 1999 compared to
the same period of 1998.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash used in investing activities was $45.6 million for the six months ended
June 30, 1999 compared to $320.7 million in the same period of 1998, a decrease
of $275.1 million. This decrease was due to: (i) lower capital expenditures in
the first half of 1999 of $56.8 million compared to $155.4 million in the same
period of 1998. This reduction of $98.6 million was due to reduced expenditures
in the first half of 1999 related to the fabrication facility in Rousset, France
and a reduced capital expenditure budget in 1999 and (ii) the acquisition of
Temic in the first half of 1998 for $99.3 million. The $275.1 million decrease
was offset by (i) cash proceeds from liquidation of $40.6 million of net
investments in marketable securities in 1999 and (ii) $17.7 million of proceeds
in 1999 primarily related to the sale of Fab 6 (see Note 8 to Notes to Condensed
Consolidated Financial Statements). The Company expects to fund the remaining
1999 capital expenditures using a combination of existing cash, sale of
short-term investments, and equipment lease financing.
CASH FLOW FROM FINANCING ACTIVITIES
In the first half of 1999, net cash used in financing activities was $37.2
million compared to net cash provided by financing activities of $177.6 million
in the first half of 1998, a decrease of $214.8 million. This decrease was
primarily due to: (i) $118.9 million of proceeds from capital leases in the
first half of 1998 compared to $25.6 million in the first half of 1999, (ii)
$115.0 million in proceeds from the issuance of the zero coupon convertible
debentures in April 1998, (iii) $7.6 million payment for settlement of warrants
in the first half of 1999 and (iv) higher payments on capital leases and notes
of $14.8 million in 1999 compared to 1998. This decrease was offset by the
repurchase of 1.0 million shares of the Company's common stock for $16.6 million
in the first quarter of 1998. As of June 30, 1999, the Company settled all
outstanding warrants and no maximum potential obligation exists. The Company
does not intend to enter into these warrant programs in the future. 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.
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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. The following is a status of
each phase as of June 30, 1999:
(i) The Company has 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.
(iii) The Company has completed the remediation phase for approximately 95
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 September 1999
or appropriate contingency plans will be implemented.
(iv) The testing phase has been completed for approximately 95 percent of all
systems. The Electronic Data Interchange (EDI) system, the financial information
system and the order entry systems are Year 2000 compliant in all locations. The
production lot tracking system is Year 2000 compliant in all locations except
Rousset, France. Rousset will implement a compliant system during the third
quarter of 1999.
(v) Implementation will occur through the remainder of 1999.
The Company expects phases (iii) through (v) of the Year 2000 program to be
completed for all internal systems by September 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. Contingency planning
began in April 1999 and will be completed in the fourth quarter of 1999.
The Company has surveyed and received statements from 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 continues to monitor suppliers
and has developed contingency plans to obtain the goods and services provided by
any vendors determined to be non-compliant.
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
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in-house labor costs and equipment upgrades. For the three and six months ended
June 30, 1999, approximately $2.2 million and $4.4 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.
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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 $799.9 million at June 30, 1999. Approximately $647.3 million of
these borrowings have fixed interest rates. The Company has approximately $152.6
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 $0.6 million adverse impact on income
before taxes on the Company's Condensed Consolidated Statements of Operations
for the six months ended June 30, 1999. 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,
German mark and Euro), 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 are denominated in U.S. dollars, except for
Japan where sales are denominated in yen. The Company's accounts receivables in
yen are hedged using a loan denominated in yen of approximately equal amount. 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 were allowed to expire because the
yen-denominated accounts receivables had decreased approximately $5.1 million.
To the extent that yen-denominated accounts receivable differ significantly from
the yen-denominated loan, the Company will buy forward currency exchange
contracts to hedge the additional exposure.
For the three and six months ended June 30, 1999, approximately 25 percent of
total revenues were denominated in foreign currencies versus approximately 17
percent and 23 percent for the corresponding periods of 1998, respectively, 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 strengthened in relation to
the U.S. dollar in the first half of 1999 compared to the same period of 1998.
There can be no assurance that this trend will continue for the remainder of
1999.
LITIGATION RISKS
The Company has from time to time received, and may in the future receive,
communications from third parties asserting patent or other intellectual
property rights covering the Company's products or processes. The semiconductor
industry is characterized by vigorous protection and pursuit of intellectual
property rights or positions, which have on occasion resulted in significant and
often protracted and expensive litigation. While the Company currently is not
involved in any such litigation,
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there can be no assurance that intellectual property claims will not be made
against the Company in the future or that the Company will not be prohibited
from using the technologies subject to such claims or required to obtain
licenses and make corresponding royalty payments. If the Company does not
prevail in any such litigation, the Company's results of operations and
financial position could be materially adversely affected.
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.
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 solicitation was used by the Company in the
placement of these securities.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Annual Meeting of Stockholders held on April 28, 1999,
proposals 1, 2, 3, and 7 were voted upon by stockholders pursuant to proxies
solicited pursuant to Regulation 14A. At a continuance of the Annual Meeting
held on June 10, 1999, proposals 4, 5, and 6 were voted upon by stockholders
pursuant to proxies solicited pursuant to Regulation 14A.
Proposal 1. Elect the following individuals to the Board of Directors:
Votes For Votes Withheld
--------- --------------
George Perlegos 88,933,935 2,012,431
Gust Perlegos 88,902,229 2,044,137
Tsung-Ching Wu 88,927,853 2,018,513
Norm Hall 88,880,965 2,065,401
T. Peter Thomas 88,941,262 2,005,104
Proposal 2. Amend the Company's 1991 Employee Stock Purchase Plan to increase
the number of shares reserved for issuance by 2,500,000 shares.
For: 56,951,666
Against: 3,158,470
Abstained: 434,457
Non-Votes: 30,401,773
Proposal 3. Amend the Company's 1996 Stock Plan to increase the number of shares
reserved for issuance by 5,000,000 shares.
For: 46,889,912
Against: 13,121,363
Abstained: 465,337
Non-Votes: 30,469,754
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Proposal 4. Change the Company's state of incorporation from California to
Delaware by means of a merger of the Company with and into a wholly-owned
Delaware subsidiary.
For: 50,856,816
Against: 14,850,860
Abstained: 463,677
Non-Votes: 28,299,669
Proposal 5. Establish a classified Board of Directors of the Company when the
change in its state of incorporation, proposed above, occurs.
For: 44,170,276
Against: 21,386,175
Abstained: 612,383
Non-Votes: 28,302,188
Proposal 6. Increase the number of authorized shares of Common Stock of the
Company from 240,000,000 to 500,000,000 when the change in its state of
incorporation, proposed above, occurs.
For: 51,725,372
Against: 15,406,204
Abstained: 583,262
Non-Votes: 26,756,184
Proposal 7. Appointment of PricewaterhouseCoopers L.L.P. as independent
accountants of the Company for the year ending December 31, 1999.
For: 90,366,087
Against: 282,758
Abstained: 297,521
Non-Votes: 0
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit:
27.1 Financial Data Schedule
(B) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATMEL CORPORATION
-----------------
(Registrant)
AUGUST 13, 1999 /S/ DONALD COLVIN
-----------------
DONALD COLVIN
Chief Financial Officer and Vice President, Finance
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule