<PAGE> 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.
<PAGE> 2
ATMEL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATMEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
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
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
<PAGE> 4
ATMEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 5
ATMEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 6
ATMEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 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:
<TABLE>
<CAPTION>
(in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
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
============ ============
</TABLE>
5
<PAGE> 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands, except per share data) 1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
Cumulative net Shares covered Potential
(in thousands) premium received by warrants obligation
---------------- ----------- ----------
<S> <C> <C> <C>
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
======= ====== =======
</TABLE>
6
<PAGE> 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).
<TABLE>
<S> <C>
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
============
</TABLE>
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
<PAGE> 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):
<TABLE>
<S> <C>
Product developments $ 8,784
Process developments 9,621
System level integration 5,020
---------
$ 23,425
=========
</TABLE>
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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands, except per share data)
1999 1998
----------- -----------
<S> <C> <C>
Net revenues $ 290,037 $ 303,123
=========== ===========
Net (loss) income $ (12,370) $ 18,356
=========== ===========
Diluted net (loss) income per share $ (0.12) $ 0.18
=========== ===========
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Three Months Ended
(in thousands, except per share data) March 31,
1999 1998
---------- ----------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 14
Information about segments (in thousands):
<TABLE>
<CAPTION>
Non-volatile
Memories Temic ASIC Logic Total
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Reconciliations of segment information to financial statements (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
Operating income 1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
Before- Tax
Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------------- ------------- -------------
<S> <C> <C> <C>
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)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
Before- Tax
Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------------- ------------- -------------
<S> <C> <C> <C>
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)
============= ============= =============
</TABLE>
12
<PAGE> 15
The accumulated balances of other comprehensive income at March 31, 1999 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Current
Beginning Period Ending
Balance Change Balance
------------- ------------- -------------
<S> <C> <C> <C>
Foreign currency translation adjustments $ 492 $ (13,844) $ (13,352)
Unrealized gain (loss) on securities (463) 867 404
------------- ------------- -------------
$ 29 $ (12,977) $ (12,948)
============= ============= =============
</TABLE>
13
<PAGE> 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
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 %
========== ==========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Three Months Ended
(in thousands) March 31, Increase/
Segment 1999 1998 (decrease)
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
Three Months Ended March 31,
Region 1999 1998
---------- ----------
<S> <C> <C>
North America $ 98,786 $ 94,315
Europe 88,195 90,039
Asia 103,056 76,038
---------- ----------
Total $ 290,037 $ 260,392
========== ==========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-29-1998
<PERIOD-END> MAR-31-1999
<CASH> 181,631
<SECURITIES> 153,558
<RECEIVABLES> 259,352
<ALLOWANCES> 27,294
<INVENTORY> 240,637
<CURRENT-ASSETS> 897,766
<PP&E> 900,146
<DEPRECIATION> 472,842
<TOTAL-ASSETS> 1,863,773
<CURRENT-LIABILITIES> 358,722
<BONDS> 736,794
0
0
<COMMON> 358,228
<OTHER-SE> 376,775
<TOTAL-LIABILITY-AND-EQUITY> 1,863,773
<SALES> 290,037
<TOTAL-REVENUES> 290,037
<CGS> 186,165
<TOTAL-COSTS> 269,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 13,272
<INCOME-PRETAX> 26,090
<INCOME-TAX> 9,392
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (29,068)
<NET-INCOME> (12,370)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
