<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 SEPTEMBER 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)
DELAWARE 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 NOVEMBER 5, 1999, REGISTRANT HAD OUTSTANDING 100,802,284 SHARES OF COMMON
STOCK.
<PAGE> 2
ATMEL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999 and December
31, 1998 1
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and September 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998 3
Condensed Consolidated Statement of Comprehensive Income for the three
and nine months ended September 30, 1999 and September 30, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATMEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 182,507 $ 161,721
Short-term investments 160,561 161,844
Accounts receivable 301,776 252,601
Inventories 262,252 240,258
Other current assets 65,783 74,967
------------ ------------
TOTAL CURRENT ASSETS 972,879 891,391
Fixed assets, net 921,397 964,126
Other assets 53,984 107,220
------------ ------------
TOTAL ASSETS $ 1,948,260 $ 1,962,737
============ ============
CURRENT LIABILITIES
Current portion of long-term debt $ 84,425 $ 81,995
Trade accounts payable 149,182 141,842
Accrued liabilities and other 167,943 151,212
Deferred income on shipments to distributors 28,574 24,170
------------ ------------
TOTAL CURRENT LIABILITIES 430,124 399,219
Long-term debt less current portion 718,262 771,069
Deferred income taxes 3,404 3,404
------------ ------------
TOTAL LIABILITIES 1,151,790 1,173,692
------------ ------------
Put warrants -- 56,850
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 387,858 330,073
Accumulated other comprehensive income (13,821) 29
Retained earnings 422,433 402,093
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 796,470 732,195
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,948,260 $ 1,962,737
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 4
ATMEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUES $ 340,244 $ 273,814 $ 941,423 $ 822,411
EXPENSES
Cost of sales 211,767 172,699 592,142 536,566
Research and development 46,296 45,929 136,649 125,982
Selling, general and administrative 46,321 40,796 126,646 107,737
In process research and development -- -- -- 23,425
Restructuring charges -- -- -- 66,300
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 304,384 259,424 855,437 860,010
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 35,860 14,390 85,986 (37,599)
Interest and other expenses, net 8,820 9,689 8,788 23,470
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 27,040 4,701 77,198 (61,069)
Income tax provision (benefit) 9,734 83 27,790 (1,071)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 17,306 4,618 49,408 (59,998)
Cumulative effect of accounting change,
net of tax effect -- -- (29,068) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 17,306 $ 4,618 $ 20,340 $ (59,998)
========== ========== ========== ==========
BASIC NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 0.17 $ 0.05 $ 0.49 $ (0.60)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX EFFECT -- -- (0.29) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 0.17 $ 0.05 $ 0.20 $ (0.60)
========== ========== ========== ==========
DILUTED NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 0.17 $ 0.05 $ 0.48 $ (0.60)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX EFFECT -- -- (0.28) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 0.17 $ 0.05 $ 0.20 $ (0.60)
========== ========== ========== ==========
SHARES USED IN BASIC NET INCOME (LOSS)
PER SHARE CALCULATIONS 100,475 99,472 100,218 99,267
========== ========== ========== ==========
SHARES USED IN DILUTED NET INCOME (LOSS)
PER SHARE CALCULATIONS 104,009 100,053 103,242 99,267
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 5
ATMEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss) $ 20,340 $ (59,998)
Items not requiring the use of cash
Depreciation and amortization 150,570 148,961
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 and investments (15,333) (50)
Other (7,109) 273
Changes in operating assets and liabilities
Accounts receivable (49,490) 14,126
Inventories (4,030) (80,184)
Prepaid taxes and other assets 7,765 23,556
Trade accounts payable and other accrued liabilities 28,992 (25,648)
Income taxes payable (625) 15,965
Deferred income on shipments to distributors 4,404 (5,608)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 164,552 121,118
---------- ----------
CASH FROM INVESTING ACTIVITIES
Acquisition of fixed assets (118,586) (176,321)
Sale of fixed assets 19,307 699
Acquisition of other assets (200) (41,638)
Purchase of other businesses (7,374) (99,250)
Purchase of investments (83,064) (211,434)
Sale or maturity of investments 88,305 193,863
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (101,612) (334,081)
---------- ----------
CASH FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible bonds -- 115,004
Proceeds from capital leases and notes 42,507 253,006
Principal payments on capital leases and notes (79,521) (185,720)
Payment from settlement of put warrants (7,619) --
Repurchase of stock -- (20,047)
Issuance of common stock 8,357 8,403
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (36,276) 170,646
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (5,878) 2,977
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,786 (39,340)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 161,721 174,310
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 182,507 $ 134,970
========== ==========
Interest paid $ 34,652 $ 28,766
Income taxes paid $ 12,745 $ 1,090
Issuance of common stock for purchase of other assets $ 197 $ 2,652
Fixed asset purchases in accounts payable $ 12,055 $ 8,786
Purchase of call warrants from proceeds of put warrants $ -- $ 4,450
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 6
ATMEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 17,306 $ 4,618 $ 20,340 $ (59,998)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 5,599 10,783 (11,687) 9,941
Unrealized losses on securities:
Unrealized holding losses arising (1,342) (972) (2,925) (999)
during period
Less: Reclassification adjustment of
gain included in net income (loss) 762 -- 762 --
--------- --------- --------- ---------
Other comprehensive income (loss) 5,019 9,811 (13,850) 8,942
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 22,325 $ 14,429 $ 6,490 $ (51,056)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 7
ATMEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1999, and the
results of operations, comprehensive income and cash flows for the three and
nine month periods ended September 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):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Materials and purchased parts $ 15,733 $ 14,082
Finished goods 20,247 43,913
Work in progress 226,272 182,263
--------- ---------
TOTAL $ 262,252 $ 240,258
========= =========
</TABLE>
5
<PAGE> 8
3. 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 Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic and diluted net income (loss) (numerator) $ 17,306 $ 4,618 $ 20,340 $ (59,998)
========= ========= ========= =========
Shares used in basic net income (loss) per share
Weighted average shares of common
stock outstanding 100,475 99,472 100,218 99,267
========= ========= ========= =========
Shares used in diluted net income (loss) per
share calculations (denominator):
Weighted average shares of common stock
outstanding 100,475 99,472 100,218 99,267
Dilutive effect of stock options 3,534 581 3,024 --
--------- --------- --------- ---------
104,009 100,053 103,242 99,267
========= ========= ========= =========
Basic net income (loss) per share $ 0.17 $ 0.05 $ 0.20 $ (0.60)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.17 $ 0.05 $ 0.20 $ (0.60)
========= ========= ========= =========
</TABLE>
The Company has debt securities for $150.0 million and $115.0 million that could
potentially dilute basic EPS in the future. The following dilutive shares were
excluded from diluted EPS because to do so would have been antidilutive: 5,964
shares and 5,870 shares for the three months ended September 30, 1999 and 1998,
respectively; 5,838 shares and 5,139 shares for the nine months ended September
30, 1999 and 1998, respectively.
4. 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
nine months of 1999 is summarized as follows (in thousands):
6
<PAGE> 9
<TABLE>
<CAPTION>
Cumulative Weighted Shares Shares Potential
Net Average covered by covered by obligation
Premium Exercise Put Call on Put
Received Price Warrants Warrants Warrants
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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) --
--------- --------- --------- --------- ---------
SEPTEMBER 30, 1999 $ 2,389 -- -- -- $ --
========= ========= ========= ========= =========
</TABLE>
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
$1,150,000. 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 September 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 nine months ended September 30, 1999 and 1998.
5. 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 $1.3 million at December
31, 1998, for the cost of terminating certain employees at Temic's MHS
subsidiary. For the nine months ended September 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.
7
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1998 1998
--------- ---------
<S> <C> <C>
Net revenues $ 273,814 $ 865,520
========= =========
Net income (loss) $ 4,618 $ (68,508)
========= =========
Diluted net income (loss) per share $ 0.05 $ (0.69)
========= =========
</TABLE>
6. SMART INFORMATION TRANSFER (SIT)
On April 9, 1999, the Company acquired substantially all of the assets and
assumed certain associated liabilities of the SIT business of the Semiconductor
Products Sector of Motorola, Inc. for $7.4 million. The transaction was
accounted for as a purchase.
7. 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 $17.6 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 expenses, net."
8. 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 included in the caption "Other
assets" in the Company's Condensed Consolidated Balance Sheet at December 31,
1998) of $48.9 million were written-off in the first quarter of 1999 and
presented net of tax for $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 were completed in the second quarter of 1999. 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.
8
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands, except per share data) September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of
accounting change $ 17,306 $ 4,618 $ 49,408 $ (59,998)
Deferred start-up costs expensed -- (7,620) -- (10,870)
---------- ---------- ---------- ----------
Net Income (loss) $ 17,306 $ (3,002) $ 49,408 $ (70,868)
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) before cumulative effect
of accounting change $ 0.17 $ 0.05 $ 0.48 $ (0.60)
========== ========== ========== ==========
Net income (loss) $ 0.17 $ (0.03) $ 0.48 $ (0.71)
========== ========== ========== ==========
</TABLE>
9. 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 (NVM), Temic, Application Specific
Integrated Circuits (ASIC) and Logic. The items labeled "Unallocated 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):
<TABLE>
<CAPTION>
NVM Temic ASIC Logic Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues from external customers $ 163,933 $ 66,842 $ 83,754 $ 25,715 $ 340,244
Segment operating income (loss) 19,739 13,074 12,668 (1,361) 44,120
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues from external customers $ 113,987 $ 68,357 $ 68,455 $ 23,015 $ 273,814
Segment operating income (loss) 2,137 8,386 7,389 (1,575) 16,337
</TABLE>
Information about segments (in thousands):
<TABLE>
<CAPTION>
NVM Temic ASIC Logic Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues from external customers $ 424,868 $ 201,023 $ 242,751 $ 72,781 $ 941,423
Segment operating income 46,410 17,172 39,044 7,821 110,447
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues from external customers $ 377,627 $ 163,359 $ 202,222 $ 79,203 $ 822,411
Segment operating income 24,965 10,571 17,828 9,581 62,945
</TABLE>
9
<PAGE> 12
Reconciliations of segment information to financial statements (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Operating income 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total income for reportable segments $ 44,120 $ 16,337 $ 110,447 $ 62,945
Unallocated amounts:
Corporate R&D (7,473) (2,405) (20,819) (3,825)
In process research and development -- -- -- (23,425)
Restructuring charges -- -- -- (66,300)
Corporate expenses (787) 458 (3,642) (6,994)
---------- ---------- ---------- ----------
Consolidated operating income (loss) before interest,
taxes, and cumulative effect of accounting change $ 35,860 $ 14,390 $ 85,986 $ (37,599)
========== ========== ========== ==========
</TABLE>
10. COMPREHENSIVE INCOME
The income tax effect of each element of comprehensive income for the three and
nine months ended September 30, 1999 and 1998, respectively, is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
--------------------------------------- --------------------------------------
Before- Tax Before- Tax
Tax (Expense) Net-of-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustments $ 8,747 $ (3,148) $ 5,599 $ (18,261) $ 6,574 $ (11,687)
Unrealized gain on securities,
Net of reclassification adj (907) 327 (580) (3,380) 1,217 (2,163)
--------- --------- --------- --------- --------- ---------
Other comprehensive income
(loss) $ 7,840 $ (2,821) $ 5,019 $ (21,641) $ 7,791 $ (13,850)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
--------------------------------------- --------------------------------------
Before- Tax Before- Tax
Tax (Expense) Net-of-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustments $ 16,590 $ (5,807) $ 10,783 $ 15,294 $ (5,353) $ 9,941
Unrealized gain on securities (1,496) 524 (972) (1,537) 538 (999)
--------- --------- --------- --------- --------- ---------
Other comprehensive income
(loss) $ 15,094 $ (5,283) $ 9,811 $ 13,757 $ (4,815) $ 8,942
========= ========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 13
The accumulated balances of other comprehensive income at September 30, 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 $ (11,687) $ (11,195)
Unrealized gain (loss) on securities (463) (2,163) (2,626)
--------- --------- ---------
$ 29 $ (13,850) $ (13,821)
========= ========= =========
</TABLE>
11
<PAGE> 14
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET REVENUES 100.0% 100.0% 100.0% 100.0%
EXPENSES
Cost of sales 62.3 63.1 62.9 65.2
Research and development 13.6 16.8 14.5 15.3
Selling, general and administrative 13.6 14.9 13.5 13.1
In process research and development -- -- -- 2.9
Restructuring charges -- -- -- 8.1
------ ------ ------ ------
TOTAL OPERATING EXPENSES 89.5 94.8 90.9 104.6
OPERATING INCOME (LOSS) 10.5 5.2 9.1 (4.6)
Interest and other expenses, net 2.6 3.5 0.9 2.8
------ ------ ------ ------
INCOME (LOSS) BEFORE TAXES 7.9 1.7 8.2 (7.4)
Income tax provision (benefit) 2.8 0.0 2.9 (0.1)
------ ------ ------ ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 5.1 1.7 5.3 (7.3)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- (3.1) --
------ ------ ------ ------
NET INCOME (LOSS) 5.1% 1.7% 2.2% (7.3)%
====== ====== ====== ======
</TABLE>
12
<PAGE> 15
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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Increase/ September 30, Increase/
Segment 1999 1998 (decrease) 1999 1998 (decrease)
- ------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-volatile Memory $ 163,933 $ 113,987 $ 49,946 $ 424,868 $ 377,627 $ 47,241
Temic 66,842 68,357 (1,515) 201,023 163,359 37,664
ASIC 83,754 68,455 15,299 242,751 202,222 40,529
Logic 25,715 23,015 2,700 72,781 79,203 (6,422)
---------- ---------- ---------- ---------- ---------- ----------
Total $ 340,244 $ 273,814 $ 66,430 $ 941,423 $ 822,411 $ 119,012
========== ========== ========== ========== ========== ==========
</TABLE>
Net revenues increased 14.5 percent to $941.4 million for the nine months ended
September 30, 1999 from $822.4 million in the same period of 1998. This increase
was primarily due to (i) much higher shipments for substantially all segments
and products in 1999 compared to 1998 and (ii) the inclusion of Temic's sales
for $201.0 million for the full nine months ended September 30, 1999 compared to
$163.4 million from March 1 to September 30 of 1998. See Note 5 (Temic
Acquisition) of Notes to Condensed Consolidated Financial Statements for a
discussion on the Temic acquisition . Net revenues increased 24.3 percent to
$340.2 million in the quarter ended September 30, 1999 from $273.8 million in
the corresponding quarter of 1998 due to much higher shipments for substantially
all segments and products.
NON-VOLATILE MEMORY (NVM)
NVM revenues increased $47.2 million for the nine months ended September 30,
1999 compared to the same period in 1998 due to much higher unit shipments
offset partially by lower average selling prices (ASPs). The increase in unit
shipments 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.
For the three months ended September 30, 1999, NVM revenues increased $49.9
million compared to the same period of 1998 due to much higher unit shipments
for substantially all products within this segment, particularly EEPROM and
Flash products, both of which service the wireless, cell, phone and other
telecommunications-related markets. These increases were offset by erosion in
ASPs, particularly for lower density Flash products.
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 ASPs. The
memory portion of the semiconductor industry has continued to experience intense
competition among suppliers during 1999, particularly for the commodity portion.
13
<PAGE> 16
If this condition continues, the Company's growth and results of operations
could be adversely affected. While ASPs substantially stopped their long decline
in the second quarter of 1999, they are still lower than in similar periods in
1998. The Company expects ASPs to continue an upward climb in the fourth quarter
of 1999 and the first half of 2000 because (i) demand will continue to increase
faster than supply in the industry during this time, (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 NVM products. Based on these positive factors and
overall improvements in business conditions within the industry, the Company
expects its revenues will continue to increase in the fourth quarter of 1999 and
into the first half of next year. However, there can be no assurance that ASPs
or that business conditions will improve in these periods. 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 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 and third quarters of 1999, there can be no
assurance that this growth will resume in future periods, as was evidenced by
the declines in 1997 and 1998 and the first quarter of 1999.
TEMIC
Temic segment revenues increased $37.7 million for the nine months ended
September 30, 1999, compared to 1998 due to the inclusion of Temic's products
for the full nine months of 1999 compared to seven months in 1998. These
increases were offset slightly by erosion in ASPs. For the three months ended
September 30, 1999, revenues decreased $1.5 million compared to 1998 due to
price erosion offset by a slight increase in unit shipments.
APPLICATION SPECIFIC INTEGRATED CIRCUIT (ASIC)
The ASIC segment increased $15.3 million and $40.5 million for the three and
nine months ended September 30, 1999 compared to the same periods of 1998. These
increases were due to (i) positive revenue contribution from the April 1, 1999
acquisition of the Smart Information Transfer (SIT) business (see Note 6 of
Notes to Condensed Consolidated Financial Statements), (ii) higher shipments in
cell-based integrated circuits (CBICs) products, particularly related to
electronic game-related products, and (iii) higher shipments in customer
designed circuits. These increases were offset by erosion in ASPs. The Company
will continue to increase resources and manufacturing capacity allocated to the
ASIC segment in the fourth quarter of 1999 and in the first half of 2000.
LOGIC
The Logic segment decreased $6.4 million for the nine months ended September 30,
1999 compared to 1998 due to price erosion in all of this segment's products
offset slightly by increases in unit shipments. For the three months ended
September 30, 1999, revenues increased $2.7 million due to much higher unit
shipments of programmable logic devices which was offset by price erosion in all
of this segment's products.
14
<PAGE> 17
The Company's net revenues by geographic regions are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Region 1999 1998 Increase 1999 1998 Increase
- ------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
North America $ 128,834 $ 102,612 $ 26,222 $ 332,421 $ 318,740 $ 13,681
Europe 84,021 81,112 2,909 279,892 244,865 35,027
Asia 127,389 90,090 37,299 329,110 258,806 70,304
--------- --------- --------- --------- --------- ---------
Total $ 340,244 $ 273,814 $ 66,430 $ 941,423 $ 822,411 $ 119,012
========= ========= ========= ========= ========= =========
</TABLE>
Foreign sales as a percentage of net revenues increased 3.5 percent in the first
nine months of 1999 to 64.7 percent compared to 61.2 percent in the same period
of 1998. Sales to Europe increased 14.3 percent or $35.0 million in the first
nine months 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
nine months in 1999 compared to only seven 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 negative $7.6 million impact on sales to Europe for the
nine months ended September 30, 1999 compared to the same period in 1998. For
the three months ended September 30, 1999, sales to Europe increased 3.6 percent
due to higher ASPs offset by a slight decrease in unit shipments. Fluctuations
in the French franc, German mark, and the euro had a negative $5.7 million
impact on sales to Europe in the third quarter of 1999 compared to the same
period in 1998.
Sales to Asia increased $70.3 million in the first nine months of 1999 to $329.1
million compared to $258.8 million in the same period of 1998. The increase was
due to significant increases in unit shipments combined with slightly higher
ASPs. Sales to Asia, except to Japan, are denominated in US dollars.
Fluctuations in the yen had a $2.5 million and $7.8 million positive impact on
sales to Japan for the three and nine months ended September 30, 1999 compared
to the same periods in 1998.
For the three and nine months ended September 30, 1999, approximately 42 percent
and 41 percent, respectively, of foreign sales were denominated in foreign
currencies compared to 37 percent and 38 percent for the same periods of 1998.
The five and three percent increases in the three and nine months ended
September 30, 1999 compared to the same periods of 1998 were due to higher sales
denominated in the German mark, French franc, and Japanese yen. While revenues
for the first nine months of 1999 were impacted favorably by an overall
weakening 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 strengthen against foreign currencies as was the case in the first half of
1999 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 improved to 62.9 percent in the
first nine months of 1999, from 65.2 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, (ii) increased utilization of the recently completed 8 inch
wafer fabrication facility in Rousset, France, (iii) higher product margins in
the ASIC and Temic segments, (iv) implementation of the restructuring plan (see
"In Process Research and Development and Restructuring" herein) and (v) lower
provision for inventory obsolescence. The lower provision was related to one of
the Company's Asian subsidiaries holding significantly lower inventory levels.
15
<PAGE> 18
Cost of sales as a percentage of net revenues were essentially flat at 62.3
percent and 63.1 percent in the third quarter of 1999 and 1998, respectively.
The slight 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, (ii) higher product margins in the ASIC and Temic segments
and (iii) lower provision for inventory obsolescence.
While gross margins have slightly improved during 1999, the Company could
continue to experience additional competitive pressures in its markets from
existing companies and new entrants, which among other things could prevent a
further recovery of 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 lowered
its capital expenditure plan for 1999 and will focus on implementing chemical,
mechanical polishing (CMP), 0.35-micron, 0.25-micron and 0.18-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 decreased to 14.5
percent in the first nine months of 1999, from 15.3 percent in the corresponding
period of 1998. Research and development expenses increased 8.5 percent to
$136.6 million in the first nine months of 1999 from $126.0 million in the
corresponding period of 1998. The increase was primarily due to the Company's
continued investment in the shrinking of the die size of its integrated circuits
to 0.35-micron, 0.25-micron, and 0.18-micron line widths; enhancement of mature
products; development of new products; development of smartcard products for
this emerging marketplace; CMOS, BiCMOS, and SiGe process technologies;
manufacturing improvements; and the inclusion of Temic's research and
development expense for the full nine months of 1999 compared to only seven
months in 1998. For the three months ended September 30, 1999, research and
development expenses were $46.3 million compared to $45.9 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 $36.3 million and $12.2 million for the three
and nine months ended September 30, 1999, on research and 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 $26.3 million for product development, $3.4 million for process
development and $6.6 million for system level integration (SLI) for the nine
months ended September 30, 1999. For the three months ended September 30, 1999,
the Company spent $8.5 million for product development, $1.1 million for process
development and $2.6 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 17.6 percent to $126.6 million in the first nine
months of 1999 from $107.7 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 nine
months of 1999 compared to only seven months in 1998, (ii) higher selling costs
due to higher revenues, primarily in the ASIC segment, and (iii) higher G&A
expenses at two of the Company's European subsidiaries. As a percentage of net
revenues, SG&A expenses were 13.5 percent for the first nine months of 1999
compared to 13.1 percent for the corresponding period of 1998.
16
<PAGE> 19
SG&A expenses increased by 13.5 percent to $46.3 million in the third quarter of
1999 from $40.8 million in the same quarter of 1998. The increase was largely
due to higher selling costs due to higher revenues, particularly in the NVM
segment whose revenues were significantly higher in the third quarter. As a
percentage of net revenues, SG&A expenses were 13.6 percent for the third
quarter of 1999 compared to 14.9 percent for the corresponding quarter of 1998.
Due to an improved collection environment in 1999 compared to 1998, the Company
did not experience a significant provision for doubtful accounts receivable.
However, the provision 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 expensed $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" herein for a
discussion on the Company's expenditures); 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 and expects to implement 0.25-micron technology in the first
half of 2000. 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 older technologies. The Company recognized the
impairment charge when the future undiscounted cash
17
<PAGE> 20
flows of each asset were estimated to be insufficient to recover its related
carrying value. At such time, the carrying values of these assets were written
down to the Company's estimates of fair value. Fair value was based on sales of
similar assets or other estimates of fair value, such as estimated future cash
flows. The Company did not realize any significant proceeds from disposal.
INTEREST AND OTHER EXPENSES, NET
Interest and Other Expenses, Net decreased $14.7 million to $8.8 million in the
first nine months of 1999 compared to $23.5 million in the same period of 1998.
The decrease was primarily due to (i) a $14.9 million pre-tax gain related to
the sale of certain assets (see Note 7 of Notes to Consolidated Financial
Statements), (ii) higher interest income due to higher cash and short-term
investment balances and higher interest rates, (iii) gain on sale of equity
investments of $5.0 million, and (iv) foreign exchange transaction gains of $1.1
million. These increases were offset by a combination of (i) higher interest
expense due to higher interest rates, (ii) $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
(iii) losses on disposals on non-essential fixed assets for $2.9 million.
Interest and Other Expenses, Net decreased $0.9 million to $8.8 million in the
third quarter of 1999 compared to $9.7 million in the same period of 1998. The
decrease was primarily due to (i) lower foreign exchange transaction losses of
$0.4 million and (ii) higher interest income due to higher interest rates and
higher cash and short-term investment balances. 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 nine months
ended September 30, 1999 compared to a tax benefit rate of 1.8 percent for the
same periods in 1998. The 1998 rate was lower than normal due 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 nine months of 1998 and non-deductible permanent differences arising from
foreign operations.
The increase in the tax provision for the three and nine month periods ended
September 30, 1999 of $9.7 million and $28.9 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 (LOSS) BY SEGMENT
The Company's operating income (loss) by segments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Increase/ September 30, Increase/
Segment 1999 1998 (decrease) 1999 1998 (decrease)
- ------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NVM $ 19,739 $ 2,137 $ 17,602 $ 46,410 $ 24,965 $ 21,445
Temic 13,074 8,386 4,688 17,172 10,571 6,601
ASIC 12,668 7,389 5,279 39,044 17,828 21,216
Logic (1,361) (1,575) 214 7,821 9,581 (1,760)
--------- --------- --------- --------- --------- ---------
Total $ 44,120 $ 16,337 $ 27,783 $ 110,447 $ 62,945 $ 47,502
========= ========= ========= ========= ========= =========
</TABLE>
For a reconciliation of segment operating income to total operating income, see
Note 9 "Segment Reporting" in Notes to Condensed Consolidated Financial
Statements.
18
<PAGE> 21
For the nine months ended September 30, 1999, operating income by segment
increased $47.5 million compared to the same period in 1998 due to increases of
$21.4 million and $21.2 million in the NVM and ASIC segments, respectively. Both
of these segments had much higher gross margins related to much higher unit
shipments. The NVM segment was offset by higher selling costs; the ASIC segment
was offset by much higher research and development.
For the three months ended September 30, 1999, operating income by segment
increased $27.8 million compared to the same period in 1998 due primarily to an
increase of $17.6 million in the NVM segment. The NVM segment had much higher
gross margins related to much higher unit shipments. This increase was offset by
higher research and development and selling costs.
NET INCOME
Net income of $20.3 million for the first nine months of 1999 increased $80.3
million from a net loss of $60.0 million in the corresponding period of the
prior year. The increase was primarily due to higher gross margins and two 1998
charges for $66.3 million and $23.4 million for restructuring and IPR&D,
respectively, for which no similar charges were recorded in 1999. These
increases were offset by the write-off, net of taxes, of previously capitalized
start-up costs of $29.1 million (see Note 8 of Notes to Condensed Consolidated
Financial Statements). For the third quarter of 1999, net income of $17.3
million increased by $12.7 million from a net income of $4.6 million in the same
period of 1998 due to higher gross margins offset by higher tax provision.
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 September 30, 1999, the Company had $343.1 million in cash and short-term
investments, an increase of $19.5 million from $323.6 million at December 31,
1998, and $542.8 million in net working capital, an increase of $50.6 million
from $492.2 million at December 31, 1998. Accounts receivable increased 19.5
percent to $301.8 million at September 30, 1999 from $252.6 million at December
31, 1998. The average days of accounts receivable outstanding were 80.4 days and
78.2 days for the first nine months of 1999 and 1998, respectively. The increase
in average days outstanding was due primarily to an increase in foreign sales
where payment terms are longer. 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
19
<PAGE> 22
expects that average days outstanding will decrease with improved business
conditions. For the nine months ended September 30, 1999, the Company wrote-off
approximately $24.0 million of accounts receivables. The majority of these
write-offs were previously reserved for at December 31, 1998, and had no impact
on the Company's results of operations. Inventories increased $22.0 million to
$262.3 million at September 30, 1999 from $240.3 million at December 31, 1998
primarily to support a higher sales level and the fact that Fab 7 in Rousset,
France was brought into production at the end of the second quarter. For the
nine months ended September 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 meet the Company's short and
long-term liquidity and capital requirements through the end of 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 nine months ended September 30, 1999, net cash provided by operations
was $164.5 million compared to $121.1 million in the same period of 1998, an
increase of $43.4 million. The increase was due to a decrease of $44.8 million
of cash used for net working capital purposes, particularly the decrease in cash
used for inventory purposes. Although cash used for inventory purposes did
increase in 1999, it was not at the level used in 1998. The improvement in net
cash used for working capital purposes was offset by a decrease of $1.4 million
in net income before items not requiring the use of cash.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash used in investing activities was $101.6 million for the nine months
ended September 30, 1999 compared to $334.1 million in the same period of 1998,
a decrease of $232.5 million. This decrease was due to: (i) lower capital
expenditures in the first nine months of 1999 of $118.6 million compared to
$176.3 million in the same period of 1998. This reduction of $57.7 million in
1999 compared to 1998 was due to reduced expenditures in 1999 related to the
second quarter 1999 completion of Fab 7 in Rousset, France and a reduced capital
expenditure budget in 1999, (ii) the acquisition of Temic in April of 1998 for
$99.3 million, (iii) increased cash proceeds from liquidation of $22.8 million
of net investments in marketable securities in 1999 compared to 1998 and (iv)
$19.3 million of proceeds from sale of fixed assets in 1999 primarily related to
the sale of Fab 6 (see Note 7 to Notes to Condensed Consolidated Financial
Statements).
Due to high demand for the Company's products, the Company intends to increase
capacity in Fab 7 in both the fourth quarter of 1999 and the first half of 2000
and to purchase a wafer fabrication facility. Accordingly, the Company will
invest in major equipment purchases as requirements dictate. The Company expects
to fund these equipment and facility purchases and 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 nine months of 1999, net cash used in financing activities was
$36.3 million compared to net cash provided by financing activities of $170.6
million in the first nine months of 1998, a decrease of $206.9 million. This
decrease was primarily due to: (i) $111.2 million of decreased proceeds from
20
<PAGE> 23
capital leases in 1999 compared to 1998, (ii) $115.0 million in proceeds from
the issuance of the zero coupon convertible debentures in April 1998, and (iii)
$7.6 million payment for settlement of warrants in the first half of 1999. This
decrease was offset by the repurchase of 1.4 million shares of the Company's
common stock for $20.0 million in 1998. As of September 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 4 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
worldwide 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 September 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 remediation phase for mission critical systems are substantially
complete, except for an on-going network upgrade in our San Jose, California
site which will be completed in the fourth quarter. All vendor fixes, except as
mentioned previously, that were awaiting fixes at June 30, were completed in the
third quarter.
(iv) The testing phase is also substantially complete for all mission critical
systems, except for the aforementioned network upgrade in our San Jose,
California site which will be completed in the fourth quarter. The Electronic
Data Interchange (EDI) system, the financial information system, order entry,
and production lot tracking systems are Year 2000 compliant in all locations.
(v) Implementation activities are also largely completed. Other preparations
associated with this final phase includes, but are not limited to, employee
training, resource allocation, contingency development and will continue 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 the end of the year. The Company's Year
2000 program requires contingencies for all non-compliant computer systems,
equipment or suppliers. The Company is addressing possible issues related to
21
<PAGE> 24
non-compliance and devising 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
worldwide 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 three and nine months ended September 30, 1999,
approximately $0.1 million and $4.5 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.
22
<PAGE> 25
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company has short-term debt, long-term debt and capital leases totaling
$802.7 million at September 30, 1999. Approximately $651.3 million of these
borrowings have fixed interest rates. The Company has approximately $151.4
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 $0.5 million adverse impact on income
before taxes on the Company's Condensed Consolidated Statements of Operations
for the nine months ended September 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 acquisitions of Temic and SIT, 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 nine months ended September 30, 1999, approximately 26 percent
of total revenues were denominated in foreign currencies versus approximately 23
percent for the corresponding periods of 1998. The increase was due primarily to
the inclusion of Temic's sales, the majority of which are denominated in foreign
currencies, and SIT, all of which are recorded 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 only slightly impacted as overall foreign
currencies remained stable in the first nine months of 1999 compared to the same
period of 1998. There can be no assurance that this stability 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
23
<PAGE> 26
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, 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 and
financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 4 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit:
27.1 Financial Data Schedule
(B) Reports on Form 8-K:
None
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATMEL CORPORATION
-----------------------------------------
(Registrant)
NOVEMBER 10, 1999 /s/ DONALD COLVIN
-----------------------------------------
DONALD COLVIN
Chief Financial Officer and Vice
President, Finance (Principal Financial
and Accounting Officer)
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-29-1998
<PERIOD-END> SEP-30-1999
<CASH> 182,507
<SECURITIES> 160,561
<RECEIVABLES> 310,117
<ALLOWANCES> 8,341
<INVENTORY> 262,252
<CURRENT-ASSETS> 972,879
<PP&E> 1,445,562
<DEPRECIATION> 524,165
<TOTAL-ASSETS> 1,948,260
<CURRENT-LIABILITIES> 430,124
<BONDS> 718,262
0
0
<COMMON> 387,858
<OTHER-SE> 408,612
<TOTAL-LIABILITY-AND-EQUITY> 1,948,260
<SALES> 941,423
<TOTAL-REVENUES> 941,423
<CGS> 592,142
<TOTAL-COSTS> 855,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,683
<INTEREST-EXPENSE> 28,265
<INCOME-PRETAX> 77,198
<INCOME-TAX> 27,790
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (29,068)
<NET-INCOME> 20,340
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
