<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________
COMMISSION FILE NUMBER 0-19032
ATMEL CORPORATION
(Registrant)
CALIFORNIA 77-0051991
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number )
2325 ORCHARD PARKWAY, SAN JOSE, CALIFORNIA 95131
(Address of principal executive offices)
(408) 441-0311
Registrant's telephone number
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
ON SEPTEMBER 30, 1998, REGISTRANT HAD OUTSTANDING 99,572,460 SHARES OF COMMON
STOCK.
<PAGE> 2
ATMEL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30,
1998 and December 31, 1997 1
Condensed Consolidated Income Statements for the
three and nine months ended September 30, 1998 and
September 30, 1997
2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and September 30, 1997 3
Consolidated Statements of Comprehensive income for the
three and nine months ended September 30, 1998 and
September 30, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
-i-
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATMEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 134,970 $ 174,310
Short-term investments 53,912 63,222
Accounts receivable, net 252,954 216,991
Inventories 236,474 124,336
Other current assets 108,290 119,358
------------- -------------
TOTAL CURRENT ASSETS 786,600 698,217
Other assets 110,098 42,338
Long-term investments 122,417 95,536
Fixed assets, net 982,501 985,949
------------- -------------
TOTAL ASSETS $ 2,001,616 $ 1,822,040
============= =============
CURRENT LIABILITIES:
Current portion of long-term debt $ 78,520 $ 67,522
Trade accounts payable and other accrued liabilities 319,910 290,890
Income taxes payable 15,965 0
Deferred income on shipments to distributors 19,648 25,256
------------- -------------
TOTAL CURRENT LIABILITIES 434,043 383,668
Convertible notes 267,640 150,000
Long-term debt less current portion 503,648 421,389
Other long-term liabilities 19,063 34,499
------------- -------------
TOTAL LIABILITIES 1,224,394 989,556
------------- -------------
Put warrants 69,730 46,050
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 315,359 334,303
Retained earnings 392,133 452,131
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 707,492 786,434
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,001,616 $ 1,822,040
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
<PAGE> 4
ATMEL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES: $ 273,814 $ 240,050 $ 822,411 $ 717,932
EXPENSES:
Cost of sales 172,699 135,572 536,566 397,849
Research and development 45,929 29,624 125,982 88,152
Selling, general and administrative 40,796 24,459 107,737 74,763
In process research and development 0 0 23,425 0
Restructuring charges 0 0 66,300 0
--------- --------- --------- ---------
TOTAL EXPENSES 259,424 189,655 860,010 560,764
--------- --------- --------- ---------
Operating income (loss) 14,390 50,395 (37,599) 157,168
Other expenses, net (9,689) (3,701) (23,470) (8,715)
--------- --------- --------- ---------
Income (loss) before taxes 4,701 46,694 (61,069) 148,453
Income tax provision (benefit) 83 16,345 (1,071) 51,958
--------- --------- --------- ---------
NET INCOME (LOSS) $ 4,618 $ 30,349 $ (59,998) $ 96,495
========= ========= ========= =========
BASIC NET INCOME (LOSS) PER SHARE $ 0.05 $ 0.30 $ (0.60) $ 0.97
========= ========= ========= =========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.05 $ 0.30 $ (0.60) $ 0.95
========= ========= ========= =========
SHARES USED IN BASIC NET INCOME (LOSS)
PER-SHARE CALCULATION 99,472 99,506 99,267 99,349
========= ========= ========= =========
SHARES USED IN DILUTED NET INCOME (LOSS)
PER-SHARE CALCULATION 100,053 101,926 99,267 101,629
========= ========= ========= =========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (59,998) $ 96,495
Items not requiring the use of cash
Depreciation and amortization 148,961 111,093
Write-down of fixed assets 65,000 0
In process research and development expense 23,425 0
Other 223 13,870
Changes in operating assets and liabilities
Accounts receivable 14,126 (85,550)
Inventories (80,184) (53,976)
Other current assets 23,556 (26,600)
Trade accounts payable and other accrued liabilities (24,348) (31,202)
Income taxes payable 15,965 10,444
Deferred income on shipments to distributors (5,608) 11
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 121,118 34,585
--------- ---------
CASH FROM INVESTING ACTIVITIES
Acquisition of fixed assets (176,321) (229,295)
Acquisition of other assets (40,939) (4,510)
Acquisition of Temic Telefunken Microelectronic (99,250) 0
Purchase of investments (211,434) (68,615)
Sale or maturity of investments 193,863 61,231
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (334,081) (241,189)
--------- ---------
CASH FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible bonds 115,004 150,000
Proceeds from capital leases, short-term loan and notes 253,006 181,087
Principal payments on capital leases, short-term loan and
notes (185,720) (62,935)
Proceeds from settlement of warrants 0 4,425
Repurchase of stock (20,047) 0
Issuance of Common Stock 8,403 12,599
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 170,646 285,176
--------- ---------
EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT 2,977 (15,994)
--------- ---------
NET CASH PROVIDED (USED) (39,340) 62,578
CASH AT BEGINNING OF PERIOD 174,310 104,113
--------- ---------
CASH AT END OF PERIOD $ 134,970 $ 166,691
========= =========
INTEREST PAID $ 28,766 $ 19,206
INCOME TAXES PAID $ 1,090 $ 38,157
ISSUANCE OF COMMON STOCK FOR PURCHASE OF OTHER ASSETS $ 2,652 $ 0
FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE $ 8,786 $ 37,757
PURCHASE OF CALL WARRANTS FROM PROCEEDS OF PUT WARRANTS $ 4,450 $ 2,088
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,618 $ 30,349 $(59,998) $ 96,495
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 10,783 (2,395) 9,941 (10,396)
Unrealized gains (losses) on securities (972) (368) (999) (585)
-------- -------- -------- --------
Total other comprehensive income (loss) 9,811 (2,763) 8,942 (10,981)
-------- -------- -------- --------
Comprehensive income (loss) $ 14,429 $ 27,586 $(51,056) $ 85,514
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE> 7
ATMEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
These unaudited interim financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present
fairly, in all material respects, the financial position of Atmel Corporation
(Company or Atmel) and its subsidiaries as of September 30, 1998 and the results
of operations and cash flows for the three month and nine month periods ended
September 30, 1998 and 1997. Because all of the disclosures required by
generally accepted accounting principles are not included, these interim
statements should be read in conjunction with the audited financial statements
and notes thereto in the Company's Annual Report to Shareholders for the year
ended December 31, 1997. The year-end condensed balance sheet data was derived
from the audited financial statements and does not include all of the
disclosures required by generally accepted accounting principles. The income
statements for the periods presented are not necessarily indicative of results
to be expected for any future period, nor for the entire year.
2. ACCOUNTS RECEIVABLE
Allowance for doubtful accounts is calculated based on the aging of the
Company's accounts receivable, historical experience, current and future
short-term business conditions and management judgment. The Company writes off
an account receivable against the allowance when the Company determines it is
uncollectible and no longer actively pursues collection of the receivable.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out for materials
and purchased parts and average cost for work in progress) or market.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DEC. 31, 1997
------------------ -------------
<S> <C> <C>
Materials and purchased parts $ 18,746 $ 10,527
Finished Goods 36,086 25,590
Work in progress 181,642 88,219
-------- --------
TOTAL $236,474 $124,336
======== ========
</TABLE>
4. NET INCOME (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128) effective with the year ended
December 31, 1997. All prior period net income per-share amounts have been
restated to comply with SFAS 128 as well as the two-for-one stock splits paid on
April 11, 1994, and August 8, 1995.
In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted net income per share is
provided as follows:
-5-
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Basic and diluted net income (loss) $ 4,618 $ 30,349 $ (59,998) $ 96,495
========= ========= ========= =========
Denominator:
Shares used in basic net income per share calculations
Weighted average shares of common stock outstanding 99,472 99,506 99,267 99,349
========= ========= ========= =========
Shares used in diluted net income per share
calculations
Weighted average shares of common stock outstanding 99,472 99,506 99,267 99,349
Dilutive effect of stock options 581 2,420 0 2,280
--------- --------- --------- ---------
100,053 101,926 99,267 101,629
========= ========= ========= =========
Basic net income (loss) per share $ 0.05 $ 0.30 $ (0.60) $ 0.97
========= ========= ========= =========
Diluted net income (loss) per share $ 0.05 $ 0.30 $ (0.60) $ 0.95
========= ========= ========= =========
</TABLE>
In January 1996, the Board of Directors of the Company approved a stock
repurchase program that allows the Company to repurchase up to 5,000 shares of
its common stock. The Board of Directors approved the repurchase of an
additional 5,000 shares in January 1998. The primary purpose of this stock
repurchase program is to increase shareholder value. In connection with this
program, the Company has entered into certain cash-less warrant transactions
which provide the Company with the flexibility to implement its repurchase plan,
under which the Company would purchase its stock when favorable market
conditions existed and without immediately impacting the Company's cash
resources. In addition, the Company paid $16,623 in cash to repurchase 1,000
shares of its common stock in January 1998 and another $3,424 in cash to
repurchase 400 shares of its common stock in August 1998.
5. PUT WARRANTS
The Company has sold put warrants to an independent third party during the nine
months ended September 30, 1998 and used the proceeds from the sale of the put
warrants to purchase call warrants in a cash-less transaction. The put warrants
entitle the holder to sell shares of the Company's common stock to the Company
at contractual prices. The call warrants entitle the Company to buy, at
contractual prices, from the same independent third party shares of the
Company's common stock. The outstanding put and call warrants, which expire
between October 26, 1998 and May 4, 1999, are exercisable at any time before
maturity and may be settled in cash, at the Company's option. The maximum
contractual repurchase obligation of $69,730 has been reclassified from
shareholders' equity to put warrants as of September 30, 1998. There was no
impact on basic and diluted net income per share in the nine months ended
September 30, 1998. In October, 1998, the Company entered into an agreement with
the holder of a put warrant, which consists of 1,200 underlying shares at an
exercise price of $24.875, to extend the expiration date to May 14, 1999. The
extension required a net cash payment of $1,750 by the Company.
-6-
<PAGE> 9
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 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. 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.
<TABLE>
<CAPTION>
As Originally
Reported As Restated
-------- -----------
<S> <C> <C>
Purchase price $99,250 $99,250
======= =======
Purchased technology $12,734 $19,661
Workforce in place 2,384 3,681
In-process technology 32,241 23,425
Other assets, net of assumed liabilities 51,891 52,483
------- -------
$99,250 $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
September 30, 1998, purchased technology and workforce in place, net of
accumulated amortization of $346 and $65, respectively, amounted to $19,315 and
$3,616, respectively.
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
-7-
<PAGE> 10
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:
<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. It was estimated that, on average, in-process product technology
was 38 percent complete at the date of acquisition based on the cost of research
development to date compared to total estimated cost.
The Company expects to incur up to a total of $30,000 in development costs over
the next two years to complete this project. 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 estimate 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 development
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 development to date compared to total estimated cost.
The Company expects to incur up to a total of $10,000 in development costs over
the next two years to complete these projects. The Company anticipates the
development will be completed and net cash in-flows will begin in the 1999-2000
time frame.
-8-
<PAGE> 11
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.
The Company expects to incur up to a total of $17,000 in development costs over
the next two years to complete this project. 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 tax 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 $6,800 for
the cost of terminating certain employees at Temic's MHS subsidiary. At the
acquisition date, Atmel management had assessed the need to terminate employees
at MHS. Subsequent to the acquisition, Atmel management finalized its plan to
terminate 120 employees representing all departments except the information
systems and product design departments. At September 30, 1998, no employees had
been terminated. The Company believes that the accrual will be sufficient to
cover the termination costs and that planned terminations will be completed and
all costs incurred by March 1999.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition had occurred at the beginning of periods
presented and do not purport to be indicative of what would have occurred had
the acquisition been made as of the date, or of results which my occur in the
future.
-9-
<PAGE> 12
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------- --------
<S> <C> <C>
Net revenues $ 865,520 $918,891
========= ========
Net income (loss) $ (68,508) $ 83,203
========= ========
Diluted net income (loss) per share $ (0.69) $ 0.80
========= ========
</TABLE>
7. CONTINGENCIES
The Company is involved in certain patent related legal matters, in the ordinary
course of business. No provision for any liability that may result upon the
resolution of these matters has been made in the accompanying financial
statements nor is the amount or range of possible loss, if any, reasonably
estimable.
The Company was named as a defendant in a patent infringement lawsuit that was
filed on January 21, 1998. The plaintiff contended that certain of the Company's
devices infringe seven patents it allegedly owns and was seeking a judgment of
infringement for each of these asserted patents and other costs. The amount of
judgment sought by the plaintiff was not specified in the lawsuit. The Company
settled the patent disputes and entered into a cross-license agreement with the
plaintiff in August 1998.
8. RECENT ACCOUNTING PRONOUNCEMENT
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP is effective for the Company's fiscal year ended December 31, 1999 and
will require the effect of adoption be reported as a cumulative effect of change
in accounting principle. Upon adoption of the SOP, the Company expects to record
a charge against earnings. At September 30, 1998, start-up costs of $49,557 were
reported as other assets.
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
not yet evaluated the effects of this change on its operations. The Company will
adopt SFAS 133 as required for its first quarterly filing of fiscal year 2000.
9. ZERO COUPON CONVERTIBLE DEBT
In April 1998, the Company completed a zero coupon convertible debt financing,
which raised approximately $115,000. The debt is convertible, at the option of
the holder, into the Company's common stock at the rate of 13.983 shares per
$1,000 principal amount at maturity of the debt. The effective interest rate of
the debt is 5.5 percent per annum. The net proceeds were used to repay a
short-term loan of approximately $110,000 with Nationsbank which was originally
borrowed to finance
-10-
<PAGE> 13
the acquisition of Temic. The debt is not redeemable by the Company prior to
April 21, 2003. Thereafter, the debt will be redeemable for cash, at the option
of the Company in whole at any time or in part from time to time at redemption
prices equal to the issue price plus accrued interest. At the option of the
holder as of April 21, 2003, 2008 and 2013, the Company may be required to
redeem the debt at prices equal to the issue price plus accrued interest. The
Company may, at its option, elect to redeem the debt for cash or common stock of
the Company, or any combination thereof.
10. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS 130), effective with its
1998 fiscal year. The income tax effect of each element of comprehensive income
is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
<S> <C> <C> <C>
Foreign currency translation adjustments $ 16,590 $ (5,807) $ 10,783
Unrealized gain (loss) on securities (1,496) 524 (972)
-------- -------- --------
Other comprehensive income $ 15,094 $ (5,283) $ 9,811
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
<S> <C> <C> <C>
Foreign currency translation adjustments $ 15,294 $ (5,353) $ 9,941
Unrealized gain (loss) on securities (1,537) 538 (999)
-------- -------- --------
Other comprehensive income $ 13,757 $ (4,815) $ 8,942
======== ======== ========
</TABLE>
The accumulated balances of other comprehensive income at September 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
Current
Beginning Period Ending
Balance Change Balance
--------- ------- -------
<S> <C> <C> <C>
Foreign currency translation adjustments $(6,449) $ 9,941 $ 3,492
Unrealized gain (loss) on securities (654) (999) (1,653)
------- ------- -------
$(7,103) $ 8,942 $ 1,839
======= ======= =======
</TABLE>
-11-
<PAGE> 14
11. IN PROCESS RESEARCH AND DEVELOPMENT AND RESTRUCTURING CHARGES
During the second quarter of fiscal 1998, the Company announced a restructuring
plan which included a 10 percent work force reduction and the write-down of
certain manufacturing equipment and machinery with older process technology. The
majority of the 10 percent of employees to be terminated will be factory workers
in the Company's manufacturing facilities located in the U.S. and Europe. The
program is primarily aimed at focusing the Company's business processes,
attaining cost efficiencies and increasing manufacturing flexibility. The
restructuring charges of $66,300 included a provision of $1,300 for severance
costs which are anticipated to be paid primarily in the second half of fiscal
1998. As of September 30, 1998, approximately $100 had been charged against the
provision.
As the Company continued to move toward production with 0.35-micron technology,
the Company recognized an impairment charge of approximately $65,000 relating to
manufacturing equipment with 0.65-micron and 0.5-micron technologies. The
decision to accelerate implementation of 0.35-micron technology was prompted by
the continued price erosion of the Company's Flash memory products, and
weakening business conditions for its EPROM products have further negatively
affected the Company's gross margin. In making its decision, the Company
examined the relationship between the costs of fixed assets in its Colorado
facility and the projected revenues produced from these assets during the next
three years, and concluded that the gross margin of its products would decline
rapidly based upon the continued price erosion and maturity of its products.
Accordingly, the Company decided to move toward more advanced manufacturing
processes using 0.35-micron technology in its Colorado facility, in an effort to
maintain its revenues and reduce its costs. However, due to the current
depressed state of the average selling prices for the semiconductor memory
products, even the additional output per wafer does not provide a positive gross
margin (without reducing depreciation charges from the manufacturing equipment).
The Company recognized the impairment charge when the future undiscounted cash
flows of each asset were estimated to be insufficient to recover its related
carrying value. At such time, the carrying values of these assets were written
down to the Company's estimates of fair value and will continue to be
depreciated over their remaining useful lives. Fair value was based on sales of
similar assets or other estimates of fair value such as estimated future cash
flows. The Company does not anticipate significant proceeds from disposal. None
of the assets affected by this action are currently held for sale.
Additionally, as previously indicated, a $23,425 purchased in-process research
and development expense related to the acquisition of Temic in March 1998 has
been charged against the second quarter's operating results. At the time of the
acquisition, the technological feasibility of the acquired in-process technology
had not been established and the Company believes the technology has no
alternative use. The Company intends to develop the acquired technology (see
Research and Development); however, it is uncertain whether the Company will be
successful in this regard. If the development of the technology is unsuccessful,
the technology may be abandoned during the development phase.
-12-
<PAGE> 15
12. SHAREHOLDER RIGHTS PLAN
In September 1998, the Board of Directors approved a shareholder rights plan
under which shareholders of record on September 16, 1998 received a right to
purchase (a "Right") one-thousandth share of the Company's Series A Preferred
Stock for each outstanding share of the Company's Common Stock at an exercise
price of $75, subject to adjustment. The Rights will separate from the Common
Stock, Rights certificates will be issued and the Rights will become exercisable
upon the earlier of: (i) fifteen (15) days (or such later date as may be
determined by a majority of the Board of Directors) following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 20 percent
or more of the Company's outstanding Common Stock or (ii) fifteen (15) business
days following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 20 percent or more of the
outstanding Common Stock of the Company. The Rights expire on the earliest of
(i) September 4, 2008, (ii) redemption or exchange of the Rights or (iii)
consummation of a merger, consolidation or asset sale resulting in expiration of
the Rights.
13. RESTATEMENT
After discussions with the Staff of the Securities and Exchange Commission (the
"SEC"), the Company has restated the accompanying consolidated financial
statements as September 30, 1998 and for the three and nine months ended
September 30, 1998. The financial statements have been restated to reflect a
change in the purchase price allocation using a percentage completion
methodology which resulted in an adjustment to the valuation and related
amortization of intangibles arising from the acquisition of Temic in March 1998.
Additionally, at the time of the original filing of Form 10-Q for the quarter
ended March 31, 1998, the Company did not have sufficient information to make an
allocation of the purchase price of Temic in accordance with Accounting
Principles Board (APB) Opinion No. 16. Accordingly, the Company had included a
preliminary purchase price allocation based on Temic's March 31, 1998 balance
sheet in the absence of a valuation of assets and liabilities as required by APB
Opinion No. 16. The Company, after discussions with the SEC, has treated the
restatement of the purchase price allocation based on final valuations of the
tangible and intangible assets and liabilities acquired, including in-process
research and development, as a change in accounting estimate in the quarter
ended June 30, 1998. The Company has restated the income tax provision as a
result of the finalization of the purchase price allocation of Temic.
The impact of the restatement for the quarter ended September 30, 1998 was as
follows:
<TABLE>
<CAPTION>
As Originally Reported As Restated
---------------------- -----------
<S> <C> <C>
Income before taxes $5,228 $4,701
Income tax provision $1,046 $83
Net income $4,182 $4,618
Diluted net income per share $0.04 $0.05
Total assets $1,986,527 $2,001,616
</TABLE>
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investors are cautioned that certain statements in this Form 10-Q are forward
looking statements that involve risks and uncertainties. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
and variations of such words and similar expressions are intended to identify
such forward looking statements. These statements are based on current
expectations and projections about the semiconductor industry and assumptions
made by the management and are not guarantees of future performance. Therefore,
actual events and results may differ materially from those expressed or
forecasted in the forward looking statements due to factors such as the effect
of changing economic conditions, material changes in currency exchange rates,
conditions in the overall semiconductor market (including the historic
cyclicality of the industry), continued financial turmoil in the Asian markets,
risks associated with product demand and market acceptance risks, the impact of
competitive products and pricing, delays in new product development,
manufacturing capacity utilization, product mix and technological risks and
other risk factors identified in the Company's filings with the Securities and
Exchange Commission, including the Company's Form 10-K Report. The Company
undertakes no obligation to update any forward looking statements in this Form
10-Q.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating data
as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET REVENUES 100.0 % 100.0 % 100.0% 100.0%
EXPENSES
Cost of sales 63.1 56.5 65.3 55.4
Research and development 16.7 12.3 15.3 12.3
Selling, general and administrative 14.9 10.2 13.1 10.4
In process research and development 0.0 0.0 2.8 0.0
Restructuring charges 0.0 0.0 8.1 0.0
----- ----- ----- -----
TOTAL EXPENSES 94.7 79.0 104.6 78.1
OPERATING INCOME (LOSS) 5.3 21.0 (4.6) 21.9
Other expense, net (3.5) (1.5) (2.9) (1.2)
----- ----- ----- -----
INCOME (LOSS) BEFORE TAXES 1.8 19.5 (7.5) 20.7
Income tax provision (benefit) 0.1 6.8 (0.1) 7.2
----- ----- ----- -----
NET INCOME (LOSS) 1.7% 12.7 % (7.4) % 13.5 %
===== ===== ===== =====
</TABLE>
NET REVENUES
The Company's net revenues by geographic destination for the three-month and
nine-month periods ended September 30, 1998 and 1997 are summarized as follows:
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<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
North America $ 78,270 $ 97,488 $ 249,391 $ 285,987
Europe 164,022 84,535 409,055 219,911
Asia 103,705 120,201 317,282 321,304
Elimination (72,183) (62,174) (153,317) (109,270)
--------- --------- --------- ---------
Total $ 273,814 $ 240,050 $ 822,411 $ 717,932
========= ========= ========= =========
</TABLE>
Net revenues increased 14.1 percent to $273.8 million in the three months ended
September 30, 1998 from $240.1 million in the corresponding quarter of 1997. Net
revenues for the first nine months ended September 30, 1998 increased 14.6
percent to $822.4 million from $717.9 million in the same period of 1997. This
increase was primarily attributable to the inclusion of revenues from the
Temic's business, a recent acquisition by the Company. See Note 6 (Temic
Acquisition) in Notes to Condensed Consolidated Financial Statements. The
revenue decrease in the North American region was primarily due to continued
price erosion of the Company's memory products (caused by continued weakened
business conditions and excess manufacturing capacity in the semiconductor
industry). The increase in revenues in the European region was primarily due to
the revenue contribution from Temic. The decrease in revenues in the Asian
region was largely due to continued financial turmoil and weakened business
conditions in the Asian region.
Excluding the $68.4 million revenue contribution from Temic, net revenues for
the three months ended September 30, 1998 would have decreased by approximately
14.5 percent compared to the corresponding quarter of 1997. During the three
months ended September 30, 1998, revenues from the Company's ASIC and logic
products increased 36.6 percent and 23.5 percent, respectively, while revenues
from its memory products decreased 44.0 percent, compared to the corresponding
quarter of 1997. The Company expects its ASIC and logic revenues to continue to
grow as the Company is repositioning itself to participate in the
system-on-a-chip movement. The decrease in memory revenues was primarily
attributable to the declining prices and decreasing unit shipments of the
Company's Flash, EPROM and EEPROM products. During the three months ended
September 30, 1998, Flash revenues and unit shipments decreased 40.8 percent and
16.9 percent, respectively, compared to the corresponding period of 1997. EPROM
revenues and unit shipments decreased 65.6 percent and 42.2 percent,
respectively, compared to the corresponding period of 1997. Similarly, EEPROM
revenues and unit shipments decreased 35.3 percent and 10.2 percent,
respectively, compared to the corresponding period of 1997. For the nine months
ended September 30, 1998, the decrease in net revenues was approximately 8.2
percent, excluding the revenue from Temic of $163.4 million. The decrease was
primarily due to the reasons discussed above with respect to the three months
ended September 30, 1998. The Company's quarterly revenues and operating results
have become increasingly dependent upon orders booked and shipped within a given
quarter. To the extent this trend continues, the Company's quarterly results
will be less predictable and subject to greater variability.
In recent years, the Company has significantly expanded its international
operations, most recently through its acquisition of Temic. International sales
and operations are subject to a variety of risks, including those arising from
currency fluctuations, tariffs, trade barriers, taxes, export license
requirements and foreign government regulations. Because most of the Company's
foreign sales are
-15-
<PAGE> 18
denominated in U.S. dollars, the Company's products become less price
competitive in countries with currencies declining in value against the dollar.
In addition, the continuance or worsening of the adverse business and financial
conditions in Asia, where more than 26.0 percent of the Company's revenues are
generated, would have a material adverse effect on the Company's operating
results in the future.
The Company faces exposure to adverse movements in foreign currency exchange
rates. These exposures change over time and could have a material adverse impact
on the Company's financial results. Historically, the Company's primary exposure
related to non-dollar denominated sales in Japan and Europe. At the present
time, the Company hedges only currency exposures associated with Japan. The
hedging activity undertaken by the Company is intended to offset the impact of
currency fluctuations on accounts receivable that are denominated in Japanese
yen. To the extent that these forecasts are overstated or understated during
periods of currency volatility, the Company could experience unanticipated
currency gains and losses. The Company's foreign exchange contracts generally
have maturities between three and nine months. Foreign exchange contracts
outstanding, all of which were in Japanese currency, amounted to $17.4 million
at September 30, 1998.
The semiconductor industry has historically been cyclical, characterized by wide
fluctuations in product supply and demand. From time to time, the industry has
also experienced significant downturns, characterized by diminished product
demand, production overcapacity and subsequent accelerated erosion of average
selling prices. The commodity memory portion of the semiconductor industry, from
which the Company derives more than half of its revenues, has continued to
suffer from excess capacity during 1998. If these conditions continue, the
Company's growth and results of operations would be adversely affected.
The Company's continued success will depend in large part on the continued
growth of various electronics industries that use semiconductors, including
manufacturers of computers, telecommunications equipment, automotive
electronics, industrial controls, consumer electronics equipment and military
equipment. The Company's success will also depend upon a better supply and
demand balance within the industry. While the Company experienced rapid revenues
and net income growth from 1994 through 1996, there can be no assurance that
this growth will resume in the future periods, as was evidenced in 1997 and
1998.
COST OF SALES
Cost of sales as a percentage of net revenues increased to 63.1 percent during
the three months ended September 30, 1998, from 56.5 percent in the
corresponding quarter of 1997. The increase in cost of sales as a percentage of
net revenues was primarily due to excess manufacturing capacity resulting from
increases in fixed costs associated with the expansion of wafer fabrication
facilities in Colorado Springs, Colorado and Rousset, France, lower product
margins in many of the Company's non-volatile memory products and the inclusion
of lower margins from Temic. The lower product margins were attributable to a
smaller revenue base over which to spread fixed costs and the erosion of average
selling prices that were not matched with a corresponding decrease in
manufacturing cost. Cost of sales as a percentage of net revenues increased to
65.3 percent for the nine months ended September 30, 1998, from 55.4 percent in
the corresponding period of 1997. The increase in cost of sales as a percentage
of net revenues during the nine months ended September 30, 1998 was primarily
due to the reasons discussed above with respect to the three months ended
September 30, 1998.
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<PAGE> 19
The Company expects competitive pressures to increase in its markets from
existing companies and new entrants, which among other things could further
accelerate the trend of decreasing average selling prices. Accordingly, there
can be no assurance that the Company will be able to sustain its recent gross
margins. The Company has lowered its capital expenditure plan in 1998 and will
focus on implementing chemical, mechanical planarization (CMP), 0.35-micron and
0.25-micron technologies in its wafer manufacturing facilities. Implementation
of these technologies will enable the Company to achieve cost reductions through
die shrinks. However, production delays, difficulties in achieving acceptable
yields at its fabrication facilities, overcapacity or difficulties in
integrating the Temic acquisition (see discussion in Risk Associated with Temic
Acquisition below) could materially and adversely affect the Company's gross
margin and future operating results.
RESEARCH AND DEVELOPMENT
As a percentage of net revenues, research and development expense increased to
16.7 percent during the three months ended September 30, 1998, from 12.3 percent
in the corresponding quarter of 1997. Research and development expense increased
55.0 percent from $29.6 million for the three months ended September 30, 1997 to
$45.9 million for the three months ended September 30, 1998. The increase was
primarily due to the Company's continued investment in the shrinking of the die
size of its integrated circuits from 0.65-micron to 0.5-micron line widths and
from 0.5-micron to 0.35-micron line widths, enhancement of mature products,
development of new products, advanced CMOS process technology, manufacturing
improvements, the costs associated with increasing production capacity in
Colorado Springs and Rousset and the inclusion of Temic's research and
development expense of $12.0 million.
In addition, the primary technology which the Company acquired through the Temic
acquisition is the silicon germanium manufacturing process. The Company intends
to develop the acquired technology and expects to incur between $10.0 and $20.0
million per year in development costs for the next two to three years. If the
development is successful, this technology will allow wireless communication
devices to communicate at higher frequencies and at a lower cost than is
currently available with other technologies. Accordingly, the Company expects
its research and development expense will continue to increase in the future.
The Company anticipates that a CMOS like silicon germanium process will begin to
be incorporated into the Company's products in the year 2000 - 2002 time frame.
The Company believes that continued investment in process technology and product
development are essential for it to remain competitive in the markets it serves
and is committed to high levels of expenditures for research and development.
Accordingly, the Company expects its research and development expense will
continue to increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by 66.8 percent to $40.8
million in the three months ended September 30, 1998 from $24.5 million in the
corresponding quarter of 1997. The increase was largely due to provision for bad
debts expense, legal costs related to patent infringement lawsuit and the
inclusion of Temic's selling, general and administrative expense of $11.3
million. As a percentage of net revenues, selling, general and administration
expenses were 14.9 percent for the three months ended September 30, 1998 and
10.2 percent for the corresponding quarter of 1997. The
-17-
<PAGE> 20
Company expects selling, general and administrative expenses to increase due
primarily to expansions in international markets, legal costs associated with
intellectual property litigation and provision for doubtful accounts receivable.
The provision for doubtful accounts receivable may increase as the Company
continues to evaluate the status of its accounts receivable. The increase will
primarily be due to the aging of accounts receivable, an anticipated increase in
accounts receivable, continued weakened business conditions and less financially
strong customers.
IN RESEARCH AND DEVELOPMENT AND RESTRUCTURING CHARGES
During the second quarter of fiscal 1998, the Company announced a restructuring
plan which included a 10 percent work force reduction and the write-down of
certain manufacturing equipment and machinery with older process technology. The
majority of the 10 percent of employees to be terminated will be factory workers
in the Company's manufacturing facilities located in the U.S. and Europe. The
program is primarily aimed at focusing the Company's business processes,
attaining cost efficiencies and increasing manufacturing flexibility. The
effects of the restructuring programs are expected to reduce the Company's cost
of sales, salary cost and depreciation and improve its profit margins in the
future. The Company does not believe the restructuring programs will generate
increased costs in other areas or lead to diminished revenues. The full
implementation of the restructuring programs will take place over the next two
quarters. The Company is converting its manufacturing process to use 0.35-micron
technology and is developing 0.25-micron technology. Until these migrations are
completed, the older equipment and associated manufacturing processes are still
being used. The 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. See Note 11 (In Process Research and Development and
Restructuring Charges) in Notes to Condensed Consolidated Financial Statements.
As the Company continued to move toward production with 0.35-micron technology,
the Company recognized an impairment charge of $65.0 million relating to
manufacturing equipment with 0.65-micron and 0.5-micron technologies. The
Company recognized the impairment charge when the future undiscounted cash flows
of each asset were estimated to be insufficient to recover its related carrying
value. At such time, the carrying values of these assets were written down to
the Company's estimates of fair value. Fair value was based on sales of similar
assets or other estimates of fair value, such as estimated future cash flows.
The Company does not anticipate significant proceeds from disposal. None of the
assets affected by this action are currently held for sale.
Additionally, as previously indicated, a $23.4 million purchased in-process
research and development expense related to the acquisition of Temic in March
1998 has been charged against the second quarter's operating results. The
Company also 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 5 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 in-process research and development 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 believes the technology has no alternative use. The
Company intends to develop the acquired technology (see Research and
Development); however, it is uncertain whether the Company will be successful in
this regard. If the development of the technology is unsuccessful, the
technology may be abandoned during the development phase.
-18-
<PAGE> 21
OTHER EXPENSES, NET
The Company reported $9.7 million of net interest and other expenses for the
three months ended September 30, 1998, compared to $3.7 million of net interest
and other expenses for the corresponding period of 1997. The increase in net
interest and other expenses was primarily due to a combination of higher
interest expense associated with the increase in borrowings to finance the
expansion of the Company's fabrication facilities in Colorado Springs and
Rousset and to finance the acquisition of Temic during the first quarter of
1998, as well as the result of a portion of interest expense being capitalized
in the third quarter of 1997 (in connection with the construction of the
Company's fabrication facility in Rousset). Foreign exchange loss included in
Other Expenses, Net for the nine months ended September 30, 1998 and 1997 was
$0.4 million and $3.0 million, respectively.
INCOME TAX PROVISION (BENEFIT)
The Company's effective tax rate was 35.0 percent for the nine months ended
September 30, 1997 and 1.8 percent for the nine months ended September 30, 1998.
The reduction in tax rate was due to the tax effect of the Temic acquisition.
NET INCOME (LOSS)
The Company reported a net income of $4.7 million for the three months ended
September 30, 1998, compared to net income of $30.3 million in the corresponding
period of 1997. Net loss for the nine months ended September 30, 1998 was $60.0
million, compared to net income of $96.5 million in the corresponding period of
1997. The substantial decrease in net income was primarily due to the in process
research and development and restructuring charges incurred during the nine
months ended September 30, 1998. See In Process Research and Development and
Restructuring Charges above for detail.
RISKS ASSOCIATED WITH TEMIC ACQUISITION
The Company acquired Temic on March 1, 1998. While the Company believes the
Temic acquisition is in the best interest of the Company and its shareholders,
there can be no assurance that management of the Company will be successful in
its efforts to integrate the operations of Temic. There are significant risks
associated with the Temic acquisition, including but not limited to difficulties
in integration of product offerings, manufacturing operations and coordination
of sales and marketing and research and development efforts. The difficulties of
Temic integration may be increased by the necessity of coordinating
geographically separated organizations, the complexity of the technologies being
integrated and the necessity of integrating personnel with disparate business
backgrounds and combining two corporate cultures. The integration of operations
following the acquisition of Temic requires the dedication of management
resources that may distract 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.
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<PAGE> 22
YEAR 2000 RISKS
The Company initiated a program during 1997 to review its computer hardware and
software systems to determine the impact of and to provide solutions for Year
2000 requirements. The Year 2000 program is being conducted in five phases - (i)
planning, (ii) inventory/impact, (iii) remediation, (iv) testing and (v)
monitoring. The Company has completed the planning phase of the Year 2000
program for both information technology (IT) and non-information technology
(Non-IT) systems. The inventory/impact phase has been completed for IT systems
and is substantially completed for Non-IT systems. The Company has completed the
remediation phase for most of its IT systems (i.e., factory management system,
order entry and tracking system, electronic data interchange (EDI) and financial
information systems). The remediation phase for the remaining IT systems is
approximately 35 percent completed and is expected to be fully completed by
mid-1999. The Company has begun the remediation process for Non-IT systems and
expects this remediation process to be completed in mid-1999. The testing phase
had been completed for the EDI system and is approximately 80 percent completed
for the order entry and tracking system and the financial information system.
Depending upon the timing of the remediation phase, the testing phase for the
remaining IT systems and Non-IT systems will begin immediately following the
completion of the remediation process. The Company expects phases (i) through
(iv) of the Year 2000 program to be completed during the third quarter of 1999.
The Company has also begun the process of identifying its top 100 suppliers and
sending these suppliers a Year 2000 compliance survey. The Company expects this
process to be completed by mid-1999. The Company has not yet established a
contingency plan for any Year 2000 issues that may arise, but expects to
establish such a plan during its completion of phases (i) through (v) of the
Year 2000 program.
The Company's cost related to identifying and addressing Year 2000 issues are
not expected to be material. Thus far, the major cost associated with
identifying and addressing Year 2000 issues has been in-house labor costs. The
Company does not anticipate costly replacements for Non-IT equipment, since the
Company expects that substantially all of this equipment can be upgraded to be
Year 2000 compliant. If the Company were unable to successfully upgrade its IT
and Non-IT systems to be Year 2000 compliant, its wafer productions system and
business and financial information systems could be materially and adversely
affected, which in turn could result in a material adverse effect on the
Company's business, operating results and financial conditions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $188.9 million in cash and short-term
investments, a decrease of $48.7 million from December 31, 1997, and $352.6
million in net working capital, an increase of $38.0 million from December 31,
1997. Accounts receivable increased 16.6 percent to $253.0 million at September
30, 1998 from $217.0 million at December 31, 1997. The increase was primarily
due to the inclusion of Temic's accounts receivable of $47.9 million. The
average days of accounts receivable outstanding were 78.2 and 83.0 days for the
nine month periods ended September 30, 1998 and 1997, respectively. The
improvement in average days outstanding was due primarily to the write-off of
accounts receivable at the end of 1997, the collection efforts made by the
Company during the third quarter of 1998 and price adjustments given to the
Company's distributors and charged against the distributors reserve during the
third quarter of 1998 which resulted in a reduction of its accounts receivable
balance at September 30, 1998.
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<PAGE> 23
Inventories increased 90.2 percent to $236.5 million at September 30, 1998 from
$124.3 million at December 31, 1997. The increase in inventory was primarily due
to the combination of decline in sales, the continuation of production and the
inclusion of Temic's inventory of $40.4 million. Of the increase in inventories,
$26.7 million was in ASIC products, $39.7 million was attributable to memory
products, $5.4 million was attributable to Atmel ES2 products and $40.4 million
was attributable to Temic products. The increase in ASIC products was due to an
increase in customer demand for the Company's ASIC products and because the
Company is positioning itself to participate in system level integrated
products. The increase in memory products was due to a combination of declining
sales and continued production. The Company has continued production in the
belief that demand will increase and wants to be positioned to respond quickly
when the opportunity arises. The increase in inventory from Atmel ES2, Inc., a
wholly-owned subsidiary of the Company, was due to its final obligations to
fulfill "end of life purchases" for its customers before its manufacturing
facility is closed. The increase in inventory from Temic was a result of the
acquisition of Temic in March 1998. The inventory turnover for the nine months
ended September 30, 1998 was 3.0 times compared to 4.1 times of the
corresponding period of 1997.
At September 30, 1998, the Company had long-term investments of $122.4 million,
an increase of $26.9 million from December 31, 1997. These investments consisted
of United States government obligations and state and municipal securities. In
April 1998, the Company completed a zero coupon convertible debt financing,
which raised approximately $115.0 million. See Note 9 (Zero Coupon Convertible
Debt) in Notes to Condensed Consolidated Financial Statements.
During the nine months ended September 30, 1998, the Company generated net cash
flows from operations of $121.1 million. Net cash used in investing activities
was $334.1 million, due to acquisitions of fixed and other assets of $217.3
million, investment in Temic of $99.3 million, purchases of marketable
securities of $211.4 million, offset by sale of marketable securities of $193.9
million. Net cash provided from financing activities was $170.6 million, due to
funding from capital leases and bank borrowings of $253.0 million, issuance of
zero coupon convertible notes of $115.0 million and proceeds from stock issuance
of $8.4 million, offset by payments of capital leases and notes payable of $75.7
million, payment of $110.0 million loan with Nationsbank and payments of $20.0
million for the repurchase of the Company's common stock. The $253.0 million of
capital lease and bank borrowings included a $110.0 million of short-term loan
from Nationsbank which was used to finance the acquisition of Temic. This
short-term loan with Nationsbank was subsequently repaid from the net proceeds
received in connection with the zero coupon convertible debt financing completed
in April 1998. See Note 9 (Zero Coupon Convertible Debt) in the Notes to
Condensed Consolidated Financial Statements.
The Company believes that its existing sources of liquidity, together with cash
flows from operations, leasing financing on equipment and other short- and
medium-term bank borrowing, will be sufficient to meet the Company's liquidity
and capital requirements through the first half of 1999. The Company may,
however, seek additional equity or debt financing to fund the expansion of its
wafer fabrication capacity or other projects; the timing and amount of such
capital requirements cannot be precisely determined at this time. There can be
no assurance that such financing would be available in amounts or terms
acceptable to the Company.
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<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as a defendant in a patent infringement lawsuit that was
filed on January 21, 1998. The plaintiff contended that certain of the Company's
devices infringe seven patents it allegedly owns and was seeking a judgment of
infringement for each of these asserted patents and other costs. The amount of
judgment sought by the plaintiff was not specified in the lawsuit. The Company
settled the patent disputes and entered into a cross-license agreement with the
plaintiff in August 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For the nine months ended September 30, 1998, the Company sold 2,500 put
warrants. The entire proceeds from the sale of the put warrants were used by the
Company to purchase call warrants in a cash-less transaction. Put warrants
entitle the holder of each warrant to sell to the Company, by physical delivery,
one share of Common Stock at a specified strike price. The Company's outstanding
put warrants expire on October 26, 1998, March 5, 1999 and May 4, 1999, are
exercisable only on the maturity date, and may be settled in cash at the
Company's option.
The maximum potential repurchase obligations of the Company are as follows:
1,200 shares with a strike price of 24.88 per share or $29,850, 1,000 shares
with a strike price of $12.88 per share or $12,880 and 1,500 shares with a
strike price of $18.00 or $27,000. 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 or diluted net income (loss) per share
in the nine months ended September 30, 1998 and 1997, resulting from these
transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit:
27.1 Financial Data Schedule
(B) Reports on Form 8-K:
A Form 8-K was filed on September 15, 1998 (reporting the declaration of a
dividend under the Registrant's Preferred Shares Rights Agreement).
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<PAGE> 25
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)
APRIL 27, 1999 /S/ GEORGE PERLEGOS
---------------------------------------------------
GEORGE PERLEGOS
President, Chief Executive Officer
(Principal Executive Officer)
APRIL 27, 1999 /S/ DONALD COLVIN
---------------------------------------------------
DONALD COLVIN
Chief Financial Officer and Vice President, Finance
(Principal Financial and Accounting Officer)
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<PAGE> 26
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 134,970
<SECURITIES> 53,912
<RECEIVABLES> 286,141
<ALLOWANCES> 33,187
<INVENTORY> 236,474
<CURRENT-ASSETS> 786,600
<PP&E> 1,563,644
<DEPRECIATION> 581,143
<TOTAL-ASSETS> 2,001,616
<CURRENT-LIABILITIES> 434,043
<BONDS> 267,640
0
0
<COMMON> 315,359
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,001,616
<SALES> 822,411
<TOTAL-REVENUES> 822,411
<CGS> 536,566
<TOTAL-COSTS> 860,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,966
<INTEREST-EXPENSE> 34,027
<INCOME-PRETAX> (61,069)
<INCOME-TAX> (1,071)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,998)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
