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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-19032
ATMEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 77-0051991
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2325 ORCHARD PARKWAY, SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 441-0311
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
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Indicate by 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
5, 1999 as reported on the Nasdaq National Market, was approximately
$1,556,300,000. Shares of Common Stock held by each officer and director have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 5, 1999 Registrant had outstanding 100,119,747 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1999 is incorporated by reference in Part
III of this Report on Form 10-K to the extent stated herein.
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ITEM 1. BUSINESS
GENERAL
Atmel Corporation (Atmel or the Company) designs, manufactures and markets
a broad range of high performance nonvolatile memory and logic integrated
circuits using its proprietary complementary metal-oxide semiconductor (CMOS)
technologies. AMOS (metal-oxide silicon) structure is created by superimposing
several layers of conducting, insulating and transistor forming materials. After
a series of processing steps, a typical structure might consist of levels called
diffusion, polysilicon and metal that are separated by insulating layers. CMOS
technology provides two types of transistors, an "n-type" transistor (nMOS) and
a "p-type" transistor (pMOS). These transistors serve as the fundamental
building blocks of digital electronics. By connecting them in various ways,
integrated circuit designers can construct devices that detect and amplify
analog signals, perform logic operations or act as storage media (memory). CMOS
offers higher performance at a lower power and scales extremely well to small
feature size. Atmel's strategy is to offer products that provide the enabling
technology and features that allow the Company's customers to develop and bring
to market new, high value-added systems and products.
Speed, density, power usage and specialty packaging differentiate the
Company's products. These products are used in a range of applications in the
telecommunications, computing, networking, consumer and automotive electronics
and other markets.
RECENT DEVELOPMENTS
On March 1, 1998, the Company acquired the integrated circuit business of
Temic Telefunken Microeletronic (Temic) of Heilbronn, Germany, a wholly owned
subsidiary of Daimler.Benz A.G., from Vishay Intertechnology for $99.3 million
cash. Temic designs, manufactures and sells analog, microcontroller and ASIC
products that service the automotive, telecommunications, consumer and
industrial markets. The Company's operating results for the year ended December
31,1998 included approximately ten months of the results of Temic, which
included $238.4 million of net revenues.
In January 1999, the Company completed the sale of certain items of plant
and equipment in Rousset, France for $17.7 million. The assets sold had been
written down to fair market value as the result of an asset impairment reserve
provided in December 1997. At the time the impairment reserve was provided, the
Company had planned to continue using Fab 6 indefinitely. However, a worldwide
excess of semiconductor manufacturing capacity made this facility uneconomic to
operate and, during the fourth quarter of 1998, the Company agreed to sell the
manufacturing equipment in Fab 6. The Company expects to recognize a gain in the
first quarter of 1999 of $17.3 million in connection with this transaction.
In January 1999, Atmel announced that it signed a non-binding memorandum of
understanding to acquire the Smart Information Transfer (SIT) business of the
Semiconductor Products Sector of Motorola, Inc. Under the terms of the
memorandum of understanding, Atmel intends to purchase substantially all of the
assets of the SIT business and assume certain associated contractual
liabilities. The closing is expected to occur at the end of March 1999 and is
expected to be non-dilutive to Atmel's earnings in 1999.
PRODUCTS
The Company's products consist primarily of advanced logic, mixed-signal,
nonvolatile memory, radio frequency and system-level integration semiconductor
solutions.
The Company has four reportable segments, each of which require different
design, development and marketing resources to produce and sell semiconductor
integrated circuits: Nonvolatile Memories, Temic, ASICs and Logic. The
Nonvolatile Memories segment designs, develops and markets erasable programmable
read-only memories (EPROMs), electrically erasable programmable read-only
memories (EEPROMs), and Flash memories for a marketplace characterized by
standardized products and commodity pricing. The Temic segment is a wholly owned
European subsidiary producing analog, microcontroller and specialty products to
service the automotive, telecommunications, consumer and industrial markets.
Although some of its products overlap with one or more of the other segments,
the Temic segment is managed as a discrete business with its
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own design, development, manufacturing and marketing resources. The ASIC segment
designs, develops and markets semicustom gate arrays and cell-based integrated
circuits as well as full custom application-specific integrated circuits to meet
specialized customer requirements for high performance devices in a broad
variety of customer-specific applications. The Logic segment designs, develops
and markets microcontrollers, erasable programmable logic devices (EPLDs), and
field programmable gate arrays (FPGAs) for sale to customers who use them in
products for telecommunications, computers, networking, image processing,
industrial and military applications, and avionics.
The Company's products are based on its proprietary CMOS, bipolar, BiCMOS
and silicon germanium (SiGe) process technologies. Within each product family,
the Company offers its customers products with a range of speed, density, power
usage, specialty packaging and other features.
NONVOLATILE MEMORIES
EPROMs. The Company shipped its first EPROM in early 1986. The worldwide
EPROM market is intensely competitive and characterized by commodity pricing.
The Company's strategy is to target the high-performance end of this market by
offering faster speed, higher density and lower power usage devices. The Company
currently offers EPROMs with access speeds of 150 nanoseconds to 45 nanoseconds
and densities of 256 kilobits to 8 megabits. These products are generally used
to contain the operating programs of embedded microcontroller or Digital Signal
Processing-based systems (DSP), such as hard disk drives, CD-ROM drives and
modems.
Parallel-Interface EEPROMs. The Company is the leading supplier of high
performance parallel-interface EEPROMs. The Company introduced its first
parallel-interface EEPROM product, a 64K-bit EEPROM, in February 1986. The
Company believes that its parallel-interface EEPROM products, all of which are
full featured, represent the most complete parallel-interface EEPROM product
family in the industry. The Company has maintained this leadership role through
early introduction of high speed and low power consumption CMOS devices. The
Company was the industry's first supplier of a sub-100 nanoseconds 256K
parallel-interface EEPROM and the first volume producer of 1-megabit and
4-megabit devices. The Company is the sole-source supplier for several customers
for certain parallel-interface EEPROM devices. In the design of its product
family, the Company has emphasized device reliability, achieved partly through
the incorporation of on-chip error detection and correction features. The
Company currently offers parallel-interface EEPROMs with access speeds of 250
nanoseconds to 55 nanoseconds and densities of 16 kilobits to 4 megabits. These
products are generally used to contain frequently updated data in cellular
telephones, communications infrastructure equipment and avionics navigation
systems.
Serial-Interface EEPROMs. Atmel used its parallel-interface EEPROM
technology leadership and 6-inch sub-micron fabrication capability to enter the
serial-interface EEPROM market in 1991. This move allowed the Company to
substantially broaden its EEPROM product offerings to include most package and
temperature configurations required by customers in certain segments of the
serial-interface EEPROM market (i.e., the 2-wire, 3-wire, 4-wire and SPI market
segments). The serial-interface EEPROM product line incorporates many of the
reliability, speed and other features of the Company's parallel-interface EEPROM
products. The Company currently offers serial-interface EEPROMs with access
speeds of 20 milliseconds to 10 microseconds and densities of 1 kilobit to 1
megabit. These products are generally used to contain user-preference data in
cellular and cordless telephones, home appliances, automotive applications and
computer peripherals.
Flash Memories. Flash memories represent the latest technology in
nonvolatile devices that can be reprogrammed in-system. Flash memories offer a
middle ground in price and features between EPROMs, which can be reprogrammed
only a few times and only if removed from a system, and relatively more
expensive parallel-interface EEPROMs, in which any individual byte of data can
be reprogrammed on the device in-system tens to hundreds of thousands of times.
Introduced in late 1989, Atmel's Flash memories, based on its EEPROM technology,
were the industry's first Flash memories that could be reprogrammed using only a
single 5-volt power source, a single 3-volt power source or a single 2.7-volt
power source as opposed to the heavier, larger and more expensive 12-volt power
source typically utilized by many EPROM-
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based Flash memories. These lower power requirements are particularly important
in portable telecommunications and consumer electronic products and other
systems where small size and weight and longer battery life are critical
customer requirements. In early 1997, the Company expanded its Flash product
offerings by introducing a range of products based on its more cost-effective
Flash technology. The Company currently offers Flash memories with densities of
256 kilobits to 16 megabits.
The flexibility and ease of use of the Company's Flash memories make them
an attractive alternative to EPROMs in systems where program information stored
in memory must be rewritten after the system leaves its manufacturing
environment. In addition, many customers use Flash memories within the system
manufacturing cycle, affording the customer in-system diagnostic and test
programming prior to reprogramming for final shipment configuration. The
reprogrammability of Flash memories also serves to support later system
upgrades, field diagnostic routines and in-system reconfiguration, as well as
capturing voice and data messages for later review.
DataFlash(R). The DataFlash product line represents one of the newest
innovations in nonvolatile memory from the Company. Arising out of a need for
memory devices that fit between the requirements of serial-interface EEPROMs and
standard Flash memories, the Company began shipping DataFlash products in April
1997 and has already established market leadership. DataFlash products were
designed to easily and efficiently handle large amounts of frequently changing
data, ideally addressing the needs of digital voice storage, digital image
storage, and text/data storage applications such as digital answering machines,
cellular phones, fax machines, digital cameras and computer peripherals.
To minimize cost, DataFlash products utilize the Company's latest Flash
technology for the core memory array combined with the simple SPI interface from
the serial-interface EEPROMs. Other architectural features include dual on-chip
SRAM buffers and error detection logic, as well as additional command and device
status logic. Available in both 5.0-volt only and 2.7-volt only versions, the
Company offers densities from 1 megabit to 8 megabits.
The Company's memory products are used to provide nonvolatile program and
data storage in digital systems for a variety of applications and markets,
including computing, telecommunications, data communications, consumer
electronics, automotive, industrial/instrumentation and military/avionics.
TEMIC
Temic is a wholly owned European subsidiary producing analog,
microcontroller and specialty products to service the automotive,
telecommunications, consumer and industrial markets. Although some of its
products overlap with one or more of the other segments, the Temic segment is
managed as a discrete business with its own design, development, manufacturing
and marketing resources.
Temic is focused on developing and marketing high-frequency products for
cordless and cellular phones in the frequency range of 0.9 to 2.4 GHz. Those
products, which are using silicon-germanium and a process called UHF5, are
primarily used in GSM, DCS cellular systems and DECT, ISM, CT0, CT1+ and CT2
corded phones.
For automotive applications, Temic offers a family of read, read/write and
encryption identification ICs, which are used for access control and operated at
a frequency in the range of 100kHz. These ICs are used in combination with a
reader IC offering contactless identification for a wide variety of
applications.
Another product family is based on RF-Link technology, which is used for
remote keyless entry for automobiles, as well as for all other RF Remote Control
applications, such as air conditioning control, garage openers, outside wireless
temperature monitoring and security home alarm systems.
Temic also specializes in providing intelligent load driver ICs suited for
the rugged automotive environment. These ICs are manufactured in BCDMOS
technology, a 0.8-micron mixed signal technology providing analog-bipolar, DMOS
power and CMOS logic function on a single chip. The applications for these
automotive products are primarily motor drivers and smart valve controls.
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Temic's microcontroller product solutions utilize the C51 and the C251
architectures, and typically involve A/D converters, timers, LCD drivers, ROM,
RAM and analog functions. These products are manufactured on a 0.5-micron
CMOS/analog CMOS process. Temic also offers a radiation hardened process which
enables its customers to use the products in space. The major applications today
are ASICs and microcontrollers for satellite communication.
ASICS
The Company manufactures and markets semi-custom gate arrays and cell-based
integrated circuits (CBICs), as well as full custom application-specific
integrated circuits (ASICs), to meet customer requirements for high-performance
logic devices in a broad variety of customer-specific applications. These logic
devices are designed to achieve highly-integrated solutions for particular
applications by combining a variety of logic functions on a single chip rather
than using a multi-chip solution. In mid-1990, the Company introduced its CMOS
gate array product family to satisfy high gate count and high-performance
requirements, primarily in computer, avionics and military applications. The
Company's gate array family consists of devices ranging from 35,000 gates to
more than 3,000,000 gates. Each of these gate arrays utilizes logic elements
from the Company's 0.6, 0.5, 0.35 and 0.25-micron cell libraries and minimizes
gate delays to as little as 256 picoseconds. In 1995, through the acquisition of
European Silicon Structures (now Atmel ES2), the Company entered the cell-based
integrated circuit (CBIC) business, with a range of products that can include
standard digital and analog functions, as well as nonvolatile memory elements
and large pre-designed macro functions all mixed on a single chip. The Company's
ASIC products are targeted primarily at customers whose high-end applications
require high-speed, high-density or low or mixed-voltage devices. However, Atmel
offers special versions of its devices to serve as upgrade and consolidation
paths for users of one or more of the Company's PLDs or competing vendors'
complex PLDs or FPGAs.
To develop gate arrays and CBICs, system designers require sophisticated
development aids. These CAE tools include logic synthesizers, logic circuit
simulators, timing analysis and verification tools, test pattern generators and
testability graders, automated circuit placement and interconnection programs
and mask tooling generators. As with its PLDs and FPGAs, the Company has chosen
to rely on industry-standard CAE design tools to provide its customers access to
reliable, state-of-the-art development tools. Currently, the Company's ASICs are
supported with software tools from vendors, including Cadence Design Systems,
Cadence Design Automation, Design Technologies, Exemplar Logis, Inc., K2
Technologies, Mentor Graphics, Model Technology, Inc., Simutest, Inc., Summit
Design, Inc., Synopsys, Inc., and Viewlogic.
The Company is working closely with certain customers to develop and
manufacture custom ASIC products for the Company to sell on a sole-source basis.
The Company also has agreements to produce custom products including
radio-frequency powered identification chips targeted at smart card devices.
LOGIC
Microcontrollers. Atmel offers three embedded microcontroller architectures
targeted at the high-volume embedded controller market. The portfolio includes
the industry standard 8-bit 80C31 licensed from Intel. The 80C31 family is the
highest volume 8-bit microcontroller in the marketplace. The Company also offers
microcontrollers based on the Intel license through its wholly-owned subsidiary,
Temic. The second architecture is the ARM Thumb(R) 16/32-bit RISC architecture
licensed from Advanced Risc Machines Ltd. The ARM Thumb is the defacto standard
16/32-bit embedded microcontroller with over 22 licensees supporting the
architecture. The third is the AVR 8-bit RISC microcontroller that is the
highest-performance machine in its class. The AVR offers 16-bit performance at
8-bit price enabling an entirely new class of consumer devices.
Atmel makes these microcontroller architectures available to customers in
any of three ways. They can be purchased as standard products, as application
specific products or as a core in the ASIC library. The Company's key
differentiator is to make standard product devices available with in-system
programmable Flash program and EEPROM data memory and with a variety of
peripheral functions, such as analog to
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digital converters. The Company targets these devices for use in high-volume
consumer electronics, computer peripheral, telecommunications and industrial
markets.
These microcontroller products are developed using the Company's cell-based
design methodology. This provides the ability to quickly modify existing devices
and create application specific derivatives. For example, the AVR product family
was announced in June 1997 and today there are 12 standard parts shipping in
volume production. These devices are fully supported with evaluation and
development tools, in-circuit emulators and third party high-level language
compilers. The AVR has excellent market acceptance. There are over 12,000
designers who are using the Flash Microcontroller Starter Kit and are evaluating
the AVR architecture.
PLDs. Atmel shipped its first programmable logic device (PLD) product in
November 1987. Atmel has developed a line of PLDs, ranging from 500 to 5,000
gates, that are reprogrammable and that incorporate nonvolatile elements from
its CMOS EEPROM technology. These devices are often used as prototyping and
pre-production devices, and allow for later conversion to gate array products
for volume production. Atmel offers customers the ability to migrate from PLDs
(either its own or competitors') to Atmel gate arrays with minimal conversion
effort. The Company offers CMOS PLDs with high performance and low power
consumption. Atmel's PLDs have device speeds as fast as 5 nanoseconds and can
support high-speed microprocessor-based applications.
Atmel has adopted the use of industry standard computer-aided engineering
(CAE) design tools for customer programming of its PLDs. The Company's PLD
product architecture facilitates support from a variety of design tool vendors,
affording the customer greater flexibility and lower cost than competing
architectures, which typically incorporate proprietary programming requirements.
The Company has cultivated close working relationships with leading independent
CAE tool vendors to supply low-cost, industry-standard design and programming
equipment for the Company's customers. Currently, the Company's PLDs are
supported with software tools from vendors, including Viewlogic, Data I/O
Corporation, IS Data and Logical Devices. Atmel's PLD products are used in a
broad range of markets and applications, including telecommunications,
computers, industrial and military/avionics.
FPGAs. In March 1993, Atmel acquired the technology and certain technical
personnel for field programmable gate arrays (FPGAs) to expand the breadth of
the Company's user-configurable logic device product offerings. The Company
believes that its FPGA designs are well suited for data and computation
intensive applications and also affords its customers a migration path among
logic solutions as their volume and cost requirements change. Atmel's AT6000
FPGAs were first shipped by the Company in the first quarter of 1994 and are
being used in graphics, image processing, networking and telecommunications
applications, often as a co-processor to a digital signal processor (DSP) to
speed-up certain software routines by implementing them in hardware. In October
1997, the Company introduced the new AT40K family of FPGAs with FreeRAM and
Cache Logic. These FPGAs are the first to offer distributed RAM without loss of
logic resources as well as a reconfigurable solution for adaptive DSP and other
compute intensive applications. The devices range in density from 2,000 to
50,000 usable gates. Both the AT6000 and AT40K FPGA families can be designed
using industry standard CAD/CAE tools. In addition to the FPGAs, Atmel has also
introduced a family of reconfigurable FPGA Configuration EEPROMs that can
replace one-time-programmable devices from other FPGA vendors.
TECHNOLOGY
From its inception, Atmel has focused its efforts on developing advanced
CMOS processes that can be used to manufacture reliable nonvolatile elements for
memory and logic integrated circuits. The Company believes that it is a leader
in single and multiple-layer metal, nonvolatile CMOS processing, which enables
it to produce its high-density, high-speed and low-power memory and logic
products.
Increasing the number of layers of a CMOS device raises a number of
technological issues. First, each additional layer requires an additional
photomask, adding complexity to the manufacturing process. Also, because
nonvolatile circuit elements typically generate higher internal voltages, the
layers of isolation material are required to be thicker and more effective than
with other devices. Adding more and thicker layers
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increases surface irregularities in the device, further complicating the
manufacturing process. These surface irregularities can cause brittle metal
layers to break, which result in device failure. The Company believes that by
virtue of its expertise in manufacturing CMOS and nonvolatile integrated
circuits, it is able to produce multiple-layer metal devices that are as fast as
or faster than comparable single-layer devices manufactured by its competitors.
The Company's current integrated circuits incorporate effective feature
sizes as small as 0.35-microns and, on its memory products, oxide tunnels within
the silicon semiconductor layers of less than 80 angstroms. To enable it to
continue to serve the high-performance requirements of its customers, the
Company is developing CMOS processes which support effective feature sizes as
small as 0.25-microns.
Through its acquisition of Temic, Atmel has broadened its technology
expertise. Temic's technology focus has been on developing technology for high
frequency products, which are used primarily in cellular telephones and
networking applications. A second major technology focus is on mixed signal
technologies for automotive applications.
In order to achieve high-frequency with high efficiency and very low noise,
Temic has developed a silicon germanium (SiGe) technology. This technology is
based on the well-established bipolar silicon process technology, but one of the
key process steps -- the epitaxial layer -- is modified by adding germanium to
the silicon. The minimum feature size of 0.8-microns supports design of very
small radio frequency (RF) receivers and transceivers as well as power
amplifiers. This technology is designed to replace gallium arsenide (GaAs)
technology, which is commonly used for power amplifiers in cellular telephones.
In order to extend the capabilities of SiGe, Temic has begun to combine the
high-frequency features of SiGe with CMOS in order to integrate high-density
logic parts and RF analog functions on a single integrated circuit. This
SiGe/CMOS technology will enable Atmel to provide single-chip system solutions
to the marketplace.
In order to strengthen Temic's position in the automotive end market, the
Company has begun the development of a high-voltage bipolar/DMOS/CMOS mixed
technology called BCDMOS. This complex process has a minimum feature size of
0.8-microns and will be used primarily for automotive applications.
MANUFACTURING
The Company processes wafers for its integrated circuits primarily at its
manufacturing facility located in Colorado Springs, Colorado. This facility,
which consists of a Class 10 wafer fabrication line, a Class 1 wafer fabrication
line and additional buildings for engineering and test operations, enables the
Company to process in volume 6-inch wafers with effective feature sizes as small
as 0.35-microns. A wafer fabrication line is considered a Class 10 line if the
air contains no more than 10 particles of a 0.5-micron width per cubic meter.
Similarly, a wafer fabrication line is considered a Class 1 line if the air
contains no more than 1 particle of a 0.35-micron width per cubic meter. The
Company also has a newly constructed 8-inch semiconductor fabrication facility
located in Rousset, France. A lower volume 6-inch plant, also in Rousset, was
closed during the fourth quarter of 1998 in an effort to improve the
productivity and efficiency of the Company's French manufacturing operations.
The newly constructed 8-inch factory is a 388,000-square-foot facility which
will produce 8-inch silicon wafers using a new 0.35-micron process.
Temic's manufacturing facilities are located in Nantes, France and
Heilbronn, Germany. The French facility consists of a 6-inch Class 10 wafer
fabrication line with a capability of manufacturing wafers at a minimum
geometrical feature size of 0.5-microns, as well as an assembly line for
military and space products, and additional buildings for engineering and
design. The German site consists of a 6-inch, mini environment, a wafer
fabrication line for 0.5-micron geometries, a test area for RF and automotive
products, and several buildings for design and engineering. The majority of the
products manufactured in Nantes and Heilbronn are assembled in the Philippines
in Temic's own assembly line in combination with a test operation for the
finished goods.
Because the Company relies on its facilities in Colorado Springs, Colorado;
Rousset and Nantes, France; and Heilbronn, Germany for wafer fabrication, its
business and operating results would be adversely affected if
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wafer fabrication at these facilities were interrupted for any reason, including
factors beyond the Company's control. The Company plans to increase its wafer
fabrication capacity at its existing facilities during 1999 and to install
additional equipment at its 8-inch facility in Rousset.
The fabrication of semiconductor products, such as those sold by the
Company is highly complex and sensitive to dust and other contaminants, thus
requiring production in a highly controlled and clean environment. Minute
impurities, difficulties in the fabrication process or defects in the masks used
to print circuits on the wafers or other factors can cause a substantial
percentage of the wafers to be rejected or numerous die on each wafer to be
nonfunctional. The Company has, from time to time, experienced delays in product
shipments due to yield problems and may experience problems in achieving
acceptable yields in the manufacture of wafers, particularly in connection with
the planned expansion of its capacity. To optimize wafer yield and minimize
quality problems, the Company tests its products at various stages in the
fabrication process, performs high-temperature burn-in qualification and
continuous reliability monitoring on all products, and conducts numerous quality
control inspections throughout the entire production flow using analytical
manufacturing controls. While the Company's personnel have substantial
experience in the fabrication process, the Company may experience production
delays or difficulties in achieving or maintaining acceptable yields of
functional devices. Any such prolonged delays or difficulties would adversely
affect the Company's operating results.
Average selling prices typically decrease over the life of a product as
volumes increase and competitors enter the market. The Company relies primarily
on obtaining cost reductions in the manufacture of products by increased unit
demand to absorb fixed costs and introducing new, higher-priced products which
incorporate advanced features in order to offset such selling price declines.
However, due in part to overcapacity in the semiconductor industry in 1997 and
1998, average selling prices of commodity memory products, such as EPROM and
Flash, declined at an accelerated pace. The Company was unable to match this
rapid erosion of average selling prices with a corresponding reduction in
manufacturing cost. Manufacturing cost reductions may be achieved through using
advanced process technologies to reduce the line-widths in circuit designs which
would enable more die to be etched onto a silicon wafer, increasing unit
production volume to lower the fixed costs allocated to each die and negotiating
volume discounts on assembly and packaging costs. To the extent that such cost
reductions, increased unit demand, and new product introductions do not occur in
a timely manner or prices decline more rapidly than costs, operating results
will be adversely affected. In addition, due in part to overcapacity in the
semiconductor industry, 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.
The Company offers its customers numerous packaging options for its
standard products. The Company believes that by providing multiple packaging
options it can target its products to niche markets, which are less susceptible
to competitive pressures than commodity markets.
In general, the raw materials and equipment used in the production of the
Company's integrated circuits are available from several suppliers and the
Company is not dependent upon any single source of supply. Although shortages
have occurred and lead times have been extended in the industry on occasion, the
Company has not experienced any material difficulties in obtaining raw materials
or equipment to date.
Federal, state and local regulations impose various environmental controls
on the discharge or disposal of toxic, volatile or otherwise hazardous chemicals
and gases used in the manufacturing process. While the Company believes it has
all environmental permits necessary to conduct its business and that its
activities conform to present environmental regulations, increasing public
attention has been focused on the environmental impact of semiconductor
operations. While the Company has not experienced any material adverse effect on
its operations from governmental regulations, there can be no assurance that
changes in such regulations will not impose the need for additional capital
equipment or other requirements. Any failure by the Company to control the use
of, or to restrict adequately the discharge of, hazardous substances under
present or future regulations, could subject the Company to substantial
liability or could cause its manufacturing operations to be suspended.
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The Company manufactures wafers for its products in its facilities located
in Colorado Springs, Colorado; Rousset and Nantes, France; and Heilbronn,
Germany. The wafers are then sorted and probed at the Company's facilities.
After wafer probing, the wafers are shipped to one or more of the Company's
independent assembly contractors, located in China, Hong Kong, Malaysia,
Philippines, South Korea, Taiwan and Thailand, where the wafers are separated
into die, packaged and, in some cases, tested. Once packaged, most of the
integrated circuits are shipped back to Atmel's facilities, where the Company
performs final testing before shipment to its customers. The Company's reliance
on independent contractors to assemble and package its products involves
significant risks, including reduced control over quality and delivery
schedules, the potential lack of adequate capacity and discontinuance or
phase-out of such contractors' assembly processes. There can be no assurance
that such contractors will continue to assemble, package and test products for
the Company. In addition, because the Company's assembly contractors are located
in foreign countries, the Company is subject to certain risks generally
associated with contracting with foreign suppliers, including currency exchange
fluctuations, political and economic instability, trade restrictions and changes
in tariff and freight rates.
MARKETING AND SALES
The Company markets its products worldwide to a diverse base of original
equipment manufacturers (OEMs) serving primarily commercial markets. In the
United States and Canada, the Company sells its products to large OEM accounts
primarily through manufacturers' representatives and through national and
regional distributors. The Company supports this sales network from the
Company's headquarters in San Jose, California and through regional offices in
Southern California, Colorado, Illinois, Massachusetts, Minnesota, New Jersey,
North Carolina and Texas. Sales to domestic OEMs and to domestic distributors,
as a percentage of worldwide net revenues, were 25 percent and 9 percent in
1998, 26 percent and 13 percent in 1997, and 25 percent and 11 percent in 1996,
respectively.
The Company recognizes revenues on products shipped to domestic
distributors only after the product has been shipped by the distributor to its
end customer. Consistent with industry practice, the Company provides its
domestic distributors with stock balancing and price protection rights, which
permit distributors to return slow-moving products for credit and allow price
adjustments on product inventories if the Company lowers the price of those
products. Generally, distributors may return products for up to a maximum of 5.0
percent of the net value of all products purchased by distributors during the
immediately preceding period.
Sales to foreign customers are made primarily through international
representatives, who are managed from the Company's headquarters in San Jose and
from its foreign sales offices in Hainfeld, Austria; Kanata, Canada; Beijing and
Shanghai, China; Camberly, England; Glostrup, Denmark; Frankfurt and Raubling,
Germany; Espoo, Finland; Hong Kong; Paris, France; Agrate Brianza, Italy; Tokyo,
Japan; Seoul, Korea; Singapore; Stockholm, Sweden and Taipei, Taiwan. Foreign
product sales were approximately 65 percent, 60 percent and 65 percent of total
revenues in 1998, 1997 and 1996, respectively. Although foreign sales are
subject to certain government export restrictions, to date the Company has not
experienced any material difficulties because of these restrictions. Atmel
expects that revenues derived from international sales will continue to
represent a significant portion of net revenues. International sales are subject
to a variety of risks, including those arising from currency fluctuations,
tariffs, trade barriers, taxes and export license requirements. Because the
majority of the Company's foreign sales are denominated in United States
dollars, the Company's products may become less price competitive in countries
with currencies declining in value against the dollar. In 1998, currency issues
adversely affected the Company's operating results as the dollar strengthened in
relation to the yen. In 1997, the business condition in Asia was severely
affected by the banking and currency issues which adversely affected the
Company's operating results. The continuance or worsening of the business and
financial situations in Asia, where more than 30 percent of the Company's
revenues are generated, would likely have a material adverse effect on the
Company's operating results in the future.
The Company has some transactions denominated in the Euro because some
customers and vendors are insisting on Euro based transactions. These requests
are from European customers and vendors which were formerly transacting in
French franc or German mark. Since the fluctuations of French franc and German
8
<PAGE> 10
mark are tied to the Euro, the Company predicts it will experience no additional
currency exposure from its current situation if such transactions are switched
to Euro based transactions.
A significant portion of the Company's sales is made from inventory on a
current basis. Sales are made primarily pursuant to purchase orders for current
delivery, or agreements covering purchases over a period of time, which are
frequently subject to revision and cancellation without penalty. Generally, in
light of current industry practice and experience, the Company does not believe
that such agreements provide meaningful backlog figures or are necessarily
indicative of actual sales for any succeeding period.
The Company believes that its network of manufacturers' representatives and
distributors provides effective coverage of existing and potential OEM customers
while minimizing the costs associated with a large direct sales force. The
Company's agreements with its manufacturers' representatives and domestic and
international distributors are generally terminable by either party on short
notice, subject to local laws. The Company's marketing, sales and support
organization at December 31, 1998 consisted of 583 persons.
In 1998, 1997 and 1996, Motorola, Inc. accounted for 14.0 percent, 12.6
percent and 12.0 percent of the Company's net revenues, respectively.
The Company typically has agreements with its customers, including
Motorola, Inc., that allow the customers to cancel their orders on short notice
and without penalty, and therefore these agreements may not be a meaningful
indicator of future revenues.
RESEARCH AND DEVELOPMENT
The Company believes that significant investment in research and
development is critical to its continued success, growth and profitability, and
therefore intends to continue to devote substantial resources, including
management time, to achieve its objectives. These objectives include increasing
the performance of its existing product lines, developing new product lines
drawing on its expertise in CMOS nonvolatile process and design technologies,
and developing new process and design technologies. The Company focuses its
efforts on improving the speed, density, power usage and reliability of its
existing product families. The Company continues to develop new products and
revise some of its current products with smaller effective feature sizes, the
fabrication of which will be substantially more complex than fabrication of the
Company's current products. No assurance can be given that the Company's product
and process development efforts will be successful or that its new products will
achieve market acceptance.
At December 31, 1998, approximately 744 employees were engaged in research
and development at the Company. During 1998, 1997 and 1996 the Company spent
$174.8 million, $137.9 million and $110.2 million, respectively, on research and
development. Included in the 1997 research and development expense was $15.0
million of expense related to qualifying the newly completed 8-inch fabrication
facility in France. Research and development expenses are charged to operations
as incurred. The Company expects that these expenditures will continue to
increase in the future.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, rapid product obsolescence and price erosion. The
semiconductor industry has historically been characterized by wide fluctuations
in product supply and demand. From time to time, the industry has also
experienced significant downturns, often in connection with or in anticipation
of maturing product cycles and declines in general economic conditions. These
downturns, which occurred in 1997 and 1998, have been characterized by
diminished product demand, production overcapacity and subsequent accelerated
erosion of average selling prices, and in some cases have lasted for more than a
year. The Company's business could be materially and adversely affected by an
industry-wide downturn.
The Company's competitors include many large domestic and foreign companies
which have substantially greater financial, technical, marketing and management
resources than the Company, as well as emerging companies attempting to sell
products to specialized markets, including those addressed by the
9
<PAGE> 11
Company. The Company believes that no single competitor offers products that
compete across the Company's entire product line.
The Company competes principally on the basis of the technical innovation
and performance of its CMOS products, including their speed, density, power
usage, reliability and specialty packaging alternatives as well as on price and
product availability. The Company believes that it competes favorably with
respect to each of these factors. While the Company's strategy is to target
niche markets, which the Company believes are typically less susceptible to
competitive pricing pressure than commodity markets, the Company experiences
significant price competition, particularly in connection with the sale of
nonvolatile memory products, and may experience increased price competition in
other niche markets in the future, which would adversely affect its operating
margins.
The ability of the Company to compete successfully depends on a number of
factors, including its success in designing and manufacturing new products that
implement new technologies, the rate at which customers incorporate the
Company's products into their systems, product introductions by the Company's
competitors, the number and nature of its competitors in a given market, and
general market and economic conditions. Many of these factors are outside of the
Company's control. The Company is continually in the process of designing and
commercializing new and improved products to maintain its competitive position.
The success of new product introductions depends upon several factors, including
timely completion and introduction of new product designs, achievement of
acceptable fabrication yields and market acceptance. The development of new
products by the Company and their design-in to customers' systems can take as
long as three years, depending upon the complexity of the device and the
application. Accordingly, new product development requires a long-term forecast
of market trends and customer needs, and the successful introduction of the
Company's products may be adversely affected by competing products or
technologies serving markets addressed by the Company's products. There can be
no assurance that the Company will be able to compete successfully in all areas
in the future.
PATENTS AND LICENSES
The Company currently maintains a portfolio of United States patents and
has patent applications on file with the U.S. Patent and Trademark Office. In
addition, the Company has adopted an internal patenting program and expects to
continue to file patent applications where appropriate to protect its
proprietary technologies. However, the Company believes that its continued
success depends primarily on factors such as the technological skills and
innovative abilities of its personnel rather than on its patents. In addition,
no assurance can be given that patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to the Company.
As is typical in the semiconductor industry, 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. In the past, the Company has been involved in such
litigation, which adversely affected its operating results. 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 by third parties or be required to obtain
licenses and make related royalty payments. In addition, the necessary
management attention to and legal costs associated with technology litigation
can have a significant adverse affect on operating results.
EMPLOYEES
At December 31, 1998, the Company had 6,138 full-time equivalent employees,
including 480 in sales, marketing and customer support, 4,811 in manufacturing,
maintenance and support, 744 in research and product development and 103 in
finance and administration.
The Company's future success depends in large part on the continued service
of its key technical and management personnel and on its ability to continue to
attract and retain qualified employees, particularly those highly-skilled
design, process and test engineers involved in the manufacture of existing
products and the development of new products and processes. The competition for
such personnel is intense, and the loss of key
10
<PAGE> 12
employees, none of whom is subject to an employment agreement for a specified
term or post-employment non-competition agreement, could have a material adverse
effect on the Company.
The Company has never had a work stoppage, no employees are represented by
a labor organization in the United States and the Company considers its employee
relations to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George Perlegos... 49 Chairman, President and Chief Executive
Officer
Gust Perlegos..... 51 Executive Vice President, General Manager
Tsung-Ching Wu.... 48 Executive Vice President, Technology
Donald Colvin..... 46 Vice President, Finance and Chief Financial
Officer
B. Jeffrey Katz... 55 Vice President, Marketing
Mikes N. Sisois... 53 Vice President, Planning and Information
Systems
</TABLE>
George Perlegos has served as the Company's President and Chief Executive
Officer and a director from its inception in 1984. George Perlegos holds degrees
in electrical engineering from San Jose State University (B.S.) and Stanford
University (M.S.).
Gust Perlegos has served as Vice President, General Manager and a director
of the Company since January 1985, and as Executive Vice President since January
1996. Gust Perlegos holds degrees in electrical engineering from San Jose State
University (B.S.), Stanford University (M.S.) and the University of Santa Clara
(Ph.D.). Gust Perlegos is a brother of George Perlegos.
Tsung-Ching Wu has served as a director of the Company since January 1985,
and as Vice President, Technology since January 1986, and as Executive Vice
President since January 1996. Mr. Wu holds degrees in electrical engineering
from the National Taiwan University (B.S.), the State University of New York at
Stony Brook (M.S.) and the University of Pennsylvania (Ph.D.).
Donald Colvin joined the Company in 1995 as Chief Financial Officer of the
Atmel-ES2 subsidiary, and was promoted to Vice President Finance and Chief
Financial Officer of the Company in March 1998. Before joining Atmel through the
Company's acquisition of ES2, Mr. Colvin spent nine years with Motorola Inc., in
Europe in various financial positions. He left Motorola in 1985 to join ES2 as
Financial Director for France. He became Vice President and Chief Financial
Officer of ES2 in 1991. Mr. Colvin holds a B.S. in Economics and Masters in
Business from the University of Strathclyde, Scotland.
B. Jeffrey Katz has served the Company as Vice President, Marketing since
November 1988. From 1987 to 1988 Mr. Katz was Vice President of Marketing and
Sales at Mosaic Systems, Inc., a multi-chip module supplier. Mr. Katz was
employed by Intel from 1977 to 1987 where he held various marketing positions,
including Director of Marketing. Mr. Katz holds a B.S. in computer engineering
from Case Western University.
Mikes N. Sisois joined the Company in February 1985 as Director of
Information Systems and has served as Vice President, Planning and Information
Systems since January 1986. Mr. Sisois holds a B.S. in engineering from San Jose
State University, and an M.B.A. and Ph.D. from the University of Santa Clara.
ITEM 2. PROPERTIES
The Company's headquarters are located in San Jose, California. This
291,000 square-foot building is owned by the Company and is occupied by the
product design, engineering, final product testing, research and development,
sales, marketing and administrative personnel. The Company owns semiconductor
wafer fabrication plants and test facilities, occupying 450,000 square-feet,
located in Colorado Springs, Colorado. The Company also has a new 388,000
square-foot facility which produces 8-inch silicon wafers using new 0.35
11
<PAGE> 13
and 0.25-micron processes, located in Rousset, France. With the acquisition of
Temic, the Company acquired two additional wafer fabrication facilities with
test facilities, each of which hosts 6-inch wafer fabrication lines using a
0.5-micron process. These facilities are located in Heilbronn, Germany and
Nantes, France.
Semiconductor manufacturing capacity is affected by a number of factors
including absolute level of utilization, manufacturing yields, product mix, and
manufacturing efficiencies in terms of wafer through-put and productivity. For
example, a high level of utilization for a product experiencing rapid price
erosion results in under-utilization of manufacturing capacity. During 1998,
continued price erosion for the Company's nonvolatile memory products (caused by
continued weakened business conditions and excess manufacturing capacity in the
overall semiconductor industry) resulted in the under-utilization of its
manufacturing capacity and lower gross margin. In 1998, the Company's capital
expenditures were approximately $188 million, and focused primarily on
implementing 0.35-micron technology, chemical mechanical planarization (CMP) and
shallow trench isolation (STI) in Colorado Springs and Rousset. In 1996 and
1997, based upon the Company's rapid growth in sales from 1994-96, as well as
its expectation of continued growth in the semiconductor industry, the Company
invested heavily in new plant and equipment to increase manufacturing capacity.
The Company's capital expenditures in 1998, 1997 and 1996 were $188 million,
$312 million and $511 million, respectively, which resulted in significantly
increased manufacturing capacity by mid-1997. However, the expected growth did
not materialize in the second half of 1997.
The Company also leases research and development facilities in the
following locations: Berkeley, California; Espoo, Finland; Columbia, Maryland;
Bloomington, Minnesota; Trondheim, Norway; Morrisville, North Carolina; Athens,
Greece; and Patras, Greece. The Company's sales offices are located in
Princeton, New Jersey; Braintree, Massachusetts; Kanata, Canada; Golden,
Colorado; Beaverton, Oregon; Hoffman Estates, Illinois; Novi, Michigan;
Burnsville, Minnesota; Dallas, Texas; Raleigh, North Carolina; Anaheim Hills,
California; Jalisco, Mexico; Hainfeld, Austria; Glostrup, Denmark; Espoo,
Finland; Wissous, France; Duisburg, Germany; Raubling, Germany; Wedel, Germany;
Weisbaden-Nordenstadt, Germany; Kowloon, Hong Kong; Agrate Brianza, Italy;
Tokyo, Japan; Seoul, Korea; Singapore; Stockholm, Sweden; Taipei, Taiwan; and
Camberley, United Kingdom. The Company's 1998 aggregate average monthly rental
payments for its facilities were approximately $0.2 million. The Company
believes that suitable additional or alternative space will be available as
needed on commercially reasonable terms to meet its current and foreseeable
requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that management
believes could have a material adverse effect on the Company's operating
results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net revenues................................ $260,392 $288,205 $273,814 $288,681
Gross margin................................ 96,200 88,530 101,115 108,100
Net income (loss)........................... 26,793 (91,409) 4,618 9,960
Basic net income (loss) per share........... 0.27 (0.92) 0.05 0.10
Diluted net income (loss) per share......... 0.27 (0.92) 0.05 0.10
Price range of common stock per share
High...................................... 20.50 20.25 14.63 16.38
Low....................................... 14.00 12.75 6.03 7.19
YEAR ENDED DECEMBER 31, 1997
Net revenues................................ $252,946 $224,936 $240,050 $240,350
Gross margin................................ 116,569 99,036 104,478 35,960
Net income.................................. 38,738 27,408 30,349 (94,694)
Basic net income per share.................. 0.39 0.28 0.30 (0.95)
Diluted net income per share................ 0.38 0.27 0.29 (0.95)
Price range of common stock per share
High...................................... 46.88 29.63 39.06 37.50
Low....................................... 23.75 22.50 26.50 18.06
</TABLE>
The Company has been in correspondence with the staff of the Securities and
Exchange Commission regarding the timing of certain accounting charges
recognized by the Company during the fourth quarter of 1997. The Company is
actively working with the SEC to resolve these questions to the mutual
satisfaction of both parties. However, it is possible the Company may be
required to amend its quarterly financial information in 1997 to reflect these
timing items.
COMMON STOCK DATA
(IN THOUSANDS, EXCEPT RECORD HOLDER DATA)
As of December 31, 1998, there were approximately 1,861 record holders of
the Company's common stock. The last reported sales price on that date was
$15.3125.
The Company's common stock is traded on the Nasdaq National Market under
the symbol "ATML". No cash dividends have been paid on the common stock, and the
Company currently has no plans to pay cash dividends in the future.
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 could repurchase its stock when favorable market
conditions existed and without immediately impacting the Company's cash
resources.
13
<PAGE> 15
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.
<TABLE>
<CAPTION>
CUMULATIVE NET
PREMIUM NUMBER OF POTENTIAL
RECEIVED WARRANTS OBLIGATION
-------------- --------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1995............................... $ 0 0 $ 0
Sales of put warrants........................... 9,223 3,275 73,099
Purchases of call warrants...................... (9,223) 0 0
Expiration of warrants.......................... 8,133 (2,275) (44,849)
-------- ------ --------
DECEMBER 31, 1996............................... 8,133 1,000 28,250
Sales of put warrants........................... 5,238 2,000 46,050
Purchases of call warrants...................... (5,238) 0 0
Expiration of warrants.......................... 4,425 (1,000) (28,250)
-------- ------ --------
DECEMBER 31, 1997............................... 12,558 2,000 46,050
Sales of put warrants........................... 20,250 3,700 69,730
Purchases of call warrants...................... (4,600) 0 0
Expirations..................................... 0 (800) (16,200)
Expiration of warrants.......................... (18,200) (2,200) (42,730)
-------- ------ --------
DECEMBER 31, 1998............................... $ 10,008 2,700 $ 56,850
======== ====== ========
</TABLE>
The put warrants entitle the aforementioned independent third party to sell
shares of the Company's common stock to the Company at specified strike prices
and exercise dates, while the call warrants entitle the Company to buy from the
same third party shares of the Company's common stock at specified strike prices
and exercise dates.
The outstanding put warrants and corresponding call warrants expire on May
4, 1999 and May 14, 1999, respectively, are exercisable only on the maturity
date, and may be settled in cash or shares of common stock, at the Company's
option. The May 4 position was closed out in January 1999.
The maximum potential repurchase obligations of the Company as of December
31, 1998 are as follows: 1,500 shares with a strike price of $18.00 or $27,000
and 1,200 shares with a strike price of $24.88 or $29,850. The put warrants have
been classified separately on the balance sheet to reflect the maximum potential
obligation of the Company. There was no impact on basic and diluted net income
per share in 1998, 1997 or 1996 resulting from these transactions.
14
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ATMEL CORPORATION
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C> <C>
NET REVENUES.................... $1,111,092 $ 958,282 $1,070,288 $634,241 $375,093
INCOME (LOSS)
Before taxes.................. (50,931) 6,001 309,153 172,262 90,076
Net........................... (50,038) 1,801 201,722 113,693 59,450
Basic net income per share.... (0.50) 0.02 2.06 1.20 0.69
Diluted net income per
share...................... (0.50) 0.02 2.00 1.16 0.66
RETURN ON REVENUES
Before taxes.................. (4.6)% 0.6% 28.9% 27.2% 24.0%
Net........................... (4.5)% 0.2% 18.8% 17.9% 15.8%
RETURN ON AVERAGE SHAREHOLDERS'
EQUITY........................ (6.6)% 0.2% 29.3% 24.0% 20.6%
REVENUES PER EMPLOYEE........... 190 228 298 260 235
FIXED ASSETS, NET............... 964,126 985,949 867,423 472,285 264,800
TOTAL ASSETS.................... 1,962,737 1,822,040 1,455,914 919,621 540,946
LONG-TERM DEBT, NET OF CURRENT
PORTION....................... 771,069 571,389 278,576 88,455 46,514
LONG-TERM DEBT AS A PERCENTAGE
OF SHAREHOLDERS' EQUITY....... 105.3% 72.7% 35.3% 15.0% 13.0%
SHAREHOLDERS' EQUITY............ 732,195 786,434 789,751 588,768 358,088
</TABLE>
The fluctuations in the numbers shown above are discussed in Item 7 of this
Report on Form 10-K as part of the Management's Discussion and Analysis of
Financial Condition and Results of Operations.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's revenues in 1998 increased as compared to 1997. The increase
was primarily attributable to the inclusion of revenues from Temic's business,
which Atmel acquired in March of 1998. See Note 2 of Notes to Consolidated
Financial Statements. Excluding the results of Temic, Atmel's revenues in 1998
decreased, reflecting the cyclical downturn in the worldwide semiconductor
industry throughout 1997 and 1998. While sales of the Company's
application-specific integrated circuits (ASIC) and logic-related products
increased, continued price erosion of the Company's commodity-oriented
nonvolatile memory products (caused by continued weakened business conditions
and excess manufacturing capacity in the semiconductor industry) more than
offset the impact of higher sales of ASIC and logic-related products in 1998.
These commodity-oriented nonvolatile memory products include erasable
programmable read-only memories (EPROMs) and Flash memories. The continued
weakened business conditions in the worldwide semiconductor industry also
contributed to the Company's decision to implement a restructuring plan, which
was announced during the second quarter of fiscal 1998. The restructuring plan,
which resulted in a nonrecurring charge of approximately $66.3 million, included
a 10 percent work force reduction and an impairment charge to write-down the
value of certain manufacturing equipment and machinery with older process
technology. See Note 4 of Notes to Consolidated Financial Statements. The
Company also recognized an in-process research and development charge of $23.4
million relating to the Temic acquisition, during the second quarter of 1998.
RESULTS OF OPERATIONS
NET REVENUES
Total net revenues increased 15.9 percent to $1,111.1 million in 1998 from
$958.3 million in 1997. The increase was primarily due to the inclusion of
revenues from Temic's business, which Atmel acquired in March 1998. See Note 2
of Notes to Consolidated Financial Statements. Net revenues from Temic included
in 1998 totaled approximately $238.4 million, which represents approximately 10
months of net revenues, as the acquisition occurred in March. Going forward, the
Company expects greater net revenue contribution from Temic, as Atmel will
benefit from the full year's inclusion of Temic's net revenues. Excluding the
sales from Temic, Atmel's net revenues in 1998 declined 9 percent due to
continued price erosion in the Company's nonvolatile memory business, caused by
continued weakened business conditions and excess manufacturing capacity in the
worldwide semiconductor industry.
The Company experienced a 10.5 percent decrease in net revenues from
$1,070.3 million in 1996 to $958.3 million in 1997, primarily due to greater
than average price erosion in the Company's nonvolatile memory businesses,
weaker business conditions in Europe and Japan and the strengthening of the
United States dollar.
The Company's net revenues by geographic delivery location (see Note 11 of
the Consolidated Financial Statements) for the three years ended December 31,
1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
North America................... $ 387,783 $381,433 $ 374,518
Europe.......................... 308,969 153,734 235,537
Asia............................ 359,990 381,631 433,242
Other........................... 54,350 41,484 26,991
---------- -------- ----------
$1,111,092 $958,282 $1,070,288
========== ======== ==========
</TABLE>
Foreign sales accounted for 65 percent of net revenues in 1998 compared to
60 percent in 1997 and 65 percent in 1996. The increase in foreign sales as a
percent of net revenues from 1997 to 1998 primarily is a result of the inclusion
of Temic's revenues, the majority of which were derived from Europe. The decline
in foreign sales as a percent of net revenues from 1996 to 1997 is primarily due
to greater than average price erosion in the Company's memory businesses, as
well as the weaker business conditions in Europe and Japan.
16
<PAGE> 18
While the Company shipped more memory product units in 1998 than 1997, the
decline in average selling prices more than offset the increase in memory
product units shipped.
The increase of $155 million in European sales in 1998 was attributable
primarily to sales from the Company's Temic subsidiary in Germany, and the
Company's subsidiary, Atmel ES2 in France. The decrease of $22 million in Asian
sales in 1998 was attributable primarily to the effect of the general weakened
business conditions and excess manufacturing capacity in the semiconductor
industry, and the dollar value of foreign currency denominated sales which had
an unfavorable impact in Japan as the dollar strengthened against the Japanese
yen. If 1998 sales, which were billed in yen had been calculated at the 1997
average yen rate, 1998 sales would have been approximately $7 million higher.
From 1997 to 1998, the French franc and the German mark average exchange rate to
the dollar changed 1.1 percent and 1.5 percent respectively, and therefore had
very little effect on the Company's revenues. The decreases in 1997 net revenues
in Europe and Asia compared to 1996 were due primarily to greater than average
price erosion in the Company's memory businesses, as well as the weaker business
conditions in Europe and Japan. While the Company shipped more memory product
units in 1998 than 1997, the decline in average selling prices more than offset
the increase in memory product units shipped.
A portion of the Company's revenues in Japan and Europe were generated in
local currency. Since the Company has European assets and liabilities in local
currencies, no hedging program exists for the European sales. However, for
Japanese sales, the Company used forward contracts to hedge its currency risk
relating to accounts receivable that are denominated in Japanese yen. The
foreign exchange contracts generally have maturities that do not exceed three
months. Foreign exchange contracts outstanding, all of which were in Japanese
currency, amounted to $5.1 million and $9.5 million at December 31, 1998 and
1997, respectively. At December 31, 1998, net unrealized loss from these
contracts was $(0.9) million. The Company expects no impact from the Euro as it
begins to sell in the new European currency. The French franc, German mark and
Euro all fluctuate against the dollar at the same rate and therefore no direct
impact on Atmel's operations is expected form Euro currency transactions.
The Company's ASIC and logic businesses represented approximately 25
percent and 9 percent, respectively, of its 1998 net revenues, and 1998 net
revenues for these two product groups increased by approximately 27 percent
compared to 1997. The increase in ASIC and logic net revenues was primarily a
result of increased sales of the Company's custom and digital ASICs,
microcontrollers, and FPGA and PLD products. The Company's nonvolatile memory
business represented approximately 44 percent of its 1998 net revenues and sales
decreased by approximately 25 percent compared to 1997. The decrease in sales of
the Company's Flash and EPROM products were the primary contributors to the
Company's memory revenue decline in 1998. Typically, the Company expects a
normal level of price decline throughout a product's life cycle. However, as the
semiconductor industry has historically been cyclical, characterized by wide
fluctuations in product supply and demand, the industry experiences significant
downturns from time to time, as it did in 1997 and 1998. These downturns are
characterized by diminished product demand, production overcapacity and
subsequent accelerated erosion of average selling prices. Because Flash and
EPROM products are commodity-oriented, they are subject to greater declines in
average selling prices than other product areas within the Company. The
commodity memory portion of the semiconductor industry suffered from excess
capacity during 1997 and 1998, which led to continued price erosion throughout
1998. While the Company shipped more Flash product units in 1998 than 1997, the
decline in average selling prices more than offset the increase in Flash product
units shipped. In 1998, both unit sales and the average selling price of EPROM
products declined.
In 1997, the Company's ASIC and logic businesses represented approximately
22 percent and 9 percent, respectively, of net revenues, and 1997 combined net
revenues for these two groups increased by approximately 14 percent compared to
1996. The Company's memory business represented approximately 69 percent of its
1997 net revenues. Although the Company shipped more memory product units in
1997 than 1996, the net revenues for memory products decreased by approximately
18 percent compared to 1996. As noted above, the decline was primarily due to
greater than average price erosion in the memory product markets due to the
downturn experienced by the semiconductor industry in 1997.
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The Company believes future sales growth will depend substantially on the
success of new products. New products are generally incorporated into customers'
products or systems at the design stage. However, design wins may precede volume
sales by a year or more. No assurance can be given that any design win will
result in future revenues, which depends in large part on the success of the
customer's end product or system. The Company expects the average selling price
of each product to decline as individual products mature, typically within two
years, and competitors enter the market. To offset average selling price
decreases, typically experienced over the life of any particular product, the
Company relies primarily on attaining cost reductions in the manufacturing of
those products and on introducing new, higher priced products, which incorporate
advanced features or integrated technologies to address new or emerging markets.
Manufacturing cost reductions may be achieved through using advanced process
technologies to reduce the line widths in circuit designs which would enable
more die to be etched onto a silicon wafer, increasing unit production volume to
lower the fixed costs allocated to each die and negotiating volume discounts on
assembly and packaging costs. To the extent that such cost reductions and new
product introductions do not occur in a timely manner, the Company's operating
results could be adversely affected. In addition, due in part to overcapacity in
the semiconductor industry, 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.
As noted above, 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 now derives less than half of its
revenues, suffered from excess capacity during 1997 and 1998, which led to
continued price erosion during 1998. If these conditions extend through 1999,
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, military
equipment and 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 this growth will resume in future periods, as was
evident in 1997 and 1998.
COST OF SALES AND GROSS MARGIN
The Company's cost of sales represents the costs of its wafer fabrication,
assembly and test operations. Cost of sales as a percentage of net revenues
fluctuates, depending on product mix, manufacturing yields and the level of
utilization of manufacturing capacity. Cost of sales as a percentage of net
revenues in 1998 was 64.5 percent, compared with 62.8 percent in 1997 and 50.4
percent in 1996.
The 1997 percentage of 62.8 percent includes an inventory write-off of
$53.1 million, which resulted from the rapid selling price erosion in the fourth
quarter of 1997. During the first half of 1997, demand for the Company's
products was increasing, as demonstrated by encouraging new orders and business
opportunities, particularly in the emerging Asian markets, being received by the
Company's sales force. Based on these early indications, the Company was
anticipating substantial revenue and margin improvements for the fourth quarter
of 1997 and was building its parts inventory in mid-1997 in anticipation of
demand for, and expected industry shortage of, semiconductor products in the
fourth quarter of 1997. However, late in the fourth quarter of 1997, it became
apparent that the expected growth would not materialize. Revenues and margins
began to reflect this much tougher business environment. The Company responded
to this tougher business environment and rapid down-turn of the semiconductor
industry by writing off its inventory. The inventory write-off consisted of
$42.5 million of slow-moving inventory and $10.6 million of inventory that was
marked to the lower market value.
The increase in cost of sales as a percentage of net revenues in 1998 was
primarily due to manufacturing overcapacity resulting from increases in fixed
costs associated with the expansion of wafer fabrication facilities
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and lower product margins in many of the Company's memory products. The lower
product margins were attributable to the rapid erosion of average selling prices
that were not matched with a corresponding decrease in manufacturing cost.
Additionally, with a greater portion of the Company's business conducted in
Europe through its Temic subsidiary in Germany, and Atmel ES2 in France, the
German mark, the French franc or the Euro average rate to the dollar may have a
greater impact on the Company's future cost of sales than in the past.
The Company has capitalized certain costs incurred in the start-up phase of
the Company's new manufacturing facilities in Atmel ES2. At December 31, 1998
and 1997, start-up costs associated with Atmel ES2 totaled approximately $49.0
million and $18.5 million, respectively, and are reported as other assets. The
Company is required to adopt SOP 98-5 "Reporting on the Costs of Start-Up
Activities" effective January 1, 1999. Accordingly, the Company expects to
record a charge of $49.0 million as the cumulative effect of a change in
accounting principle upon adoption of the standard in its financial statements
for the three month period ended March 31, 1999.
The Company has lowered its capital expenditure plan to $150 million in
1999 and will focus on continuing implementation of chemical, mechanical
planarization (CMP) and shallow trench isolation (STI), 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 cost
reductions through die shrinks. However, production delays, difficulties in
achieving acceptable yields at any of its manufacturing facilities or
overcapacity could materially and adversely affect the Company's gross margin
and future operating results.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased to $174.8 million in 1998
from $137.9 million in 1997 and $110.2 million in 1996. The $36.9 million
increase in 1998 was primarily due to the inclusion of Temic's R&D expense, and
the Company's continued investment in the development of 0.35-micron and 0.25-
micron process technology, implementation of CMP and STI capability in the
Colorado Springs and Rousset facilities, shrinking of the die size from
0.65-micron to 0.5-micron to 0.35-micron and 0.25-micron line widths,
enhancement of mature products, development of new products, advanced CMOS and
BiCMOS process technologies, manufacturing improvements and other costs
associated with increasing production capacity in Colorado Springs and Rousset.
The 1998 R&D expenses exclude the in-process R&D charge of $23.4 million
related to the acquisition of Temic, which has been separately presented in the
consolidated statements of operations. This $23.4 million charge represents
purchased in-process technology for three projects that have not yet reached
technological feasibility and have no alternative future use. The Company
expects to incur between $10.0 and $20.0 million per year in development costs
to complete these projects. 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. If the
development of the technology is unsuccessful, the technology may be abandoned
during the development phase. The Company anticipates the development will be
completed and benefits will begin in the 2000-2001 time frame.
The $27.7 million increase in 1997 was primarily due to the one-time charge
of $15.0 million to R&D expense in connection with the qualification of the
Company's 0.5-micron manufacturing facility in Rousset, France, the Company's
continued investment in the shrinking of the die size from 0.65-micron to
0.5-micron line widths, development of 0.35-micron process technology,
enhancement of mature products, development of new products, advanced CMOS and
BiCMOS process technology, manufacturing improvements and costs associated with
increasing production capacity in Colorado Springs and Rousset. The Company
believes that continued investment in process technology and product development
are essential to remain competitive in the markets it serves and is committed to
high levels of expenditures for research and development.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expense of $149.1 million, which
included approximately $41.4 million of SG&A expense associated with Temic, was
slightly less than 1997 SG&A of $150.1 million,
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and decreased to 13.4 percent of revenues in 1998 from 15.7 percent of revenues
in 1997. SG&A expenses increased 30.1 percent to $150.1 million, or 15.7 percent
of revenues, in 1997, from $115.4 million, or 10.8 percent of revenues, in 1996.
The decrease from 1997 to 1998 reflects the effect of initiatives implemented in
connection with the Company's restructuring program that has reduced the
Company's infrastructure, including certain cost reduction actions taken in the
second half of 1998 to reduce the Company's overall cost structure in response
to current business conditions.
The majority of the increase from 1996 to 1997 was attributable to the
$41.3 million write-down of accounts receivable in the fourth quarter of 1997.
The pre-tax charge was established in response to the Company's re-assessment of
the probability of collection of certain receivables following the rapid
down-turn of the semiconductor industry and the difficult collection environment
due to the financial turmoil in Asia in the fourth quarter of 1997. More than 40
percent of the Company's revenues are generated in Asia.
Although the Company's accounts receivable balance began to increase during
1997, the Company attributed this to the state of the semiconductor industry and
business conditions in Asia. The Company believed that business conditions would
improve in the second half of 1997. Based on this expectation, the Company was
prepared to accept slower payment on outstanding receivables because the Company
believed that accounts would be made current when business conditions improved.
Accordingly, the Company still anticipated that they would be able to collect
these outstanding receivables.
Late in the fourth quarter of 1997, it became apparent that the expected
growth in the semiconductor market would not materialize and in fact business
conditions further deteriorated. Customers increasingly began to seek reasons to
return products and became more aggressive about requesting longer payment
terms. Revenues and margins began to reflect this tougher business environment.
Based on these factors, the Company reassessed the probability of collection of
certain receivables and as a result, the Company wrote off $41.3 million of
accounts receivable.
RESTRUCTURING AND IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In the second quarter of 1998, the Company implemented an overall cost
reduction plan due to weakened business conditions in the semiconductor
industry. As part of the plan, the Company announced a worldwide workforce
reduction of approximately 600 people, through early retirement, terminations
and attrition in the second half of 1998 and provided $1.3 million for severance
costs. As of December 31, 1998, approximately 250 employees had received
severance benefits totaling $1.3 million under this program. The rest of the
Company's objective was met primarily through attrition.
In addition to cost reduction actions, the Company recognized an impairment
loss related to the write-down of certain assets in the wafer manufacturing
facility in Colorado Springs. As a result, the Company recorded a $65 million
non-recurring charge in 1998. In making its decision, the Company examined the
relationship between the costs of fixed assets in its Colorado manufacturing
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
obtain additional revenue per wafer. However, due to the current depressed state
of average selling prices for semiconductor memory products, even the additional
output per wafer did not provide a positive gross margin at the existing fixed
cost structure.
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. In measuring impairment, the Company groups assets at
the plant level which is the lowest level from which there are identifiable,
independent cashflows. Accordingly, the carrying values of these Colorado plant
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 their disposal. None of the assets affected by this action are
currently held for sale.
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The Company also recognized an in-process research and development charge
of $23.4 million relating to the Temic acquisition, during the second quarter of
1998. This charge represents the value of three projects that were in-process at
the time of acquisition and have not reached technological feasibility and had
no alternative future use.
In determining the amount of in-process research and development, the
Company engaged an independent valuation firm to conduct an appraisal of the
acquired assets. The value of these projects was determined by estimating the
net cash flows from the sale of the products resulting from the completion of
the projects reduced to the percentage of completion of the project. Net cash
flows were then discounted back to their present value. The nature of the
efforts to develop the purchased in-process technology into commercially viable
products principally relates to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the product can be produced to meet its design specification including
function, features and technical performance requirements. In September 1998,
the Chief Accountant of the SEC expressed concerns about the methodologies many
companies were using to determine the amount of in-process research and
development. A working group has been formed by the Financial Accounting
Standards Board (FASB) to study this issue, however at this time it is unknown
what guidelines this group will generate and whether the resulting guidance will
differ from valuation methods traditionally employed. The SEC's concerns appear
to focus on excluding from the valuations the costs of any efforts to complete
development currently underway and an apportionment of cash flow estimates based
on the stage of completion of in-process technology.
The methodology used to value intangible assets acquired in the Temic
acquisition took into account these concerns raised by the SEC. Accordingly, the
Company believes that the valuation methodology used by the independent
appraisers is appropriate.
In December 1997, the Company recognized an impairment charge of $43
million relating to the impairment of machinery and equipment in its
manufacturing facility (Fab 6) located in Rousset, France. The impairment charge
was due to the projected inability of this fabrication plant to produce product
at costs acceptable in today's market and the need to consolidate manufacturing
in one location in France to take advantage of advanced technologies in its new
manufacturing facility (Fab 7). 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. As 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 expense was reported as a
non-recurring charge in statement of operations
The Company originally estimated that the proceeds from the eventual
disposal of these assets would not be significant. During the year, the Company
continued to use these assets at approximately 50 percent of capacity until
manufacturing operations at Fab 6 were ceased. During November and December
1998, the Company sought to dispose of the equipment and received offers to
purchase certain equipment in Fab 6. See Recent Developments. Accordingly, these
assets, which have a net book value of zero, have been classified as assets held
for sale.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income increased to $16.2 million in 1998 from $12.1
million in 1997, which was a decline from $16.5 million in 1996. Other income
consists of investment gains and losses and realized and unrealized foreign
currency exchange gains and losses. The increase from 1997 to 1998 was primarily
due to the significant decline in interest rates that occurred in the latter
part of 1998, resulting in gains taken in the Company's portfolio of U.S.
securities. The decline from 1996 to 1997 was primarily due to the combination
of the losses sustained on sale of stock investments in 1997 and the gains
realized from sale of stock investments and a parcel of land in 1996.
Interest expense, which includes interest on capital lease financing,
increased to $47.5 million in 1998 from $31.2 million in 1997 and $12.9 million
in 1996. The increase in both years was primarily due to the
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increase in borrowings used to finance the expansion and construction of the
Company's manufacturing facilities located in Colorado Springs and Rousset,
respectively.
TAXES ON INCOME
The Company had an income tax benefit of $0.9 million in 1998 compared to
income tax expense of $4.2 million in 1997 and $107.4 million in 1996. The
effective tax rate in 1998 was 1.75 percent as compared to 70.0 percent and 34.8
percent in 1997 and 1996, respectively. The 1998 effective tax rate was impacted
by the treatment of acquisition charges associated with the acquisition of Temic
and the tax effect of foreign losses, the benefit from which was not recorded.
The increase from 1996 to 1997 was primarily caused by valuation allowances
provided for foreign losses, the tax rate effect of which was magnified due to
the lower level income before taxes.
YEAR 2000 RISKS
The Company is assessing and planning for Year 2000 computer date issues at
all of its design, manufacturing and sales locations.
The Company initiated a program during 1997 to review its computer hardware
and software systems, to prioritize and determine the impact of, and to provide
solutions for Year 2000 requirements. The Year 2000 program is being conducted
in five parallel phases -- (i) planning, (ii) inventory/impact, (iii)
remediation, (iv) testing and (v) implementation.
(i) As of March 1999, the Company had completed the planning phase of
the Year 2000 program for both information technology (IT) and
non-information technology (non-IT) systems. IT includes computers,
peripherals, software, and networks. Non-IT comprises manufacturing
equipment, test equipment, and building support equipment.
(ii) The inventory/impact phase has been completed for all systems.
(iii) The Company has completed the remediation phase for
approximately 80 percent of all systems. The remaining systems have been
analyzed and are awaiting vendor fixes. All fixes will be in place by the
end of June or appropriate contingency plans will be implemented.
(iv) The testing phase has been completed for the Electronic Data
Interchange (EDI) system and the financial information system. The order
entry systems are Year 2000 compliant in all locations except Rousset,
France. Rousset will implement a compliant system during May 1999.
(v) Implementation will occur through the remainder of 1999.
The Company expects phases (i) through (iv) of the Year 2000 program to be
completed for all internal systems by June 30, 1999. Implementation (v) is
formalizing contingency plans for any non-compliant computer systems, equipment
or suppliers. The Company will address all possible issues related to non-
compliance and devise mitigating procedures. This process will begin in July
1999 and will be completed in the fourth quarter of 1999.
The Company has surveyed all its critical manufacturing equipment vendors
and material and utility suppliers for Year 2000 compliance. All the equipment
and utility vendors have responded and their progress is being monitored
closely. The Company has not received surveys from all its critical suppliers,
but expects to do so by the end of May 1999. The Company will establish
contingency plans to obtain the goods and services provided by any vendors
determined to be non-compliant at the end of June 1999.
The Company's products are not date sensitive unless they have been
programmed that way by its customers. The Company's microcontroller products are
not designed with specific date functions and rely on user provided programming
for their operation. The Company's non-volatile memory products are also user
programmable devices. There are no date related logic functions within the
circuits and therefore depend on the customer for compliance with Year 2000 date
compatibility. EPLDs are programmable logic devices that are designed to allow
customers to perform a broad range of logic functions. The Company provides no
specific
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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 are no date related function or logic inside the Atmel
FPGA unless a customer has chosen to program the FPGA logic that way. ASIC
products are designed to customers' specifications and the Company has no
control over date functions required by customers of such circuits.
The Company's costs related to identifying and addressing Year 2000 issues
world-wide are estimated to be $7 million. Thus far, the major costs associated
with identifying and addressing Year 2000 issues has been in-house labor costs
and equipment upgrades. During 1998, approximately $3.3 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 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 condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital requirements through
cash flow from operations, equipment lease financing arrangements and other
borrowing arrangements.
During 1998, the Company generated net cash flow from operations of $135.5
million.
Accounts receivable increased by $35.6 million to $252.6 million in 1998,
primarily due to a 15.9 percent increase in 1998 revenues compared to 1997.
Accounts receivable increased by $42.5 million to $217.0 million in 1997 from
$174.5 million in 1996, due to the Company extending longer payment terms to its
customers and a more difficult collection environment because of the financial
turmoil in Asia, where more than 30.0 percent of the Company's revenues were
generated. The weakened market conditions and business competition required the
Company to extend its payment terms to its customers. Average days of accounts
receivable outstanding were 83.0 and 82.7 in 1998 and 1997, respectively. As the
semiconductor industry conditions improve, the average days outstanding are
expected to decrease.
Inventory balances increased by approximately $115.9 million from 1997 to
1998, due primarily to weakened market conditions and business competition
requiring manufacturers to carry more inventory to meet just-in-time deliveries.
Additionally, the increase in inventory balances from 1997 to 1998 reflects the
inclusion of Temic's inventory, which totaled approximately $36.1 million. The
increase in inventory balances of $54.1 million from 1996 to 1997 reflects the
Company's increased manufacturing output and inventory reduction programs by the
Company's OEM customers. During periods of excess manufacturing capacity in the
industry and rapidly eroding prices, as experienced in 1997 and 1998, OEM
customers reduce inventory levels and rely on manufacturers to carry more
inventory to meet just-in-time deliveries. Inventory turnover decreased to 4.6
in 1998 from 7.7 in 1997.
Trade accounts payable and other accrued liabilities increased by
approximately $2.2 million from 1997 to 1998, and increased by approximately
$54.0 million from 1996 to 1997. The smaller increase in 1998 as compared to
1997 is primarily attributable to the reduced purchases of and timing of
payments of fixed assets in 1998. The increase from 1996 to 1997 primarily
reflects the acquisition of capital equipment, construction costs and the timing
of payment of certain other trade payables.
The Company made capital investments in 1998 totaling $187.7 million
primarily to implement CMP and STI, and to advance the technology process in its
Colorado Springs and Rousset wafer fabrication facilities. In 1997, the Company
made capital investments totaling $312.1 million to increase manufacturing
capacity at all its fabrication plants and to complete construction of its
8-inch plant in Rousset. To finance these improvements and expansions, the
Company incurred a number of debt obligations totaling $298.2 million in 1998
and $397.5 million in 1997. At December 31, 1998, the Company had $323.6 million
in cash and short-term investments, a decrease of $9.5 million from December 31,
1997. The Company has classified all investments as short term since it has the
intent and ability to redeem them within the year. At December 31,
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1998, the Company had $492.2 million in working capital, an increase of $82.1
million from December 31, 1997.
In January and August 1998, Atmel re-purchased 1.0 million and 0.4 million,
respectively, of its shares for $20.0 million. The shares were then retired.
The Company believes that its existing sources of liquidity, together with
cash flows from operations, lease financing on equipment and other short- or
medium-term bank borrowing, will be sufficient to meet the Company's liquidity
and capital requirements through 1999. The Company may, however, in the longer
term seek additional equity or debt financing to fund further expansion of its
wafer fabrication capacity, or to fund other projects or acquisitions. The
timing and amount of such capital requirements cannot be precisely determined at
this time and will depend on a number of factors, including demand for the
Company's products, product mix changes, semiconductor industry conditions and
competitive factors.
------------------------
FORWARD LOOKING STATEMENTS
Investors are cautioned that certain statements in this Report on Form 10-K
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, fab
capacity utilization, product mix and technological risks, ability to integrate
and manage acquisitions and other risk factors identified in the Company's
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to update any forward looking statements in this Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
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 exposures 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 that do
not exceed three months. Foreign exchange contracts outstanding, all of which
were in Japanese currency, amounted to $5.1 million, $9.5 million and $5.4
million at December 31, 1998, 1997, and 1996, respectively.
The Company maintains investment portfolio holdings of various issuers,
types and maturities whose values are dependent upon short-term interest rates.
These securities are generally classified as available for sale, and
consequently are recorded on the balance sheet at fair value with unrealized
gains and losses being recorded as a separate part of shareholders' equity. The
Company does not currently hedge these interest rate exposures.
Given the Company's current profile of interest rate exposures and the
maturities of its investment holdings, the Company believes that a change in
interest rates would not have a material adverse impact on the Company's
investment portfolio or statement of operations through December 31, 1999.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item regarding Consolidated Financial
Statements and supplementary data is set forth in the section entitled "Selected
Quarterly Financial Data" which appears in Item 5 of this Report on Form 10-K,
the Consolidated Financial Statements and related notes thereto, and Report of
the Independent Accountants, which appear on pages 29 to 53 of this Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this Item regarding directors and executive
officers set forth under the captions "Election of Directors" and "Section
16(a)Beneficial Ownership Reporting Compliance" in Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 28, 1999
(the "1999 Proxy Statement"), is incorporated herein by reference. Information
regarding identification of Registrant's executive officers is set forth in Part
I, Item 1 of this Report on Form 10-K under the caption "Executive Officers of
the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item regarding compensation of Registrant's
directors and executive officers set forth under the captions "Director
Compensation" and "Executive Compensation" in the 1999 Proxy Statement is
incorporated herein by reference (except to the extent allowed by Item 402(a)(8)
of Regulation S-K).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item regarding beneficial ownership of
Registrant's common stock by certain beneficial owners and management of
Registrant set forth under the caption "Security Ownership" in the 1999 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item regarding certain relationships and
related transactions with management set forth under the caption "Compensation
Committee Interlocks and Insider Participation" in the 1999 Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of, or incorporated by
reference into, this Report on Form 10-K:
1. Financial Statements.
Consolidated Statements of Operations for the Three Years Ended December
31, 1998.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1998.
Consolidated Statements of Shareholders' Equity for the Three Years
Ended December 31, 1998.
25
<PAGE> 27
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
2. Financial Statement Schedules. The following Financial Statement
Schedules for the years ended December 31, 1998, 1997 and 1996 should be read in
conjunction with the Consolidated Financial Statements, and related notes
thereto.
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Valuation and Qualifying Accounts........................... S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits. The following Exhibits are filed as part of, or incorporated
by reference into, this Report on Form 10-K:
<TABLE>
<S> <C>
3.1(3) Articles of Incorporation of Registrant, as amended to date.
3.2(1) Bylaws of Registrant.
3.3(6) Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in Exhibit
4.1).
4.1(6) Preferred Shares Rights Agreement dated as of September 4,
1998, between Atmel Corporation and BankBoston, N.A.,
including the Certificate of Determination, the form of
Rights Certificate and the Summary of Rights.
10.1(1)+ 1986 Incentive Stock Option Plan, as amended, and forms of
stock option agreements thereunder.
10.2(1)+ 1991 Employee Stock Purchase Plan, as amended.
10.3(3) Credit Agreement dated April 20, 1995, between Wells Fargo
Bank and Registrant.
10.4(1) Form of Indemnification Agreement between Registrant and its
officers and directors.
10.5(2) Consulting Agreement by and between Norman Hall and
Registrant dated March 1, 1990.
10.6(4) 1996 Stock Plan, as amended and forms of agreements
thereunder.
10.7(5) Indenture, dated as of May 17, 1997, by and among Atmel
S.A., Atmel Corporation and State Street Bank and Trust
Company of California, N.A., as trustee thereunder.
10.8(5) Registration Rights Agreement, dated as of May 15, 1997, by
and among Atmel Corporation and Deutsche Morgan Grenfell
Inc., Alex. Brown & Sons, Incorporated, BNP plc, Credit
Lyonnais Securities, Smith Barney Inc. and Societe Generale
Securities Corp.
10.9(7) Indenture, dated as of April 21, 1998, by and between the
Company and State Street Bank and Trust Company of
California, N.A., as trustee thereunder (including the form
of debenture).
10.10(7) Registration Rights Agreement dated as of April 21, 1998, by
and between the Company and Morgan Stanley & Co.
Incorporated.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C>
24.1 Power of Attorney (included on the signature pages hereof).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-38882) declared effective on March 19,
1991.
(2) Incorporated by reference to exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
(3) Incorporated by reference to exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(4) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (File No. 333-15823) filed on November 8, 1996.
(5) Incorporated by reference to exhibits to the Company's Report on Form 8-K
(File No. 000-19032) filed on June 4, 1997.
(6) Incorporated by reference to exhibits to the Company's Registration
Statement on Form 8-A (No. 000-19032) filed on September 15, 1998.
(7) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-3, as amended (File No. 333-59261), filed on July 16,
1998.
+ The item listed is a compensatory plan.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by the Company
during the quarter ended December 31, 1998.
27
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ATMEL CORPORATION
March 22, 1999 By: /s/ GEORGE PERLEGOS
------------------------------------
George Perlegos
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George Perlegos and Donald Colvin, and
each of them, jointly and severally, his attorneys-in-fact, each with the power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on 10-K has been signed by the following persons on March 22, 1999 on
behalf of the Registrant in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GEORGE PERLEGOS President, Chief Executive Officer and
- ----------------------------------------------------- Director (principal executive officer)
(George Perlegos)
/s/ DONALD COLVIN Vice President, Finance and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
(Donald Colvin) officer)
/s/ NORM HALL Director
- -----------------------------------------------------
(Norm Hall)
/s/ GUST PERLEGOS Director
- -----------------------------------------------------
(Gust Perlegos)
/s/ T. PETER THOMAS Director
- -----------------------------------------------------
(T. Peter Thomas)
/s/ TSUNG-CHING WU Director
- -----------------------------------------------------
(Tsung-Ching Wu)
</TABLE>
28
<PAGE> 30
ATMEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- --------- -----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C>
NET REVENUES............................................ $1,111,092 $958,282 $1,070,288
EXPENSES
Cost of sales........................................... 717,147 602,239 539,215
Research and development................................ 174,808 137,896 110,239
Selling, general and administrative..................... 149,069 150,098 115,362
Restructuring and in-process research and development
charges............................................... 89,725 43,000 --
---------- -------- ----------
TOTAL EXPENSES................................ 1,130,749 933,233 764,816
---------- -------- ----------
OPERATING INCOME (LOSS)................................. (19,657) 25,049 305,472
Interest and other income............................... 16,197 12,107 16,532
Interest expense........................................ (47,471) (31,155) (12,851)
Income (loss) before taxes.............................. (50,931) 6,001 309,153
Provision for (benefit from) income taxes............... (893) 4,200 107,431
---------- -------- ----------
NET INCOME (LOSS)....................................... $ (50,038) $ 1,801 $ 201,722
========== ======== ==========
BASIC NET INCOME (LOSS) PER SHARE....................... $ (0.50) $ 0.02 $ 2.06
---------- -------- ----------
DILUTED NET INCOME (LOSS) PER SHARE..................... $ (0.50) $ 0.02 $ 2.00
---------- -------- ----------
SHARES USED IN BASIC NET INCOME (LOSS) PER-SHARE
CALCULATIONS.......................................... 99,358 99,438 98,070
---------- -------- ----------
SHARES USED IN DILUTED NET INCOME (LOSS) PER-SHARE
CALCULATIONS.......................................... 99,358 101,601 100,680
---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 31
ATMEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 161,721 $ 174,310
Short-term investments...................................... 161,844 158,758
Accounts receivable, net of allowance for doubtful accounts
of $34,610 in 1998 and $24,623 in 1997.................... 252,601 216,991
Inventories................................................. 240,258 124,336
Other current assets........................................ 74,967 119,358
---------- ----------
TOTAL CURRENT ASSETS.............................. 891,391 793,753
Fixed assets, net........................................... 964,126 985,949
Other assets................................................ 107,220 42,338
---------- ----------
TOTAL ASSETS...................................... $1,962,737 $1,822,040
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt........................... $ 81,995 $ 67,522
Trade accounts payable...................................... 200,101 197,070
Accrued liabilities and other............................... 92,953 93,820
Deferred income on shipments to distributors................ 24,170 25,256
---------- ----------
TOTAL CURRENT LIABILITIES......................... 399,219 383,668
Long-term debt.............................................. 771,069 571,389
Deferred income taxes....................................... 3,404 34,499
---------- ----------
TOTAL LIABILITIES................................. 1,173,692 989,556
Put warrants................................................ 56,850 46,050
---------- ----------
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY
Preferred stock; no par value: Authorized; 5,000 shares;
None issued and outstanding............................... -- --
Common stock; no par value: Authorized: 240,000 shares;
Shares issued: 99,683 at December 31, 1998, and 99,723 at
December 31, 1997......................................... 330,073 351,584
Unrealized loss on investments.............................. (463) (1,003)
Cumulative translation adjustment........................... 492 (16,278)
Retained earnings........................................... 402,093 452,131
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 732,195 786,434
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $1,962,737 $1.822,040
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 32
ATMEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss)......................................... $(50,038) $ 1,801 $201,722
Items not requiring the use of cash
Depreciation and amortization........................... 199,568 158,382 110,988
Restructuring and in-process research and development... 89,725 43,000 --
Accounts receivable write-off........................... -- 41,300 --
Inventories write-down.................................. -- 53,100 --
Provision for doubtful accounts receivable.............. 26,642 11,105 19,425
Provision for excess and obsolete inventory............. 22,070 1,452 1,117
Other................................................... (11,587) 16,439 (1,600)
Changes in operating assets and liabilities
Accounts receivable..................................... (887) (92,862) (93,787)
Inventories............................................. (106,305) (108,631) (22,896)
Other assets............................................ 56,879 (61,448) (7,935)
Trade accounts payable and other accrued liabilities.... (58,382) 17,915 94,545
Income taxes payable.................................... (31,095) -- (9,766)
Deferred income on shipments to distributors............ (1,086) (2,679) 5,987
-------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 135,504 78,874 297,800
CASH FROM INVESTING ACTIVITIES
Acquisition of fixed assets............................... (187,728) (312,066) (511,019)
Acquisition of other assets............................... (41,226) (25,483) (9,756)
Purchase of Temic Telefunken Microelectronic.............. (99,250) -- --
Purchase of investments................................... (151,188) (129,642) (101,417)
Sale or maturity of investments........................... 148,102 128,668 89,678
-------- --------- --------
NET CASH USED BY INVESTING ACTIVITIES........... (331,290) (338,523) (532,514)
-------- --------- --------
CASH FROM FINANCING ACTIVITIES
Issuance of notes payable................................. 41,044 56,815 39,241
Principal payments on notes............................... (17,094) (10,853) (2,152)
Proceeds from capital leases.............................. 142,179 190,705 234,239
Principal payments on capital leases...................... (89,944) (78,528) (54,784)
Proceeds from issuance of convertible notes............... 115,004 150,000 --
Tax benefit from exercise of options...................... -- 5,033 2,535
Proceeds (payment) from settlement of warrants............ (2,550) 4,425 8,133
Repurchase of common stock................................ (20,047) -- --
Issuance of common stock.................................. 11,886 13,170 10,079
-------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 180,478 330,767 237,291
-------- --------- --------
Effect of foreign currency on cash and cash equivalents... 2,719 (921) (3,998)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents...... (12,589) 70,197 (1,421)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 174,310 104,113 105,534
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ 161,721 174,310 104,113
======== ========= ========
INTEREST PAID............................................. 35,648 29,039 12,015
INCOME TAXES PAID......................................... 1,161 42,507 103,912
ISSUANCE OF STOCK FOR OTHER ASSETS........................ 2,652 -- 12,625
OTHER NON-CASH ACQUISITIONS............................... -- -- 2,320
FIXED ASSET PURCHASES IN ACCOUNTS PAYABLE................. 19,376 54,326 5,706
PURCHASE OF CALL WARRANTS FROM PROCEEDS OF PUT WARRANTS... 4,450 5,238 9,223
NOTE PAYABLE ISSUED FOR PREPAID ROYALTIES................. 9,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 33
ATMEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------ RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ --------- -------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995................ 97,207 $ 341,634 $248,608 $ (1,474) $588,768
Sales of stock
Exercise of options...................... 874 4,606 -- -- 4,606
Employee stock purchase plan............. 236 5,473 -- -- 5,473
Issuance for asset acquisition........... 435 12,625 -- -- 12,625
Tax benefit from exercise of options....... -- 2,535 -- -- 2,535
Proceeds from settlement of warrants....... -- 8,133 -- -- 8,133
Put warrants reclassification, net......... -- (28,250) -- -- (28,250)
Other comprehensive income
Unrealized loss on investments........... -- -- -- (3,998) (3,998)
Foreign currency translation
adjustment............................ -- -- -- (1,863) (1,863)
Net income................................. -- -- 201,722 -- 201,722
------ --------- -------- -------- --------
Comprehensive income (loss)................ -- -- 201,722 (5,861) 195,861
------ --------- -------- -------- --------
BALANCES, DECEMBER 31, 1996................ 98,752 346,756 450,330 (7,335) 789,751
Sales of stock
Exercise of options...................... 733 6,522 -- -- 6,522
Employee stock purchase plan............. 238 6,648 -- -- 6,648
Tax benefit from exercise of options....... -- 5,033 -- -- 5,033
Proceeds from settlement of warrants....... -- 4,425 -- -- 4,425
Put warrants reclassification, net......... -- (17,800) -- -- (17,800)
Other comprehensive income
Unrealized loss on investments........... -- -- -- (11,809) (11,809)
Foreign currency translation
adjustment............................ -- -- -- 1,863 1,863
Net income................................. -- -- 1,801 -- 1,801
------ --------- -------- -------- --------
Comprehensive income (loss)................ -- -- 1,801 (9,946) (8,145)
------ --------- -------- -------- --------
BALANCES, DECEMBER 31, 1997................ 99,723 351,584 452,131 (17,281) 786,434
Sales of stock
Exercise of options...................... 528 2,624 -- -- 2,624
Employee Stock Purchase Plan............. 624 6,610 -- -- 6,610
Issuance for purchase of DCT............. 208 2,652 -- -- 2,652
Repurchase of shares....................... (1,400) (20,047) -- -- (20,047)
Payment on settlement of warrants.......... -- (2,550) -- -- (2,550)
Put warrants reclassification, net......... -- (10,800) -- -- (10,800)
Other comprehensive loss
Unrealized gain on investments........... -- -- -- 540 540
Foreign currency translation
adjustment............................ -- -- -- 16,770 16,770
Net loss................................... -- -- (50,038) -- (50,038)
------ --------- -------- -------- --------
Comprehensive income (loss)................ -- -- (50,038) 17,310 (32,728)
------ --------- -------- -------- --------
BALANCES, DECEMBER 31, 1998................ 99,683 $ 330,073 $402,093 $ 29 $732,195
====== ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 34
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Atmel Corporation designs, develops, manufactures and markets a broad range
of high-performance non-volatile memory and logic integrated circuits using its
proprietary complementary metal-oxide semiconductor (CMOS) technologies. The
Company's products are used in a range of applications in the
telecommunications, computing, networking, consumer and automotive electronics
and other markets. The Company's customers comprise a diverse group of domestic
and foreign original equipment manufacturers (OEMs) and distributors.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. For purposes of presentation, the Company has
indicated that its year ends on December 31, although the Company operates on a
52-week or 53-week year ending on the Monday closest to December 31. Fiscal
1998, 1997 and 1996 were 52-week years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Investments
Investments with an original or remaining maturity of 90 days or less, as
of the date of purchase, are considered cash equivalents, and consist of highly
liquid money market instruments. The carrying amount of these instruments
approximates fair value.
The Company maintains its cash balances at a variety of financial
institutions and has not experienced any material losses relating to such
instruments. The Company invests its excess cash in accordance with its
investment policy which has been reviewed and approved by the Board of Directors
to minimize credit risk.
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
accounts receivable against the allowance when the Company determines a balance
is uncollectible and no longer actively pursues collection of the receivable.
33
<PAGE> 35
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
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
and are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Materials and purchased parts.................. $ 14,082 $ 10,527
Finished goods................................. 43,913 25,590
Work in progress............................... 182,263 88,219
-------- --------
TOTAL................................ $240,258 $124,336
======== ========
</TABLE>
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements............................ 10 to 20 years
Machinery and equipment............................... 2 to 5 years
Furniture and fixtures................................ 5 years
</TABLE>
Deferred Income on Shipments to Distributors
Sales to distributors are subject to price protection and right of return.
Generally, distributors may return products for up to a maximum of 5.0 percent
of the net value of all products purchased by distributors during the
immediately preceding period. Accordingly, recognition of such sales is deferred
until shipments are made by the distributors to their customers. Other sales,
principally to OEMs, are recorded at the time products are shipped, net of
allowances for estimated returns.
Foreign Currency Translation
The functional currency of foreign subsidiaries is considered to be the
United States dollar, except for Atmel ES2, whose functional currency is the
French franc and Temic Telefunken Microelectronic, whose functional currency is
the German mark. Translation gains and losses from remeasurement of the
financial statements of these companies where the functional currency is the
U.S. dollar are included in the consolidated statements of operations. The
effect of the translation of the accounts of Atmel ES2 and Temic has been
included in the shareholders' equity as a cumulative foreign currency
translation adjustment. Foreign exchange gain (loss) included in interest and
other income for the years ended December 31, 1998, 1997 and 1996 was $(283),
$(2,438) and $(2,444), respectively.
Derivatives
The Company conducts business on a global basis in several major
international currencies. As a result, it is exposed to adverse movements in
foreign currency exchange rates. The Company enters into forward foreign
exchange contracts to hedge certain of its foreign currency exposures. These
financial instruments are designed to minimize exposure and reduce risk from
foreign currency exchange rate fluctuations in the regular course of business.
The Company does not enter into forward exchange contracts for trading purposes.
Realized gains and losses on the contracts are included in other income and
offset foreign exchange gains and losses from the revaluation of intercompany
balances or other current assets and liabilities denominated in currencies other
than the functional currency of the reporting entity. The foreign exchange
contracts generally
34
<PAGE> 36
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
have maturities that do not exceed three months. Foreign exchange contracts
outstanding, all of which were in Japanese currency, amounted to $5,122 and
$9,478 at December 31, 1998 and 1997, respectively. At December 31, 1998, net
unrealized loss from these contracts was $(892).
The Company's forward exchange contracts contain credit risk in that its
counterparties may be unable to meet the terms of the agreements. The Company
minimizes such risk by limiting its counterparties to a limited number of major
financial institutions. In addition, the potential risk of loss with any one
party resulting from this type of credit risk is monitored. The Company does not
expect any material losses as a result of default by the other parties.
Certain Risks and Concentrations
The Company sells its products primarily to OEMs and distributors in North
America, Europe and Asia, generally without requiring any collateral. The
Company maintains adequate allowances for potential credit losses and performs
ongoing credit evaluations.
The Company's products are concentrated in the semiconductor industry,
which is highly competitive and rapidly changing. Significant technological
changes in the industry could affect operating results adversely. The Company's
inventories include high-technology parts and components that may be specialized
in nature or subject to rapid technological obsolescence. While the Company has
programs to minimize the required inventories on hand and considers
technological obsolescence in estimating required allowances to reduce recorded
amounts to market values, such estimates could change in the future.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for that period. Diluted net income (loss) per share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of incremental
common shares issuable upon exercise of stock options, warrants and convertible
securities for all periods.
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share is provided as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Basic and diluted net income (loss) (numerator).... $(50,038) $ 1,801 $201,722
Shares used in basic net income (loss) per-share
calculations (denominator).......................
Weighted average shares of common stock
outstanding................................... 99,358 99,438 98,070
-------- -------- --------
Shares used in diluted net income (loss) per-share
calculations (denominator)....................... 99,358 99,438 98,070
Dilutive effect of stock options................... -- 2,163 2,610
-------- -------- --------
99,358 101,601 100,680
======== ======== ========
Basic net income (loss) per share.................. $ (0.50) $ 0.02 $ 2.06
-------- -------- --------
Diluted net income (loss) per share................ $ (0.50) $ 0.02 $ 2.00
-------- -------- --------
</TABLE>
The number of common stock equivalents not included in the calculation of
diluted net income (loss) per share because they were anti-dilutive were 6,113,
4,225 and 4,225 in 1998, 1997 and 1996, respectively.
35
<PAGE> 37
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
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 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 warrant transactions which provide
the Company with the flexibility to implement its repurchase plan, under which
the Company could repurchase its stock when favorable market conditions existed
and without immediately impacting the Company's cash resources.
In connection with the Company's stock repurchase program, put warrants
were sold to an independent third party during fiscal years 1998, 1997 and 1996.
The Company used the proceeds from the sale of the put warrants to purchase call
warrants in a transaction not requiring any net cash outlay at the time.
<TABLE>
<CAPTION>
CUMULATIVE NET SHARES COVERED BY POTENTIAL
PREMIUM RECEIVED WARRANTS OBLIGATION
---------------- ----------------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1995......................... $ 0 0 $ 0
Sales of put warrants..................... 9,223 3,275 73,099
Purchases of call warrants................ (9,223) 0 0
Expiration of warrants.................... 8,133 (2,275) (44,849)
-------- ------- --------
DECEMBER 31, 1996......................... 8,133 1,000 28,250
Sales of put warrants..................... 5,238 2,000 46,050
Purchases of call warrants................ (5,238) 0 0
Expiration of warrants.................... 4,425 (1,000) (28,250)
-------- ------- --------
DECEMBER 31, 1997......................... 12,558 2,000 46,050
Sales of put warrants..................... 20,250 3,700 69,730
Purchases of call warrants................ (4,600) 0 0
Expirations............................... 0 (800) (16,200)
Expiration of warrants.................... (18,200) (2,200) (42,730)
-------- ------- --------
DECEMBER 31, 1998......................... $ 10,008 2,700 $ 56,850
======== ======= ========
</TABLE>
The put warrants entitle the aforementioned independent third party to sell
shares of the Company's common stock to the Company at specified strike prices
and exercise dates, while the call warrants entitle the Company to buy from the
same third party shares of the Company's common stock at specified strike prices
and exercise dates.
The outstanding put warrants and corresponding call warrants expire on May
4 and May 14, 1999, respectively, are exercisable only on the maturity date, and
may be settled in cash or shares of stock, at the Company's option. The May 4
position was closed out in January 1999.
The maximum potential repurchase obligations of the Company as of December
31, 1998 are as follows: 1,500 shares with a strike price of $18.00 or $27,000
and 1,200 shares with a strike price of $24.88 or $29,850. The put warrants have
been classified separately on the balance sheet to reflect the maximum potential
obligation of the Company. There was no impact on basic and diluted net income
per share in 1998, 1997 or 1996 resulting from these transactions.
Income Taxes
Provision for (benefit from) income tax is comprised of its current tax
liability and change in deferred tax assets and liabilities. Deferred tax assets
and liabilities are recognized for the expected tax consequences of
36
<PAGE> 38
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
temporary differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements using enacted tax rates and laws
that will be in effect when the difference is expected to reverse.
Long-Lived Assets
The Company periodically evaluates the recoverability of a long-lived asset
based upon the estimated cash flows estimated to be generated by the related
asset. The evaluation is performed at the lowest level for which there are
identifiable, independent cashflows.
Accounting For Start-Up Costs
Expenditures directly related to and incurred during the start-up phase of
the Company's new manufacturing facilities are deferred and amortized over
future periods. Upon conclusion of the start-up period, these costs are
amortized on a straight-line basis over periods of no more than five years.
Recoverability of these costs is assessed on an ongoing basis and write-downs to
net realizable values are recorded as necessary. At December 31, 1998 and 1997,
start-up costs of $48,980 and $18,473, respectively, were reported as other
assets. See Recent Pronouncements.
Recent Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on when
costs related to software developed or obtained for internal use should be
capitalized or expensed. The SOP is effective for transactions entered into for
fiscal years beginning after December 15, 1998. The Company has reviewed the
provisions of the SOP and does not believe adoption of this standard will have a
material effect on the Company's results of operations, financial position or
cash flows.
In April 1998, the Accounting Standards Executive Committee issued 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 December 31, 1998, start-up costs of $48,980 were reported as other
assets, and, accordingly, the Company expects to charge this amount to income as
the cumulative effect of a change in accounting principle in its financial
statements for the three month period ended March 31, 1999.
In June 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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 amounts to
conform to the 1998 presentation. These reclassifications did not change the
previously reported net income or the total assets of the Company.
37
<PAGE> 39
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 2 -- ACQUISITIONS
Acquisition of Temic
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>
<S> <C>
Purchase price............................................. $99,250
=======
Purchased technology....................................... 19,661
Work force in place........................................ 3,681
In-process technology...................................... 23,425
Other assets, net of assumed liabilities................... 52,483
-------
$99,250
=======
</TABLE>
The Company is amortizing purchased technology and work force in place over
five years. In-process technology was charged to operations upon acquisition. At
December 31, 1998, purchased technology and work force in place, net of
accumulated amortization of $1,966 and $368, respectively, amounted to $17,695
and $3,313, 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. The value of these projects was
determined by estimating the net cash flows from the sale of the products
resulting from the completion of the projects reduced to the percentage of
completion of the project. Net cash flows were then discounted back to their
present value.
The nature of the efforts to develop the purchased in-process technology
into commercially viable products principally relates to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its design
specification, including function, features and technical performance
requirements. The Company expects to incur between $10.0 and $20.0 million per
year in development costs. 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. If the
development of the technology is unsuccessful, the technology may be abandoned
during the development phase.
The Company anticipates the development will be completed and benefits will
begin in the 2000-2001 time frame. The resulting net cash flows from such
products were based on the Company's estimates of revenue, cost of sales,
research and development costs, sales and marketing costs, income taxes,
percentage completion and weighted average rate of return of such projects.
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
38
<PAGE> 40
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
estimate revenue were 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.
Estimated income taxes were consistent with the Company's anticipated tax rate
for the foreseeable future. Estimated percentage completion was based on the
cost of research development to date compared to estimated total expenditure to
complete the project. The discount rate used was based on the Company's required
risk adjusted weighted average rate of return. 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 products. However, the Company cannot guarantee that
it will realize revenue from these products in the amounts estimated and actual
revenue realized from these products may be significantly lower than expected in
the future.
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 December 31, 1998, 82
employees had been terminated and 38 employees remained to be terminated. $3,700
has been charged against the reserve and $3,100 is remaining in the accrual. The
Company believes that the remaining accrual will be sufficient to cover the
remaining termination costs and that planned terminations will be completed and
all costs incurred by 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenues................................ $1,154,201 $1,227,596
Net loss.................................... (35,123) (19,011)
Diluted net income (loss) per share......... $ (0.35) $ (0.19)
</TABLE>
Acquisition of DCT
In June 1998, the Company acquired all of the remaining outstanding common
and preferred stock of DCT for $1,151 cash and 207,966 shares of Atmel common
stock. Certain of the selling shareholders of DCT were officers and family of
officers of Atmel who participated in the transaction on the same terms as other
selling shareholders. Atmel previously owned less than 20 percent of the
preferred stock of DCT and recorded the investment at cost. DCT is engaged in
the design, production and marketing of data communication products. The excess
of the purchase price over the acquired assets amounted to $5,084 and was
allocated to goodwill. Goodwill is being amortized its useful life. At December
31, 1998, goodwill, net of accumulated amortization, amounted to $2,838. The
revenue and net income of DCT is not material to the results of Atmel for the
years ended December 31, 1998 and 1997 and, accordingly, no pro forma results
have been presented.
39
<PAGE> 41
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 3 -- BALANCE SHEET DETAIL
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Income tax receivable....................... $ -- $ 48,000
Deferred income taxes....................... 29,921 53,051
VAT receivable.............................. 10,702 10,222
Other....................................... 34,344 8,085
---------- ----------
TOTAL............................. $ 74,967 $ 119,358
========== ==========
</TABLE>
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Capitalized start-up costs.................. $ 48,980 $ 18,473
Developed technology related to Temic....... 17,695 --
Prepaid royalty............................. 11,400 --
Other....................................... 29,145 23,865
---------- ----------
TOTAL............................. $ 107,220 $ 42,338
========== ==========
</TABLE>
Accrued liabilities and other consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Accrued returns, royalties and licenses..... $ 29,451 $ 35,707
Accrued salaries, benefits and other........ 35,852 21,549
Federal, state, local and foreign taxes..... 27,650 36,564
---------- ----------
TOTAL............................. $ 92,953 $ 93,820
========== ==========
</TABLE>
The Company has entered into a number of technology license agreements with
unrelated third parties. Generally, the agreements require a one-time or annual
license fee. In addition, the Company may be required to pay a royalty on sales
of certain products that are derived under these licensing arrangements. The
royalty expense is accrued in the period in which the revenues incorporating the
technology are recognized.
NOTE 4 -- FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Land........................................ $ 14,591 $ 14,591
Buildings and improvements.................. 416,460 372,976
Machinery and equipment..................... 941,316 918,315
Furniture and fixtures...................... 15,622 9,991
Construction in progress.................... 20,902 24,688
---------- ----------
1,408,891 1,340,561
Less accumulated depreciation and
amortization.............................. (444,765) (354,612)
---------- ----------
TOTAL............................. $ 964,126 $ 985,949
========== ==========
</TABLE>
40
<PAGE> 42
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Fixed assets include machinery and equipment acquired under capital leases
of $547,838 and $444,747 at December 31, 1998 and 1997, respectively, related
accumulated amortization amounted to $281,723 and $160,732, respectively.
Depreciation expense was $190,882, $153,873 and $102,752, in 1998, 1997 and
1996, respectively.
In June 1998, the Company announced a restructuring program which included
the write-down of certain manufacturing equipment and machinery with older
process technology in its Colorado facility. The program is primarily aimed at
focusing the Company's business processes, attaining cost efficiencies and
increasing manufacturing flexibility.
As part of the plan, the Company announced a worldwide workforce reduction
of approximately 600 people, through early retirement, terminations and
attrition in the second half of 1998 and provided $1,300 for severance costs. As
of December 31, 1998, approximately 250 employees had received severance
benefits totaling $1,300 under this program. The rest of the Company's objective
was met primarily through attrition.
As the Company continued to move toward production with 0.35-micron
technology, the Company recognized an impairment charge of $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
manufacturing 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 obtain additional revenue per wafer. However, due to the current
depressed state of the average selling prices for semiconductor memory products,
even the additional output per wafer does not provide a positive gross margin at
the existing fixed cost structure.
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. The Company measured impairment at the plant level which
is the lowest level from which there are identifiable, independent cash flows.
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.
In December 1997, the Company recognized an impairment charge of $43,000
relating to the impairment of machinery and equipment from its old manufacturing
facility (Fab 6) located in Rousset, France. The impairment charge was due to
the projected inability of this old fabrication plant to produce product at
costs acceptable in today's market and the need to consolidate manufacturing in
one location in Rousset, France to take advantage of new technologies in the
Company's new manufacturing facility (Fab 7). 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 expense
was reported as a non-recurring charge in the income statement.
The Company originally estimated that the proceeds from the eventual
disposal of these assets would not be significant. During the year, the Company
continued to use these assets at approximately 50 percent of capacity until
manufacturing operations at Fab 6 were ceased. During November and December
1998, the
41
<PAGE> 43
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Company sought to dispose of the equipment and received offers to purchase
certain equipment in Fab 6. Accordingly, these assets, which have a net book
value of zero, have been classified as assets held for sale. See Subsequent
Events under Note 13.
NOTE 5 -- SHORT-TERM INVESTMENTS
All marketable securities are deemed by management to be available for sale
and are reported at fair value with net unrealized gains or losses reported
within shareholders' equity. Realized gains and losses are recorded based on the
specific identification method. For fiscal years 1998, 1997 and 1996, gross
realized gains and losses were $90, $69 and $9, respectively. The carrying
amount of the Company's investments is shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1998 1997
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Investments
U.S. Government obligations............ $101,838 $ 94,799 $123,516 $122,741
State and municipal securities......... 53,124 60,727 30,962 30,768
Other.................................. 7,345 6,318 5,283 5,249
-------- -------- -------- --------
162,307 161,844 159,761 158,758
Allowance for unrealized losses.......... (463) -- (1,003) --
-------- -------- -------- --------
TOTAL.......................... $161,844 $161,844 $158,758 $158,758
======== ======== ======== ========
</TABLE>
At December 31, 1998, investments with scheduled maturities within one year
were $48,850 and for one to three years were $112,994. At December 31, 1997,
investments with scheduled maturities within one year were $63,222 and for one
year to three years were $95,536. The Company has classified all investments as
short term since it has the intent and ability to redeem them within the year.
NOTE 6 -- BORROWING ARRANGEMENTS
Information with respect to the Company's debt obligations is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Various non-interest-bearing notes............. $ 15,679 $ 6,078
Various interest-bearing notes................. 127,117 89,398
Convertible notes.............................. 265,004 150,000
Capital lease obligations...................... 445,264 393,435
-------- --------
853,064 638,911
Less amount due within one year................ (81,995) (67,522)
-------- --------
LONG-TERM DEBT DUE AFTER ONE YEAR.............. $771,069 $571,389
======== ========
</TABLE>
The non-interest-bearing notes are due in varying amounts through the year
2015 and have been discounted between 7.0 percent and 8.0 percent. The
interest-bearing notes bear interest at rates between 2.6 percent and 6.4
percent and include loans where interest rates are based on the London
Inter-Bank Official Rate and the short-term French PIBOR. A Japanese currency
loan has been recorded net of realized foreign currency gains of $671 and $4,349
at December 31, 1998 and 1997, respectively. A French currency loan has been
recorded net of realized foreign currency loss of $1,928 at December 31, 1998.
42
<PAGE> 44
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
The $150,000 convertible notes bear interest at the rate of 3.25 percent
per annum to June 1, 2000, and thereafter, at the rate of 8.25 percent per
annum. Interest on the notes is payable on June 1 and December 1 of each year,
commencing December 1, 1997. The notes will mature on June 1, 2002. The notes
are convertible into common stock of the Company at the conversion price of
$35.50 per share. The Company accrues interest based on the effective rate of
5.75 percent.
In April 1998, the Company completed a zero coupon convertible debt
financing, which raised $115,004. 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 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. In addition,
the debt is redeemable at the option of the holder as of April 21, 2003, 2008
and 2013, 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.
The Company leases certain manufacturing equipment under capital leases
with average annual interest rates of 6.5 percent and 6.0 percent for 1998 and
1997, respectively. The obligations are recorded net of $123,523, which
represents future interest at December 31, 1998.
Future payments of long-term debt and capital leases are as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER
------ ------- ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Notes payable and convertible
notes........................... 36,087 42,810 26,281 173,169 119,869 9,584
Capital leases.................... 45,908 111,490 69,311 54,270 60,632 103,653
</TABLE>
The carrying amount of the Company's long-term debt instruments (excluding
capital leases) approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be available to the
Company for similar debt obligations at December 31, 1998.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company leases its domestic and foreign sales offices under
non-cancelable operating leases. These leases contain various expiration dates
and renewal options of two to four years. The Company also leases certain
manufacturing equipment under operating leases expiring at various dates through
2006. Rental expense for 1998, 1997 and 1996 was $7,996, $7,586 and $7,402,
respectively. Rental payments over the term of these leases are as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
- ------ ------ ------ ---- ----
<S> <C> <C> <C> <C>
$7,745 $6,950 $4,674 $897 $645
</TABLE>
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. The amount or range of possible loss, if any, is not reasonably
subject to estimation.
43
<PAGE> 45
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 8 -- TAXES ON INCOME
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------ --------
<S> <C> <C> <C>
Federal
Current..................................... $(1,651) $2,196 $ 92,632
Deferred.................................... (5,475) 6,900 (6,618)
State
Current..................................... -- 628 10,458
Deferred.................................... (4,217) (7,524) (161)
Foreign
Current..................................... 10,450 2,000 2,209
Deferred.................................... -- -- 8,911
------- ------ --------
TOTAL INCOME TAX.................... $ (893) $4,200 $107,431
======= ====== ========
</TABLE>
44
<PAGE> 46
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Current deferred income tax assets included in deferred income taxes and
other current assets at December 31, 1998 and 1997 were $74,191 and $68,591,
respectively. The components of the net deferred income tax assets are set forth
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS
Allowance for doubtful accounts........................ 3,382 6,633
Allowance for sales returns............................ 738 1,490
Capital loss carryforward.............................. -- 1,733
Deferred income on shipments to distributors........... 6,752 5,474
Inventory valuation.................................... 5,942 2,999
Net operating loss..................................... 27,868 15,410
Research and development and other tax credits......... 8,231 4,237
Reserve for recurring charges.......................... 2,029 3,831
Reserve for restructuring charges...................... 10,835 18,877
Reserve for royalty.................................... 1,461 6,240
Reserve for employee benefits.......................... 1,196 1,517
Intangible assets and other............................ 5,470 --
Other.................................................. 287 150
-------- --------
Total deferred income tax assets................ 74,191 68,591
Less valuation allowance............................... (26,774) (15,540)
-------- --------
Net deferred income tax assets......................... 47,417 53,051
DEFERRED INCOME TAX LIABILITIES
Fixed assets........................................... (3,044) (34,499)
State taxes............................................ (3,910) --
Deferred grant income.................................. (13,946) --
-------- --------
Total deferred tax liabilities.................. (20,900) (34,499)
-------- --------
TOTAL NET DEFERRED INCOME TAX ASSETS......... $ 26,517 $ 18,552
======== ========
Net short-term deferred tax asset (liability).......... 29,921 53,051
Net long-term deferred tax asset (liability)........... (3,404) (34,499)
-------- --------
TOTAL NET DEFERRED INCOME TAX ASSETS......... $ 26,517 $ 18,552
======== ========
</TABLE>
For the year ended December 31, 1998, the valuation allowance was increased
to $26,774. The change in the valuation allowance from December 31, 1997 of
$11,234 resulted from deferred tax assets arising from the acquisition of Temic,
the realization of which is uncertain.
45
<PAGE> 47
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
The Company's effective tax rate (benefit) differs from the United States
federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
U. S. federal statutory income tax rate....... (35.00)% 35.00% 35.00%
Foreign operations............................ 14.97 (85.10) 0.20
In-process research and development........... 20.24 0.00 0.00
State taxes, net of federal income tax
benefit..................................... (5.38) (35.20) 2.20
Research and development credits.............. 0.00 (61.80) (0.50)
Benefit of foreign sales corporation.......... 0.00 0.00 (2.90)
Change in valuation allowance................. 0.00 240.00 0.00
Tax exempt income............................. (1.29) (24.50) (0.70)
Other, net.................................... 4.71 1.60 1.50
------ ------ -----
EFFECTIVE TAX RATE (BENEFIT).................. (1.75)% 70.00% 34.80%
====== ====== =====
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $11,000 and $15,000,
respectively. The federal net operating loss expires in year 2013 and the state
net operating losses expire in different years between years 2003 and 2013.
Income before income taxes included income (loss) from foreign subsidiaries
of $(7,676), $(13,899) and $22,724 in 1998, 1997 and 1996, respectively.
The Company's U.S. income tax returns for the years 1993 through 1995 are
presently under examination by the Internal Revenue Service. Final proposed
adjustments have not yet been received for these years. The Company believes the
ultimate outcome of the IRS audit will not have a material adverse impact on the
Company's financial position or results.
NOTE 9 -- EMPLOYEE OPTION AND STOCK PURCHASE PLANS
The Company has two stock option plans -- the 1986 Incentive Stock Option
Plan (1986 Plan) and the 1996 Stock Option Plan (1996 Plan). The 1986 Plan
expired in April 1996. The 1996 Plan, which has reserved 4,000 shares of Common
Stock for issuance thereunder, was approved by the shareholders on April 26,
1996. Under the Company's 1996 Plan, the Company may issue common stock directly
or grant options to purchase common stock to employees, consultants and
directors of the Company. Options, which generally vest over four years, are
granted at fair market value on the date of the grant and generally expire ten
years from that date.
Under the 1991 Employee Stock Purchase Plan, qualified employees are
entitled to purchase shares of the Company's common stock at 85 percent of the
fair market value at certain specified dates. Of the 5,500 shares authorized to
be issued under this plan, 2,575 shares were available for issuance at December
31, 1998.
46
<PAGE> 48
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Activity under the Company's 1986 Plan and 1996 Plan is set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------------------------
AVAILABLE EXERCISE AGGREGATE WEIGHTED AVERAGE
FOR NUMBER OF PRICE PER EXERCISE EXERCISE PRICE
GRANT OPTIONS SHARE PRICE PER SHARE
--------- --------- ----------- --------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31,
1995....................... 199 5,112 0.75-33.63 $ 55,725 $10.90
Options authorized........... 4,000 -- -- -- --
Options granted.............. (576) 576 20.15-36.88 14,555 25.27
Options canceled............. 122 (122) 2.16-36.88 (2,134) 17.49
Options expired.............. (142) -- -- -- --
Options exercised............ -- (874) 0.75-33.63 (4,606) 5.27
------ ------ ----------- --------- ------
BALANCES, DECEMBER 31,
1996....................... 3,603 4,692 0.75-36.88 63,540 13.54
Options granted.............. (1,385) 1385 20.19-42.75 36,204 26.14
Options canceled............. 184 (184) 0.75-33.63 (4,790) 26.03
Options exercised............ -- (733) 4.25-42.75 (6,522) 8.90
------ ------ ----------- --------- ------
BALANCES, DECEMBER 31,
1997....................... 2,402 5,160 0.75-42.75 88,432 17.14
Options granted.............. (6,264) 6,264 7.38-19.06 71,562 11.42
Options canceled............. 5,651 (5,651) 7.94-42.75 (110,311) 19.52
Options expired.............. (721) -- -- -- --
Options exercised............ -- (528) 2.13-17.25 (2,624) 4.97
------ ------ ----------- --------- ------
BALANCES, DECEMBER 31,
1998....................... 1,068 5,245 0.75-36.88 $ 47,059 $ 8.97
====== ====== =========== ========= ======
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $11.39, $26.14 and $25.27 per share, respectively. The number of shares
exercisable under the Company's stock option plans at December 31, 1998, 1997
and 1996 were 1,406, 2,734 and 2,463, respectively.
The Company's Board of Directors approved option repricing programs
effective January 14, 1998 and October 9, 1998. Under the repricing program,
current U.S. employees (other than certain insiders) holding outstanding options
with exercise prices above $17.00 and $7.94 per share, respectively, could elect
to amend such options to change the exercise price to $17.00 and $7.94 per
share, the fair market value on the effective date. Accordingly, outstanding
options held by employees electing to participate in the program were amended to
change the exercise price to $17.00 and $7.94 per share. All other terms of such
options remained unchanged, except that the repriced options are not exercisable
for a period of one year after the effective date of the repricing. If an
employee voluntarily terminates his or her employment prior to the end of the
one-year non-exercise period, the amended options will be forfeited and the
unexercised shares returned to the 1996 Plan.
The following table summarizes the stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.75 - 7.38....... 816 4.3 years $3.90 760 $ 3.64
7.94 - 7.94....... 3,525 7.7 7.94 8 7.94
8.13 - 36.19....... 886 6.7 17.19 626 15.94
36.88 - 36.88....... 18 7.4 36.88 12 36.88
----- -----
$ 0.75 - 36.88....... 5,245 7.0 8.97 1,406 9.42
===== =====
</TABLE>
47
<PAGE> 49
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based
Compensation. Accordingly, no compensation cost has been recognized for the 1986
Plan and 1996 Plan. If the compensation cost for the 1986 Plan and 1996 Plan had
been determined based on the fair value at the grant date for options granted in
1998, 1997 and 1996 consistent with the provisions of SFAS 123, the Company's
net income (loss) and net income (loss) per share for 1998, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Net income (loss) -- as reported..................... $(50,038) $ 1,801 $201,722
Net income (loss) -- pro forma....................... $(59,447) $(1,197) $196,641
Basic net income (loss) per share -- as reported..... $ (0.50) $ 0.02 $ 2.06
Basic net income (loss) per share -- pro forma....... $ (0.60) $ (0.01) $ 2.01
Diluted net income (loss) per share -- as reported... $ (0.50) $ 0.02 $ 2.00
Diluted net income (loss) per share -- pro forma..... $ (0.60) $ (0.01) $ 1.95
</TABLE>
The fair value of each option grant for both 1986 Plan and 1996 Plan is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Risk-free interest................................... 5.3% 5.7%-6.9% 5.1%-6.8%
Expected life after vesting (years).................. 0.37-0.75 0.38-1.12 0.95-1.56
Expected volatility.................................. 55% 51.0%-55.0% 38.0%-40.0%
Expected dividend.................................... $0 $0 $0
</TABLE>
The weighted average expected life was calculated based on the period from
the vesting date to the exercise date and the exercise behavior of the
employees.
NOTE 10 -- RETIREMENT PLAN
The Company maintains a 401(k) Tax Deferred Savings Plan (Plan) for the
benefit of qualified employees. In fiscal year 1996, the Company began matching
each eligible employee's contribution with up to a maximum of five hundred
dollars. The matching contribution made by the Company was $804 and $713 for
1998 and 1997, respectively.
NOTE 11 -- OPERATING SEGMENTS
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Statement 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports. It also establishes standards for related disclosures about
products, geographic areas and major customers. The Company has four reportable
segments, each of which require different design, development and marketing
resources to produce and sell semiconductor integrated circuits: Nonvolatile
Memories, Temic, ASICs and Logic. The Nonvolatile Memories segment designs,
develops and markets erasable programmable read-only memories (EPROMs),
electrically erasable programmable read-only memories (EEPROMs), and Flash
memories for a marketplace characterized by standardized products and commodity
pricing. The Temic segment is a wholly owned European subsidiary producing
analog, microcontroller and specialty products to service the automotive,
telecommunications, consumer and industrial markets. Although some of its
products overlap with one or more of the other segments, the Temic segment is
managed as a discrete business with its own design, development, manufacturing
and marketing resources.
48
<PAGE> 50
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
The ASIC segment designs, develops and markets semicustom gate arrays and
cell-based integrated circuits as well as full custom application-specific
integrated circuits to meet specialized customer requirements for high
performance devices in a broad variety of customer-specific applications. The
Logic segment designs, develops and markets microcontrollers, erasable
programmable logic devices (EPLDs), and field programmable gate arrays (FPGAs)
for sale to customers who use them in products for telecommunications,
computers, networking, image processing, industrial and military applications,
and avionics.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on income or loss from operations before interest,
nonrecurring gains and losses, foreign exchange gains and losses, and income
taxes.
The Company's six inch wafer manufacturing facility in Colorado Springs,
Colorado and its eight inch wafer manufacturing facility in Rousset, France are
manufacturing cost centers serving the non-Temic segments. These facilities'
operating costs are reflected in the segments' cost of sales on the basis of
product standard costs. Because operating segments are defined by the products
they design and sell, they do not make sales to each other. Other than Temic,
whose assets are separately identifiable, the Company does not report assets, or
track expenditures on long-lived assets by operating segment.Three of the
Company's reportable segments are groupings of product families each of which
requires different design, development, selling and distribution capabilities.
The Temic segment is also managed separately as a discrete business unit with
its own design, development, manufacturing and marketing resources.
Information about segments:
<TABLE>
<CAPTION>
NONVOLATILE ALL
MEMORIES TEMIC ASIC LOGIC OTHER TOTAL
----------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net revenue from external customers...... $493,662 $238,431 $278,467 $100,532 $ -- $1,111,092
Depreciation and amortization............ -- 14,887 -- -- 184,681 199,568
Segment operating income................. 43,486 4,905 19,749 13,327 -- 81,467
Segment assets........................... -- 133,777 -- -- 1,828,960 1,962,737
Expenditures for long lived assets....... -- 14,802 -- -- 172,926 187,728
YEAR ENDED DECEMBER 31, 1997
Net revenue from external customers...... $659,485 $ -- $212,153 $ 86,644 $ -- $ 958,282
Depreciation and amortization............ -- -- -- -- 158,382 158,382
Segment operating income (loss).......... 122,874 -- (6,826) 18,401 -- 134,449
Segment assets........................... -- -- -- -- 1,822,040 1,822,040
Expenditures for long lived assets....... -- -- -- -- 312,066 312,066
YEAR ENDED DECEMBER 31, 1996
Net revenue from external customers...... $807,496 $ -- $199,743 $ 63,049 $ -- $1,070,288
Depreciation and amortization............ -- -- -- -- 110,988 110,988
Segment operating income................. 281,691 -- 29,773 9,766 -- 321,230
Segment assets........................... -- -- -- -- 1,455,914 1,455,914
Expenditures for long lived assets....... -- -- -- -- 511,019 511,019
</TABLE>
Temic was acquired on March 1, 1998. Accordingly, no comparative segment
information is disclosed and segment operating results for Temic reflect the
period from acquisition to December 31, 1998.
49
<PAGE> 51
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Reconciliations of segment information to financial statements:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues
Total external revenues for reportable
segments............................. $1,111,092 $ 958,282 $1,070,288
Other revenues......................... -- -- --
---------- ---------- ----------
Total consolidated revenue... $1,111,092 $ 958,282 $1,070,288
========== ========== ==========
Operating income (loss)
Total income for reportable segments... $ 81,467 $ 134,449 $ 321,230
Unallocated amounts:
Corporate R&D........................ (11,200) (8,850) (5,179)
Nonrecurring charges................. (66,300) (43,000) --
Corporate expenses................... (23,624) (57,550) (10,579)
---------- ---------- ----------
Consolidated income (loss) before
interest and income taxes......... $ (19,657) $ 25,049 $ 305,472
========== ========== ==========
Assets
Total assets for reportable segments... $ 133,777 $ -- $ --
Other unallocated amounts.............. 1,828,960 1,822,040 1,455,914
---------- ---------- ----------
Consolidated total assets.... $1,962,737 $1,822,040 $1,455,914
========== ========== ==========
</TABLE>
50
<PAGE> 52
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Geographic Information
<TABLE>
<CAPTION>
LONG-LIVED
REVENUES ASSETS
---------- ----------
<S> <C> <C>
1998
United States...................................... $ 387,783 $572,520
Germany............................................ 111,248 65,890
France............................................. 51,972 323,733
Japan.............................................. 89,344 --
Rest of Asia....................................... 270,646 --
Rest of Europe..................................... 145,749 --
Rest of World...................................... 54,350 1,983
---------- --------
Total...................................... $1,111,092 $964,126
========== ========
1997
United States...................................... $ 381,433 $690,875
Germany............................................ 30,949 --
Japan.............................................. 110,971 --
France............................................. 28,121 294,410
Rest of Asia....................................... 270,660 --
Rest of Europe..................................... 94,664 --
Rest of World...................................... 41,484 664
---------- --------
Total...................................... $ 958,282 $985,949
========== ========
1996
United States...................................... $ 374,518 $663,159
Germany............................................ 46,943 --
Japan.............................................. 196,494 --
France............................................. 31,266 203,850
Rest of Asia....................................... 236,748 --
Rest of Europe..................................... 157,328 --
Rest of World...................................... 26,991 414
---------- --------
Total...................................... $1,070,288 $867,423
========== ========
</TABLE>
Revenues are attributed to countries based on delivery locations.
One customer accounted for $156,036, $120,744 and $128,435 in 1998, 1997
and 1996, respectively.
NOTE 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 rights to
purchase ("Rights") one-thousandth of a 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 and 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 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
51
<PAGE> 53
ATMEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
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 earlier of (i)
September 4, 2008, (ii) redemption or exchange of the Rights, or (iii)
consummation of a merger, consolidation or assets sale resulting in expiration
of the Rights.
NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED)
In January 1999, the Company completed the sale of certain items of plant
and equipment located at Fab 6 in Rousset, France for $17,691. The assets sold
had been written down as the result of an impairment charge in the fourth
quarter of 1997. The Company expects to recognize a gain in the first quarter of
1999 of $17,324 in connection with this transaction.
In January 1999, Atmel announced that it signed a non-binding memorandum of
understanding to acquire the Smart Information Transfer (SIT) business of the
Semiconductor Products Sector of Motorola, Inc. Under the terms of the
memorandum of understanding, Atmel intends to purchase substantially all of the
assets of the SIT business and assume certain associated contractual
liabilities. The closing is expected to occur at the end of March 1999 and is
expected to be non-dilutive to Atmel's earnings in 1999.
52
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
January 21, 1999
To the Board of Directors and
Shareholders of Atmel Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholder's equity and of
cash flows present fairly, in all material respects, the financial position of
Atmel Corporation and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
53
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Atmel Corporation
and subsidiaries has been included in this Form 10-K on page 53. In connection
with our audit of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 26 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly the information required to be included therein.
/s/ PricewaterhouseCoopers L.L.P.
San Jose, California
January 22, 1999
54
<PAGE> 56
SCHEDULE II
ATMEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGED CREDITED END OF
DESCRIPTION PERIOD TO EXPENSES TO EXPENSES DEDUCTIONS PERIOD
----------- ------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLE:
Fiscal year ended 1996............... $12,700 $19,425 $ (1,211) $ (2,641)(1) $28,273
Fiscal year ended 1997............... 28,273 52,387 -- (56,037)(1) 24,623
Fiscal year ended 1998............... $24,623 $26,642 $ (1,498) $(15,157)(1) $34,610
SALES RETURN AND ALLOWANCES:
Fiscal year ended 1996............... $13,835 $ 9,190 $(12,423) $ (51) $10,551
Fiscal year ended 1997............... 10,551 8,509 (14,541) (95) 4,424
Fiscal year ended 1998............... $ 4,424 $13,967 $ (4,301) $ -- $14,090
ALLOWANCE FOR INVENTORY OBSOLESCENCE:
Fiscal year ended 1996............... $ 4,246 $ 1,177 $ -- $ -- $ 5,423
Fiscal year ended 1997............... 5,423 54,552 -- (54,490) 5,485
Fiscal year ended 1998............... $ 5,485 $22,070 $ (3,616) $ -- $23,939
</TABLE>
- ---------------
(1) Represents the write-off of specific accounts receivable balances.
55
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
3.1(3) Articles of Incorporation of Registrant, as amended to date.
3.2(1) Bylaws of Registrant.
3.3(6) Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in Exhibit
4.1).
4.1(6) Preferred Shares Rights Agreement dated as of September 4,
1998, between Atmel Corporation and BankBoston, N.A.,
including the Certificate of Determination, the form of
Rights Certificate and the Summary of Rights.
10.1(1)+ 1986 Incentive Stock Option Plan, as amended, and forms of
stock option agreements thereunder.
10.2(1)+ 1991 Employee Stock Purchase Plan, as amended.
10.3(3) Credit Agreement dated April 20, 1995, between Wells Fargo
Bank and Registrant.
10.4(1) Form of Indemnification Agreement between Registrant and its
officers and directors.
10.5(2) Consulting Agreement by and between Norman Hall and
Registrant dated March 1, 1990.
10.6(4) 1996 Stock Plan, as amended and forms of agreements
thereunder.
10.7(5) Indenture, dated as of May 17, 1997, by and among Atmel
S.A., Atmel Corporation and State Street Bank and Trust
Company of California, N.A., as trustee thereunder.
10.8(5) Registration Rights Agreement, dated as of May 15, 1997, by
and among Atmel Corporation and Deutsche Morgan Grenfell
Inc., Alex. Brown & Sons, Incorporated, BNP plc, Credit
Lyonnais Securities, Smith Barney Inc. and Societe Generale
Securities Corp.
10.9(7) Indenture, dated as of April 21, 1998, by and between the
Company and State Street Bank and Trust Company of
California, N.A., as trustee thereunder (including the form
of debenture).
10.10(7) Registration Rights Agreement dated as of April 21, 1998, by
and between the Company and Morgan Stanley & Co.
Incorporated.
13.1 Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1997 (except for the portions of the
1997 Annual Report to the Shareholders expressly
incorporated by reference in the Report on Form 10-K, the
1997 Annual Report to Shareholders is furnished for the
information of the Securities and Exchange Commission and is
not to be deemed "filed").
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (included on the signature pages hereof).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-38882) declared effective on March 19,
1991.
<PAGE> 58
(2) Incorporated by reference to exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
(3) Incorporated by reference to exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(4) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (File No. 333-15823) filed on November 8, 1996.
(5) Incorporated by reference to exhibits to the Company's Report on Form 8-K
(File No. 000-19032) filed on June 4, 1997.
(6) Incorporated by reference to exhibits to the Company's Registration
Statement on Form 8-A (No. 000-19032) filed on September 15, 1998.
(7) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-3, as amended (File No. 333-59261), filed on July 16,
1998.
+ The item listed is a compensatory plan.
<PAGE> 1
EXHIBIT 21.1
ATMEL CORPORATION
SUBSIDIARIES OF REGISTRANT
The following are the subsidiaries of the Registrant:
Atmel (OY) Finland, a Finnish corporation
Atmel Acquisitions Corporation, a United States corporation
Atmel Asia Limited, a Hong Kong corporation
Atmel ES2 GmbH, a German corporation
Atmel ES2 S.A., a French corporation
Atmel ES2, B.V., a Netherlands corporation
Atmel Finance Inc., a United States corporation
Atmel Finland Development Center (OY), a Finnish corporation
Atmel FSC, Inc., a Barbadian corporation
Atmel Helles, a Greek corporation
Atmel Holding GmbH, a German corporation
Atmel Japan K.K., a Japanese corporation
Atmel Korea Limited, a Korean corporation
Atmel Research, a Cayman Islands corporation
Atmel S.A., a French corporation
Atmel SARL, a French corporation
Atmel Singapore Pte. Limited, a Singaporean corporation
Atmel Taiwan Limited, a Taiwanese corporation
Atmel U.K. Limited, a United Kingdom corporation
Dream S.A., a French corporation
ES2 B.V. Netherlands, a Dutch corporation
ES2 Limited, a United Kingdom corporation
ES2 Netherlands B.V., a Dutch corporation
Facility Service GmbH, a German corporation
Inka SARL, a French corporation
MATRA MHS GmbH, a German corporation
MHS Italia Srl, an Italian corporation
MHS S.A., a French corporation
Temic France SNC, A French corporation
Temic Hong Kong Limited, a Hong Kong corporation
Temic Korea Limited, a Korean corporation
Temic Nordic AB, a Norwegian corporation
Temic Philippines, a Philippine corporation
Temic Semiconductor GmbH, a German corporation
Temic Semiconductor N.A. Corporation, a United States
corporation
Temic Semiconductor Singapore PTE Limited, a Singaporean
corporation
Temic UK Limited, a United Kingdom corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Atmel Corporation on Form S-8 (File Nos. 33-39925, 33-93662, 333-15823 and
333-71881) of our report dated January 21, 1999 on our audits of the
consolidated financial statements of Atmel Corporation and subsidiaries as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, which report is included in this Annual Report on Form 10-K
and our report dated January 21, 1999, on our audit of the consolidated
financial statement schedule which report is included in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March , 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 161,721
<SECURITIES> 161,844
<RECEIVABLES> 252,601
<ALLOWANCES> 34,610
<INVENTORY> 240,258
<CURRENT-ASSETS> 891,391
<PP&E> 1,408,891
<DEPRECIATION> 444,765
<TOTAL-ASSETS> 1,962,737
<CURRENT-LIABILITIES> 399,219
<BONDS> 0
0
0
<COMMON> 732,195
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,962,737
<SALES> 1,111,092
<TOTAL-REVENUES> 1,111,092
<CGS> 717,147
<TOTAL-COSTS> 1,130,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,471
<INCOME-PRETAX> (50,931)
<INCOME-TAX> (893)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,038)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
