<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-16617
ALTERA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0016691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Innovation Drive, San Jose, California 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 544-7000
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 at least the past 90 days.
Yes X No _____
Number of shares of common stock outstanding at November 6, 1998: 97,294,293
<PAGE> 2
ALTERA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
PART I
FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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ALTERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 88,409 $ 22,761
Short-term investments 406,444 354,808
---------- ----------
Total cash, cash equivalents,
and short-term investments 494,853 377,569
Accounts receivable, net 64,667 55,251
Inventories 70,039 98,883
Deferred income taxes 67,579 63,076
Other current assets 27,116 21,423
---------- ----------
Total current assets 724,254 616,202
Property and equipment, net 152,981 152,417
Investments and other assets 154,309 183,899
---------- ----------
$1,031,544 $ 952,518
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,361 $ 20,649
Accrued liabilities 19,891 16,688
Accrued compensation 16,214 20,226
Deferred income on sales to distributors 150,307 128,268
Income taxes payable 2,767 --
---------- ----------
Total current liabilities 202,540 185,831
Convertible subordinated notes -- 230,000
---------- ----------
Total liabilities 202,540 415,831
---------- ----------
Stockholders' equity:
Common stock 97 89
Additional paid-in capital 303,959 123,544
Retained earnings 524,948 413,054
---------- ----------
Total stockholders' equity 829,004 536,687
---------- ----------
$1,031,544 $ 952,518
========== ==========
</TABLE>
See accompanying notes to financial information.
3
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ALTERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 164,218 $ 162,126 $ 481,910 $ 474,026
--------- --------- --------- ---------
Costs & expenses:
Cost of sales 62,511 60,749 184,292 177,991
Research and development 15,223 14,334 43,863 41,088
Selling, general and administrative 27,142 29,163 83,852 83,423
--------- --------- --------- ---------
Total costs and expenses 104,876 104,246 312,007 302,502
--------- --------- --------- ---------
Income from operations 59,342 57,880 169,903 171,524
Interest and other income, net 5,065 925 6,882 2,516
--------- --------- --------- ---------
Income before taxes 64,407 58,805 176,785 174,040
Provision for income taxes 20,931 19,994 57,451 59,173
--------- --------- --------- ---------
Income before accounting change and equity investment 43,476 38,811 119,334 114,867
Equity in loss of WaferTech (3,333) -- (7,440) --
--------- --------- --------- ---------
Income before cumulative effect of accounting change 40,143 38,811 111,894 114,867
Cumulative effect of change in accounting principle -- -- -- (18,064)
--------- --------- --------- ---------
Net income $ 40,143 $ 38,811 $ 111,894 $ 96,803
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income before accounting change $ 0.41 $ 0.44 $ 1.21 $ 1.30
========= ========= ========= =========
Net income $ 0.41 $ 0.44 $ 1.21 $ 1.10
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income before accounting change $ 0.40 $ 0.40 $ 1.14 $ 1.17
========= ========= ========= =========
Net income $ 0.40 $ 0.40 $ 1.14 $ 0.99
========= ========= ========= =========
WEIGHTED AVERAGE SHARES:
Basic 97,235 88,782 92,173 88,332
========= ========= ========= =========
Diluted 100,902 103,068 101,488 102,610
========= ========= ========= =========
</TABLE>
* Restated to reflect change in accounting principle.
See accompanying notes to financial information.
4
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ALTERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997*
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 111,894 $ 96,803
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- 18,064
Equity in loss of WaferTech 7,440 --
Depreciation and amortization 22,487 19,428
Deferred income taxes (4,503) (21,830)
Changes in assets and liabilities:
Accounts receivable, net (9,416) 19,227
Inventories 28,844 (22,115)
Other assets 4,447 6,257
Accounts payable and accrued liabilities (8,097) 27,051
Deferred income on sales to distributors 22,039 35,273
Income taxes payable 6,349 (5,183)
--------- ---------
Cash provided by operating activities 181,484 172,975
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (18,363) (71,381)
Net change in short-term investments (51,636) (113,449)
Net change in long-term investments 552 (688)
--------- ---------
Cash used for investing activities (69,447) (185,518)
--------- ---------
Cash flows from financing activities:
Tax benefit from employee stock transactions 4,806 16,835
Net proceeds from issuance of common stock 9,153 12,202
Repurchase of common stock (60,348) --
--------- ---------
Cash provided by (used for) financing activities (46,389) 29,037
--------- ---------
Net increase in cash and cash equivalents 65,648 16,494
Cash and cash equivalents at beginning of period 22,761 70,788
--------- ---------
Cash and cash equivalents at end of period $ 88,409 $ 87,282
========= =========
Supplemental disclosure of non-cash items:
Conversion of subordinated debt into common stock $ 226,787 --
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 48,421 $ 70,195
Cash paid during the period for interest 6,568 6,613
</TABLE>
*Restated to reflect change in accounting principle.
See accompanying notes to financial information.
5
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ALTERA CORPORATION
NOTES TO FINANCIAL INFORMATION
(Unaudited)
Note 1 - Interim Statements:
In the opinion of the Company, the accompanying unaudited financial data
contains all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information included therein. This
financial data should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report to
Stockholders for the year ended December 31, 1997. Results for the interim
period presented are not necessarily indicative of results for the entire year.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Note 2 - Balance Sheet Details:
<TABLE>
<CAPTION>
(In thousands)
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Inventories:
Purchased parts and raw materials $ 101 $ 1,503
Work-in-process 50,564 67,442
Finished goods 19,374 29,938
--------- ---------
$ 70,039 $ 98,883
========= =========
Property and equipment:
Land $ 20,496 $ 20,496
Building 79,895 75,111
Equipment 110,998 102,953
Office furniture and equipment 10,421 9,767
Leasehold improvements 1,128 1,884
--------- ---------
222,938 210,211
Accumulated depreciation and amortization (69,957) (57,794)
--------- ---------
$ 152,981 $ 152,417
========= =========
</TABLE>
Note 3 - Earnings Per Share:
Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period and excludes the dilutive effect of stock options and convertible
securities. Diluted earnings per share gives effect to all dilutive common
shares and other dilutive securities outstanding during the period. In computing
diluted earnings per share, the average stock price for the period is used in
determining the number of shares assumed to be purchased from exercise of stock
options.
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ALTERA CORPORATION
NOTES TO FINANCIAL INFORMATION (continued)
(Unaudited)
A reconciliation of basic and diluted earnings per share is presented below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1998 1997 1998 1997*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Income before cumulative effect of
change in accounting principle $ 40,143 $ 38,811 $ 111,894 $ 114,867
Cumulative effect of change in accounting principle -- -- -- (18,064)
--------- --------- --------- ---------
Net income $ 40,143 $ 38,811 $ 111,894 $ 96,803
========= ========= ========= =========
Weighted average common shares outstanding 97,235 88,782 92,173 88,332
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income before cumulative effect of
change in accounting principle $ 0.41 $ 0.44 $ 1.21 $ 1.30
Cumulative effect of change in accounting principle -- -- -- (0.20)
--------- --------- --------- ---------
Net income $ 0.41 $ 0.44 $ 1.21 $ 1.10
========= ========= ========= =========
Diluted:
Income before cumulative effect of change
in accounting principle $ 40,143 $ 38,811 $ 111,894 $ 114,867
Cumulative effect of change in accounting principle -- -- -- (18,064)
--------- --------- --------- ---------
Net income 40,143 38,811 111,894 96,803
Convertible notes interest, net
of income taxes and capitalized interest -- 2,020 4,039 5,099
--------- --------- --------- ---------
$ 40,143 $ 40,831 $ 115,933 $ 101,902
========= ========= ========= =========
Weighted average common shares outstanding 97,235 88,782 92,173 88,332
Dilutive stock options 3,667 5,296 3,882 5,288
Assumed conversion of notes -- 8,990 5,433 8,990
--------- --------- --------- ---------
Weighted average common shares outstanding 100,902 103,068 101,488 102,610
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of $ 0.40 $ 0.40 $ 1.14 $ 1.17
change in accounting principle
Cumulative effect of change in accounting principle -- -- -- (0.18)
--------- --------- --------- ---------
Net income $ 0.40 $ 0.40 $ 1.14 $ 0.99
========= ========= ========= =========
</TABLE>
*Restated to reflect change in accounting principle.
7
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ALTERA CORPORATION
NOTES TO FINANCIAL INFORMATION (continued)
(Unaudited)
Note 4 - Common Stock Repurchase:
In September 1998, the Company repurchased 260,000 shares of common stock for a
total price of $8.6 million. The repurchased shares were retired upon
acquisition. Since the inception of the repurchase program through September 30,
1998, the Company has repurchased a total of 1,960,000 shares, of which
1,810,000 shares were repurchased in 1998.
Note 5 - Convertible Subordinated Notes:
In June 1995, the Company issued $230.0 million of convertible subordinated
notes (the "Notes") due in June 2002 and bearing an interest rate of 5.75%,
payable semiannually. The Notes were convertible into shares of the Company's
common stock at a price of $25.585 per share. On May 15, 1998, the Company
called for the redemption of the Notes effective June 16, 1998. As a result,
substantially all of the Notes were converted into 8,988,649 shares of common
stock with the remaining Notes redeemed at a price of $1,033.06 per $1,000
principal amount of the Notes. Total semi-annual interest paid on the Notes
during 1998 was $6.5 million. The unamortized debt issuance costs as of the
redemption date of approximately $3.1 million was recorded as a reduction to
additional paid-in-capital.
Note 6 - New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
accounting and reporting on derivative instruments for periods beginning after
June 15, 1999 and early adoption is permitted. SFAS No. 133 requires that all
derivative instruments be recognized in the balance sheet as either assets or
liabilities and measured at fair value. Furthermore, SFAS No. 133 requires
current recognition in earnings of changes in the fair value of derivative
instruments depending on the intended use of the derivative and the resulting
designation. The Company is currently evaluating the effects of the new standard
and has not determined its method or timing of adopting SFAS No. 133 or the
impact on its financial statements.
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ALTERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. Net sales during the third quarter of 1998 were $164.2
million, 1.3% higher than the $162.1 million reported for the same period last
year, and 2.3% higher compared to the second quarter of 1998 net sales of $160.5
million. Net sales in the third quarter of 1998 increased from the same period
last year primarily due to increases in sales of new and mainstream products,
which were partially offset by lower sales of mature products. Net sales of new
products, consisting of FLEX10KA/10KE, FLEX6000, and MAX7000A product families,
increased from $2.2 million in the third quarter of 1997 to $23.5 million in the
third quarter of 1998 while net sales of mainstream products, consisting of
MAX7000S, MAX9000, and FLEX10K, increased from $32.6 million to $58.8 million.
During the same periods, net sales of mature products, consisting of the
Classic, MAX5000, MAX7000, and FLEX8000 families, decreased from $111.8 million
to $67.9 million. Management expects that the decline in sales of the mature
products, which presently comprise approximately 41.3% of the Company's revenue
base, will continue. The Company's ability to maintain or increase net sales in
the future is dependent on sales of new and mainstream product families
increasing more rapidly than the decline in sales of mature product families.
While management is optimistic that new and mainstream product sales will
increase, there can be no assurances that new and mainstream product sales
growth will offset the decline in sales of mature products.
Sales during the third quarter of 1998 increased over second quarter
sales in North America and Europe, while sales in Japan declined and sales in
Asia Pacific remained relatively flat. Japan sales decreased 5.4% sequentially
during the third quarter of 1998, following a 7.7% sales growth in the second
quarter of 1998 as compared to the first quarter of 1998. The poor economic
environment in Japan and Asia Pacific may limit the Company's future sales of
its products in these regions, particularly in the communications segment. As
the economic environment in Japan and Asia Pacific remains unfavorable, the
Company's overall sales may be adversely impacted as a result.
During the third quarter of 1998, the Company's inventories decreased
to $70.0 million from $77.2 million at June 30, 1998. The decrease reflects the
decline in mainstream and mature product inventories partially offset by an
increase in the Company's new product inventories.
Gross Margin. The gross margin percentage in the third quarter of
61.9% was down from 62.5% in the same period a year ago and was up from 61.6%
during the prior quarter. The decrease from the same period a year ago was
primarily attributable to lower selling prices, partially offset by lower
manufacturing costs due to increased yields and lower wafer costs. Gross margins
during the third quarter increased slightly
9
<PAGE> 10
from the second quarter of 1998 as a result of lower manufacturing costs due to
process advancements, increased yields, and lower wafer costs.
Yields measured as a total for all product families increased
slightly from the second quarter to the third quarter of 1998. The Company
experienced improved yields in FLEX10KA and MAX9000. However, yields for the
MAX7000 and FLASHlogic product families were lower than yields in the second
quarter. Yields increased in the third quarter of 1998 over the same period a
year ago primarily due to improved yields in FLEX10K and FLEX10KA. The Company
continues to spend significant research and development resources to improve
production yields on both new and established products. Difficulties in
production yields often occur when the Company is beginning production of new
products or transitioning to new processes. These difficulties can potentially
result in significantly higher costs and lower product availability. Management
expects to continue to introduce new and established products using new process
technologies and may encounter similar start-up difficulties during the
transition to such process technologies. Further, production throughput times
vary considerably among the Company's wafer suppliers, and the Company may
experience delays from time to time in processing some of its products which
also may result in higher costs and lower product availability.
Research and Development. Research and development expenditures were
$15.2 million for the third quarter of 1998, which is higher than the $14.3
million for the same period a year ago and the $14.2 million in the prior
quarter. Relative to the same period a year ago, expenses increased primarily as
a result of increased headcount and increased depreciation expense on
engineering tools. Research and development expenses increased from the second
quarter to the third quarter of 1998 mainly as a result of increased labor
expenses. The research and development expenditures include expenditures for
labor, prototype and pre-production costs, development of process technology,
development of software to support new products and design environments, and
development of new packages. As a percentage of net sales, research and
development expenditures were 9.3% and 8.8% for the third quarters of 1998 and
1997, respectively, and were 8.9% for the second quarter of 1998. Historically,
the level of research and development expenditures as a percentage of net sales
has fluctuated in part due to the timing of the purchase of masks and wafers
used in development and prototyping of new products. The Company expects that,
in the long term, research and development expenses will increase in absolute
dollars but may fluctuate as a percentage of net sales.
The Company expects to continue to make significant investments in
the prototyping of FLEX10KA/10KE, FLEX6000, and MAX7000A product families.
During the third quarter of 1998, the Company announced APEX (formerly
code-named Raphael), its newest family of devices, which utilizes a
revolutionary, new architecture for programmable logic devices. Given the
revolutionary architecture and density of the APEX product family, APEX will be
entirely supported by the Company's fourth-generation software design tool,
Quartus, which is currently in development. Therefore, the commercial viability
of APEX is dependent on the user acceptance of Quartus. Because customers may be
slow in adopting and learning
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Quartus, management can give no assurance of the acceptance of Quartus and
therefore of the APEX family. The Company currently expects APEX and Quartus to
be available in the first half of 1999. The Company also continues to focus its
efforts on the development of new programmable logic chips, related development
software and hardware, and advanced semiconductor wafer fabrication processes.
However, there can be no assurance that the Company will accomplish its goals in
the development and subsequent introduction of new products and manufacturing
processes. Furthermore, there is no assurance that these products will achieve
market acceptance, that the new manufacturing processes will be successful, or
that the suppliers will provide the Company with the quality or quantity of
wafers and materials that the Company requires. The Company must continue to
develop and introduce new products in a timely manner to help counter the
industry's historical trend of declining prices as products mature.
Selling, General, and Administrative. Third quarter selling, general,
and administrative expenses of $27.1 million was $2.1 million lower than the
same quarter a year ago and $1.4 million lower than the prior quarter. Selling,
general and administrative expenses in the third quarter of 1998 decreased
primarily as a result of reductions in legal, advertising and other
administrative expenses. Selling, general, and administrative expenses include
commission and incentive expenses, advertising and promotional expenditures,
legal, and salary expenses related to field sales, marketing, and administrative
personnel.
Operating Income. Third quarter 1998 operating income of $59.3
million, representing 36.1% of net sales, was higher than the 35.7% for the same
quarter a year ago and the 34.9% achieved during the second quarter of 1998. The
year-to-year increase in operating income, as a percentage of net sales, was
mainly attributable to the overall decrease in the Company's operating expenses.
Interest and Other Income, Net. Interest and other income was $5.1
million for the third quarter of 1998, which is higher than the $925,000 for the
same period a year ago and the $1.7 million in the prior quarter. Interest and
other income in the third quarter of 1998 increased from the same period last
year primarily due to the reduction in interest expense related to the
conversion of the convertible subordinated notes and the increase in interest
income related to higher cash balances available for investment. Interest and
other income mainly consists of interest income on cash balances available for
investment.
Provision for Income Taxes. The Company's effective income tax rate
was 32.5% for the nine months ended September 30, 1998 compared to 34.0% for the
year ended December 31, 1997. The decrease in the rate is due in part to
increased research and development tax credits, a change in the geographic mix
of income, and an increased amount of tax-exempt interest income in 1998
compared to 1997.
Equity Investment. In June 1996, Altera, TSMC, and several other
partners formed WaferTech, LLC ("WaferTech"), a joint venture company in the
development stage, to build and operate a wafer manufacturing plant in Camas,
Washington. In return for a $140.4 million cash investment, Altera received an
18.0% equity ownership in the joint venture company and certain rights to
procure output from the facility at market prices.
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<PAGE> 12
The Company accounts for this investment under the equity method based on the
Company's ability to exercise significant influence on the operating and
financial policies of WaferTech. During the first nine months of 1998, the
Company recorded a charge of $7.4 million representing the Company's equity in
the loss of WaferTech, net of tax.
Change in Accounting Principle. In October 1997, the Company changed
its accounting method for recognizing sales to distributors with an effective
date of January 1, 1997. The Company previously recognized sales upon shipment
as title passes to customers, including distributors, net of appropriate
reserves for sales returns and allowances. The accounting change involves the
deferral of sales recognition on shipments to distributors until the product is
sold to the end customer. The Company believes that deferral of distributor
sales and related gross margins until the product is shipped by the distributors
results in a more meaningful measurement of operations and is a preferable
method of accounting for distributor sales. The cumulative effect in prior years
of the change in accounting method was $18.1 million. The results of operations
and cash flows for the nine-month period ended September 30, 1997 have been
restated to reflect the accounting change.
Future Results. Future operating results will depend on the Company's
ability to develop, manufacture, and sell complicated semiconductor components
and complex software that offers customers greater value than products of
competing vendors. The Company's efforts in this regard may not be successful.
Also, a number of factors outside of the Company's control, including general
economic conditions and cycles in world markets, exchange rate fluctuations, or
a lack of growth in the Company's end markets could impact future results. The
Company is highly dependent upon subcontractors to fabricate silicon wafers and
perform assembly and testing services. Disruptions or adverse supply conditions
arising from market conditions, political strife, labor disruptions, natural or
man-made disasters, other factors, and normal process variations could have a
material adverse effect on the Company's future operating results. Competitive
break-throughs and particularly competitive pricing could also impact future
operating results. Additionally, litigation relating to competitive patents and
intellectual property could have an adverse impact on the Company's financial
condition or operating results.
The Company owns numerous United States patents and has additional
pending United States and foreign patent applications on its semiconductor and
software products. The Company also has technology licensing agreements with
AMD, Cypress Semiconductor, Intel, and Texas Instruments that give the Company
royalty-free rights to design, manufacture, and package products using certain
patents they control. Other companies have filed applications for, or have been
issued, other patents and may develop, or obtain proprietary rights relating to,
products or processes competitive with those of the Company. From time to time
the Company may find it desirable to obtain additional licenses from the holders
of patents relating to products or processes competitive with those of the
Company. Although its patents and patent applications may have value in
discouraging competitive entry into the Company's market segment and the Company
believes that its current licenses will assist it in developing additional
products, there can be no assurance that any additional
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<PAGE> 13
patents will be granted to the Company, that the Company's patents will provide
meaningful protection from competition, or that any additional products will be
developed based on any of the licenses that the Company currently holds. The
Company believes that its future success will depend primarily upon the
technical competence and creative skills of its personnel, rather than on its
patents, licenses, or other proprietary rights.
The Company, in the normal course of business, from time to time
receives and makes inquiries with respect to possible patent infringements. As a
result of inquiries received from companies, it may be necessary or desirable
for the Company to obtain additional licenses relating to one or more of its
current or future products. There can be no assurance that such additional
licenses could be obtained, and, if obtainable, could be obtained on conditions
that would not have a material adverse effect on the Company's operating
results. If the inquiring companies were to allege infringement of their
patents, as is the case in the Company's current litigation with competitors,
there can be no assurance that any necessary licenses could be obtained, and, if
obtainable, that such licenses would be on terms or conditions that would not
have a material adverse effect on the Company. In addition, if litigation were
initiated, there can be no assurance that these companies would not succeed in
obtaining significant monetary damages or an injunction against the manufacture
and sale of one or more of the Company's product families. It may be necessary
or desirable for the Company to incur significant litigation expenses to enforce
its intellectual property rights.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments
increased by $117.3 million in the first nine months of 1998, from $377.6
million at December 31, 1997 to $494.9 million at September 30, 1998. The
increase is mainly attributable to net income of $111.9 million, adjusted by
non-cash items including the equity in the loss of WaferTech and depreciation
and amortization aggregating $29.9 million. Also during the first nine months of
1998, the Company repurchased 1,810,000 shares of its common stock for $60.4
million.
The Company believes that its cash, cash equivalents, and short-term
investments, combined with cash generated from ongoing operations, will be
adequate to finance the Company's operations and capital expenditures for at
least the next year.
Impact of Currency and Inflation. The Company purchases the majority
of its materials and services in U.S. dollars, and most of its foreign sales are
transacted in U.S. dollars. However, Altera does have Japanese yen denominated
purchase contracts with Sharp Corporation of Japan for processed silicon wafers.
In recent years, the Company did not hold or purchase any foreign exchange
contracts for the purchase or sale of Japanese yen. During the first half of
1998, the Company entered into a forward exchange contract to purchase Malaysian
ringgit to meet a portion of its firm contractual commitments of ringgit
required in 1998. At the end of the third quarter of 1998 the Company had no
open forward contracts. The Company may choose to enter into similar contracts
from time to time should conditions appear favorable. Effects of inflation on
Altera's financial results have not been significant.
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<PAGE> 14
Year 2000 Compliance
Most computer programs were designed to perform data computations on
the last two digits of the numerical value of a year. When a computation
referencing the year 2000 is performed, these systems may interpret "00" as the
year 1900 and could either stop processing date-related computations or could
process them incorrectly. Computations referencing the year 2000 might be
invoked at any time, but are likely to begin occurring in the year 1999.
Pursuant to its year 2000 ("Y2K") compliance program, the Company has
undertaken various initiatives intended to ensure that its computer equipment
and software will function properly with respect to dates in the year 2000 and
thereafter. As used herein, the term "computer equipment and software" includes
systems that are commonly considered information technology ("IT") systems
(e.g., accounting, data processing and telephone systems) as well as those that
are not commonly considered IT systems (e.g., manufacturing equipment, building
and facility operations systems). In addition, the Company has also reviewed the
software products it sells, and has upgraded and will upgrade such products to
offer full Y2K compliance. Based upon its identification and assessment efforts
to date, the Company anticipates that by June 1999, it will be fully compliant
with Y2K standards, specifically DISC PD-2000-1 as published by the British
Standards Institute. The Company has not incurred and does not anticipate that
it will incur material expenditures for the remediation of any Y2K issues.
The Company could be adversely impacted by Y2K issues faced by major
distributors, suppliers, customers, vendors, and financial service organizations
("Third Parties") with which the Company interacts. The most reasonably likely
worst case scenario for the Company with respect to the Y2K problem is the
failure of a major distributor or supplier to be Y2K compliant such that the
distribution of Altera products or the supply of components for such products is
interrupted temporarily. This could result in the Company not being able to
produce or distribute product for a period of time, which in turn could result
in lost sales and profits. Based solely on responses received from over 90% of
these Third Parties, the Company has no reason to believe that there will be any
material adverse impact on the Company's financial condition or results of
operations relating to any Y2K issues of such Third Parties. However, there can
be no assurance that the responses received are accurate or that the Y2K status
reflected in such responses will not change, and the failure of either of these
to be true could have a material adverse effect on the Company's financial
condition or results of operations. Management will continue to determine the
impact, if any, that Third Parties who are not Y2K compliant may have on the
financial condition or results of operations of the Company.
The Company has charged its business resumption planning committee to
evaluate Y2K business disruption scenarios, coordinate the establishment of Y2K
contingency plans, and identify and implement preemptive strategies. Contingency
plans for critical business processes will be developed by June 1999.
14
<PAGE> 15
Safe Harbor Notice
This Quarterly Report on Form 10-Q contains "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward looking statements
are generally written in the future tense and/or are preceded by words such as
"expects," "suggests," "believes," "anticipates," or "intends." The Company's
future results of operations and the other forward looking statements contained
in this Report involve a number of risks and uncertainties, many of which are
outside the Company's control. Some of these risks and uncertainties are
described in proximity to forward looking statements that are contained in the
section of this Report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Factors that could cause actual
results to differ materially from projected results include but are not limited
to risks associated with the Company's ability to achieve continued cost
reductions and maintain gross margins, the Company's ability to achieve and
maintain appropriate inventory mix and levels and respond successfully to
changes in product demand, the ability of price reductions to increase demand
and strengthen the Company's market share over the long term, successful
development and subsequent introduction of new products through investment in
research and development and application of new process technologies to old and
new product lines, market acceptance of the Company's new products and continued
demand for the Company's existing products, litigation involving intellectual
property rights, issuance of new patents and acquisition of other intellectual
property rights, the Company's ability to finance its operations and
expenditures, the ability of Third Parties to be Y2K compliant, and general
market conditions. Additional risk factors are disclosed in the Company's 1997
Annual Report on Form 10-K on file with the Securities and Exchange Commission.
15
<PAGE> 16
ALTERA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
PART II
OTHER INFORMATION
16
<PAGE> 17
Item 1. Legal Proceedings
In June 1993, Xilinx, Inc. ("Xilinx") brought suit against the
Company seeking monetary damages and injunctive relief based on the Company's
alleged infringement of certain patents held by Xilinx. In June 1993, the
Company brought suit against Xilinx, seeking monetary damages and injunctive
relief based on Xilinx's alleged infringement of certain patents held by the
Company. In April 1995, the Company filed a separate lawsuit against Xilinx in
Delaware, Xilinx's state of incorporation, seeking monetary damages and
injunctive relief based on Xilinx's alleged infringement of one of the Company's
patents. In May 1995, Xilinx counterclaimed against the Company in Delaware,
asserting defenses and seeking monetary damages and injunctive relief based on
the Company's alleged infringement of certain patents held by Xilinx.
Subsequently, the Delaware case has been transferred to California. Due to the
nature of the litigation with Xilinx and because the lawsuits are still in the
pre-trial stage, the Company's management cannot estimate the total expense, the
possible loss, if any, or the range of loss that may ultimately be incurred in
connection with the allegations. Management cannot ensure that Xilinx will not
succeed in obtaining significant monetary damages or an injunction against the
manufacture and sale of the Company's MAX5000, MAX7000, FLEX8000, or MAX9000
families of products, or succeed in invalidating any of the Company's patents.
Although no assurances can be given as to the results of these cases, based on
the present status, management does not believe that any of such results will
have a material adverse effect on the Company's financial condition or results
of operations.
In August 1994, Advanced Micro Devices, Inc. ("AMD") brought suit
against the Company seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by AMD. In September
1994, Altera answered the complaint asserting that it is licensed to use the
patents which AMD claims are infringed and filed a counterclaim against AMD
alleging infringement of certain patents held by the Company. In October 1997,
upon completion of trials bifurcated from the infringement claims, the Court
ruled that the Company is licensed under all patents asserted by AMD in the
suit. In December 1997, AMD filed a Notice of Appeal of the Court's rulings. Due
to the nature of the litigation with AMD, and because AMD has appealed the court
rulings that the Company is licensed under all of the patents asserted by AMD in
the suit, the Company's management cannot estimate the total expense, the
possible loss, if any, or the range of loss that may ultimately be incurred in
connection with the allegations. Management cannot ensure that AMD will not
succeed in obtaining significant monetary damages or an injunction against the
manufacture and sale of the Classic, MAX5000, MAX7000, FLEX8000, MAX9000,
FLEX10K and FLASHlogic product families, or succeed in invalidating any of the
Company's patents remaining in the suit. Although no assurances can be given to
the results of this case, based on its present status, management does not
believe that any of such results will have a material adverse effect on the
Company's financial condition or results of operations.
In August 1998, the Company received notice that the Lemelson
Medical, Education & Research Foundation, Limited Partnership (the "Lemelson
Foundation") brought suit against the Company and twenty-five other U.S.
semiconductor companies seeking monetary damages and injunctive relief based on
such
17
<PAGE> 18
companies' alleged infringement of certain patents held by the Lemelson
Foundation. In October 1998, the Company and the Lemelson Foundation reached
agreement on a settlement of the suit against the Company, pursuant to which the
Company obtained from the Lemelson Foundation fully paid-up nonexclusive
licenses to, and covenants not to sue under, the aforesaid patents and any
currently pending patent applications. As a result of this settlement, the
Lemelson Foundation has withdrawn its suit against the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the nine months
ended September 30, 1998.
(a) Reports on Form 8-K
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTERA CORPORATION
/s/ NATHAN SARKISIAN
-----------------------------------------------
Nathan Sarkisian, Senior Vice President
(duly authorized officer) and Chief
Financial Officer (principal financial officer)
Date: November 12, 1998
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
27.1 Financial Data Schedule for the nine months ended
September 30, 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 88,409
<SECURITIES> 406,444
<RECEIVABLES> 64,667
<ALLOWANCES> 6,691
<INVENTORY> 70,039
<CURRENT-ASSETS> 724,254
<PP&E> 152,981
<DEPRECIATION> 69,957
<TOTAL-ASSETS> 1,031,544
<CURRENT-LIABILITIES> 202,540
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 828,907
<TOTAL-LIABILITY-AND-EQUITY> 1,031,544
<SALES> 481,910
<TOTAL-REVENUES> 481,910
<CGS> 184,292
<TOTAL-COSTS> 184,292
<OTHER-EXPENSES> 127,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 176,785
<INCOME-TAX> 57,451
<INCOME-CONTINUING> 119,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,894
<EPS-PRIMARY> 1.21<F1>
<EPS-DILUTED> 1.14
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
