<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 June 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 July 31, 1998: 97,330,818
<PAGE> 2
ALTERA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 1998
PART I
FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
2
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ALTERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
June 30, Dec.31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,877 $ 22,761
Short-term investments 379,879 354,808
-------- --------
Total cash, cash equivalents,
and short-term investments 443,756 377,569
Accounts receivable, net 60,791 55,251
Inventories 77,236 98,883
Deferred income taxes 66,076 63,076
Other current assets 25,558 21,423
-------- --------
Total current assets 673,417 616,202
Property and equipment, net 152,588 152,417
Investments and other assets 165,879 183,899
-------- --------
$991,884 $952,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,482 $ 20,649
Accrued liabilities 18,564 16,688
Accrued compensation 11,363 20,226
Deferred income on sales to distributors 144,001 128,268
Income taxes payable 860 --
-------- --------
Total current liabilities 197,270 185,831
Convertible subordinated notes -- 230,000
-------- --------
Total liabilities 197,270 415,831
-------- --------
Stockholders' equity:
Common stock 97 89
Additional paid-in capital 309,712 123,544
Retained earnings 484,805 413,054
-------- --------
Total stockholders' equity 794,614 536,687
-------- --------
$991,884 $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 Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1998 1997* 1998 1997*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 160,476 $ 165,857 $ 317,692 $ 311,900
--------- --------- --------- ---------
Costs & expenses:
Cost of sales 61,691 61,887 121,781 117,242
Research and development 14,233 14,439 28,640 26,754
Selling, general and administrative 28,572 29,500 56,710 54,260
--------- --------- --------- ---------
Total costs and expenses 104,496 105,826 207,131 198,256
--------- --------- --------- ---------
Income from operations 55,980 60,031 110,561 113,644
Interest & other income, net 1,665 1,262 1,817 1,591
--------- --------- --------- ---------
Income before taxes 57,645 61,293 112,378 115,235
Provision for income taxes 18,733 20,839 36,520 39,179
--------- --------- --------- ---------
Income before accounting change and equity investment 38,912 40,454 75,858 76,056
Equity in loss of WaferTech (2,296) -- (4,107) --
--------- --------- --------- ---------
Income before cumulative effect of accounting change 36,616 40,454 71,751 76,056
Cumulative effect of change in accounting principle -- -- -- (18,064)
--------- --------- --------- ---------
Net income $ 36,616 $ 40,454 $ 71,751 $ 57,992
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income before accounting change $ 0.41 $ 0.46 $ 0.80 $ 0.86
========= ========= ========= =========
Net income $ 0.41 $ 0.46 $ 0.80 $ 0.66
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income before accounting change $ 0.38 $ 0.41 $ 0.74 $ 0.77
========= ========= ========= =========
Net income $ 0.38 $ 0.41 $ 0.74 $ 0.60
========= ========= ========= =========
WEIGHTED AVERAGE SHARES:
Basic 90,311 88,340 89,601 88,106
========= ========= ========= =========
Diluted 101,612 102,615 101,785 102,378
========= ========= ========= =========
</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
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1997*
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 71,751 $ 57,992
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 4,107 --
Depreciation and amortization 15,213 12,760
Deferred income taxes (3,000) (11,830)
Changes in assets and liabilities:
Accounts receivable, net (5,540) 10,494
Inventories 21,647 3,810
Other current assets 101 (8,828)
Accounts payable and accrued liabilities (5,154) 17,747
Deferred income on sales to distributors 15,733 29,526
Income taxes payable 2,838 (5,183)
--------- ---------
Cash provided by operating activities 117,696 124,552
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (11,999) (48,818)
Net change in short-term investments (25,071) (96,897)
Long-term investments 1,126 (688)
--------- ---------
Cash provided by (used for) investing activities (35,944) (146,403)
--------- ---------
Cash flows from financing activities:
Tax benefit from employee stock transactions 3,695 9,530
Net proceeds from issuance of common stock 7,435 8,000
Repurchase of common stock (51,766) --
--------- ---------
Cash provided by (used for) financing activities (40,636) 17,530
--------- ---------
Net increase (decrease) in cash and cash equivalents 41,116 (4,321)
Cash and cash equivalents at beginning of period 22,761 70,788
--------- ---------
Cash and cash equivalents at end of period $ 63,877 $ 66,467
========= =========
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 $ 30,361 $ 54,795
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)
June 30, Dec. 31,
1998 1997
--------- ---------
<S> <C> <C>
Inventories:
Purchased parts and raw materials $ 266 $ 1,503
Work-in-process 56,213 67,442
Finished goods 20,757 29,938
--------- ---------
$ 77,236 $ 98,883
========= =========
Property and equipment:
Land $ 20,496 $ 20,496
Building 77,291 75,111
Equipment 107,966 102,953
Office furniture and equipment 10,237 9,767
Leasehold improvements 1,109 1,884
--------- ---------
217,099 210,211
Accumulated depreciation and amortization (64,511) (57,794)
--------- ---------
$ 152,588 $ 152,417
========= =========
</TABLE>
Note 3 - Income Per Share:
Basic net income per share is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options and convertible securities. Diluted net income per share gives
effect to all dilutive common shares and other dilutive securities outstanding
during the period. In computing diluted net income 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 the numerators and denominators of the basic and diluted
income per share is presented below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997* 1998 1997*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Income before cumulative
effect of change in
accounting principle $ 36,616 $ 40,454 $ 71,751 $ 76,056
Cumulative effect of change in
accounting principle -- -- -- (18,064)
--------- --------- --------- ---------
Net income $ 36,616 $ 40,454 $ 71,751 $ 57,992
========= ========= ========= =========
Weighted average common shares
outstanding 90,311 88,340 89,601 88,106
========= ========= ========= =========
BASIC NET INCOME PER SHARE:
Income before cumulative
effect of change in
accounting principle $ 0.41 $ 0.46 $ 0.80 $ 0.86
Cumulative effect of change in
accounting principle -- -- -- (0.20)
--------- --------- --------- ---------
Net income $ 0.41 $ 0.46 $ 0.80 $ 0.66
========= ========= ========= =========
Diluted:
Income before cumulative effect of change
in accounting principle $ 36,616 $ 40,454 $ 71,751 $ 76,056
Cumulative effect of change in
accounting principle -- -- -- (18,064)
--------- --------- --------- ---------
Net income 36,616 40,454 71,751 57,992
Convertible notes interest, net of
income taxes and capitalized interest 1,807 1,455 4,039 3,079
--------- --------- --------- ---------
$ 38,423 $ 41,909 $ 75,790 $ 61,071
========= ========= ========= =========
Weighted average common shares outstanding 90,311 88,340 89,601 88,106
Dilutive stock options 3,893 5,285 3,990 5,282
Assumed conversion of notes 7,408 8,990 8,194 8,990
--------- --------- --------- ---------
Weighted average common shares outstanding 101,612 102,615 101,785 102,378
========= ========= ========= =========
DILUTED NET INCOME PER SHARE:
Income before cumulative
effect of change in
accounting principle $ 0.38 $ 0.41 $ 0.74 $ 0.77
Cumulative effect of change in
accounting principle -- -- -- (0.17)
--------- --------- --------- ---------
Net income $ 0.38 $ 0.41 $ 0.74 $ 0.60
========= ========= ========= =========
</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 May and June 1998, the Company repurchased 1,010,000 shares of common stock
for a total price of $34.7 million. The repurchased shares were retired upon
acquisition. Additionally, in June 1998, the Company's Board of Directors
increased the number of shares authorized for repurchase from 2,000,000 to
6,000,000. Since the inception of the repurchase program through June 30, 1998,
the Company has repurchased a total of 1,700,000 shares, of which 1,550,000
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 has not determined the timing of adopting SFAS No. 133
or the impact of such adoption on its financial statements. However, the new
standard's requirement to reflect at market value those financial instruments
utilized to hedge currency will result in fluctuations in the fair value being
included in shareholders' equity, net of tax.
8
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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 second quarter of 1998 were $160.5
million, 3.4% lower than the $165.9 million reported for the same period last
year, and 2.1% higher compared to the first quarter of 1998 net sales of $157.2
million. Net sales in the second quarter of 1998 decreased from the same period
last year primarily due to declines in sales of mainstream and mature product
families, which were partially offset by higher sales of new products including
the FLEX 10K and MAX 7000S product families. Net sales of new products increased
from $29.2 million in the second quarter of 1997 to $69.8 million in the second
quarter of 1998 while net sales of mainstream products, consisting of the MAX
7000, FLEX 8000, and FLASHLogic families, decreased from $103.9 million to $70.2
million. During the same periods, net sales of mature products, consisting of
the Classic and MAX 5000 families, decreased from $22.1 million to $11.0
million. Management expects that the decline in sales of the mainstream and
mature products, which presently comprise approximately half 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 product families increasing
more rapidly than the decline in sales of mainstream and mature product
families. While management is optimistic that new product sales will increase,
there can be no assurances that new product sales growth will offset the decline
in sales of mainstream and mature products.
Sales during the second quarter of 1998 increased over first quarter
sales in North America, Japan and Asia Pacific, while sales in Europe declined.
European sales decreased 5.5% sequentially during the second quarter of 1998,
following a 10.5% sales growth in the first quarter of 1998 as compared to the
fourth quarter of 1997. The decrease reflected declines in major programs of
some of the larger customers in Europe. Despite poor economic conditions in
Japan and Asia Pacific, these regions experienced rapid growth in new product
family sales which more than offset the decline in sales of mainstream and
mature products. However, 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 and further economic decline in these regions
could result in an overall decrease in sales.
During the second quarter of 1998, the Company's inventories decreased
to $77.2 million from $97.3 million at March 31, 1998. The decrease reflects the
decline in mainstream and mature product inventories and an increase in the
Company's new product inventories which currently comprises over half of total
inventories.
9
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Gross Margin. The gross margin percentage in the second quarter of
61.6% was down from 62.7% in the same period a year ago and 61.8% during the
prior quarter. Gross margins during the second quarter decreased slightly from
the first quarter of 1998 reflecting the result of aggressive pricing of newer
products, offset in part by lower manufacturing costs due to process
advancements, increased yields, increased manufacturing activity and lower wafer
costs.
Yields measured as a total for all product families increased slightly
from the first quarter to the second quarter of 1998. The Company experienced
improved yields in the FLEX 10K and FlashLogic product families. However, yields
for the MAX 7000 product families were lower than yields in the first quarter as
a result of the transition of certain devices in the MAX 7000 product families
to new and more advanced processes. 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
$14.2 million for the second quarter of 1998, which is relatively even with the
$14.4 million for the same period a year ago and the $14.4 million in the prior
quarter. 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 sales, research and development
expenditures were 8.9% and 8.7% for the second quarters of 1998 and 1997,
respectively, and were 9.2% for the first quarter of 1998. Historically, the
level of research and development expenditures as a percentage of sales has
fluctuated in part due to the timing of the purchase of 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 sales.
The Company expects to continue to make significant investments in
prototyping of the MAX 7000S, FLEX 6000 and FLEX 10K product families. 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. The Company has announced
"Raphael," a new architecture that will enable the manufacture of complex
programmable logic devices (PLD) at capacities exceeding those found in the
largest PLDs in the market today. The Company is also developing its next
generation software package, Quartus. The Company currently expects Raphael and
Quartus to be available in the first half of 1999. 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
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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. Second quarter selling, general,
and administrative expenses of $28.6 million are $928,000 lower than the same
quarter a year ago and $434,000 higher than the prior quarter. Compared to the
same period a year ago, the decrease in selling, general and administrative
expenses relates primarily to lower advertising, commissions and legal costs,
offset by higher payroll costs as a result of increased headcount. The increase
in selling, general, and administrative expenses from the first to the second
quarter of 1998 was the result of additional accruals for litigation costs,
offset by decreased labor and other employee-related 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. Second quarter 1998 operating income of $56.0
million, representing 34.9% of net sales, was lower than the 36.2% for the same
quarter a year ago and higher than the 34.7% achieved during the first quarter
of 1998. The year-to-year decrease in operating income, as a percentage of net
sales, was mainly attributable to the overall decrease in the Company's gross
margin.
Interest and Other Income. Interest and other income increased compared
to the same quarter a year ago and the first quarter of 1998. Interest and other
income consists of interest income on cash balances available for investment
offset by interest expense related to the Company's convertible notes (such
interest expense is net of capitalized interest incurred during the construction
of the new headquarters). The increase in interest and other income from the
first to the second quarter of 1998 is a result of lower interest expense as a
result of the retirement of the convertible subordinated debt coupled with
higher cash balances available for investment.
Income Taxes. The Company's provision for income taxes was 32.5% for
the six months ended June 30, 1998 compared to 34.0% for the year ended December
31, 1997. The decrease in the income tax provision 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% equity ownership in the joint venture company and certain rights to procure
output from the facility at market prices. 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 six months
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of 1998, the Company recorded a charge of $4.1 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 three- and six-month periods ended June 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 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
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<PAGE> 13
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 $66.2 million in the first six months of 1998, from $377.6 million
at December 31, 1997 to $443.8 million at June 30, 1998. The increase is mainly
attributable to net income of $71.8 million, adjusted by non-cash items
including the equity in the loss of WaferTech and depreciation and amortization
aggregating $19.3 million. Also during the first six months of 1998, the Company
repurchased 1,550,000 shares of its common stock for $51.8 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 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 foreign currencies. However, in January
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. 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 date computations
using 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 compliance program, the Company anticipates that by
early 1999, its information systems, databases and programs and its software
products will be compliant with year 2000 standards, specifically DISC PD-2000-1
as published by the British Standards Institute. The Company has implemented new
information systems which are year 2000 compliant and does not anticipate that
it will incur material expenditures for the resolution of any remaining year
2000 issues relating to either its own information systems, databases and
programs or its software products. However, the Company could be adversely
impacted by year 2000 issues faced by major distributors, suppliers, customers,
vendors, and financial service organizations ("Third Parties") with which the
Company interacts. Management continues the process of determining the impact,
if any, that Third Parties who are not year 2000 compliant may have on the
financial condition or results of operations of the Company. Based solely on
responses received from certain Third Parties thus far, 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 year
2000 issues of such Third Parties.
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, unforeseen year 2000 issues faced by significant third parties
with which the Company interacts, and general market conditions. Additional
risk
14
<PAGE> 15
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
JUNE 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 MAX 5000, MAX 7000, FLEX 8000, or MAX 9000 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, MAX 5000, MAX 7000, FLEX 8000, MAX 9000,
FLEX 10K 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-
17
<PAGE> 18
five other U.S. semiconductor companies seeking monetary damages and injunctive
relief based on such companies' alleged infringement of certain patents held by
the Lemelson Foundation. Because the lawsuit against the Company is still in its
preliminary 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 the Lemelson
Foundation will not succeed in obtaining significant monetary damages or an
injunction against the manufacture and sale of the Company's PLD products, or
succeed in invalidating any of the Company's patents. Although no assurances can
be given as 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 13,
1998 at 10:00 a.m. The following matters were acted upon at the meeting:
<TABLE>
<CAPTION>
VOTES BROKER
MATTER VOTES VOTES WITHHELD/ NON-
ACTED UPON FOR AGAINST ABSTENTIONS VOTES
---------- ----- ------- ----------- ------
<S> <C> <C> <C> <C>
1. Election of directors to the Company's
Board of Directors:
Rodney Smith 79,982,542 387,045 0 0
Charles M. Clough 80,053,575 316,012 0 0
Michael A. Ellison 80,071,828 297,759 0 0
Paul Newhagen 80,072,943 296,644 0 0
Robert W. Reed 80,071,302 298,285 0 0
William E. Terry 80,071,012 298,575 0 0
Deborah D. Triant 80,073,455 296,132 0 0
2. Approval of amendment to the 1996 Stock 47,611,706 32,314,767 199,887 243,227
Option Plan to increase the number of
shares of Common Stock reserved for
issuance from 5,300,000 to 6,500,000
3. Approval of amendment to the 1987 78,407,931 1,531,022 187,407 243,227
Employee Stock Purchase Plan to increase
the number of shares of Common
Stock reserved for issuance from
2,800,000 to 3,100,000
4. Approval of the adoption of the 1998 62,666,653 17,211,542 248,565 242,827
Director Stock Option Plan and the 170,000
shares of Common Stock reserved thereunder
5. Ratification of the appointment of Price 80,258,899 54,856 55,832 0
Waterhouse LLP (as succeeded by
PricewaterhouseCoopers LLP) as independent
accountants for the Company for the fiscal
year ending December 31, 1998
</TABLE>
18
<PAGE> 19
Item 5. Other Information
The Securities and Exchange Commission recently adopted certain
amendments to its rules governing the submission by stockholders of proposals
intended to be represented at meetings of stockholders. These amendments, which
became effective on June 29, 1998, included granting the Company the right to
exercise discretionary voting authority with respect to certain stockholder
proposals that the Company did not have notice of within a specified time period
prior to the meeting.
The Company currently intends to hold its 1999 Annual Meeting of
Stockholders in May 1999 and to mail proxy statements relating to such meeting
in April 1999. Pursuant to the SEC's new amendments, any stockholder who intends
to present a proposal at the Company's 1999 Annual Meeting of Stockholders
without requesting the Company to include such proposal in the Company's proxy
statement must notify the Company no later than February 22, 1999 of his or her
intention to present the proposal. Otherwise, the Company intends to exercise
discretionary voting authority with respect to such stockholder proposal
pursuant to authority conferred on the Company by proxies to be solicited by the
Board of Directors of the Company and delivered to the Company in connection
with the meeting.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the six months ended
June 30, 1998.
(b) Reports on Form 8-K
None.
19
<PAGE> 20
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: August 13, 1998
20
<PAGE> 21
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 63,877
<SECURITIES> 379,879
<RECEIVABLES> 60,791
<ALLOWANCES> 4,550
<INVENTORY> 77,236
<CURRENT-ASSETS> 673,417
<PP&E> 152,588
<DEPRECIATION> 64,511
<TOTAL-ASSETS> 991,884
<CURRENT-LIABILITIES> 197,270
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 794,517
<TOTAL-LIABILITY-AND-EQUITY> 991,884
<SALES> 317,692
<TOTAL-REVENUES> 317,692
<CGS> 121,781
<TOTAL-COSTS> 121,781
<OTHER-EXPENSES> 85,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,832
<INCOME-PRETAX> 112,378
<INCOME-TAX> 36,520
<INCOME-CONTINUING> 75,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,751
<EPS-PRIMARY> 0.80<F1>
<EPS-DILUTED> 0.74
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
