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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-16617
ALTERA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0016691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
101 INNOVATION DRIVE
SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices)
408-544-7000
(Registrant's telephone number, including area code)
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 August 6, 1999: 198,876,871
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<TABLE>
<CAPTION>
NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 ............................................ 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998................. 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 .......................... 5
Notes to Condensed Consolidated Financial Statements ................ 6
ITEM 2: Management's Discussion and Analysis of Financial Conditions
and Results of Operations ........................................ 9
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.................................................... 17
ITEM 4: Submission of Matters to a Vote of Security Holders.................. 18
ITEM 5: Other Information ................................................... 18
ITEM 6: Exhibits and Reports on Form 8-K..................................... 19
Signatures.................................................................... 20
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
ALTERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 182,796 $ 131,029
Short-term investments 492,974 448,077
---------- ----------
Total cash, cash equivalents,
and short-term investments 675,770 579,106
Accounts receivable, net 77,908 56,138
Inventories 65,861 69,869
Deferred income taxes 71,394 69,644
Other current assets 22,552 24,776
---------- ----------
Total current assets 913,485 799,533
Property and equipment, net 150,621 152,320
Investments and other assets 161,869 141,478
---------- ----------
$1,225,975 $1,093,331
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,549 $ 14,479
Accrued liabilities 14,470 16,615
Accrued compensation 12,767 19,356
Deferred income on sales to distributors 166,308 161,160
---------- ----------
Total current liabilities 201,094 211,610
---------- ----------
Stockholders' equity:
Common stock 199 98
Capital in excess of par value 359,188 314,182
Retained earnings 665,494 567,441
---------- ----------
Total stockholders' equity 1,024,881 881,721
---------- ----------
$1,225,975 $1,093,331
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 197,783 $ 160,476 $ 384,182 $ 317,692
Costs & expenses:
Cost of sales 72,268 61,691 141,422 121,781
Research and development 19,862 14,233 36,885 28,640
Selling, general and administrative 33,741 28,572 66,061 56,710
--------- --------- --------- ---------
Total costs and expenses 125,871 104,496 244,368 207,131
--------- --------- --------- ---------
Income from operations 71,912 55,980 139,814 110,561
Interest and other income, net 6,005 1,665 10,623 1,817
--------- --------- --------- ---------
Income before income taxes and
equity investment 77,917 57,645 150,437 112,378
Provision for income taxes 25,323 18,733 48,892 36,520
--------- --------- --------- ---------
Income before equity investment 52,594 38,912 101,545 75,858
Equity in loss of WaferTech, LLC (1,516) (2,296) (3,492) (4,107)
--------- --------- --------- ---------
Net income $ 51,078 $ 36,616 $ 98,053 $ 71,751
========= ========= ========= =========
EARNINGS PER SHARE:
Basic $ 0.26 $ 0.20 $ 0.50 $ 0.40
========= ========= ========= =========
Diluted $ 0.25 $ 0.19 $ 0.48 $ 0.37
========= ========= ========= =========
WEIGHTED AVERAGE SHARES:
Basic 197,533 180,622 196,699 179,202
========= ========= ========= =========
Diluted 206,748 203,224 206,060 203,570
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ALTERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 98,053 $ 71,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in loss of WaferTech 3,492 4,107
Depreciation and amortization 13,948 15,213
Deferred income taxes (1,750) (3,000)
Changes in assets and liabilities:
Accounts receivable, net (21,770) (5,540)
Inventories 3,367 21,647
Other assets 17,685 101
Accounts payable and accrued liabilities (15,824) (5,154)
Deferred income on sales to distributors 5,148 15,733
Income taxes payable 38,763 6,533
--------- ---------
Cash provided by operating activities 141,112 121,391
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,953) (11,999)
Net change in short-term investments (44,897) (25,071)
Investment in WaferTech, LLC (37,500) --
Net change in long-term investments (588) 1,126
--------- ---------
Cash used for investing activities (93,938) (35,944)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 17,439 7,435
Repurchase of common stock (12,846) (51,766)
--------- ---------
Cash provided by (used for) financing activities 4,593 (44,331)
--------- ---------
Net increase in cash and cash equivalents 51,767 41,116
Cash and cash equivalents at beginning of period 131,029 22,761
--------- ---------
Cash and cash equivalents at end of period $ 182,796 $ 63,877
========= =========
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 $ 14,540 $ 30,361
Cash paid during the period for interest -- 6,568
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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ALTERA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and Basis of Presentation:
The condensed consolidated financial information as of June 30, 1999 and for the
six month periods ended June 30, 1999 and 1998 included herein is unaudited and
has been prepared by the Company in accordance with generally accepted
accounting principles and reflects all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to state
fairly the Company's financial position, results of operations, and cash flows
for the periods presented. The December 31, 1998 balance sheet was derived from
audited financial statements on that date. All significant intercompany
transactions and balances have been eliminated.
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 and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results will differ from those estimates, and such differences
may be material to the financial statements. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K, as filed on March 30, 1999, with
the Securities and Exchange Commission. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for any future periods.
The Company has an interim period that ends on the Friday nearest June 30, 1999.
For presentation purposes, the interim financial statements and accompanying
notes refer to the Company's interim period end as June 30th.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Note 2 - Balance Sheet Details (in thousands):
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<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Inventories:
Purchased parts and raw materials $ 57 $ 65
Work-in-process 45,990 46,207
Finished goods 19,814 23,597
--------- ---------
$ 65,861 $ 69,869
========= =========
Property and equipment:
Land $ 20,496 $ 20,496
Building 80,583 80,338
Equipment and software 121,181 115,332
Office furniture and fixtures 10,674 10,287
Leasehold improvements 1,293 1,183
--------- ---------
234,227 227,636
Accumulated depreciation and amortization (83,606) (75,316)
--------- ---------
$ 150,621 $ 152,320
========= =========
</TABLE>
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Note 3 - Common Stock Split:
On April 21, 1999, the Company declared a two-for-one stock split in the form of
a 100 percent stock dividend to holders of record of the Company's common stock
on May 4, 1999. The dividend shares were distributed to stockholders on May 19,
1999. All share and per share data has been retroactively restated to reflect
the two-for-one stock split for all periods presented.
Note 4 - 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. Diluted earnings
per share gives effect to all dilutive potential common shares outstanding
during a period. In computing diluted earnings per share, the tax benefit
resulting from employee stock transactions and the average stock price for the
period are used in determining the number of shares assumed to be purchased from
exercise of stock options.
A reconciliation of basic and diluted earnings per share is presented below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Net income $ 51,078 $ 36,616 $ 98,053 $ 71,751
========= ========= ========= =========
Weighted average common shares
outstanding 197,533 180,622 196,699 179,202
========= ========= ========= =========
Basic earnings per share $ 0.26 $ 0.20 $ 0.50 $ 0.40
========= ========= ========= =========
Diluted:
Net income $ 51,078 $ 36,616 $ 98,053 $ 71,751
Convertible notes interest, net of
income taxes and capitalized interest -- 1,807 -- 4,039
--------- --------- --------- ---------
$ 51,078 $ 38,423 $ 98,053 $ 75,790
========= ========= ========= =========
Weighted average common shares
outstanding 197,533 180,622 196,699 179,202
Dilutive stock options 9,215 7,786 9,361 7,980
Assumed conversion of notes -- 14,816 -- 16,388
--------- --------- --------- ---------
Weighted average common shares
outstanding 206,748 203,224 206,060 203,570
========= ========= ========= =========
Diluted earnings per share $ 0.25 $ 0.19 $ 0.48 $ 0.37
========= ========= ========= =========
</TABLE>
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Note 5 - Common Stock Repurchase:
In March, July and August of 1999, the Company repurchased 520,000, 275,000 and
120,000 shares of common stock for an aggregate cost of $12.8 million, $10.0
million and $4.3 million, respectively. The repurchased shares were retired upon
acquisition. Since the inception of the repurchase program, the Company has
repurchased a total of 5,135,000 shares.
Note 6 - 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 $25.59 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 7 - 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, 2000 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 expects that its adoption of SFAS No. 133, which will
become effective in fiscal year 2001, will not have a material effect on the
Company's financial statements.
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ITEM 2: Management's Discussion and Analysis of Financial Conditions and Results
of Operations
The following Discussion and Analysis of Financial Conditions and Results
of Operations 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. 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 continue to achieve die size
reductions, 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, 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 1998
Annual Report on Form 10-K on file with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Sales
Sales during the second quarter of 1999 were $197.8 million, or 23.2%
higher than the $160.5 million reported for the same period last year. Sales in
the second quarter of 1999 increased from the same period last year primarily
due to increases in unit sales of New and Mainstream products, which were
partially offset by lower unit sales of Mature products. Sales of New products
increased to $52.2 million or 216.2% in the second quarter of 1999 from $16.5
million in the second quarter of 1998, while sales of Mainstream products
increased to $73.9 million or 38.7% from $53.3 million. During the same periods,
sales of Mature products decreased to $58.2 million or 22.5% from $75.0 million.
Sales during the six months ended June 30, 1999 were $384.2 million or 20.9%
higher than the $317.7 million reported for the same period last year. This
increase is attributable primarily to the increase in unit sales of New and
Mainstream products partially offset by a decrease in unit sales of Mature
products. Sales of New and Mainstream products increased $66.8 million and $47.4
million or 262.8% and 49.1%, respectively, in the first six months of 1999
compared to the first six months of 1998. During the same periods, sales of
Mature products decreased $46.9 million or 28.4%. Management expects that the
decline in sales of the Mature products, which presently comprise approximately
29.4% of the Company's revenue base during the second quarter of 1999 and 30.8%
during the six months ended June 30, 1999, will continue. The Company's ability
to maintain or increase sales in the future is dependent on sales of New and
Mainstream product families increasing more rapidly than the decline
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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.
In the third quarter of 1998, the composition of the Company's product
categories was changed and prior data reported here have been restated to
reflect those changes. New products now consist of the Company's 3.3-volt (or
lower) families, are manufactured on a 0.35-micron (or finer) geometry and are
made up of the FLEX 10KA/10KE, FLEX 6000/6000A, MAX 7000A/7000B and APEX
families. Sales of New products represented 26.4% of total sales in the second
quarter of 1999 as compared to 10.3% in the second quarter of 1998. Mainstream
products now include the MAX 7000S, MAX 9000 and FLEX 10K families. Sales of
Mainstream products represented 37.4% of total sales in the second quarter of
1999 and 33.2% in the second quarter of 1998. Mature products now consist of the
Classic, MAX 5000, MAX 7000 and FLEX 8000 families. Sales of Mature products
represented 29.4% of total sales in the second quarter of 1999 and 46.8% in the
second quarter of 1998. Other products include Tools, FLASHlogic, Configuration
Devices, MPLDs, and FSPs. Other products represented 6.8% and 9.7% of total
sales in the second quarters of 1999 and 1998, respectively.
Sales in North America, Japan and Asia Pacific increased, while sales in
Europe declined as a percentage of total sales in the first six months of 1999
compared to the first six months of 1998. Sales in North America increased 22.7%
to $215.4 million from $175.6 million, Japan increased 28.7% to $75.1 million
from $58.3 million and Asia Pacific increased 74.6% to $21.8 million from $12.5
million. European sales remained flat at approximately $71.0 million for each of
the respective periods.
Gross Margin
Gross Margin for the three and six months ended June 30, 1999 were $125.5
million or 63.5% of sales and $242.8 million or 63.2% of sales, respectively.
Gross margin for the comparable periods in 1998 were $98.8 million or 61.6% of
sales and $195.9 million or 61.7% of sales, respectively. The increase was
primarily attributable to cost reductions as a result of manufacturing process
improvements.
Yields measured as a total for all product families increased slightly in
the six months ended June 30, 1999 over the same period a year ago primarily due
to improved yields on FLEX 10K and FLEX 10KA products, partially offset by yield
reduction on FLEX 10KE products. The Company achieved additional cost reductions
on its FLEX 10KA family through new wafer process technologies (die shrinks).
The Company continues to spend significant research and development resources to
improve production yields on both new and established products. Difficulties in
production yields can 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.
For example, in the second quarter of 1999, limited availability of packaging
material (piece parts) used in certain of the Company's new and proprietary
FineLine BGA ("Ball Grid Array") packages limited production. This in turn
limited shipments of the Company's new
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FLEX 10KE product family. 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 for the three months ended June 30,
1999 and 1998 were $19.9 million and $14.2 million, or 10.0% and 8.9% of sales,
respectively. For the six months ended June 30, 1999 and 1998, research and
development expenses were $36.9 million and $28.6 million, or 9.6% and 9.0% of
sales, respectively. 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. In absolute dollars, expenses
increased primarily as a result of increased headcount, spending on masks,
wafers, package development and outside development services. This increased
spending relates to the development of new products including FLEX 10KA/10KE,
MAX 3000A, MAX 7000A/7000B and APEX, as well as the Quartus software.
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 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 sales.
The Company expects to continue to make significant investments in the
development of FLEX 10KA/10KE, MAX 3000A, MAX 7000A/7000B, APEX and Quartus
software. During the first quarter of 1999, the Company shipped its newest
family of devices, APEX, and its new fourth generation software design tool,
Quartus. APEX devices utilize a new architecture for programmable logic and
address higher density designs. APEX devices are exclusively supported by the
Company's new software design tool, Quartus. The commercial success of the APEX
family is dependent on the acceptance of its use in high-density designs and the
successful introduction and acceptance of the Quartus design software.
Management expects both products to be successful in the market, however, it can
give no assurances that this will be the case. 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.
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Selling, General and Administrative
Selling, general and administrative expenses for the three months ended
June 30, 1999 and 1998 were $33.7 million and $28.6 million, or 17.1% and 17.8%
of sales, respectively. For the six months ended June 30, 1999 and 1998,
selling, general and administrative expenses were $66.1 million and $56.7
million, or 17.2% and 17.9% of sales, respectively. Selling, general, and
administrative expenses include commission and incentive expenses, advertising
and promotional expenditures, legal expenses and salary expenses related to
field sales, marketing and administrative personnel. In absolute dollars, the
increase in selling, general and administrative expenses was mainly driven by
increased personnel expenses for marketing and administration, higher commission
and incentive expenses associated with higher sales.
Income from Operations
Income from operations for the second quarters of 1999 and 1998 were $71.9
million and $56.0 million, or 36.4% and 34.9% of sales, respectively. For the
six months ended June 30, 1999 and 1998, income from operations were $139.8
million and $110.6 million, or 36.4% and 34.8% of sales, respectively. The
year-to-year increase in operating income, as a percentage of sales, was
primarily due to improvements in gross margin.
Interest and Other Income
Interest and other income for the three months ended June 30, 1999 and 1998
were $6.0 million and $1.7 million, respectively. For the six months ended June
30, 1999 and 1998, interest and other income were $10.6 million and $1.8
million, respectively. Interest and other income consists mainly of interest
income on cash balances available for investment. The increase in interest and
other income was primarily due to the reduction in interest expense related to
the conversion of the convertible subordinated notes during the second quarter
of 1998 and the increase in interest income related to higher cash balances
available for investment. The increase in interest and other income was
partially offset by a $1.2 million charge attributed to the write-off of an
equity investment during the first quarter of 1999.
Provision for Income Taxes
The Company's effective tax rate was 32.5% for the three and six months
ended June 30, 1999 and 1998.
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Equity Investment
In June 1996, the Company, TSMC and several other partners formed
WaferTech, LLC ("WaferTech"), a joint-venture company, to build and operate a
wafer manufacturing plant in Camas, Washington. In return for a $140.4 million
cash investment, the Company received an 18% equity ownership in the
joint-venture company and certain rights and obligations to procure up to 27% of
the factory's output at market prices. In January 1999, the Company purchased
from Analog Devices, Inc. an additional 5% equity ownership interest in
WaferTech for approximately $37.5 million, increasing its ownership interest to
23% and enabling the Company to procure up to 35% of the factory's output 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. The Company's equity in the net
loss of WaferTech was $1.5 million and $3.5 million for the three and six months
ended June 30, 1999, respectively, as compared to $2.3 million and $4.1 million
for the same periods a year ago.
Future Results
Future operating results will depend on the Company's ability to develop,
manufacture and sell complex semiconductor components and programming software
that offer customers greater value than solutions offered by competing vendors.
The Company's efforts in this regard may not be successful. The Company is
developing programmable chips for applications that are presently served by
other ASIC vendors. These vendors have well-established market positions and a
solution that has been proven technically feasible and economically competitive
over several decades. There can be no assurance that the Company will be
successful in displacing ASIC vendors in the targeted applications and
densities. Furthermore, other programmable logic vendors are targeting these
applications and may be successful in securing market share to the exclusion of
the Company. Moreover, standard cell technologies are increasingly used by the
Company's customers to achieve greater integration in their systems; this may
not only impede the Company's efforts to penetrate the ASIC market but may also
displace the Company's products in the applications that it presently serves.
The Company's future growth will depend on its ability to continually and, on a
timely basis, introduce new products, and to continue to improve the performance
of the Company's products in response to both evolving demands of the market
place and competitive product offerings.
The Company is highly dependent upon subcontractors to manufacture silicon
wafers and perform assembly, test and shipment to end customers. The Company is
also dependent on its wafer foundry partners to improve process technologies in
a timely manner to enhance the Company's product designs and cost structure.
Their inability to do so could have a severe negative impact on the Company. The
vast majority of the Company's products are manufactured and shipped to
customers by subcontractors located in Asia, principally Japan, Taiwan, Korea,
the Philippines, Hong Kong and Malaysia. Disruptions or adverse supply
conditions arising from market conditions, political strife, labor disruptions
and other factors could have adverse consequences on the Company's future
results. Natural or man-made disasters, normal process fluctuations and
variances in manufacturing yields could have a severe negative impact on
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the Company's operating capabilities. The Company has sought to diversify its
operating risk by participating in the WaferTech joint venture to manufacture
silicon wafers with other partners in Camas, Washington. In October 1998,
production began at WaferTech. WaferTech is currently in the initial stages of
production volumes and has yet to make a profit. Although the Company expects
future WaferTech production volumes and profitability to increase, the ramp up
of WaferTech's production has not met the targeted level to achieve such
profitability. There can be no assurances that the worldwide supply and demand
for semiconductor wafers will be such that WaferTech will make a profit and that
WaferTech will not continue to have an adverse impact on the Company's operating
results.
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 adversely
impact future results. An important component of the Company's growth, the
networking equipment market, has been growing at a slower rate in recent years.
Should this trend continue, the Company's growth in future years may be limited.
Because of the foregoing and other factors that might affect the Company's
operating results, past financial performance should not be considered an
indicator of future performance, and investors should not use historical trends
to anticipate future results. In addition, the cyclical nature of the
semiconductor industry and other factors have resulted in a highly volatile
price of the Company's common stock.
Liquidity and Capital Resources
Since its inception, the Company has used a combination of equity and debt
financing and cash flow from operations to support its operating activities.
During the first six months of 1999, cash, cash equivalents and short-term
investments increased by $96.7 million to $675.8 million from $579.1 million at
December 31, 1998. During the first six months of 1999, the Company's operating
activities generated net cash of $141.1 million. This cash flow was primarily
attributable to net income of $98.1 million, adjusted by depreciation and
amortization of $13.9 million, an increase in income taxes payable and a
decrease in other assets of $38.8 million and $17.7 million, respectively,
partially offset by an increase in accounts receivable of $21.8 million and a
decrease in accounts payable and accrued liabilities of $15.8 million. Cash used
in investing activities of $93.9 million for the first six months of 1999 is
primarily the result of net purchases of short-term investments of $44.9
million, an additional investment in WaferTech, LLC of $37.5 million and
purchases of property, plant and equipment of $11.0 million. Financing
activities provided cash of $4.6 million for the first six months of 1999
primarily from proceeds from exercises of stock options of $17.4 million, offset
partially by repurchase of common stock of $12.8 million.
As of June 30, 1999, the Company had $675.8 million of cash, cash
equivalents and short-term investments available to finance future growth. The
Company believes the available sources of funds and
14
<PAGE> 15
cash expected to be generated from operations will be adequate to finance
current operations and capital expenditures for at least the next year.
The Company purchases the majority of its materials and services in U.S.
dollars, and its foreign sales are transacted in U.S. dollars. Altera does have
Japanese yen denominated purchase contracts with Sharp Corporation ("Sharp") of
Japan for processed silicon wafers. Effective August 1, 1999, all purchase
contracts with Sharp are denominated in U.S. dollars. In recent years, the
Company has not entered into any foreign exchange contracts for the purchase or
sale of Japanese yen. At the end of the second quarter of 1999, the Company had
no open forward contracts. The Company may choose to enter into such contracts
from time to time should conditions appear favorable. Effects of inflation on
Altera's financial results have not been significant.
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. As of the end of June 1999, all computer equipment
and software that are material to the Company's internal business operations
have been determined to be Y2K compliant. With respect to MAX+PLUS II, the
Company's third-generation software product, the Company has determined that it
is fully compliant with Y2K standards, specifically DISC PD-2000-1 as published
by the British Standards Institute. While the Company believes that its newest
software product, Quartus, is also Y2K compliant, this software product is
currently undergoing formal Y2K compliance testing, which is scheduled to be
completed by the first half of October 1999. 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
15
<PAGE> 16
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 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, if the responses received from these Third Parties are
not accurate or circumstances change, then there could be an unforeseen material
adverse impact on the Company's financial condition and 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 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. These
contingency plans were fully developed by the end of June 1999. Altera will
maintain compliance of its essential business systems and continue to track the
vendors and manufacturers of these system components in order to seek to resolve
any Y2K issues that may be identified in the second half of 1999.
16
<PAGE> 17
PART II OTHER INFORMATION
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 District
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 District Court's
rulings. In April 1999, the Federal Circuit Court ruled in AMD's favor on its
appeal, finding that Altera is not licensed to AMD's patents, and remanded the
case back to the District Court for further proceedings. Altera filed a petition
for rehearing before the Federal Circuit Court to seek an overturn of this
determination, which was denied. Further proceedings will now take place in the
District Court. Due to the nature of the litigation with AMD, 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 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.
17
<PAGE> 18
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 26, 1999
at 10:00 a.m. The following matters were acted upon at the meeting:
<TABLE>
<CAPTION>
VOTES BROKER
MATTER FOR VOTES WITHHELD/ NON-
ACTED UPON VOTES AGAINST ABSTENTIONS VOTES
---------- ----- ------- ----------- -----
<S> <C> <C> <C> <C>
1. Rodney Smith 84,475,985 5,871,136 0 0
Charles M. Clough 84,465,048 5,882,073 0 0
Michael A. Ellison 84,609,694 5,737,427 0 0
Paul Newhagen 84,609,894 5,737,227 0 0
Robert W. Reed 84,589,794 5,757,327 0 0
Deborah D. Rieman 84,456,370 5,890,751 0 0
William D. Terry 84,598,799 5,748,322 0 0
2. Approval of amendment of the 1996 58,039,082 32,205,752 102,387 100
Stock Option Plan to Increase from
13,000,000 to 18,000,000 the number
of shares of Common Stock Reserved
for issuance thereunder.
3. Approval of amendment of the 1987 88,119,723 2,138,620 88,878 100
Employee Stock Purchase Plan to
increase from 6,200,000 to 6,600,000
the number of shares of Common Stock
reserved for issuance thereunder.
4. Ratification of the appointment 90,244,844 23,776 78,501 0
of PriceWaterhouseCoopers LLP as
independent accountants for the
Company for the fiscal year ending
December 31, 1999.
</TABLE>
ITEM 5. Other Information
On April 21, 1999, the Board of Directors of the Company approved a
two-for-one stock split in the form of a stock dividend. Holders of record of
the Company's common stock on May 4, 1999 received one additional share of
Company common stock for each share held. The market price for Altera common
stock as reported by Nasdaq reflected the stock split beginning May 20, 1999. In
connection with the stock split, the Board of Directors of the Company also
authorized doubling from 6,000,000 to 12,000,000 the number of shares authorized
for repurchase under the Company's share repurchase program.
18
<PAGE> 19
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the six months ended June 30, 1999.
(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 16, 1999
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule for the six months ended June 30, 1999.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 182,796
<SECURITIES> 492,974
<RECEIVABLES> 77,908
<ALLOWANCES> 5,256
<INVENTORY> 65,861
<CURRENT-ASSETS> 913,485
<PP&E> 150,621
<DEPRECIATION> 83,606
<TOTAL-ASSETS> 1,225,975
<CURRENT-LIABILITIES> 201,094
<BONDS> 0
0
0
<COMMON> 199
<OTHER-SE> 1,024,682
<TOTAL-LIABILITY-AND-EQUITY> 1,225,975
<SALES> 384,182
<TOTAL-REVENUES> 384,182
<CGS> 141,422
<TOTAL-COSTS> 141,422
<OTHER-EXPENSES> 102,946
<LOSS-PROVISION> 102,946
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 150,437
<INCOME-TAX> 48,892
<INCOME-CONTINUING> 98,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,053
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.48
</TABLE>
